Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period
ended June 30, 2017
WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9
Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Table of contents
1. Description of activity of the Capital Group 5 1.1. Description of organisation 5 1.2. Composition of organisation 6 2. PGE Group’s strategy and its implementation 10 2.1. Updated strategy of the Capital Group 10 2.2. Implementation of key projects within the strategic objectives 11 3. Key financial results of the PGE Capital Group 19 3.1. Consolidated statement of comprehensive income 20 3.2. Key operational figures of PGE Capital Group 24 3.3. Conventional Generation segment 27 3.4. Renewables segment 31 3.5. Distribution segment 33 3.6. Supply segment 35 3.7. Other operations 36 4. Risks and opportunities 37 4.1. Risk management 37 5. Significant events of the reporting period and subsequent events 41 5.1. Investment Agreement on the financial investment in Polska Grupa Górnicza sp. z o.o. 41 5.2. Capital investment in Polimex-Mostostal S.A. 41 5.3. Termination of agreements for purchase of certificates by Enea S.A. 41 5.4. Submission of offer for acquisition of EDF assets in Poland 41 5.5. Description of material agreements 41 5.6. Changes in the Management Board and Supervisory Board 41 5.7. Decisions of the President of the Energy Regulatory Office related to realisation of LTC Act 43 5.8. Legal aspects 43 5.9. Information concerning proceedings in front of court, body appropriate for arbitration proceedings or in front of public administration authorities 43 5.10. Information concerning the guarantees for loans granted by the Company or a subsidiary 44 5.11. Information on issue, redemption and repayment of debt securities and other securities 44 5.12. Activities related to nuclear energy 44 5.13. Sale of 100% stake in Exatel S.A. to the State Treasury 45 5.14. Distribution of profit for 2016 46 6. Transactions with related entities 46 7. Publication of financial forecasts 46 8. Information about shares and other securities 47 8.1. Shareholders with a significant stake 47 8.2. Shares of the parent company owned by the members of management and supervisory authorities 47 9. Electricity market and regulatory and business environment 48 9.1. Macroeconomic environment 48 9.2. Regulatory environment 50 9.3. Supply markets 61 10. Statements of the Management Board 63 10.1. Statement on the reliable preparation of the financial statements 63 10.2. Statement on the entity authorised to audit the financial statements 63 11. Approval of the Management Board’s Report 63 Glossary 64
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Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
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Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
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Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
1. Description of activity of the Capital Group
1.1. Description of organisation The Capital Group of Polska Grupa Energetyczna S.A. (“PGE Capital Group”, the “Group”, “PGE Group”, “PGE CG”) is Poland’s largest vertically integrated power utility by revenue, installed capacity and electricity production volume. With a mix of own fuel sources, generation assets and distribution network, PGE provides a safe and reliable supply of electricity to more than five million households, businesses and institutions. PGE is the largest electricity producer in Poland, one of the leaders in wholesale and retail trading and second largest electricity distributor in Poland with regard to the number of customers. The parent company of PGE Capital Group is PGE Polska Grupa Energetyczna S.A. (“PGE S.A.”, “PGE”, the “Company”, the “Issuer”, the “Parent company”). PGE Group currently organizes its activities in the four main business segments: Conventional Generation Core business of the segment includes extraction of lignite, production of electricity and heat from conventional sources as well as transmission and distribution of heat.
Renewables Core business of the segment includes electricity generation from renewable sources and in pumped-storage power plants.
Supply Core business of the segment includes trading of electricity across the country, wholesale trading of electricity on domestic and international market, provision of services to companies from the PGE Group related to commercial management of generation capacities of the Group and electricity produced, as well as trading of CO2 allowances and energy certificates and gas.
Distribution Core business of the segment includes supply of electricity to final off-takers though the grid and HV, MV and LV infrastructure.
Since December 16, 2016 due to the lowering of the so called “power exchange obligation” (obligation to publicly sell electricity) most of the trading is executed bilaterally within the Capital Group. That change significantly attributed to the decrease of the electricity sale and purchase volumes (see p. 3.2.1 of this report) and consequently consolidated revenues (see p. 3.1.3 of this report) and costs. It had limited impact on the actual profitability of PGE Group.
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1.2. Composition of organisation Full composition of the PGE Capital group is presented in note 1.3 to the consolidated financial statements. 1.2.1. The most significant changes in organisation of the Capital Group Changes which occurred in the PGE Capital Group’s structure in the period from January 1, 2017 until the publication date of this report, are presented in note 1.3 to consolidated financial statements and described below. Setting up of new companies Entity/entities Date of registration Share capital Comment in National Court Register PGE Towarzystwo Funduszy January 27, 2017 PLN 750,000 On December 29, 2016, PGE S.A. formed a single-member company based in Warsaw in the form of a public limited company. Inwestycyjnych S.A.
PGE Inwest 19 sp. z o.o. February 24, 2017 PLN 10,000 On February 1, 2017, PGE S.A. formed a single-member company based in Warsaw in the form of a limited company.
Increase of the share capital of companies Entity Date of registration (1) Share capital Comment National Court Register (2) Increase (3) Share capital after increase PGE Inwest 13 sp. z o.o. January 27, 2017 (1) PLN 20,000 On December 7, 2016, the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s (currently a joint stock company, under (2) PLN 730 000 share capital. The increased capital was acquired by PGE S.A. in exchange for a cash contribution. PGE S.A. holds 100% of share capital. name PGE Inwest 13 S.A.) (3) PLN 750 000
PGE Nowa Energia sp. z o.o. March 22, 2017 (1) PLN 20 000 On December 20, 2016, the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s (previously: PGE Inwest 15 sp. z o.o.) (2) PLN 50 000 share capital. The increased capital was acquired by PGE S.A. in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 70 000 PGE EJ 1 sp. z o.o. February 15, 2017 (1) PLN 275 859 450 The Extraordinary Assembly of Partners of the company of December 21, 2016 adopted resolution on the increase of the share (2) PLN 34 999 020 capital of company. The increase of the share capital was acquired by all partners, i.e. PGE S.A., KGHM Polska Miedź S.A., (3) PLN 310 858 470 TAURON Polska Energia S.A. and ENEA S.A. in exchange for a cash contribution, proportionally to their stakes. PGE S.A. holds 70% in the share capital.
PGE Nowa Energia sp. z o.o. April 18, 2017 (1) PLN 70 000 On March 28, 2017, the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s (previously: PGE Inwest 15 sp. z o.o.) (2) PLN 5 150 000 share capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 5 220 000 PGE Centrum sp. z o.o. May 22, 2017 (1) PLN 20 000 On April 7, 2017, the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s share (previously: PGE Inwest 6 sp. z o.o.) (2) PLN 1 500 000 capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 1 520 000 PGE Inwest 16 sp. z o.o. April 27, 2017 (1) PLN 200 000 On April 7, 2017, the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s share (2) PLN 900 000 capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 1 100 000
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PGE Towarzystwo Funduszy June 2, 2017 (1) PLN 750 000 On May 12, 2017 the Extraordinary General Meeting of the company adopted a resolution on an increase of the company’s share capital. Inwestycyjnych S.A. (2) PLN 5 500 000 The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 6 250 000
PGE Ventures sp. z o.o. No registration at the time of (1) PLN 20 000 On May 29, 2017 the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s share (previously: PGE Inwest 7 sp. z o.o.) publication (2) PLN 420 000 capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 440 000
PGE Nowa Energia sp. z o.o. No registration at the time of (1) PLN 5 220 000 On May 30, 2017 the Extraordinary Assembly of Partners of the company adopted a resolution on an increase of the company’s share (previously: PGE Inwest 15 sp. z o.o.) publication (2) PLN 2 000 000 capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. (3) PLN 7 220 000
Acquisition or disposal of shares by the companies
Shares of the entity Date of transaction/ Number of acquired Comment registration in the National shares Court Register
Polska Grupa Górnicza sp. z o.o. (“PGG”) – November 3, 2016/ 833 333 shares The Extraordinary Assembly of Partners of PGG adopted resolution in the increase of the share capital by PLN 366 667 000 to acquisition by PGE Górnictwo i Energetyka January 27, 2017 PLN 2 672 274 200 through issue of new shares. PGE GiEK S.A. took up 833 333 shares with a nominal value of PLN 83 333 300, Konwencjonalna S.A. (“PGE GiEK S.A.”, “PGE PGG’s share capital increase representing 3.1% in the increased share capital of PGG. GiEK”). of shares in the increased share registered capital of PGG PGG – acquisition by PGE GiEK S.A. of shares February 1, 2017/ 555 556 shares The Extraordinary Assembly of Partners of PGG adopted resolution in the increase of the share capital by PLN 244 444 000 to in the increased share capital PLN 2 916 718 200 through issue of new shares. PGE GiEK S.A. took up 555 556 shares with a nominal value of PLN 55 555 600, March 10, 2017 PGG’s share representing 1.9% in the increased share capital of PGG. capital increase registered
PGG – acquisition by PGE GiEK S.A. of shares April 3, 2017/ June 7, 2017 500 000 shares On March 31, 2017 the investment agreement was signed between PGE GiEK, Enea S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA in the increased share capital PGG’s share capital increase S.A., Węglokoks S.A., Towarzystwo Finansowe Silesia sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny registered Zamknięty Aktywów Niepublicznych and PGG sp. z o.o. The investment agreement determines the conditions of the financial investment in PGG. assumes recapitalisation of PGG in three stages by PGE GiEK, Enea S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A. and Towarzystwo Finansowe Silesia sp. z o.o. with total amount of PLN 1 billion. Within the recapitalisation of PGG, PGE GiEK committed itself to acquire new shares of PGG with a total nominal value of PLN 100 million in exchange for the cash contribution in amount of PLN 100 million. On the base of that agreement, the Extraordinary Assembly of Partners of PGG adopted resolution on the increase of the share capital by PLN 500 000 000 to PLN 3 416 718 200, through issue of new shares. PGE GiEK S.A. took up 500 000 shares with a nominal value of PLN 50 000 000, representing 1.5% in the increased share capital of PGG.
PGG – acquisition by PGE GiEK S.A. of shares June 14, 2017/ 200 000 shares The Extraordinary Assembly of Partners of PGG adopted resolution in the increase of the share capital by PLN 200 000 000 to in the increased share capital PLN 3 616 718 200 through issue of new shares. PGE GiEK S.A. took up 200 000 shares with a nominal value of PLN 20 000 000, July 7, 2017 PGG’s share representing 0.6% in the increased share capital of PGG. Currently PGE GiEK S.A. holds a total of 5 700 000 shares with a nominal capital increase registered value of PLN 570 000 000 representing 15.76% in the share capital of PGG.
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Polimex-Mostostal S.A. („Polimex”) – January 20, 2017/ 37 500 000 On January 18, 2017 PGE S.A., ENEA S.A., ENERGA S.A, PGNiG Technologie S.A. (the „Investors”) signed Investment Agreement acquisition by PGE S.A. of shares in the February 21, 2017 ordinary bearer with Polimex, on the ground of which, subject to the conditions precedent specified in the agreement, the Investors have increased share capital Polimex’s share capital shares committed to make investment in Polimex. The investment involves acquisition by the Investors jointly of 150 000 000 ordinary increase registered bearer shares with a nominal value of PLN 2 each and the issue price amounting to PLN 2 PLN for one share (“New Issue Shares”), issued by Polimex for the increase of the share capital of Polimex by the amount of up to PLN 300 000 000 (the “Investment Agreement”). In accordance with the resolution of the Extraordinary General Meeting of December 28, 2016 on the increase of the share capital, the New Issue Shares will be introduced to the trading on the regulated market of the Warsaw Stock Exchange and will be dematerialised. On the ground of the Investment Agreement, in connection with the fulfilment of the conditions precedent, on January 20, 2017 PGE S.A. accepted the offer for acquisition in private placement of 37 500 000 New Issue Shares for the total price of PLN 75 000 000.
Polimex – acquisition of shares by PGE S.A. January 20, 2017 1 500 001 shares On January 18, 2017 the Investors signed a agreement with SPV Operator, obliging the parties, provided the conditions precedent are (agreement for sale of shares) fulfilled, to conclude transaction in which SPV Operator sells to the Investors total of 6 000 001 shares of Polimex. On January 20, 2017, in connection with the fulfilment of the conditions precedent, PGE S.A. acquired 1 500 001 shares of Polimex from SPV Operator.
Polimex – acquisition of shares by PGE S.A. April 28, 2017 24 shares Pursuant to the Polish regulations regarding capital market, as a consequence of the subscription tender for sale of shares. in number (tender offer) sufficient to reach by the Investors 66% threshold of voting rights on the general meeting of Polimex, on April 28, 2017 the Investors acquired total of 96 shares of Polimex, including PGE which purchased 24 shares of that company. As a result of the share capital increase of Polimex, acquisition of shares from SPV Operator and subscription offer, the Investors hold jointly 156 000 097 shares currently representing 65.93% of the share capital of Polimex, including PGE S.A. which holds 39 000 025 shares representing 16.48% of the share capital.
EXATEL S.A. – sale of shares by PGE S.A. March 29, 2017 8 360 211 shares PGE S.A. and the State Treasury of the Republic of Poland („State Treasury”) executed an agreement for the sale of 100% of shares in EXATEL S.A. to the State Treasury. As a result of the sale transaction, EXATEL S.A. and its subsidiary ENERGO-TEL S.A. are no longer part of PGE Group.
PGE GiEK S.A. – mandatory buyback of April 10, 2017 67 052 shares CDM Pekao S.A., which maintains PGE GiEK S.A.’s share register, made entries in the share register regarding transfer to PGE S.A. of the shares by PGE S.A. ownership of 67 052 shares of PGE GiEK S.A. covered by a mandatory squeeze-out procedure but not yet transferred to PGE S.A. In connection with the above, PGE S.A. currently holds a 100% stake in the share capital of PGE GiEK S.A.
EDF Polska S.A. and EDF Investment III B.V. May 19, 2017 On May 19, 2017 PGE signed the Conditional Share Sale Agreement (the “CSSA”) regarding sale of EDF assets in Poland with EDF International SAS – acquisition of shares by PGE S.A. and EDF Investment II B.V. (jointly “EDF”). The CSSA includes in particular (the “Transaction”) acquisition of 99.51% of shares of EDF Polska S.A., (conditional share sale agreement) Currently conditions acquisition of 100% of shares of EDF Investment III B.V., indirect acquisition of 50% of shares + 1 share of ZEW Kogeneracja S.A. (shares held by EDF precedent from the share Polska S.A. and EDF Investment III B.V.), and acquisition of shares in supporting subsidiaries of EDF Polska S.A. Due to the fact that the conditions sale agreement are not precedent have not been fulfilled, the shares of EDF Polska S.A. and EDF Investment III B.V. have not been transferred to PGE S.A. The closing of the fulfilled – shares of the Transaction is planned not later than January 2, 2018. After the closing of the Transaction, pursuant to the Polish regulations regarding capital market, companies have not been as a consequence of acquisition of shares of ZEW Kogeneracja S.A. PGE Group will be obliged to announce a subscription tender for shares of ZEW transferred to PGE S.A. Kogeneracja S.A. in number sufficient to reach 66% threshold of voting rights in ZEW Kogeneracja S.A.
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Transformation of companies
Transformed company Date of transaction/ Comment registration in the National Court Register PGE Inwest 13 sp. z o.o. April 25, 2017 750 shares On April 25, 2017, the Extraordinary Assembly of Partners of the company adopted a resolution on the change of this company’s legal after transformation: form into a single-member public limited company under the name PGE Inwest 13 S.A. PGE S.A. held 100% shares in the share capital of PGE Inwest 13 S.A. PGE Inwest 13 sp. z o.o. April 26, 2017 On April 26, 2017, PGE S.A. signed the Articles of Association of PGE Inwest 13 S.A. and appointed its governing bodies.
May 16, 2017 the company was registered in the National Court Register
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
2. PGE Group’s strategy and its implementation
2.1. Updated strategy of the Capital Group On September 6, 2016 the Supervisory Board approved PGE Group's strategy update presented by the Management Board of PGE. The update is aimed at adapting the Group’s activities to the changing environment. In the updated document, the Group also addresses threats and opportunities connected with, among others, volatility of fuel prices, climate policy directions, market model evolution and new technology development. Mission, vision and overall objectives In accordance with the updated strategy, PGE's mission is to ensure security and growth based on reliability of supply, technical excellence, modern services and partnership relationships. The overall objective of PGE Group's operations is to increase its shareholder value and the key role in ensuring Poland's energy security. Diagram: Redefining PGE Group’s mission.
Updated vision determines the target position of the PGE Group in four areas:
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
2.2. Implementation of key projects within the strategic objectives 2.2.1. Leader in electricity generation, actively seeking development opportunities To retain its leading position in the area of electricity generation, PGE Group must secure at least a 40% share of the electricity generation market in Poland by 2020. PGE Group is continuing its flagship investments in Opole and Turów and may invite partners to participate in these projects. At the same time, further investments in conventional energy based on a new market model will be analysed, e.g. construction of new capacities at Dolna Odra power plant. The company will carry out modernisations of conventional plants and combined heat-and-power plants in an optimal scope so that they are adapted to new industrial emission standards BAT (Best Available Technology). In May of the current year, the PGE Group successfully completed negotiations concerning the purchase of EDF assets in Poland. As a result of the execution of the conditional agreement, the installed electrical capacity of the PGE Group will increase by 25% and will reach the level of 15.95 GWe. At the same time, within the generation area, PGE Group will seek innovative solutions that will cement its competitive advantage and allow it to reduce environmental impact, including through adapting production assets to a new energy market model, maintaining a competitive lignite extraction operation, reducing SO2, NOx, particulates and mercury emissions as well as increasing the efficiency of coal combustion by-product use. PGE Group intends to retain its leadership in the renewables segment and account for approx. 25% of domestic renewables generation by 2030. To reach this ambitious target, PGE Group plans to complete those onshore wind farm projects that are at the most advanced stages, build an approx. 1 000 MW offshore wind farm and increase its presence in the distributed generation segment. These investments will depend on successes in the auction support system, development of an innovative financing model and implementation of new business models for the micro-installations segment. Diagram: PGE Group’s aspirational share in Poland’s electricity production from RES.
In order to maintain a leading position in generation, in the long term PGE Group has three strategic options, thereby can make the optimal choice in the context of future climate policy: Construction of Poland’s first nuclear power plant, following the development of a model guaranteeing economic viability of the investment, Construction of approx. 1 000 MW capacity in off-shore wind farms, based on an auction support system, Modern coal-fired power generation, including utilization of new lignite deposits in case there is a significant easing of the climate policy.
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Diagram: Strategic options.
2.2.2. Reliable and active utility and service supplier Currently on-going investments in the distribution segment are intended to increase the reliability of supply and reduce SAIDI and SAIFI by 56% compared to 2015 and the average connection time by 40%. The achievement of these quality targets is being supported by, among others, the development of electricity quality monitoring systems, intelligent grid metering and automation as well as the construction of a digital transmission system. In the retail area, PGE Group is planning to focus on strengthening relations with clients through gaining more knowledge about their needs. In response to identified expectations, PGE Group will expand its offering by, for example, adding new product and services that are complementary to electricity as well as through the development of new sales and communication channels, what will have a positive impact on monitoring client satisfaction indicators. Attaining the status of a reliable, credible and modern supplier will allow PGE Group to maintain low client migration rates in the mass segment. 2.2.3. Poland’s most efficient and flexible energy group PGE Group’s cost and operational efficiency is one of key preconditions for accomplishing the other strategic goals. On the other hand, flexibility is key to achieving the ability to respond quickly to opportunities arising in PGE Group’s environment Due to efficiency improvement, in 2020 PGE Group plans to achieve reduction of the forecasted controllable costs in the amount of PLN 500 million versus year 2016. This will allow for the total cost reduction in 2016-2020 by approx. PLN 3.5 billion versus the current efficiency scenario. The goal of the cost reduction is to strengthen PGE Group’s competitiveness and maintain potential of financing of the Group’s development. Objectives and initiatives in scope of improving the operational and cost efficiency are assigned to each business line of the Group.
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Diagram: Total reduction of controllable costs in 2016-2020.
Reduction of controllable costs will concern both the modification of organisational structure and as well as optimisation of processes. Changes in the organisational structure are intended to prepare PGE Group for development in the most promising business areas as well as to eliminate redundant functions and simplify organisational structures. These changes will be introduced through, among others, standardisation and optimisation of support functions throughout PGE Group, effective formation of new business lines and spin-off of a new business line – “Co-generation”. Process optimisation will focus on improving operational efficiency measured by ratios relating to cost, time and quality of particular processes, both basic and supporting. Within the framework of the human resources management strategy, it is planned to implement the rules of corporate employment, mobility and remuneration, as well as other initiatives connected with optimisation of labour costs. Moreover, within next four years, planned expenditures on modernization and replacements will be reduced by approximately PLN 500 million in relation to forecasts. It will be possible thanks to introduction of integrated asset management system, among others. Unified approach to planning of expenditures, that takes into account inter alia the class of the assets will allow for reducing asset maintenance costs and modernisation and replacement expenditures, while maintaining the proper availability and security of power supply. Higher flexibility at PGE Group will be achieved mainly through mechanisms for monitoring the surrounding and rapidly responding to changes, increased mobility of employees, cooperating with external partners, scientific and academic institutions, as well as streamlining decision-making, analytical and reporting processes. 2.2.4. Leader in development of new business models and operating segments The updated strategy places particular emphasis on the development of new business models and operating segments in order to diversify revenues structure and to increase EBITDA from new operations. This will be possible through PGE Group’s involvement in cooperating in the area of development and commercialisation of new technologies with credible partners having competences allowing to obtain synergies and competitive advantages. PGE Group’s involvement may come in the form of financing, technical or organisational support, depending on the type of venture and form of its implementation. New technological solutions that are of interest to PGE Group include energy warehouses, electromobility, power-to-gas technologies, LNG, diffuse energy sources, integrated intelligent solutions and the development of coal gasification installations. Involvement in the development and commercialisation of new technologies will allow PGE Group to introduce to the market a modern and comprehensive offering for clients, covering, among other things, photovoltaics, electromobility, intelligent home solutions, natural gas and demand management. PGE Group intends to build up its brand of a leader on the energy efficiency market. New ESCO (Energy Saving Company) activities will provide clients with benefits such as reduced energy consumption costs, supply continuity and improved image. This will enable PGE Group to develop long-term beneficial client relationships with industry, local government and retail customers, among others. A wide scope of initiatives to improve the effectiveness of energy infrastructure and buildings belonging to the Group will also be implemented.
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The PGE Group will allocate at least PLN 25 million per year to capital investments in innovative start-ups and incubation, and acceleration of projects at the earliest stage of development. Activities within those areas will be implemented by PGE Ventures sp. z o.o. (“PGE Ventures”), a specialized CVC (corporate venture capital) fund, and by the PGE Nowa Energia sp. z o.o. company (“PGE Nowa Energia”). Investments The Group assumes capital expenditures of approximately PLN 34 billion in 2016-2020, including more than PLN 10 billion for ongoing projects in Opole and Turów. In connection with modernisation programs that are to be completed soon, the expenditures for the existing capacities in Conventional Energy will be gradually decreasing. After construction of two flagship projects, PGE Group will be ready to invest significantly in new business areas, also abroad. Beyond 2020 PGE will be implementing a new investment program, dependent on selected strategic options, the power system's needs and new market model. Diagram: Planned capital expenditures of PGE Group.
Values of PGE Group PGE Group’s strategy will be implemented in accordance with values Partnership, Growth, Responsibility and principles in everyday work included in the Code of Ethics of PGE Group. PGE Group is a responsible organization, aware of its impact on the environment, thus in its operations focuses on reducing impact on natural environment, operating based on ethical principles and involvement in activities for the benefit of local communities.
Key projects in the first half of 2017 Development Construction of new units in Opole power plant investments ● construction of two power units of 900 MW each ● budget: approx. PLN 11 billion (net, without costs of financing) ● capital expenditures incurred so far: approx. PLN 7.6 billion ● fuel: hard coal ● net efficiency: 45.5%
● contractor: syndicate of companies: Rafako, Polimex-Mostostal and Mostostal Warszawa with co-operation of GE as Project manager on behalf of the syndicate ● commissioning: unit 5 – H2 2018; unit 6 – H1 2019
● January 31, 2014 – issue of Notice to Proceed
● status: assembly at unit 5 is at an advanced stage, first start-up work has commenced on individual installations; at unit 6 leak tests on the boiler’s pressure systems are being prepared, assembly of the turboset has continued; the Project’s overall progress at the end of June 2017 was slightly above 80% Construction of new unit in Turów power plant ● aim of the project: construction of power unit with a capacity of 490 MW ● budget: approx. PLN 4 billion (net, without costs of financing) 14 of 66
WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
● capital expenditures incurred so far: approx. PLN 0.7 billion ● fuel: lignite ● net efficiency: 43.1% ● contractor: syndicate of companies: MHPSE, Budimex and Tecnicas Reunidas ● commissioning: H1 2020 ● December 1, 2014 - issue of Notice to Proceed ● status: assembly of the boiler’s steel construction completed and consolidation of the pressure elements of the boiler has commenced; the first elements of the turboset have been delivered to the building site; erection of the cooling tower shell has commenced Construction of a Thermal Processing Installation with Energy Recovery at Rzeszów CHP ● aim of the project: construction of a thermal processing installation with energy recovery at Rzeszów CHP with capacity of approx. 8 MWe in condensation (approx. 4.6 MWe + 16.5 MWt in co-generation) ● budget: approx. PLN 293 million (net, without costs of financing) ● capital expenditures incurred so far: approx. PLN 26 million ● fuel: municipal waste ● boiler’s efficiency: 86% ● contractor: syndicate of TM.E. S.p.A. Termomeccanica Ecologia and Astaldi S.p.A ● commissioning: H1 2018 ● Agreement with the Contractor signed on December 22, 2015, Notice to Proceed issued on April 8, 2016 ● status: works related to the construction of the main structures are at the final stage, assembly has been completed of the steel structure of the boiler and consolidation of boiler’s pressure elements has commenced; construction work has been completed in the turbine set room Modernisation and Comprehensive reconstruction and modernisation of units no. 1-3 at Turów power plant replacement ● aim of the project: Adaptation to future BAT conclusions requirements regarding permissible projects emissions of sulphur, NOx and particulate, increase of availability and efficiency, as well as expansion of each turboset’s nominal capacity by approx. 15 MWe ● status: unit 2 was shut down for modernisation and the area was handed over to contractors. Main dismantling works have been completed on specific objects, installations and equipment covered by modernisation works. Modernization and renovation is under way of the burner system, including the pressure part of the unit’s boiler, and assembly of the parts of the compression turbine, production has ended of the generator’s impeller, assembly continues of the ash disposal installation, the wet deck surface made of asbestos-concrete boards, installed on the cooling tower, was disassembled, modernization work has been continued on electrical switching stations and power evacuation stations with regard to modernization of the control and supervision systems. The contractors for the boiler, turbine, generator, electrical filter have submitted the documentation of the basic project regarding modernization of unit no. 1 ● budget: PLN 0.8 billion (net, without costs of financing) ● fuel: lignite ● completion: 2020 Change in technology of furnace waste storage for units 1-12 – Bełchatów power plant and construction of installation to transport ash; production and transport of sludge from unit 14 in Bełchatów power plant ● aim of the project: to provide the capability for storage of furnace waste produced during the operation of units 1-12 of Bełchatów power plant until exhaustion of lignite resources. In the course of the project, the requirement to fit out unit 14 with new technology for the transport and storage of combustion waste was identified ● status: works related to filling in and securing the storage site continue, as do works related to installations for unit 14 – construction of a suspension production and pumping system, assembly of pipelines for the Lubień storage site, construction and modernisation of electrical switching stations ● budget for units 1-12: ca. PLN 450 million (net, without costs of financing) ● budget for unit 14: ca. PLN 85 million (net, without costs of financing) ● completion: 2018
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Modernisation of the Pomorzany power plant
● aim of the project: Reduction of NOx and SOx emissions from Benson OP-206 boilers to a level allowing to meet the requirements of future BAT conclusions as well as to ensure that the plant remains in operation until about 2040 ● status: agreements signed with main contractors (on construction of flue-gas desulphurisation FGD and deNOx installations and selected non-contractual tasks). Permits to build FGD and SCR (selective catalytic reduction of NOx) secured. General Contractors delivered documentation of main projects. As regards implementation of SCR, foundation work has been under way regarding installations for boilers A and B. As far as FGD is concerned, currently the disassembly of the switching station building is in progress, and preparatory work, and excavations for foundations are being continued ● budget: ca. PLN 213 million (net, without costs of financing) ● fuel: hard coal ● completion: SCR – 2017/2018 (boiler A and B), FGD - 2019.
Construction of flue gas denitrification installation and flue-gas desulphurisation for OP-230 boilers no. 3 and 4 in Bydgoszcz CHPs ● aim of the project: Reduction of NOx and SOx emissions from boilers no. 3 and 4 to a level allowing for further use after 2017 ● status: on July 5, 2017, an agreement was concluded for Extension of FGD with the Contractor, GE Power sp. z o.o. Tender proceedings are pending for selection of the general contractor for construction of the fumes denitrogenation installation (deNOx). ● budget: PLN 52 million (net, without costs of financing) for denitrification installation, PLN 44 million (net, without costs of financing) – value of agreement with contractor of desulphurisation installation,. ● fuel: hard coal ● completion: 2018
Project of network ● aim of the project: reduction of electricity procurement costs for balancing differences losses reduction ● activities undertaken (multi-year project): . replacement of HV/MV, MV/LV transformers with low-loss units, adaptation of transformers’ output to power consumption . grid conversion and modernisation: construction of HV/MV and MV/LV stations, increase of cable cross-sections for HV, MV and LV lines, reduction of MV and LV lines, . maintenance of optimal grid workload, elimination of adverse energy transit in HV lines, optimisation of MV line partitions, . reduction of load asymmetries in LV lines. ● the results of the project: lowering of the balancing difference in 2016 to 5.77% (in 2015 it amounted to 5.91%); volume of balancing difference in 2016 amounted to 2.41 TWh with the simultaneous increase of volumes of energy delivered to off-takers by 2.8% in comparison to 2015. ● activities initiated in first half of 2017: project assumptions for 2017-2021 were updated in March 2017; activities aimed at reducing balancing differences at PGE Dystrybucja S.A. are to be continued. Trading strategy ● aim of the project: achieving maximum margin on sale of electricity simultaneously minimising risk update associated with trading activities ● activities initiated in first half of 2017: Sale of electricity was realised pursuant to conditions resulting from optimisation of use of particular generating units in connection with the level of variable costs, level of market prices, market liquidity, regulations and laws, with the simultaneous assessment of risk associated with so called “open position”. Electricity trading methods were adapted to a reduced “power exchange obligation” (to 15% from December 16, 2016). Sales were conducted bilaterally within the Group, on forward market and spot market, where balancing of contractual position was made. Available capacities that were not sold, were offered on the balancing market. Sales channel directed to transmission and distribution grid operators was also in use. Implementation of the plan of contracting was taking into account trading directions, hedging methods, risk and open trading positions limits as well as product optimisation. Moreover, activities were undertaken to improve wholesale trade operations and adapt wholesale trade to regulatory changes, including the MIFID II directive. Works included the identification of wholesale trade areas with operations requiring verification and possible modification. Currently, works are underway to develop and implement target solutions in these areas. 16 of 66
WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Human Capital ● aim of the project: supporting the business strategy goals through securing strategic and effective Management human resources management and optimization and standardisation of HR processes. Strategy (“HCM ● activities initiated in H1 2017: works were underway to clarify the definitions of specialisations in Strategy”) Workplace Architecture. Furthermore, during meetings with PGE Group management, specialist competences were selected to be included in the Competence Model next to firm-wide and management competences. The Competence Model will eventually be used in the process of evaluating PGE Group’s employees. The 3rd Conference of PGE Group Employers took place at the end of March 2017, during which the management team discussed on changes in the work style of managers with regard to issues surrounding human capital management and adaptation of the organisation in order to meet PGE Group’s ambitious goals. Work has been commenced by a team which will be responsible for implementation of Employee Assessment at PGE Capital Group. During the first stage, Competence Assessment will be implemented based on the developed Competence Model. The team has specified the details of the procedure’s rules and commenced planning of its implementation in individual LBs. Moreover, during the first six months of 2017, work was being performed on the update of the Human Resources Management Strategy. A review was conducted of the status of implementation of strategic initiatives in view of an update of the PGE Group’s Strategy. The update of the HRM Strategy indicates the main initiatives which, in consecutive years, will be implemented by all PGE Group companies.
Strategic Research and Development and New Business Areas (“SOBiR+NB”), within which the Group intends to carry out R&D and innovation projects concerning, among others, the supply of new products or services. The SOBiR+NB areas are aligned with the Group’s most important challenges and are identified for each element of the value chain (see the graph below).
In connection with an Update of the Group’s Strategy until 2020 being introduced in the third quarter of 2016, works have progressed on updating the Development and Innovation Strategy. The updated Development and Innovation Strategy will place emphasis on challenges that most affect the Group, where R&D and innovation are essential to the achievement of business objectives. In connection with this, particular attention will be paid to both dynamically developing segments such as electromobility or energy warehousing as well as ways of acquiring and developing initiatives such as new models of management and implementation of innovations like acceleration and investing in an equity fund model in small businesses that develop technologies and products. A strategic option for PGE will be the design and development of specific technologies – which constitutes a large quality change in contrast to the previous model – an operator of technologies from other businesses, providers. An SPV named PGE Nowa Energia was formed to work with small businesses (start-ups) in the acceleration and project commercialisation (implementation of innovation solutions) formula. By working with start-up market stakeholders (small businesses, accelerators, other investors, government agencies, etc.), the company is intended to be a competence centre, allowing PGE to effectively identify and develop technologies and products being part of and related to the power value chain. In order to facilitate the continued development of companies and obtainment of new solutions from the market (at the maturity stage later than acceleration), the PGE Ventures company was established, which
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
serves the role of the investment fund of GK PGE. The purpose of the company is to invest PGE’s own funds and funds obtained via support tools – the public budget available through the Polish Development Fund (PFR) and the National Research and Development Centre (NCBiR). Innovation PGE focuses on initiating and executing R&D projects that fall within the SOBiR+NB areas. In the first half of 2017, several dozen projects were continued within these areas.
Key projects in the first half of 2017 Involvement in ● aim of the project: Introduction of a new model for developing and implementing new solutions, equity structures allowing to manage higher-risk undertakings whilst reducing time-to-market for new solutions that support the (for own purposes or to sell to other entities) development of ● main activities: new technologies . PGE Ventures company was established, dedicated as a venture capital fund (VC) to conduct and solutions as an investment activity on the basis of its own funds and funds obtained from the public well as small budget (PFR Ventures). The process of recruitment and conclusion of the first investment businesses agreements is planned for the second half of 2017; . the main assumptions of the acceleration activities conducted by the PGE Nowa Energia company have been developed and rules of co-operation between the companies (PGE Nowa Energia and PGE Ventures) have been determined, providing for optimization and maintenance of continuity at the next stages of development of small companies. Electromobility ● aim of the project: promoting and developing electric transport in Poland and gaining by PGE Capital Group of experience and the competence necessary to serve the role of the operator of electrical cars charging infrastructure and of the supplier of electrical cars charging services ● main activities concern individual transport – cars used for private and business purposes. . PGE has been continuing a project launched in December 2016 in which a pilot run is being implemented that consists of the construction of infrastructure for an electromobility system in Łódź. At the turn of the third and fourth quarter of 2017, it is planned to launch the first public, fast-charging station in Łódź, and the next stations will be opened in the following months. Moreover, PGE extended its pilot “e-Mobility” project to the next locations. On 13 April 2017, a letter of intent was signed between PGE S.A. and the Head of the Mazovia Province, and on 26 May 2017, a letter of intent between PGE S.A., the Marshal of the Podkarpacie Province and the Office of the City of Rzeszów. Both agreements concern co-operation in the development of the charging infrastructure and development of a system encouraging public and private entities to use electric cars.
Recycling ● Aim of the project: PGE Group is preparing to execute a project allowing to develop and implement a new technology for the recycling of lithium batteries, particularly those used in energy warehouse systems and to charge electric cars. This technology is intended to obtain strategic materials from used lithium batteries – cobalt, nickel and copper. The project directly supports the assumptions of the Ministry of Development concerning the transformation of the economy in the direction of closed-circuit economy, as well as the requirements of the Polish legislation specifying the needs of collection and utilization of used batteries. The project has a business potential due to the anticipated growth in the world’s market of lithium batteries and the increase in the quantity of battery wastes connected with that, as well as increased demand of markets for products recycled from used batteries. ● main activities: PGE S.A. has set up a consortium with RDLS sp. z o.o., a company of the Warsaw University operating in the area of environmental research and biotechnology. The goal of the consortium is to produce a pilot recycling installation for lithium batteries and implement this technology in Poland. The consortium jointly prepared and submitted an application for funding from the NCBR (National Centre for Research and Development). The project was recommended by NCBiR for co-financing from public funds of the Research Programme of the Power Sector (PBSE).
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3. Key financial results of the PGE Capital Group
H1 H1 % Key financial data Unit 2017 2016 change
Sales revenues PLN million 10 620 13 666 -22%
PLN EBIT 1 932 952 103% million
PLN EBITDA 3 445 3 143 10% million
Adjusted net profit attributable to equity PLN million 1 531 1 267 21% holders of the parent company* LTC compensations PLN million 83 401 -79%
LTC revenues PLN million 0 253 - Adjustment of the LTC settlements (other PLN million 83 148 -44% operations) PLN Capital expenditures 2 595 3 690 -30% million
Net cash from operating activities PLN million 3 282 2 857 15%
Net cash from investing activities PLN million -591 -4 601 87%
Net cash from financial activities PLN million -242 354 -
Adjusted net earnings per share* PLN 0.82 0.68 21%
EBITDA margin % 32% 23%
As at As at % Key financial data June 30, 2017 December 31, 2016 change Working capital PLN million 5 336 5 702 -6%
Net debt/LTM EBITDA ** x 0.61 0.70
* Net profit adjusted by impairment loss ** LTM EBITDA - Last Twelve Months EBITDA
Impact of one-offs on EBITDA [in PLN million].
One-offs H1 H1 % 2017 2016 change LTC compensations 83 401 -79% Voluntary Leave Program -4 -21 -81% Revaluation of balance sheet value of certificates 0 -118 - Totalmajątkowych 79 262 -70%
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.1. Consolidated statement of comprehensive income Chart: Key changes of recurring EBITDA in PGE Capital Group (in PLN million).
3,800
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Revenues Cost of Revenues EBITDA Result on CO from Sales of Certificates materials Return on Capitalised EBITDA Fuels 2 from Other H1 2016 electricity costs agreement heat redemption and repair distribution costs H1 2017 certificates with TSO services
Change 397 94 -89 22 -19 12 116 53 65 -98 -68 EBITDA reported H1 2016 3,143 One-offs H1 2016 262 Recurring EBITDA H1 2016 2,881 4,791 1,063 499 250 264 402 509 358 2,089 534 Recurring EBITDA H1 2017 5,188 969 588 272 245 414 393 305 2,154 436 3,366 One-offs H1 2017 79 EBITDA reported H1 2017 3,445 one-offs
*adjusted for revaluation of certificates in Szczecin CHP
Chart: Key changes of recurring EBITDA by segments (in PLN million).
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3,300
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Other Operations EBITDA Conventional Renewable EBITDA Supply Distribution + consolidation H1 2016 Generation Energy H1 2017 adjustments
Change 227 -36 214 105 -25 EBITDA reported H1 2016 3,143 1,568 205 208 1,117 45 One-offs H1 2016 262 262 0 0 0 0 Recurring EBITDA H1 2016 2,881 1,306 205 208 1,117 45 Recurring EBITDA H1 2017 1,533 169 422 1,222 20 3,366 One-offs H1 2017 79 0 0 0 0 79 EBITDA reported H1 2017 1,612 169 422 1,222 20 3,445 one-offs
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.1.1. Consolidated statement of financial position Chart: Key changes in Assets (in PLN million).
Non-current assets Current assets 69,000
68,500
68,000
67,500
67,000
66,500
66,000
65,500
65,000
64,500
64,000
Property, plant Assets Advances for Shares accounted Assets and equipment CO emission Trade LTC Cash and cash at December 31, construction for using the Inventories 2 Deposits Other at June 30, and intangible rights receivables receivables equivalents 2016 in progress equity method 2017 assets
Change 722 -118 213 97 -943 -376 -2,297 29 2,449 -121
Assets at December 31, 2016 67,474 52,018 713 402 1,596 2,349 2,705 2,300 1,241 2,669 1,481
Assets at June 30, 2017 52,740 595 615 1,693 1,406 2,329 3 1,270 5,117 1,361 67,129
Chart: Key changes in Equity and Liabilities (in PLN million).
Equity and non-current liabilities Current liabilities 70,000
69,000
68,000
67,000
66,000
65,000
64,000
Purchase of Equity and Provision for Loans, Equity and Loans, Provision for property, plant liabilities Reserve Retained certificates Trade borrowings, Environmental liabilities borrowings, CO emission and equipment Other at December 31, capital earnings 2 intended for liabilities bonds and fees at June 30, bonds and lease rights and intangible 2016 redemption lease 2017 assets
Change 1,598 -99 -1,235 -567 2 -601 -264 981 -99 -61
Equity and liabilities at December 31, 2016 67,474 13,730 9,634 9,603 1,154 416 1,225 976 411 243 10,917
Equity and liabilities at June 30, 2017 15,328 9,535 8,368 587 418 624 712 1,392 144 10,856 67,129
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.1.2. Consolidated statement of cash flows Chart: Net change in cash (in PLN million).
3,500
3,000
2,500
2,000
1,500
1,000
500
0
-500
-1,000
-1,500
-2,000 Acquisition of Purchase of financial Disposal of Repayment of property, plant assets and Net change in Net cash from subsidiaries, Deposita loans, Net change in and increase of cash operating net of after made/ borrowings, Other cash equipment share in H1 2016 activities deduction of terminated bonds and H1 2017 and intangible companies of cash acquired finance lease assets the Capital Group Change 425 1,280 164 272 2,294 -495 -101 Net change in cash -1,390 2,857 -4,228 -382 0 -11 412 -38 H1 2016 Net change in cash 3,282 -2,948 -218 272 2,283 -83 -139 2,449 H1 2017
Chart: Net financial debt in the first half of 2017 (in PLN million).
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Acquisition of Purchase of financial assets Disposal of Net financial debt Net cash from property, plant Net financial and increase of subsidiaries, net of at December 31, operating and equipment Interest paid Other debt share in after deduction of 2016 activities and intangible at June 30, 2017 companies of the cash acquired assets Capital Group
Change in HY 2017 -3,282 2,948 218 -272 156 -202
Net financial debt 5,152 5,152 4,718
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.1.3. Key financial results in the business segments Table: Breakdown of the Group’s revenues by business segments for the first half of 2017 and 2016.
in PLN million H1 2017 H1 2016 % change Conventional Generation 5 650 5 652 0% Renewables 369 370 0% Supply 7 630 8 047 -5% Distribution 3 175 2 922 9% Other operations 251 333 -25% TOTAL 17 075 17 324 -1% Consolidation adjustments -6 455 -3 658 -76% TOTAL AFTER ADJUSTMENTS 10 620 13 666 -22% Table: Key financial figures for each business segment for the first half of 2017 (after intrasegmental eliminations).
Capital Assets of the EBITDA EBIT in PLN million expenditures segment* H1 2017 Conventional Generation 1 612 855 1 906 36 653 Renewables 169 37 28 3 547 Supply 422 409 5 6 430 Distribution 1 222 642 629 17 349 Other operations 20 -31 53 609 TOTAL 3 445 1 912 2 621 64 588 Consolidation adjustments 0 20 -26 -5 325 TOTAL AFTER ADJUSTMENTS 3 445 1 932 2 595 59 263 * see note 4.1 to the consolidated financial statements Table: Key financial figures for each business segment for the first half of 2016 (after intrasegmental eliminations).
Capital Assets of the EBITDA EBIT in PLN million expenditures segment* H1 2016 Conventional Generation 1 568 915 2 855 33 603 Renewables 205 -720 95 3 849 Supply 208 195 7 4 651 Distribution 1 117 557 713 16 814 Other operations 33 -29 68 1 042 TOTAL 3 131 918 3 738 59 959 Consolidation adjustments 12 34 -48 -3 032 TOTAL AFTER ADJUSTMENTS 3 143 952 3 690 56 927 * see note 4.1 to the consolidated financial statements
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.2. Key operational figures of PGE Capital Group Table: Key operational figures.
Key figures Unit H1 2017 H1 2016 % change 2016
Lignite extraction Tons m 25.02 21.68 15% 47.68
Net electricity production TWh 27.88 25.42 10% 53.67
Heat sales GJ m 10.61 10.18 4% 18.06
Sales to final customers* TWh 19.77 21.43 -8% 42.91
Distribution of electricity** TWh 17.50 16.91 4% 34.32
* sales by PGE Obrót S.A. with additional estimation and with taking into account the sales within PGE Group ** with additional estimation 3.2.1. Balance of energy of PGE Capital Group Sales of electricity Table: Sales of electricity outside the PGE Capital Group (in TWh).
Sales volume H1 2017 H1 2016 % change 2016
SALES IN TWh, including: 32.03 50.63 -37% 104.35 Sales to end-users* 19.80 21.46 -8% 42.96 Sales on the wholesale market, including: 10.80 28.12 -62% 59.13 Sales on the domestic wholesale market - power exchange 6.84 25.22 -73% 53.15
Other sales on the domestic wholesale market 3.78 2.85 33% 5.83
Sales to foreign customers 0.18 0.05 260% 0.15 Sales on the Balancing Market 1.43 1.05 36% 2.26
* after elimination of internal sales within PGE Group The decline in sales volume to end customers compared to the same period of 2016 mainly results from lower contracted volume in the corporate client segment in tariff group A (Large companies), B and C2x (Small and Medium Enterprises). The lower sales volume on the power exchange results from a reduction of the so called “power exchange obligation”. The increase in sales volume on the other wholesale market results from optimising the sales of produced electricity through executing larger bilateral contracts. The growth in sales to foreign clients results from intensified activity in neighbouring markets, as a result of favourable price relation between foreign and Polish market. The growth in sales volume on the balancing market is related largely to the start-up run of a new unit at Gorzów CHP.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Purchases of electricity Table: Purchases of electricity from outside of the PGE Capital Group (in TWh).
Purchases volume H1 2017 H1 2016 % change 2016
PURCHASES IN TWh, including: 6.37 27.69 -77% 55.43 Purchases on the domestic wholesale market – 1.05 21.21 -95% 42.84 power exchange Purchases on the domestic wholesale market, 2.26 2.39 -5% 5.23 other Purchases from abroad 0.04 0.04 0% 0.06 Purchases from Balancing Market 3.02 4.05 -25% 7.30
In connection with the reduction of the “power exchange obligation” a large part of PGE Group’s sales in the first half of 2017 was directly hedged by the Group’s own production assets, which translated into a decrease in buying volumes both on the domestic market – exchange, as well as in the other markets. The buying volume decline on the balancing market is the result of a lower number of reductions at the generation units that are part of the Conventional Generation segment. Production of electricity Table: Production of electricity (in TWh).
Generation volume H1 2017 H1 2016 % change 2016
ENERGY GENERATION IN TWh, including: 27.88 25.42 10% 53.67 Lignite-fired power plants 19.93 16.85 18% 37.26
including co-combustion of biomass 0.00 0.00 - 0.00 Coal-fired power plants 4.81 5.47 -12% 10.71
including co-combustion of biomass 0.06 0.18 -67% 0.30 Coal-fired CHP plants 0.52 0.53 -2% 0.98 Gas-fired CHP plants 1.46 1.31 11% 2.33 Biomass-fired CHP plants 0.10 0.24 -58% 0.43 Pumped-storage power plants 0.18 0.26 -31% 0.45 Hydroelectric plants 0.26 0.24 8% 0.43 Wind power plants 0.62 0.52 19% 1.08 The main impact on the level of electricity production in the first half of 2017, as compared to the first half of 2016, was higher production in lignite-based power plants as a result of shorter – by 8 381 h – downtime of units in Bełchatów power plant for repairs and modernisations. During the first half of 2016, units no. 3 and 6 in Bełchatów power plant are in medium overhaul and unit no. 10 was being modernised. Furthermore, the average load for Elektrownia Bełchatów units in the first half of 2017 was higher by 15.4 MW. The growth in production at gas-fired combined heat-and-power plants results from higher generation at Gorzów CHP, what is the result of a new gas-and-steam unit being commissioned from January 31, 2017. The decline in production at hard coal-based plants results from longer by 3 803 h downtime of units in repairs. Lower production at Opole power plant is a result of downtime at unit no. 3, undergoing medium overhaul from March 3, 2017 until May 4, 2017. Lower production at Dolna Odra power plant is a result of downtime at unit no. 5, undergoing medium overhaul from May 31, 2017 until June 17, 2017 and downtime at unit no. 7, undergoing medium overhaul since April 3, 2017. Additionally, lower production at Dolna Odra power plant was caused by a lower average load at this plant’s units by 18.0 MW.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
A drop of production in biomass CHP plants results from limitation of production in the Szczecin CHP, which is a consequence of termination by ENEA S.A. of an agreement for purchase of certificates. In addition, lower volume of biomass co-combustion in power plants fuelled by hard coal results from discontinuation of production with co-combustion at the Opole Power Plant, as a result of decrease in profitability of production in this technology. Production at coal-fired combined heat-and-power plants remained at a level comparable to the first half of 2016. Higher production at wind power plants results mainly from better meteorological conditions in comparison to the first half of 2016. Production at hydro power plants is slightly higher than in the first half of 2016, resulting mainly from better hydrological conditions. Lower production in pumped storage power plants results from the nature of these generation units, which in the first half of 2017, were used to a lower extent by PSE S.A. 3.2.2. Sales of heat In the first half of 2017 the heat sales in PGE Capital Group totaled 10.61 GJ million and were higher by 0.43 GJ million than in the first half of 2016. Higher heat sales resulted from increased demand for heat caused by the lower outside temperatures.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.3. Conventional Generation segment Diagram: Main assets of the Conventional Generation segment.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.3.1. Key financial figures Table: Key figures for Conventional Generation. in PLN million H1 2017 H1 2016 % change
Sales revenues 5 650 5 652 0% EBIT 855 915 -7% EBITDA 1 612 1 568 3% Capital expenditures 1 906 2 855 -33%
Chart: Key changes of EBITDA in Conventional Generation [in PLN million).
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Sale of Sale of Revenues Sale of Repair and EBITDA electricity electricity Revenues from Cost CO Personnel Capitalized EBITDA property 2 maintenance Other 2016 difference difference from LTC agreement of fuel costs costs costs 2017 rights costs in volume in price with TSO
Change 336 -80 -318 122 26 105 -89 31 -13 24 -100
EBITDA H1'16 1,568 4,164 401 76 125 1,074 499 263 1,356 493
EBITDA H1'17 4,420 83 198 151 969 588 232 1,369 393 1,612
Key factors affecting the results of Conventional Generation segment in the first half of 2017 compared to the results of the first half of 2016 included: Higher electricity sales volume, mainly due to stronger production at Elektrownia Bełchatów due to shorter downtime of units for repairs and modernisations as well as higher production at Gorzów CHP owing to the handover of a new gas-and- steam unit from January 31, 2017. Decline in electricity sales prices, which caused a decrease in revenue from sales. The average realised sales price for electricity at the Conventional Generation segment excluding the sales to final off-takers in the first half of 2017 was PLN 163/MWh, compared to PLN 166/MWh in the first half of 2016. In addition, margin on the re-sale of electricity was lower by almost PLN 6/MWh. Decline in electricity sales prices, which caused a decrease in revenue from sales. The average realised sales price for electricity at the Conventional Generation segment excluding the sales to final off-takers in the first quarter of 2017 was PLN 163.5/MWh, compared to PLN 164.8/MWh in the first quarter of 2016. In addition, margin on the re-sale of electricity was lower by PLN 15.4/MWh. Lower proceeds from long-term contracts (LTCs). PLN 83 million was recognised in other operating revenues in the first half of 2017, as a result of rulings by the Court of Appeal regarding the amount of annual adjustment for 2009 for Lublin Wrotków CHP and Gorzów CHP. During the comparative period, proceeds from LTC compensation presented in operating activities amounted to PLN 253 million. Furthermore, other operating activities included recognition of LTC adjustment in amount of PLN 148 million in connection with the verdicts in court disputes: (i) favourable verdict of the Court of Appeal relating to adjustment of stranded costs for 2010 due to Opole power plant (PLN +173 million); (ii) unfavourable verdict of the Supreme Court in scope of gas adjustment for 2009 for Lublin Wrotków CHP and rejection of cassation appeal in case of gas adjustment for 2010 for Lublin Wrotków CHP and Rzeszów CHP (PLN -25 million).
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Higher revenues from certificates, what mainly results from lower revenues from certificates in the first half of 2016 due to revaluation of certificates inventories in Szczecin CHP (PLN -118 million). Higher revenue from Regulatory System Services, mainly higher revenue from the Operational Capacity Reserve resulting from higher rates and higher volume due to lower sales activity at Opole power plant, Dolna Odra power plant and unit no. 1 in Bełchatów power plant. Lower fuel consumption costs, mainly hard coal and biomass. This is mainly the effect of lower power production at power plants and biomass-based combined heat-and-power plants and in co-combustion (see p. 3.2.1 of this report). Main changes on different types of fuel are presented on the chart below. Higher CO2 costs as a result of higher production volume and lower amount of allowances granted free of charge. Lower costs of renovations and exploitation, mainly due to a smaller substantive scope of the conducted work in comparison with the corresponding period. Higher personnel costs resulting from an increase in the value of provisions for employee benefits at PGE GiEK S.A. and as a result of implementation of payment agreements in the support companies of PGE GiEK S.A. Lower capitalised costs, among other, as a result of lower volume of overburden removal in mines and recognition of lower removal costs as asset. Chart: Costs of fuels consumption (including transport) in Conventional Generation (in PLN million).
1.100 - 4.9 GJ m
+ 0.6 - 0.4 - 2.8 + 0.1 GJ m PLN/GJ GJ m 1.050 PLN/GJ
- 1.8 - 0.3 + 4.9 1.000 PLN/GJ GJ m PLN/GJ
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Fuels Hard coal Hard coal Gas Gas Biomass Biomass Heavy oil Heavy oil Fuels 2016 volume price volume price volume price volume price 2017
Change -52 6 14 -4 -59 -4 -9 3
Fuels H1'16 1,074 682 256 110 23
Fuels H1'17 636 265 47 16 969
3.3.2. Capital expenditures Table: Capital expenditures incurred in Conventional Generation segment in the first half of 2017 and 2016. in PLN million H1 2017 H1 2016 % change
Investments in generating capacities, including: 1 660 2 541 -35% . Development 1 221 1 798 -32% . Modernisation and replacement 439 743 -41% Purchase of finished capital goods 30 29 3% Vehicles 1 4 -75% Other 11 12 -8% TOTAL 1 702 2 586 -34% Capitalized costs of overburden removal in mines 204 269 -24% TOTAL with capitalized costs of overburden removal 1 906 2 855 -33%
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Highest capital expenditures in the first half of 2017 were incurred for the following projects: construction of units 5 and 6 in Opole power plant PLN 1 018 million; construction of unit no. 11 in Turów power plant PLN 129 million; construction of CCGT unit in Gorzów CHP PLN 58 million; modernisation of units 1-3 in Turów power plant PLN 55 million; change in technology of furnace waste storage in Bełchatów power plant PLN 35 million; comprehensive modernization of units 7-12 - Bełchatów power plant PLN 33 million; construction of installation to transport ash and suspension from unit 14 in Bełchatów power plant PLN 17 million; construction of a Thermal Processing Installation with Energy Recovery at Rzeszów CHP PLN 12 million; adaptation of unit no. 3 in Opole power plant to BAT conclusions – modernization of SNCR installation PLN 8 million. Key decisions for the Conventional Generation segment in the first half of 2017: On January 24, 2017, the Minister of the Environment issued a decision upholding a decision by the Marshall of the Opole Voivodeship dated October 10, 2016 on the grant of an integrated permit for units 1-6 at Opole power plant. This decision is final in the administrative course of instances. A gas-and-steam unit at Gorzów CHP was commissioned on January 31, 2017. On March 13, 2017, the President of Szczecin issued a decision regarding a permit for the construction of a flue gas
deNox system for two Benson OP-206 boilers, together with the modernisation of water heater, flue gas ventilators and rotating air warmers at Pomorzany power plant. The decision became final on March 29, 2017. On June 1, 2017, an agreement was concluded for construction of the SNCR installation on unit no. 2 at the Bełchatów Power Plant in order to adapt it to the requirements of the BAT Conclusions. On June 9, 2017, the Provincial Administrative Court in Warsaw revoked the decision of the Minister of the Environment regarding the Integrated Permit for the Opole Power Plant, covering exploitation of units 5 and 6 at Opole Power Plant, and referred the matter for another consideration by that authority. A cassation appeal is being prepared, to be submitted to the Supreme Administrative Court. On June 22, 2017, an agreement was concluded for the construction of a ground tank which will be used as a gypsum warehouse, located on an external heap at KWB Bełchatów (Bełchatów lignite mine). On June 30, 2017, an application was submitted to the Podkarpacie Marshal Office for an issue of an integrated permit for the Thermal Processing with Power Recovery Installation (ITPOE) at the Rzeszów CHP plant.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.4. Renewables segment Diagram: Main assets of the Renewables segment.
3.4.1. Key financial figures Table: Key figures for Renewables. in PLN million H1 2017 H1 2016 % change
Sales revenues 369 370 0% EBIT 37 -720 - EBITDA 169 205 -18% Capital expenditures 28 95 -71%
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Chart: Key changes of EBITDA in Renewables (in PLN million).
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50 Sale of Sale of Revenues Sale of Sale of EBITDA property property from Taxes and EBITDA electricity electricity Other 2016 rights rights agreement fees 2017 - wind - water - wind - water with TSO* Change 23 -11 4 -4 -4 -20 -24
EBITDA H1'16 205 81 55 41 6 124 29
EBITDA H1'17 104 44 45 2 120 49 169 * excluding revenues and costs relating to balancing market not affecting EBITDA result Key factors affecting the results of Renewables segment in the first half of 2017 compared to the results of the first half of 2016 included: Growth in revenues from electricity sales from wind farms results mainly from a higher electricity sales volume by 142 GWh compared to the first half of 2016. Increase in revenues from sale of electricity from hydro power plants, caused mainly by electricity sales volume increasing by 17 GWh and a price by PLN 3/MWh higher compared to the previous year. Decline in revenues from the sale of certificates, resulting from: (i) valuation of certificates at a price lower by approx. PLN 62/MWh in the first half of 2017, compared to the first half of 2016, which resulted in a decline in revenue by about PLN (-)25 million from the previous year; (ii) correction of valuation of sold certificates and update of inventory valuation, which resulted in a PLN (+)10 million increase in revenues. Lower revenues from sale of regulatory system services (contract with PSE S.A.) resulting mainly from the adjustment of revenues for 2016 and a lower settlement rate. Increase in taxes and fees is mainly connected with the change in the regulations in scope of tax base for wind farms. Unfavourable contribution on EBITDA due to the above amounted to approximately PLN 17 million. Unfavourable deviation in the “Other” item results mainly from lower revenues from the other operating activity primarily due to one-off settlement of the subsidy (PLN 21 million) caused by write-offs establishing the present value of tangible assets as of the end of the first six months of 2016. 3.4.2. Capital expenditures Capital expenditures incurred in Renewables segment in the first half of 2017 and 2016. H1 H1 in PLN million % change 2017 2016 Investments in generating capacities, including: 25 94 -73% . Development 10 73 -86% . Modernisation and replacement 15 21 -29% Other 3 1 200% TOTAL 28 95 -71%
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.5. Distribution segment Diagram: Area of PGE distribution grid.
3.5.1. Key financial figures Table: Key figures for Distribution. in PLN million H1 2017 H1 2016 % change
Sales revenues 3 175 2 922 9% EBIT 642 557 15% EBITDA 1 222 1 117 9% Capital expenditures 629 713 -12%
Chart: Key changes of EBITDA in Distribution (in PLN million).
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Key factors affecting the results of Distribution segment in the first half of 2017 compared to the results of the first half of 2016 included: Increased volume of distributed energy by 590 GWh, resulting from – inter alia – higher number of customers measured by power take-off points (by approx. 42.4 thousand) in comparison to the first half of 2016 and growth of the economic activity of customers from groups A and B in the area of operation of PGE Dystrybucja S.A. A slight drop of the average rate by approximately PLN 0.3/MWh, without taking into account the transition fee and RES fee. Decrease of revenues from connection fees results from lower investment activity of potential clients, mainly on medium voltage. Lower costs of energy to cover balancing difference as a result of a decline in the volume of balancing difference by 90 GWh and recognition of additional estimation to cover balancing difference. Increase of costs of tax on real estate in connection with an increase of grid assets in comparison with the first six months of 2016. Increase in personnel costs, resulting largely from an on-going process to optimise salaries. Lower costs of renovation and exploitation in connection with more effective use of the company’s own resources and shift of some of the work to the following months. Positive deviation in the ‘other’ item, resulting mainly from decreased IT costs by PLN 4 million and positive result on other operating activities (growth by PLN 9 million). 3.5.2. Capital expenditures Table: Capital expenditures incurred in Distribution segment in the first half of 2017 and 2016. in PLN million H1 2017 H1 2016 % change
MV and LV power networks 193 227 -15% 110/ MV and MV/MV 68 61 11% 110 kV power lines 13 18 -28% Connection of new off-takers 226 268 -16% Purchase of transformers and energy counters 71 61 16% IT, telemechanics and communication 38 57 -33% Other 20 21 -5% TOTAL 629 713 -12%
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.6. Supply segment 3.6.1. Key financial figures Table: Key figures for Supply. in PLN million H1 2017 H1 2016 % change
Sales revenues 7 630 8 047 -5% EBIT 409 195 110% EBITDA 422 208 103% Capital revenues 5 7 -29%
Chart: Key changes of EBITDA in Supply (in PLN million).
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EBITDA Result on Result on Property right Management EBITDA Other 2016 electricity price electricity volume redemption costs service 2017
Change 104 -18 120 -2 10 EBITDA H1'16 208 682 499 227 202 EBITDA H1'17 768 379 225 192 422
Key factors affecting the results of Supply segment in the first half of 2017 compared to the results of the first half of 2016 included: Increase of result from electricity results from the change of sales policy aimed at maximization of the margin. Decrease in costs to redeem certificates, mainly as a result of lower market prices for green certificates, partially offset by the introduction of an obligation to redeem certificates for electricity produced in biogas plants, which followed the amendment of the RES Act. Decrease of revenues from the Agreement for Commercial Management of Generation Capacities (“ZHZW”) due to lower trading volume by 0.6 TWh. Revenues of PGE S.A. from PGE GiEK S.A. decreased by PLN 3 million, while revenues from PGE EO increased by PLN 1 million. Change in other results from lower operating expenses by PLN 8 million and higher result on other operations by PLN 1 million.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
3.7. Other operations 3.7.1. Key financial figures Table: Key figures for Other operations. in PLN million H1 2017 H1 2016 % change
Sales revenues 251 333 -25% EBIT -31 -29 -7% EBITDA 20 33 -39% Capital expenditures 53 68 -22%
Decrease in the EBITDA result of the Other operations segment by PLN 13 million was mainly connected with the share sale agreement concluded on March 29, 2017, concerning the transfer of 100% shares of EXATEL S.A. to the State Treasury. In addition, EXATEL S.A., during the first quarter of 2017, achieved a lower EBITDA result, which was caused by a lower margin of connection lease services in comparison with the first quarter of 2016. 3.7.2. Capital expenditures Capital expenditures in Other Operations in the first half of 2017 amounted to PLN 53 million compared to PLN 68 million in the first half of 2016. Within the above amount, the highest capital expenditures in the first half of 2017 were incurred by the following companies: PGE EJ 1 sp. z o.o. – for nuclear project development PLN 19 million; PGE Systemy S.A. – for IT infrastructure and software development PLN 18 million; EXATEL S.A. – for telecommunication infrastructure development PLN 15 million.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
4. Risks and opportunities
4.1. Risk management PGE S.A., as the Corporate Centre managing the Group, creates and implements integrated risk management architecture at PGE Group. In particular, it shapes PGE Group’s risk management policies, standards and practices, designs and develops internal IT tools to support these processes, specifies global risk appetite and adequate limits as well as monitors these. PGE Capital Group companies, as well as other entities from the electrical and power sector, are exposed to a number of risks and threats resulting from the specific operating activities and operating in specific market and regulatory environment. In PGE Group risk management process is pursued based on the GRC (Governance - Risk - Compliance) model. It allows adaptation and integration of each of the operational areas at all levels of management. Having established a top-level Risk Committee, which reports directly to the Management Board, supervision over the effectiveness of risk management in the Group is ensured. Function definition within corporate risk management allows an independent assessment of particular risks, their impact on PGE Group and limiting and controlling major risks using the economic capital concept via dedicated instruments. Formation of a separate compliance function within the Group guarantees that PGE Group’s activities are in line with legal conditions and ensures observance of the adopted internal standards. The PGE Capital Group has consequently developed a comprehensive risk management system. During the first six months of 2017, a process of assessment and analysis of long-term risks was launched in the key companies of the Group. Mechanism allowing identification of areas exposed to risk and risk level measurement methods are constantly verified and developed. Thanks to that, the significant risks concerning various areas of operations are identified and kept within the assumed limits by reducing negative effects of such risks and by taking preventive or corrective measures, in accordance with the applied cycle.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
4.1.1. Risk factors and mitigating actions The main risks and threats of PGE S.A. and the PGE Group are presented below along with their assessment and outlook in the horizon of the next year.
Risk level Risk outlook
low medium high decrease growth stable low level Risk does not pose a threat and may be tolerated, medium level Risk which needs preparation of the proper reaction based on analysis of costs and benefits, Intolerable risk, which needs immediate and active reaction, leading simultaneously to limitation of high level possible consequences and of probability of occurrence thereof. Market and Prices of electricity and related products – resulting from a lack of certainty with product risks regard to the future levels and volatility of commodity prices relative to open contract positions - this particularly concerns electricity and associated products Related to prices (property rights, CO2 emission allowances). and volumes of Electricity sales volumes – this risk derives from a lack of certainty with offered products regard to the conditions determining the demand and supply of electricity, and services directly affecting the volume of market sales by PGE Group. Tariffs (regulated prices) – resulting from the requirement to approve rates for distribution services and electricity and heat prices for particular groups of entities. Property risks Failures – connected with the operation and degradation over time of energy equipment and facilities (maintenance and repair work, diagnostics) Related to Damage to property – connected with the physical protection of energy development and equipment and facilities against destructive external factors (including fire, maintenance of weather phenomena and intentional damage). the assets Investment and development – connected with strategic plans for expanding the generation, distribution and sales potential as well as on- going investments. Operational Electricity and heat production – connected with production planning and risks impact of the factors that determine production capacities. Fuel management – connected with uncertainty regarding the costs, Related to quality, timeliness and volumes of fuel supply (mainly coal) and the pursuing of effectiveness of inventory management processes. ongoing economic Human Resources – pertaining to provision of employees with the relevant processes experience and competences, who are capable of performing specific tasks. Social dialogue – connected with a failure in achieving agreement between the Group’s management and employees, what could lead to strikes/collective labour disputes. Regulatory and Legal changes in support systems – connected with uncertainty as to the legal risks future shape of the support system for production of certified energy.
Purchase of certificates and CO2 allowances - resulting from the possible Related to changes to the statutory requirement for electricity sellers to purchase compliance with a specified quantity of property rights and to uncertainty with regard to external and volume of CO emission rights granted free of charge in future. internal legal 2 provisions Compensation for the termination of long-term contracts (LTCs) – there is a possibility that the level of adjustments to advances collected for stranded costs, as calculated by the Group, will be questioned by the President of the Energy Regulatory Office (URE), as a result of which the Group will be obligated to return advances received for terminating LTCs. Environmental protection – resulting from industry regulations specifying which "environmental" requirements energy installations should meet and what the principles for using the natural environment are. The future environmental regulations and uncertainty concerning their final shape (in particular with regard to the revision of BAT / BREF) may translate into a change in the level of capital expenditures of the PGE Group. 38 of 66
WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Unresolved legal status – connected with difficulties in respect of land acquisition or access to land in the course of new investments (particularly in the Distribution segment). Concessions – resulting from the statutory requirement to hold concessions with regard to conducted operations. Discriminatory activities – connected with application by the Group of practices that limit or eliminate competition and infringe on legal regulations or consumer interests. Financial risks Credit risk – connected with the counterparty default, partial and/or late payment of receivables or a different type of breach of contractual Related to finance conditions (for example failure to deliver/collect goods or failure to pay for management any associated damages or contractual penalties). Liquidity risk – connected with the possibility of losing the ability to meet current liabilities and obtaining financing sources for business operations. Interest rate risk – resulting in particular from the negative impact of changes in market interest rates on PGE Group's cash flows generated by floating-rate financial assets and liabilities. Foreign exchange risk – understood in particular as risk that PGE Group's cash flows denominated in currencies other than the functional currency are exposed to due to negative exchange rate movements.
The main risk mitigation actions for the PGE Group are presented below along with the description of the main tools used for the management of the given risk.
Market and product risks Impact: revenues Measures: PGE Group has rules for managing market risk (price- and volume-related), which include a and product and global risk appetite measure, VaR-based position limits and management of consolidated exposure to service offerings commodity pricing risk through mechanisms for protection against risk exceeding acceptable levels. Those rules provide consistent guidance in respect of process organisation in the context of commercial strategy and mid-term planning. PGE Group follows rules pertaining to a strategy for hedging key exposures in the area of electricity and related product trading that correspond to the adopted risk appetite in the mid-term. Position hedging levels are established with consideration given to the results of analysing pricing risk in respect of electricity and related products. Target hedging levels are specified taking into consideration the Group’s financial standing, including in particular its strategic objectives. PGE Group researches, monitors and analyses the electricity and related products markets in order to optimally use its generation and selling capacities. New products are introduced on the retail market and actively promoted through nationwide marketing campaigns. Maintaining a diverse product portfolio and focusing efforts on tailoring its offering to the market, the Group diversifies channels used to reach the end-customers and diversifies target groups with account take to client’s volume potential. Efforts aimed at current clients retention are based on a model consisting of a diversified portfolio of customer loyalty schemes and client- acquisition activities. Portfolio includes also special offers dedicated to former clients who moved over to the competitors, as well as industry offerings dedicated to specific types of economic activity. PGE Group also introduces bundled offers. Particular attention is paid to ensuring a high level of customer service by developing employees’ competences and building relations with business and retail clients. Having implemented tools to support these processes, the Group effectively manages information flows, which directly translates into comfortable client relations as well as better sales planning and organisation.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
Operational risks Impact: costs Measures: PGE Group's results are to a large extent dependent on the costs incurred in the course of operations. The Group optimises costs inter alia through monitoring of fuel prices and reserves and securing supply through long-term contracts with suppliers and through price fixing formulas. Inspections, repairs and modernisation of the existing assets optimise equipment lifecycles and required availability of key components of those assets. Level of costs is affected by securing CO2 emission allowances partly free of charge and purchase of lacking allowance with the assumption of securing the margin on sales. An intensive and effective dialogue is also carried out in order to avoid escalation of potential disputes with the social partners and to work out the most favourable solutions with regard to employment and employment costs within PGE Capital Group connected therewith. Property risks Impact: assets Measures: PGE Group effectively pursues a strategy for building up and modernization of its production capacities. The Group diversifies current structure of the production sources due to energy generation technology. Currently PGE Group is running two key investments (Opole, Turów) alongside a number of grid investments, as well as modernisation and replacement projects. We are continuously carrying out maintenance and repair work. Our main generation assets were insured against failure and damage to property. The reliability of the power supply to the end users has been systematically improved.
Regulatory and legal risks Impact: Measures: PGE Group's operations are subject to a host of national and international laws and compliance area regulations. Monitoring of the changes being introduced or proposed provides that our operations in key business segments are carried in compliance with the law and that PGE Capital Group has solutions which take into account potential changes in the legal environment. PGE S.A. is one of the members of the Polish Electricity Committee that opened its office in Brussels. Through the Committee’s operations, PGE S.A. actively influences proceeding and shaping of EU law and engages a dialogue with the EU institutions. The Group adapts its internal regulations and practices to make sure that the activities are in compliance with the power sector regulations and binding law. The extraction of fossil fuels as well as the production and distribution of electricity and heat have impact on the environment therefore the Group continuously improves its activities aimed at protecting and improving the state of the environment by implementing technological and organisational solutions ensuring efficient and effective management in this area. Financial risks Impact: Finance Measures: PGE Group manages credit risk stemming from commercial transactions. Prior to executing management a transaction, a counterparty assessment is carried out and forms a base for applying credit limits, that are regularly updated and monitored. Exposures that exceed established limits are hedged in accordance with the Group’s credit risk management policy. PGE Group applies a central financing model, which is generally used by PGE S.A. when raising external capital. PGE Group subsidiaries use a variety of intra-group financing sources and liquidity risk is monitored using periodic planning for operating, investing and financing activities. As regards currency risk and interest rate risk, PGE Group has implemented internal management procedures. PGE Group companies execute derivative transactions involving interest rate- and/or currency-based instruments (IRS, CCIRS) only in order to hedge identified risk exposures.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
5. Significant events of the reporting period and subsequent events
5.1. Investment Agreement on the financial investment in Polska Grupa Górnicza sp. z o.o. Investment Agreement on the financial investment in Polska Grupa Górnicza sp. z o.o. is described in note 22.2 to the consolidated financial statements.
5.2. Capital investment in Polimex-Mostostal S.A. Capital investment in Polimex-Mostostal S.A. is described in note 22.4 to the consolidated financial statements.
5.3. Termination of agreements for purchase of certificates by Enea S.A. Termination of agreements for purchase of certificates by Enea S.A. is described in note 19.4 to the consolidated financial statements.
5.4. Submission of offer for acquisition of EDF assets in Poland Submission of offer for acquisition of EDF assets in Poland is described in note 22.3 to the consolidated financial statements.
5.5. Description of material agreements In the first quarter of 2017 there were no agreements meeting the criteria of material agreement.
5.6. Changes in the Management Board and Supervisory Board Changes in the Management Board in the first half of 2017 On February 13, 2017 the Supervisory Board adopted resolutions on dismissal of following persons from the Management Board effective February 13, 2017: Mr. Henryk Baranowski, President of the Management Board; Ms. Marta Gajęcka, Vice-President for Market Development and International Relations; Mr. Bolesław Jankowski, Vice-President for Trading; Mr. Marek Pastuszko, Vice-President for Corporate Affairs; Mr. Paweł Śliwa; Vice-President for Innovations; Mr. Ryszard Wasiłek, Vice-President for Development; Mr. Emil Wojtowicz, Vice-President for Finance. At the same time the Supervisory Board adopted resolutions on appointment of following persons to the Management Board of the tenth term of office as from February 14, 2017: Mr. Henryk Baranowski and entrusting him the position of the President of the Management Board; Mr. Bolesław Jankowski and entrusting him the position of the Vice-President for International Affairs; Mr. Wojciech Kowalczyk and entrusting him the position of the Vice-President for Capital Investments; Mr. Marek Pastuszko and entrusting him the position of the Vice-President for Corporate Affairs; Mr. Paweł Śliwa and entrusting him the position of the Vice-President for Innovations; Mr. Ryszard Wasiłek and entrusting him the position of the Vice-President for Operations; Mr. Emil Wojtowicz and entrusting him the position of the Vice-President for Finance. As at June 30, 2017, the Management Board of the Company consisted of:
Name and surname Position of the Management Board member Henryk Baranowski President of the Management Board Bolesław Jankowski Vice-President for International Affairs Wojciech Kowalczyk Vice-President for Capital Investments Marek Pastuszko Vice-President for Corporate Affairs Paweł Śliwa Vice-President for Innovations Ryszard Wasiłek Vice-President for Operations Emil Wojtowicz Vice-President for Finance
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
On June 20, 2017 Mr. Bolesław Jankowski submitted his resignation from the position of Vice-President for International Affairs, effective as of July 1, 2017.
As at the publication date of this report, the Management Board of the Company consists of:
Name and surname Position of the Management Board member Henryk Baranowski President of the Management Board Wojciech Kowalczyk Vice-President for Capital Investments Marek Pastuszko Vice-President for Corporate Affairs Paweł Śliwa Vice-President for Innovations Ryszard Wasiłek Vice-President for Operations Emil Wojtowicz Vice-President for Finance
Changes in the Supervisory Board On April 6, 2017 the Company received a resignation from Mr. Mateusz Gramza from the Company’s Supervisory Board with immediate effect.
On June 26, 2017, the State Treasury, represented by the Minister of Energy, by way of a written statement submitted to the Management Board of the Company, dismissed Mr Radosław Osiński from the Supervisory Board. On June 27, 2017, Mr Radosław Osiński was appointed by the Ordinary General Meeting to serve the function of a Member of the Supervisory Board.
As at June 30, 2017 and as at the publication date of this report, the Supervisory Board of the Company consisted of:
Name and surname Position of the Supervisory Board member Anna Kowalik Chairman of the Supervisory Board Witold Kozłowski Supervisory Board Member - independent Grzegorz Kuczyński Secretary of the Supervisory Board - independent Jarosław Głowacki Supervisory Board Member - independent Janina Goss Supervisory Board Member - independent Radosław Osiński Supervisory Board Member - dependent Mieczysław Sawaryn Supervisory Board Member - independent Artur Składanek Supervisory Board Member - independent
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As at June 30, 2017 the standing committees of the Supervisory Board consisted of: Name and surname of the Corporate Gov- Strategy and De- Appointment and member of the Supervisory Audit Committee ernance Commit- velopment Com- Remuneration Board tee mittee Committee Member Member Janina Goss from March 2, 2016 from March 2, 2016 Member Member Jarosław Głowacki from March 2, 2016 from March 2, 2016
Anna Kowalik Member Member
Member from March 2, 2016 Member Grzegorz Kuczyński Chairman from March 2, 2016 from March 18, 2016 Member Member from Sept. 13, 2016 from September 13, Witold Kozłowski Chairman from 2016 October 25, 2016 Member from Sept. 13, 2016 Member till June 26, 2017 from September 13, Radosław Osiński Chairman from 2016 till June 26, October 25, 2016 till 2017 June 26, 2017 Member Member from March 2, 2016 Mieczysław Sawaryn from March 2, 2016 Chairman from August 8, 2016 Member Member Artur Składanek from March 7, 2016 from March 2, 2016
5.7. Decisions of the President of the Energy Regulatory Office related to realisation of LTC Act Decisions of the President of the Energy Regulatory Office related to realisation of LTC Act are described in note 22.1 to the consolidated financial statements.
5.8. Legal aspects 5.8.1. Claims for annulment of the resolutions of the General Meetings of PGE S.A. Information on claims for annulment of the resolutions of the General Meetings of PGE S.A are described in note 19.4 to the consolidated financial statements. 5.8.2. The issue of compensation regarding the conversion of shares Information on the issue of compensation regarding the conversion of shares are described in note 19.4 to the consolidated financial statements.
5.9. Information concerning proceedings in front of court, body appropriate for arbitration proceedings or in front of public administration authorities As at June 30, 2017 PGE S.A. and its subsidiaries were not a party of any proceedings concerning payables or debts whose total value would constitute at least 10% of the Company’s equity. Significant proceedings pending in front of courts, competent arbitration authority or public administration authority are described in note 19.4 to the consolidated financial statements.
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5.10. Information concerning the guarantees for loans granted by the Company or a subsidiary Within the Group, in the first half of 2017 PGE S.A. and subsidiaries did not grant guarantees to other entities or to a subsidiary, where a value of guarantees constitute at least 10% of the Company’s equity.
5.11. Information on issue, redemption and repayment of debt securities and other securities Information on issue, redemption and repayment of debt securities and other securities is described in p. 1.2.1 of the foregoing report in note 18.1 to the consolidated financial statements.
5.12. Activities related to nuclear energy Business partnership As a result of the sale of shares on April 15, 2015 to the Business Partners (TAURON Polska Energia S.A., ENEA S.A. and KGHM Polska Miedź S.A.) by PGE S.A., PGE S.A. holds 70% in the share capital of PGE EJ 1 sp. z o.o. (“PGE EJ1”), and each of the Business Partners holds 10% in the share capital of PGE EJ1. According to the Partners’ Agreement, concluded on September 3, 2014, the Parties jointly undertook to finance operations under the initial phase of the Program (the “Development Stage”), proportionally to their shareholdings. The funds for the Program are paid to PGE EJ1 in form of the increase of the share capital. PGE’s financial commitment in the Development Stage will not exceed amount of approx. PLN 700 million. Proceeding for selection of technology Further action with regard to delivery of technology is dependent on the final arrangements with the Ministry of Energy related to formula of technology selection, working out economic, organisational and legal solutions, including the risk distribution and estimated costs of implementation of those solutions. Site characterisation, environmental and other surveys Site characterisation and environmental surveys connected with preparations for the construction of Poland’s first nuclear plant began in March 2017. Works are being conducted at two sites: Lubiatowo-Kopalino and Żarnowiec, within Choczewo, Krokowa and Gniewino municipalities in the Pomeranian Voivodeship. The surveys are focusing on activities necessary to prepare an environmental impact assessment and a site characterisation report. The works are expected to finish by the end of 2020. The aim of the environmental surveys is to specify the project’s impact on the environment, broken down into the preparation, construction, operation and disassembly of the nuclear plant. The aim of the site characterisation work is to obtain data to conduct an assessment of areas in terms of their usefulness as a nuclear plant site, including the verification of factors preventing the classification of area as one that meets nuclear safety requirements (major fault). The results of these works are necessary to develop solutions that ensure the plant’s safe operation and reduction of its impact on the lives of nearby residents and the natural environmental to a minimum. The surveys are being carried out by PGE EJ1, with the main role played by the survey programme contractor, ELBIS Sp. z o.o., which is part of PGE Group. The following initiatives are planned as part of works that will be conducted in the third quarter of 2017 within environmental and site characterisation surveys: obtaining archive seismic and well data (including for the purposes of surveying deep soil) and to obtain the necessary technical data from technology providers in order to prepare the environmental impact assessment and site characterisation report, start of analysis concerning, among other things, cooling water and external threats at the locations, start of work related to preparing a specification for a study on the power take-off corridor and work related to power connections point to the National Power System. Social acceptance The main aim of activities in this area is to achieve and maintain a high level of community support at the planned nuclear plant sites (eventually, at the selected site), allowing the programme to construct Poland’s first nuclear plant to be conducted and to deliver knowledge about nuclear power and about the Programme to selected stakeholder groups at national and local level.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
In the first half of 2017, works in the area of community acceptance focused on continuing activities within the Site Municipality Development Support Programme - the Programme’s budget for 2017 was adopted in the first quarter of 2017. The third quarter of 2017 assumes the signing and execution of the further agreements under the Site Municipality Development Support Programme intended to reinforce partner relations of PGE and the local communities and authorities of the three municipalities by providing support to initiatives that are of significance to the residents and development of the region. Legal regulations concerning nuclear energy In the first half of 2017, PGE S.A. participated in public consultations on a draft act on amendment of the Nuclear Law, on a draft of the Urban and Construction Code Law and on draft Water Law act. Compensations from WorleyParsons In 2013, PGE EJ1 signed an agreement for environmental studies, site characterisation and services related to obtaining permits and permissions necessary in the investment process associated with the construction of a nuclear power plant with a consortium of WorleyParsons Nuclear Services JSC, WorleyParsons International Inc. and WorleyParsons Group Inc. ("WorleyParsons"), in the amount of approximately PLN 253 million net (including basic scope of approximately PLN 167 million). Due to delays in the implementation of the agreement, in 2013 PGE EJ1 accrued to WorleyParsons a contractual penalty in the amount of approximately PLN 7 million. In addition, in connection with a further improper execution of services in 2014, PGE EJ1 accrued contractual penalties in the total amount of approximately PLN 43 million. On December 23, 2014, PGE EJ 1 terminated the contract for reasons attributable to WorleyParsons. Contractual penalties of 2013 were deducted from the remuneration payable to WorleyParsons in 2014. Penalties for 2014 were partly deducted from the remuneration payable to WorleyParsons and partly obtained from the bank guarantee. After all deductions and amounts received by the company from the bank guarantee, PGE EJ1 is entitled to claim towards WorleyParsons for payment of approximately PLN 14 million as a penalty by way of delay. On August 7, 2015 PGE EJ 1 filed with the District Court in Warsaw a claim against WorleyParsons for the payment of approximately PLN 15 million plus statutory interest for late payment of the amount due. On November 13, 2015, PGE EJ1 received a payment demand from WorleyParsons for about PLN 59 million due for WorleyParsons remuneration, which - according to the claimant - was deducted unduly, for the works that in opinion of WorleyParsons were unjustifiably not accepted and for the project management, as well as funds collected from the bank guarantee. The court obligated PGE EJ 1 sp. z o.o. to submit a statement of defence within three months from receipt. Moreover, value of claims by WorleyParsons amounting to approximately PLN 54 million was included in the WorleyParsons’ payment demand for PLN 92 million of March 13, 2015 with regard to termination of the agreement. On March 24, 2017, PGE EJ1 received a procedural document expanding the action being brought by WorleyParsons from approximately PLN 59 million to approximately PLN 104 million (i.e. by around PLN 45 million). It is possible that WorleyParsons will file another claim amounting to approximately PLN 32 million representing the difference in amount of claims from the demand for payment of March 13, 2015 and the expanded claim received on March 24, 2017. On March 29, 2017, mediation between the Parties took place – the meeting did not result in a settlement. By means of a decision of May 15, 2017, the District Court in Warsaw set the date of the hearing for September 13, 2017, while a date for replying to WorleyParsons’ letter expanding their claim has not been set yet. PGE EJ1 does not accept the claim and regards its possible admission by the court as less likely than its dismissal. Furthermore, on May 20, 2016, PGE EJ1 filed a motion with the District Court for the Capital City of Warsaw in Warsaw to commit WorleyParsons to attempt reaching a settlement concerning PGE EJ1’s claims of PLN 41 million together with statutory interest for compensation for undue contractual performance. A conciliation meeting at the court is scheduled for June 8, 2017. During the hearing on June 8, 2017, the Court stated that a certified copy of the application was not delivered to the American WorleyParsons companies, and therefore it adjourned the hearing without setting a date. On July 3, 2017, a representative of the company received information that a certified copy of the application was delivered to the American companies, and therefore we can expect that a new date of the hearing will be set.
5.13. Sale of 100% stake in Exatel S.A. to the State Treasury On March 29, 2017, the Management Board of PGE S.A. signed an agreement to sell 100% of the shares of Exatel S.A. to the State Treasury for PLN 368.5 million. Exatel S.A. is a telecommunications operator that provides solutions for business and public administration.
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5.14. Distribution of profit for 2016 Information on distribution of profit for 2016 is presented in note 16.3 to the consolidated financial statements. 6. Transactions with related entities Information about transactions with related entities is presented in note 21 to the consolidated financial statements. 7. Publication of financial forecasts PGE S.A. did not publish financial forecasts.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
8. Information about shares and other securities
8.1. Shareholders with a significant stake According to the best knowledge, on the ground of the letter from the Ministry of the State Treasury of April 27, 2016, the State Treasury holds 1 072 984 098 ordinary shares of the Company, representing 57.39% of the Company’s share capital and entitling to 1 072 984 098 votes on the General Meeting of the Company, constituting 57.39% of total votes. Table: Shareholders holding directly or indirectly by subsidiaries at least 5% of the total votes at the General Meeting of PGE S.A.
% in total votes on Shareholder Number of shares Number of votes General Meeting
State Treasury 1 072 984 098 1 072 984 098 57.39% Others 796 776 731 796 776 731 42.61% Total 1 869 760 829 1 869 760 829 100.00%
8.2. Shares of the parent company owned by the members of management and supervisory authorities According to the best knowledge of the Management Board of the Company, members of management and supervisory authorities of the Company as of the date of submission of this report and as of the date of publishing of the consolidated report for the first quarter of 2017 held following number of shares: Table: PGE S.A. shares held and managed directly by the members of management and supervisory authorities of the Company. Number of shares as of Number of shares as Nominal value date of publishing of Change in number of submission date of of shares as of submission the consolidated report Shareholder of owned shares the quarterly report date of the half-year for Q1 2017 (i.e. May (i.e. August 8, 2017) report 11, 2017) (PLN)
Management Board - - - -
Supervisory Board 7 - 7 71.75 Jarosław Głowacki 7 - 7 71.75 Other member of the Management Board and Supervisory Board did not hold shares of the Company.
Table: shares of entities related to PGE S.A. held and managed directly by the members of management and supervisory authorities of the Company. Number of shares as of Number of shares as Nominal value date of publishing of Change in number of submission date of of shares as of submission the consolidated report Shareholder of owned shares the quarterly report date of the half-year for Q1 2017 (i.e. May (i.e. August 8, 2017) report 11, 2017) (PLN)
Management Board - - - - Supervisory Board 200 -199 1 2.00 Jarosław Głowacki* 200 - 199 1 2.00 * shares of Polimex – Mostostal S.A. Other members of the Management Board and Supervisory Board did not hold shares in the entities related to PGE S.A.
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
9. Electricity market and regulatory and business environment
9.1. Macroeconomic environment PGE Group’s main operating area is Poland, and the domestic macroeconomic backdrop has a substantial impact on Group’s results. At the same time, the condition of Poland’s economy remains largely tied to the situation across the European Union and in global markets. The Group’s financial results are affected by both the situation in specific segments of the economy and the financial markets, which affect the terms of PGE Group’s debt financing. As a rule of thumb, there is a historical correlation between rising electricity demand and economic growth in Poland. Considering PGE Group’s position on the Polish power generation market, as well as its substantial share in the electricity sales and distribution market, changes in power and heat demand may have a significant impact on the Group’s results. In the first half of 2017, gross electricity consumption went up 2.3% compared to the analogical period of the previous year. The increase was higher than in the previous year, when consumption went up 2.2% compared to the analogical period of 2015. Economic trends in the first half of 2017 remained positive in general. Median from the financial institutions forecasts for the GDP in the first half of 2017 indicates growth by 3.8% compared to the same period of the previous year. Diagram: Seasonally adjusted GDP change vs. change in domestic gross electricity consumption.
Source: GDP forecasts of financial institutions according to the survey by the Central Statistical Office of Poland, PSE Economic growth and rising electricity consumption were accompanied by optimistic condition of Polish industry, which is responsible for approx. 45% of domestic electricity consumption. The Purchasing Managers’ Index (PMI) for industry reached 52.1 points in the first half of 2016, and 53.7 points on average in the first half of 2017. This is above the 50-point threshold, which means the respondents expect the sector’s situation to improve. The positive result stems mainly from growing production, employment and consumption. The results of the Polish industrial sector should be further strengthened by the Eurozone, whose PMI for the first half of 2016 reached an average level of 51.9 points, and 56.3 points in the analogical period of 2017. Diagram: Manufacturing PMI in Poland and Eurozone (in points).
Source: Markit Economics
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Positive development in the Polish economy is confirmed by dynamics in overall industrial production. In the first half of 2017, it went up sharply by 4.2% y/y, compared to 5.7% in the comparable period of the previous year. The change resulted from lower increase in industrial production dynamics (6.2% y/o/y in the first half of 2017 versus 7.3% in the first half of 2016). Simultaneously, production in the whole energy sector increased (3.8% y/y in the first half of 2017 vs -3.8% in the first quarter of 2016). The value of industrial manufacturing depends on volumes of goods produced and prices. PPI in the first half of 2017 amounted to 3.6% in relation to comparable period of the preceding year. CPI reading amounted to 1.5% y/y at the end of June.
Table: Key economic indicators for Poland.
Key economic indicators H1 2017 H1 2016 (% change y-o-y) GDP1 3.8 3.0 CPI2 1.5 -0.8 PPI3 3.6 -1.1 Sold industrial production3 4.2 5.7 Sold production – manufacturing3 6.2 7.3 Sold production – energy3 3.8 -3.8 Dynamics of domestic electricity consumption4 2.3 2.2 Gross domestic electricity consumption (TWh)4 83.5 81.6 EUR/PLN5 4.27 4.37 Source: 1 For H1 2017 GDP - survey among financial institutions, for H1 2016 - data by the Central Statistical Office of Poland, 2 National Bank of Poland, 3 Central Statistical Office of Poland, 4 PSE S.A., 5 National Bank of Poland
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
9.2. Regulatory environment Regulatory environment Domestic ● work on the National Action Plan concerning the power effectiveness for Poland 2017, works on new Energy Policy of Poland until 2050 ● publication of Strategy Of Responsible Development setting out the challenges and strategic projects for the energy area ● changes in scope of services like:
. modification of current Operational Reserve mechanism . implementation of further packages for demand reduction services ● implementation of capacity market ● further amendments to the Law on Renewable Energy Sources, defining support scheme for energy generation in renewables ● obligation to redeem RES certificates in next years ● parameters and auction schedule for RES installations and level of reference prices ● act on investments with regard to wind power plants – inability to build new power plants at a distance less than 10 times the height of the turbine, divergent court rulings regarding property tax base (whether just the mast or the entire installation with turbine) ● introduction of support scheme for highly-efficient co-generation ● change of the rules of obtaining energy efficiency certificates ● results of explanatory proceedings before the ERO President and court disputes in cases of issue of certificates of origin of energy produced from biomass for some of the branches of PGE GiEK S.A. ● matter of implementation of quality tariff in distribution, that will make regulated income dependant on SAIDI and SAIFI ratios and connection time, among others ● possible different decision in law disputes, from which most relevant were presented in note 19.4 to the consolidated financial statements ● works on new draft Water Law Act introducing fees for water services, including the use of water for energy purposes ● work on a legislative package that is intended to transform linear economy towards a circular economy and might contribute to a change in the classification of coal combustion by-products ● work on the act on electrical mobility whose purpose is to facilitate the construction of infrastructure for charging electrical cars
International ● regulations of climate and energy package determining reduction targets for years 2021-2030; legal implementation of energy union concept, including inter alia: legislative proposal regarding revision of Directive 2003/87/EC (the EU ETS Directive), including provisions specifying the following: level of linear reduction factor (LRF), division of emission allowances into emissions sold at auctions and allocated free of charge, removal of a specific volume of emissions, operation of the Market Stabilisation Reserve mechanism, level of funds and ways of fund distribution for the Modernisation Fund, ways of distributing free of charge emission allowances. Currently, final arrangements are under way concerning the position of the European Commission, the European Parliament and European Council within the so-called “trilogues”; legislative proposal with regard to revision of the Renewable Energy (RED II) Directive, including setting out the means by which Poland is to contribute to the 27% share of renewable energy in the energy mix at EU level by 2030. The draft includes, inter alia, a proposal for legislation that restricts the use and further support of biomass; legislative proposal related to internal electricity market regulation (“EMR”) and a legislative proposal related to common rules for internal electricity market (“EMD”), the aim of which is the creation of a new structure for a single energy market, including through the introduction of numerous pro-consumer solutions and increasing market flexibility and intervention into the capacity mechanism structures
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(specifically, the proposal to introduce European assessment of capacities sufficiency and a CO2 emission standard for capacity market units at a level of 550 g/kWh); legislative proposal regarding regulation on energy union governance, which is to create a system for managing the implementation of energy union objectives that is based on cooperation with other member states and on arrangements made by the European Commission. As regards achieving the renewable energy objective, the draft includes the creation of a financial platform funded by contributions from member states; legislative proposal with regard to revision of the Energy Efficiency Directive (EED), including setting out the means by which Poland is to contribute to the 30% improvement in energy efficiency at EU level by 2030. ● regulations connected with the reduction of emissions of pollutants implemented within the framework of environmental policy, including: process of revising the Best Available Techniques (“BAT”) – BAT Conclusions await the acceptance of the College of Commissioners and translation to the EU official languages, whereupon they will be officially published. BAT conclusions will likely be published in the second half of 2017 therefore the deadline for adapting to new emission requirements will probably be in the second half of 2021, at the latest.
9.2.1. Electricity prices Domestic market - Prices Day-ahead market In the first half of 2017, the average price on the day ahead market (“RDN”)1 was PLN 151/MWh, down by 7% from the average price in the previous year’s first half (PLN 163/MWh). Results of the first half of 2017 were determined mainly by the situation in the second quarter, when average RDN price amounted to PLN 148/MWh and was by 15% lower y/y (in the first quarter prices were similar y/y).
The drop of RDN electricity prices in the second quarter of 2017 was also caused by an increase in wind power generation – the supply of power in this technology grew in the second quarter of 2017 by 1.0 TWh, i.e. 47% y/y. Drop of prices at the RDN in the second quarter of 2017 resulted also from the so-called high base of the previous year effect. This phenomenon was particularly visible in June 2016 – when the high prices were connected with changes in the structure of demand and lower availability of units fuelled by lignite. It resulted in growth of production of plants characterized by a higher variable cost, and therefore, the settling of the market price at a higher level. In the second quarter of 2017, repair-related shutdowns in units fuelled by lignite were by 1/3 lower y/y, contributing to a drop in electricity prices. Another factor which contributed to a drop in spot prices (y/y) was the price of CO2 emission rights, which was lower by 18% and which, in the second quarter of 2017, amounted on average to EUR 4.79 per tonne, in comparison with EUR 5.81 one year before, additionally supported by the appreciation of PLN (the EUR exchange rate in the second quarter of 2017 amounted to PLN 4.22 in comparison with PLN 4.37 from the previous year) A slight counter-balance for the aforementioned factors was the listings of coal prices – the average level of the Polish Steam Coal Market Index (PSCMI1), in the second quarter of 2017 increased by 2.6%, to PLN 9.1/GJ in comparison with the level of PLN 8.9/GJ during the corresponding period of the previous year.
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Chart: Monthly prices and price volatility at the day ahead market in 2016–2017 (TGE)*
220 Volume (fixing, right axis) 5 200 Avegrage day-ahead price (fixing, left axis) 4 Semi-annual average
180
163 3 160 151
155 TWh 140
PLN/MWh 2 120 1 100
80 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2016 2017
* average monthly price of RDN calculated on the base of hourly quotations (fixing), weighted by the trading volume Forward market The average price for BASE_Y-18 contracts in the second quarter of 2017 reached PLN 163/MWh, while in the same period of last year BASE_Y-17 cost PLN 161/MWh on average (+2% y/y). Trading volume for BASE_Y-18 in the second quarter of 2017 was 10.0 TWh – this is 10% lower than the BASE_Y-17 trading volume in the second quarter of 2016. The average price for PEAK_Y-18 contracts in the first quarter of 2017 reached PLN 209/MWh, while in the same period of last year PEAK_Y-17 costed PLN 211/MWh on average (-1% y/y). PEAK5_Y-18 trading volume in the second quarter of 2017 amounted to 1.0 TWh – this is 9% lower than the PEAK5_Y-17 in the second quarter of 2016. In the full first half of 2017 the average price for BASE_Y-18 contracts amounted to PLN 162/MWh and was by 2% higher than BASE_Y-17 in the second half of 2016 (PLN 159/MWh). The increase of prices on forward market was negatively correlated with the trend on spot market (described in the previous paragraph). That can be explained by the specifics of the spot market, which is more prone to the events of ad hoc nature (weather, failures) and is more volatile (as an example: atypical June 2016 and its impact on RDN statistics). Whereas, on the forward market a set of fundamental factors is priced, that are relatively stable for a year ahead (volatility characteristic for spot market in longer period is evenly distributed for all days covered by the given forward instrument). BASE_Y-18 trading volume in the first half of 2017 reached 17.0 TWh – this is 22% lower than the BASE_Y-17 trading volume in the first quarter of 2016. Average price of PEAK5_Y-18 in the first half of 2017 amounted to PLN 209/MWh, what means 1% decrease in relation to the first quarter of 2016, when the average price of the analogical contract PEAK5_Y-17 amounted to PLN 210/MWh. PEAK5_Y-18 trading volume in the first half of 2017 reached 1.7 TWh – this is 26% lower than volume of PEAK5_Y-17 recorded in the first half of 2016.
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Chart: Monthly prices and price volatility on the forward market in 2016–2017 (TGE)*.
230
220 210 210 209 210
200
190 Base_Y+1 Peak5_Y+1
180 Base_Y+1 semi-annual average Peak5_Y+1 semi-annual average
170 160 162 160 159
150
140 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2016 2017
* monthly average index level for forward contracts for the next year (Y+1), baseload and peak, calculation based on hourly quotations, weighted by the trading volume.
International market
Wholesale market (comparison of day-ahead markets) During the first six months of 2017, differences in energy prices between Poland and neighbouring countries were lower than in the previous year. Parallel to the aforementioned drops in energy prices in Poland (RDN), the average prices in the key neighbouring markets increased: in Sweden by 18% y/y, in Germany by 39% y/y, in the Czech Republic by 37% y/y. During the first six months of the previous year, the energy prices in those three countries were lower by about PLN 50/MWh than in Poland, and during the first six months of 2017, the price difference between Polish and Swedish market decreased to PLN 19/MWh, prices in the German and Polish markets were very similar, and prices in the Czech market were higher than in Poland by about PLN 9/MWh. In the following map of the region, we can observe a general rule of price distribution (cheaper in the north, more expensive in the south), which is reflected by the direction of transborder exchange.
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Chart: Comparison of average prices on Polish market and on selected European markets in the first half of 2017 (prices in PLN/MWh, average exchange rate EUR/PLN 4.27).
Source: TGE, EEX, EPEX, Nordpool, OTE a.s., PXE International trading Chart: Monthly imports, exports and cross-border exchange balance in 2016-2017 (in GWh).
800 Export Import Balance 600 400 200 0
GWh -200 -400 -600 -800 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2016 2017
Source: own work based on PSE data. The direction of the commercial exchange is closely connected with the current price relation (which fluctuates every hour, i.e. when prices in Poland are higher than the prices abroad, this results in import of energy. During the first six months of 2017, Poland was a net importer. The balance of commercial exchange amounted to 1.23 TWh, and it consisted of 3.23 TWh of import and 2.00 TWh of export. If in the first quarter of 2017, import and export were comparable (1.60 TWh vs. 1.39 TWh), in the second quarter import prevailed (1.63 TWh vs. 0.61 TWh). The growth of net import in the second quarter compared to the first quarter is related to the weather factor. The Polish power sector, mainly based on conventional power generation, is characterized by less seasonality in comparison with hydro power plants in the neighbouring countries. Ice thawing in the Alps released large production volumes in hydro power plants (frozen during winter). In the second quarter of 2017, Polish market lost the price
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WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Management Board’s report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 6-month period ended June 30, 2017
advantage over the neighbours from the south observed in the first quarter (average prices in Germany and in Czech Republic decreased by 30% q/q, while in the same period prices in Poland dropped by 5% q/q).
Diagram: Geographical structure of commercial exchange in the first half of 2017 (GWh).
Source: own work based on PSE data.
Retail market The diversity of electricity prices for retail customers in the European Union depends not only on the level of the wholesale prices of electricity. The fiscal system, regulation mechanisms and support schemes in particular countries all have significant impact on the final price of electricity. In Poland in the second half of 20162, an additional burden for individual customers accounted for 22% of the electricity price, compared to the EU average of 29%. In Denmark and Germany the proportion of additional charges in the price of electricity exceeded 50%.
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Chart: Comparison of average prices for individual customers in selected EU countries in the second half of 2016 (prices in PLN/MWh).
Source: own work based on Energy prices in the EU. Eurostat, the statistical office of the European Union. EUR/PLN 4.36 Diagram: The share of additional charges in electricity prices for the individual customers in selected EU countries in the second half of 2016 (prices in PLN/MWh, calculated with average exchange rate EUR/PLN 4.36).
1,600 1,400 Taxes and fees 1,200 Sale price and distribution cost
1,000 695 912 800 297 600 240 126 113 PLN/MWh 229 130 121 400 154 104 602 558 468 544 507 200 433 445 459 419 357 386 0 DenmarkGermany Sweden Latvia Finland Slovakia Czechia Poland Estonia Lithuania Hungary
Source: own work based on PSE data.
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9.2.2. Prices of certificates In the second quarter of 2017, the average price of green certificates (PMOZE) reached PLN 28/MWh and was 70% lower y/y (OZEX_A index). The main reason of price pressure is oversupply of green certificates produced in previous years combined with the growing energy production from renewable sources. In 2017, the obligation to redeem PMOZE certificates was set at 15.40%, while the obligation to redeem biogas certificates (PMOZE-BIO) at 0.60%. A single substitute fee applies to PMOZE and PMOZE-BIO certificates, which in 2017 remains at last year’s level: PLN 300.03/MWh.
The average price for the PMOZE-BIO certificate in the second quarter of 2017 was PLN 389/MWh (the price exceeded the substitute fee). In light of the existing regulations arising under the RES Act and an interpretation issued by the President of the Energy Regulatory Office, it was not possible to meet the redemption obligation for PMOZE-BIO for the second half of 2016 by paying the substitute fee – settlement using the substitute fee is conditional upon the relative value of the substitute fee to the weighted average yearly price of the certificate.
The draft amendment to the RES Law contains provisions levelling the pressure in the market of biogas certificates – but the influence of legislative processes was reflected in PMOZE-BIO prices only after the end of the second quarter of 2017.
The average price of yellow certificates in the second quarter of 2017 reached PLN 119/MWh, at the same level as the average price in the second quarter of the preceding year (the graph shows the break of the trend – in previous quarters the prices consequently grew). The redemption obligation3 for yellow certificates in 2017 was raised from 6% to 7% as compared with year 2016 (causing additional demand), while on the other hand there was increased supply of energy produced in gas-fired co-generation sources. The substitute fee was reduced from PLN 125/MWh to PLN 120/MWh).
Chart: Average quarterly prices of certificates.
Yellow certificates Green certificates 118 114 110 (PMGM) 123 (OZEX_A) 122 93 120 119 119 118 -70% y/y 117 49 40 115 0% y/y 35 28
Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17
Source: Own work based on TGE quotations. The yellow certificates prices presented on the chart are weighted average blended price – for products PMGM-14, PMGM-15, PMGM-16, PMGM-17.
3 Redemption obligation concerns the sale of electricity to the final customer. The seller is obliged to redeem a number of “coloured” certificates (in relation to the volume of electricity sold) specified by the regulator. 57 of 66
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9.2.3. Prices of CO2 emission rights Two types of emission rights are available on the market – European Union Allowances (EUA) and Certified Emission Reductions (CER). CER-type rights may be redeemed by business operators only to a limited extent, in settlement period 2013-2020 up to 11% of the allocations granted under the National Allocation Plan for years 2008-2012. In the first half of 2017, the average prices4 of EUA allowances reached EUR 5.00/t and were 13% lower than in the same period last year (EUR 5.76/t). One of the reasons of the decline from 2016 may be the end of a 3-year backloading period and therefore an increase in the supply of EUAs on the primary market. The average quantity of allowances offered in auctions during this period was 4.4 million tonnes. In the same period of 2016, this amount was 3.4 million tonnes. The highest price – EUR 6.14/t – occurred in the first listing of 2017. The second price growth – EUR 5.91/t - occurred on March 1, 2017 and was caused by the adoption of ambitious amendments to the draft directive of EU ETS by the Environment Council. After a single increase, prices started to drop slowly and they achieved the lowest value of EUR 4.35/t on May 11, 2017.
Chart: Prices of CO2 emission rights.
9 100 90 8 7.66
80
70 7 60
6 50 5.43
EUR 40 5 30 20 4
10 volume (thousandtonnes)
3 0
2015-01 2015-04 2015-07 2015-10 2016-01 2016-04 2016-07 2016-10 2017-01 2017-04
Volume EUA_DEC (right axis) EUA_DEC (left axis) EUA_DEC yearly average
Source: Bloomberg, own work
In the first half of 2017, future EUA for December 2017 were priced in range EUR 4.35-6.14/tonne. In the same period, CERs in future contracts with delivery in December 2017 were priced in range EUR 0.20-0.29/tonne Further work on revision of the EU Emissions Trading System (EU ETS) directive is on-going. The new legal regulations concern the next settlement period, i.e. after 2020. The final version of the directive will be published after voting at the European Council and Parliament. 9.2.4. Emission rights granted free of charge for years 2013-2020 The Regulation of the Council of Ministers, that sets the allocation of allowances for particular units of electricity producers in period 2013-2020, was adopted on April 8, 2014. Analogically, allocations of allowances for heat producers were set by the Regulation of the Council of Ministers of March 31, 2014.
4 Average prices weighted by volume 58 of 66
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PGE’s installations accounts were credited with free allowances for heat for 2017 and energy for 2016, while free allowances for electricity for 2017 will be received by the Group by the end of April 2018, after verification of reports from investments submitted to the National Investment Plan.
At the same time, redemption of emission rights resulting from CO2 emissions in 2016 was completed in April 2017.
Table: Emission of CO2 from major Group installations in the first quarter of 2017 in comparison to allocation of CO2 emission rights for 2017 (in Mg).
CO emissions in Allocation of CO emission Operator 2 2 H1 2017* rights for 2017**
Bełchatów Power Plant 19 148 970 7 788 822 Turów Power Plant 3 590 780 3 135 350 Opole Power Plant 2 821 507 1 802 162 ZEDO 2 150 740 1 484 923 Bydgoszcz CHPs 425 700 347 386 Lublin Wrotków CHP 295 537 202 222 Gorzów CHP 230 978 158 071 Rzeszów CHP 182 854 94 345 Kielce CHP 114 914 64 141 Zgierz CHP 104 094 26 016 TOTAL 29 066 074 15 103 438
* estimates, emissions not verified - the data will be settled and certified by the authorised verifier of CO2 emission on the ground of yearly reports of volume of CO2 emissions ** amount of granted CO2 emission rights will be confirmed in the Regulation of the Council of Ministers in the first quarter of 2018 9.2.5. Termination of long-term contracts (LTC) Due to the termination of LTCs in accordance with the LTC Act, the producers being earlier the parties to such contracts obtained a right to receive compensations for the coverage of so called stranded costs. Stranded costs were capital expenditures resulting from investments in generating assets made by the generator before May 1, 2004 that a generator is not able to recoup from revenues obtained from sales of generated electricity, spare capacity and ancillary services in a competitive environment after early termination of LTC. The LTC Act limits the total amount of funds that may be paid to all generators to cover stranded costs, discounted as at January 1, 2007, to PLN 11.6 billion, including PLN 6.3 billion for PGE. Table: Key data relating to PGE Group generators subject to the LTC Act.
Maximum amount of stranded Generator LTC maturity and additional costs (in PLN million) Turów Power Plant 2016 2 571 Opole Power Plant 2012 1 966 ZEDO 2010 633 Lublin Wrotków CHP 2010 617 Rzeszów CHP 2012 422 Gorzów CHP 2009 108 TOTAL 6 317 In the period provided for by the LTC Act, i.e. till December 31, 2007, PGE S.A. signed LTC termination agreements with generators being parties to the then applicable LTCs. Therefore generators obtained a right to receive funds to cover their stranded costs. An adjustment period for PGE GiEK S.A. producers covered by the compensation system ended in December 2016. On April 5, 2017, PGE GiEK S.A. received information about the initiation of a proceeding regarding the amount of annual adjustment of stranded costs for 2016. On July 31, 2017 the ERO President issued decision regarding the amount of annual adjustment of stranded costs for 2016. According to the decision of the ERO President, the amount of annual adjustment of stranded costs in the generating units of PGE GiEK S.A. for 2016 amounts to approximately PLN (+)276 million.
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On April 10, 2017, PGE GiEK S.A. received information about the initiation of a proceeding regarding the amount of final adjustment of stranded costs. According to the provisions of the LTC Act, the process of establishing the final adjustment of stranded costs should be completed by August 31, 2017. If no disagreements arise in this process, decision issued by the President of the Energy Regulatory Office will conclude the participation of PGE GiEK S.A. producers in the compensation system. The impact of LTC compensations on results achieved by the PGE Group is described in note 22.1 to the consolidated financial statements.
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9.3. Supply markets 9.3.1. Fuel purchase costs Table: Volume and cost of purchase of fuels from third party suppliers in the first half of 2017 and 2016 H1 2017 H1 2016 Type of fuel Volume Cost Volume Cost (tons ths) (PLN m) (tons ths) (PLN m) Hard coal 2 446 546 2 338 504 Gas (cubic metres ths) 368 686 266 353 887 256 Biomass 253 46 501 111 Fuel oil 13 18 20 18 TOTAL 876 889
In the first half of 2017 the costs of purchasing primary fuels from providers outside the Group amounted to PLN 876 million and were lower by PLN 13 million than in the first half of 2016. Costs of purchase of the fuels in PGE Capital Group were mainly affected by biomass and hard coal. Biomasa Lower purchase volume by 50% (PLN -55 million) Lower average price by 18% (PLN -10 million) The lower volume of biomass purchases resulted from lower electricity production based on combustion and co-combustion of biomass given the non-profitability of biomass combustion (see p. 3.2.1 of this report). Hard coal
Higher purchase volume by 5% (PLN +23 million) The higher volume of hard coal purchases in the first half of 2017 results from the need to maintain required level of stocks. Higher average price by 4% (PLN +19 million) The higher price of hard coal in the first half of 2017 mainly results from the growing prices on the domestic and international mining market, which translates directly into higher contractual prices.
Gas Higher purchase volume by 4% (PLN +10 million) Higher volume of gas used is related to increases production at gas-fired CHPs (see p. 3.2.1 of this report).
Fuel oil Lower purchase volume by 35% (PLN -6 million) The lower volume of heating oil purchases in the first half 2017, comparing to the same period of 2016, was caused by a lower number of energy unit start-ups connected with failures, planned repairs and demand from the TSO. Higher average price by 54% (PLN +6million) The significant increase in the average price for heating oil was driven by growth in oil and refinery product prices across the world.
In the first half of 2017 approximately 72% of the electricity was produced from internally sourced lignite, whose extraction price is fully controlled by PGE Capital Group. In the analogical period of 2016 the share of lignite-based electricity generation amounted to 66%. 9.3.2. Tariffs PGE Group companies earn part of their income based on tariffs approved by the President of the Energy Regulatory Office: tariffs for the sale of electricity to households (G tariff group); tariffs of the distribution companies; tariffs for heat.
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Distribution of electricity Methodology of and assumptions for tariffs determination were published in the document “Tariffs for the DSO for the year 2017”, which was prepared and published by the President of the Energy Regulatory Office. On December 15, 2016 the ERO President approved the Tariff of PGE Dystrybucja S.A. for electricity distribution services for the period from January 1, 2017 until December 31, 2017. Tariff came into force on January 1, 2017. Distribution tariffs for 2017 approved by the President of the Energy Regulatory Office, contributed to changes in average tariff in particular tariff groups (calculated for revenues and volume in a given tariff year) in comparison to year 2016: A tariff group – decrease by 0.15%; B tariff group – increase by 5.89%; C+R tariff group – increase by 3.77%; G tariff group – increase by 6.23%. The change in distribution service rates takes into consideration a significant increase in the transition fee (from approx. 80% for tariff B groups to 106% for customers with highest consumption in tariff G groups) related to the costs of liquidating long- term contracts and RES fee (by approx. 47%) related to support mechanisms for the production of energy from renewable sources. These fees have an impact on growth of regulated revenue and distribution service fees, but they are fully transferred to entities in charge of support instruments, thus they do not impact profit of the distribution companies. Changes in average tariff in particular tariff groups (not including RES fee and transition fee) are as follows: A tariff group – no change; B tariff group – decrease by 0.55%; C+R tariff group – decrease by 0.22%; G tariff group – increase by 0.64%. The quality regulation elements introduced in 2016 are being continued in 2017. It has been settled that the ratios directly impacting the regulated revenue will be following key performance indicators: SAIDI – System Average Interruption Duration Index; SAIFI – System Average Interruption Frequency Index; Connection time; Transfer time of metering and billing data („CPD”), which will be included in the quality regulations as of 2018. Not meeting the levels of ratios indicated by the ERO President will result in penalty of decreasing the regulated revenue through reduction of amount of return on capital in year t+2. In the initial period no rewards are anticipated for achieving better indicators than the required ones. Impact of quality parameters realized in 2017 will be included in tariff for 2019. In accordance with the assumptions adopted by the ERO, a penalty cannot exceed 2% of regulated revenue and value of 15% of return on capital in a given year. Tariff for heat Pursuant to the Energy Law, energy companies holding concessions set tariffs for heat and propose their duration. Conduction of proceedings concerning heat tariffs approval lies within the competence of regional branches of the Energy Regulatory Office. Average sale price of heat in PGE decreased by approximately 1% in comparison to the prices in the first half of 2016.
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10. Statements of the Management Board
10.1. Statement on the reliable preparation of the financial statements To the best knowledge of the Management Board of PGE S.A., the half-yearly consolidated financial statements, containing standalone financial information for PGE S.A. and comparative data were prepared in accordance with the governing accounting principles, present a fair, true and reliable view of the material and financial situation of PGE Capital Group and its financial result. The report of the Management Board on the activities of PGE Capital Group presents a true view of the development, achievements and situation of the Capital Group.
10.2. Statement on the entity authorised to audit the financial statements The Management Board of PGE S.A. declares that the entity authorised to audit the financial statements, which reviews the interim consolidated financial statements containing standalone financial information for PGE S.A., has been appointed in accordance with provisions of the law. The entity and the statutory auditors, who performed the review, fulfilled all the requirements for issuing an unbiased and independent report on the review, in accordance with the governing provisions and professional standards. 11. Approval of the Management Board’s Report The foregoing Management Board’s Report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. was approved for publication by the Management Board of the parent company on August 8, 2017.
Warsaw, August 8, 2017 Signatures of Members of the Management Board of PGE Polska Grupa Energetyczna S.A.
President of the Management Board Henryk Baranowski
Vice-President of the Management Board Wojciech Kowalczyk
Vice-President of the Management Board Marek Pastuszko
Vice-President of the Management Board Paweł Śliwa
Vice-President of the Management Board Ryszard Wasiłek
Vice-President of the Management Board Emil Wojtowicz
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Glossary Ancillary control services provided to the transmission system operator, which are indispensable for the proper services (ACS) functioning of the national power system and ensure the keeping of required reliability and quality standards. Achievable capacity the maximum sustained capacity of a generating unit or generator, maintained continuously by a thermal generator for at least 15 hours or by a hydroelectric generator for at least five hours, at standardized operating conditions, as confirmed by tests. Balancing market a technical platform for balancing electricity supply and demand on the market. The differences between the planned (announced supply schedules) and the actually delivered/off-taken volumes of electricity are settled here. The purpose of the balancing market is to balance transactions concluded between individual market participants and actual electricity demand. The participants of the balancing market can be the generators, customers for electricity understood as entities connected to a network located in the balancing market area (including off-takers and network customers), trading companies, electricity exchanges and the TSO as the balancing company. Base, baseload standard product on the electricity market: a constant hourly power supply per day in a given period, for example week, month, quarter or year. Best Practices Document „Best Practice for GPW Listed Companies 2016” adopted by the resolution of the GPW Supervisory Board of October 13, 2015 and effective from January 1, 2016. Biomass solid or liquid substances of plant or animal origin, subject to biodegradation, obtained from agricultural or forestry products, waste and remains or industries processing their products as well as certain other biodegradable waste in particular agricultural raw materials. Black energy popular name for energy generated as a result of combustion of black coal or lignite.
CCS Carbon Capture and Storage Technology used to capture CO2 from the emissions of fossil fuel power plants followed by its underground storage. CDM Clean Development Mechanisms, one of the flexible mechanisms introduced under Article 12 of the Kyoto Protocol. CER Certified Emission Reduction. Co-combustion the generation of electricity or heat based on a process of combined, simultaneous combustion in one device of biomass or biogas together with other fuels; part of the energy thus generated can be deemed to be energy generated with the use of renewable sources. Co-generation the simultaneous generation of heat and electricity or mechanical energy in the course of one and the same technological process. Constrained the generation of electricity to ensure the quality and reliability of the national power system; this generation applies to generating units in which generation must continue due to the technical limitations of the operation of the power system and the necessity of ensuring its adequate reliability. Distribution transport of energy through distribution grid of high (110 kV), medium (15kV) and low (400V) voltage in order to supply the customers. Distribution System a power company engaging in the distribution of gaseous fuels or electricity, responsible for traffic in the Operator (DSO) gas or electricity distribution systems, current and long-term security of operation of the system, the operation, maintenance, repairs and indispensable expansion of the distribution network, including connections to other gas or power systems. ERO Energy Regulatory Office (pol. URE). ERU Emission Reduction Units.
EUA European Union Allowances: transferable CO2 emission allowances; one EUA allows an operator to release one tonne of CO2. EU ETS European Union Greenhouse Gas Emission Trading Scheme) EU emission trading scheme. Its operating rules are set out in the ETS Directive, amended by the Directive 2009/29/EC of the European Parliament and of the Council of April 23, 2009 (OJ EU L. of 2009, No. 140, p. 63—87). Generating unit a technically and commercially defined set of equipment belonging to a power company and used to generate electricity or heat and to transmit power. GJ Gigajoule, a unit of work/heat in the SI system, 1 GJ = 1000/3.6 kWh = approximately 278 kWh. GPZ main power supply point, a type of transformer station used for the processing or distribution of electricity or solely for the distribution of electricity. Green certificate popular name for energy generated from renewable energy sources. GW gigawatt, a unit of capacity in the SI system, 1 GW = 109 W. GWe one gigawatt of electric capacity. GWt one gigawatt of heat capacity. HICP Harmonised Index of Consumer Prices High Voltage Network a network with a nominal voltage of 110 kV. (HV)
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Highly efficient co- the generation of electric or mechanical power and useful heat through co-generation, in such a way as to generation ensure savings of primary energy used in: (i) a co-generation unit in the amount not lower than 10 per cent. as compared to generation of electric power and heat in separated systems with reference efficiency for separated generation; or (ii) co-generation unit with an installed capacity under 1 MW as compared to generation of electric power and heat in separated systems with reference efficiency for separated generation. IGCC Integrated Gasification Combined Cycle. Installed capacity the formal value of active power recorded in the design documentation of a generating system as being the maximum achievable capacity of that system, confirmed by the acceptance protocols of that system (a historical value, it does not change over time. IRiESP the Transmission Network Operation and Maintenance Manual required to be prepared by a transmission system operator pursuant to the Energy Law; instructions prepared for power networks that specify in detail the terms and conditions of using these networks by system users as well as terms and conditions for traffic handling, operation and planning the development of these networks; sections on transmission system balancing and system limitation management, including information on comments received from system users and their consideration, are submitted to the ERO President for approval by way of a decision. IRZ Cold Intervention Reserve Service – service consisting of maintaining power units ready for energy production. Energy is produced on request of PSE S.A. JI Joint Implementation: one of the flexibility mechanisms introduced under Article 6 of the Kyoto Protocol. Kyoto Protocol the Kyoto Protocol to the United Nations Framework Convention on Climate Change of December 11, 1997 (Dz.U. of 2005, No. 203, Item 1684), in force since February 16, 2005. KSE the National Power System, a set of equipment for the distribution, transmission and generation of electricity, forming a system to allow the supply of electricity in the territory of Poland. KSP the National Transmission System, a set of equipment for the transmission of electricity in the territory of Poland. kV kilo volt, an SI unit of electric potential difference, current and electromotive force; 1kV= 103 V. kWh kilowatt-hour, a unit of electric energy in the SI system defined as the volume of electricity used by the 1 kW equipment over one hour. 1 kWh = 3,600,000 J = 3.6 MJ. Low Voltage Network a network with a nominal voltage not exceeding 1 kV. (LV) LTC Long-term contracts on the purchase of capacity and electricity entered into between Polskie Sieci Elektroenergetyczne S.A. and electricity generators in the years 1994-2001. Medium-voltage an energy network with a nominal voltage higher than 1 kV but lower than 110 kV. network (MV) MEV Minimum Energy Volumes. MIFID II Markets in Financial Instruments Directive II - a legal act relating to the financial instruments market, that is applicable to both financial sector entities (banks) and non-financial corporations (eg energy companies).
MSR Market Stability Reserve (relating to CO2) MW a unit of capacity in the SI system, 1 MW = 106 W. Mwe one megawatt of electric power.
MWt one megawatt of heat power. NAP National emissions Allocation Plan, prepared separately for the national emission trading system and for the EU emission trading system by the National Administrator of the Emission Trading System.
NAP II National CO2 emissions Allocation Plan for the years 2008-2012 prepared for the EU emission trading system adopted by the Ordinance of the Council of Ministers of July 1, 2008 (Dz. U. of 2008, No. 202, item 1248). NCBiR National Center for Research and Development Nm3 normal cubic meter; a unit of volume from outside the SI system signifying the quantity of dry gas in 1 m3 of space at a pressure of 101.325 Pa and a temperature of 0°C.
NOx nitrogen oxides. Operational Capacity ORM constitutes of generation capacities of active Production Schedular Units (JGWa) in operation or Reserve (ORM) layover, representing excess capacity over electricity demand available to the TSO under the Energy Sale Agreements and on the Balancing Market in unforced generation
Peak, peakload a standard product on the electricity market; a constant power supply from Monday to Friday, each hour between 7:00 a.m. and 10:00 p.m. (15-hour standard for the Polish market) or between 8:00 a.m. and 8:00 p.m. (12-hour standard for the German market) in a given period, for example week, month, quarter or year. Peak power pumped a special kind of hydroelectric power plants. In addition to river flow and the difference in the water table levels storage plants they need two bodies of water connected with a channel or a pipeline. The power station is situated next to the lower lake or at the dam of the upper lake. The pumped storage facilities provide ancillary control services for the national power system. Their functions are to secure stability, provide passive energy, store excessive power in the system and supply power to the system in peak time. The pumped storage plants that have a natural 65 of 66
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inflow of water to the upper lake also generate electricity from renewable sources. The main off-taker of electricity produced by the peak power pumped storage power stations and their services is TSO
Property rights negotiable exchange-traded rights under green and co-generation certificates PSCMI1 Polish Steam Coal Market Index RAB Regulatory Asset Base. Red certificate a certificate confirming generation of electricity in co-generation with heat. Red energy popular name for electricity co-generated with heat. R egulator the President of ERO, fulfilling the tasks assigned to him in the energy law. The regulator is responsible for, among others, giving out licenses for energy companies, approval of energy tariffs, appointing Transmission System Operators and Distribution System Operators. Renewable Energy a source of generation using wind power, solar radiation, geothermal energy, waves, sea currents and tides, flow Source (RES) of rivers and energy obtained from biomass, landfill biogas as well as biogas generated in sewage collection or treatment processes or the disintegration of stored plant or animal remains. SAIDI System Average Interruption Duration Index - index of average system interruption time (long, very long and disastrous), expressed in minutes per customer per year, which is the sum of the interruption duration multiplied by the number of consumers exposed to the effects of this interruption during the year, divided by the total number of off-takers. SAIDI does not include interruptions lasting less than three minutes and is determined separately for planned and unplanned interruptions. It applies only to breakdowns in the medium (MV) and high voltage (HV). SAIFI System Average Interruption Frequency Index - index of average system amount of interruptions ( long, very long and disastrous ), determined as number of off-takers exposed to the effects of all such interruptions during the year divided by the total number of off-takers. SAIFI does not include interruptions lasting less than three minutes and is determined separately for planned and unplanned interruptions. It applies only to breakdowns in the medium (MV) and high voltage (HV). SNCR selective non-catalytic reduction
Tariff the list of prices and rates and terms of application of the same, devised by an energy enterprise and introduced as binding on the customers specified therein in the manner defined by an act of parliament. Tariff group a group of customers off-taking electricity or heat or using services related to electricity or heat supply to whom a single set of prices or charges and terms are applied. TFS Tradition Financial Services, an electricity trading platform used for concluding various transactions, purchase and sale of conventional energy, property rights, renewable energy and CO2 emission allowances. TGE Towarowa Giełda Energii S.A. (Polish Power Exchange), a commodity exchange on which trading can take place in electricity, liquid or gas fuels, extraction gas, emission allowances and property rights whose price depends directly or indirectly on electric energy, liquid or gas fuels and emission allowances, admitted to commodity exchange trading. TPA, TPA rule Third Party Access, the owner or operator of the network infrastructure to third parties in order to supply goods/services to third party customers. Transmission transport of electricity through high voltage (220 and 400 kV) transmission network from generators to distributors. Transmission System a power company engaging in the transmission of gaseous fuels or electric energy, responsible for traffic in a gas Operator (TSO) or power transmission system, current and long-term security of operation of that system, the operation, maintenance, repair and indispensable expansion of the transmission system, including connections with other gas or power systems. In Poland, for the period from July 2, 2014 till December 31, 2030 Polskie Sieci Elektroenergetyczne S.A. was chosen as a TSO in the field of energy transmission. TWh terawatt hour, a multiple unit for measuring of electricity unit in the system SI. 1 TWh is 109 kWh. Ultra -high-voltage an energy network with a voltage equal to 220 kV or higher. network (UHV) V (volt) electrical potential unit, electric voltage and electromotive force in the International System of Units (SI), 1 V= 1J/1C = (1 kg x m2) / (A x s3). 2 W (watt) a unit of power in the International Systems of Units (SI), 1 W = 1J/1s = 1 kg x m x s-3. Yellow certificate a certificate confirming generation of energy in gas-fired power plants and CCGT power plants. Yellow energy popular name for energy generated in gas-fired power plants and CCGT power plants.
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PGE Polska Grupa Energetyczna S.A. Condensed interim consolidated financial statements for the 6-month period
ended June 30, 2017 in accordance with IFRS EU (in PLN million)
WorldReginfo - bda889bc-9687-4f27-88ff-09b31e631bb9 Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
TABLE OF CONTENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ...... 4 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...... 5 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...... 6 CONSOLIDATED STATEMENT OF CASH FLOWS ...... 7 GENERAL INFORMATION, BASIS FOR PREPARATION OF THE FINANCIAL STATEMENTS AND OTHER EXPLANATORY INFORMATION ..... 8 1. General information ...... 8 1.1 Information about the parent company ...... 8 1.2 Information about the PGE Group...... 9 1.3 Structure of the PGE Group ...... 9 2. Basis for preparation of the financial statements ...... 11 2.1 Statement of compliance ...... 11 2.2 Presentation and functional currency ...... 12 2.3 New standards and interpretations published, not yet effective ...... 12 2.4 Professional judgment of management and estimates ...... 14 3. Fair value hierarchy ...... 14 EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...... 15 EXPLANATORY NOTES TO THE OPERATING SEGMENTS ...... 15 4. Information on operating segments ...... 15 EXPLANATORY NOTES TO THE STATEMENT OF COMPREHENSIVE INCOME ...... 18 5. Revenues and expenses ...... 18 5.1 Sales revenues ...... 18 5.2 Cost by nature and function ...... 19 5.3 Other operating income and expenses ...... 21 5.4 Financial income and expenses ...... 21 5.5 Share of profit of associates and joint arrangements accounted for under the equity method ...... 22 6. Impairment allowances on assets ...... 22 7. Tax in the statement of comprehensive income ...... 23 EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...... 24 8. Significant additions and disposals of property, plant and equipment and intangible assets ...... 24 9. Future investment commitments ...... 24 10. Shares in associates and joint arrangements accounted for under the equity method ...... 24 11. Deferred tax in the statement of financial position ...... 25 11.1 Deferred tax assets ...... 25 11.2 Deferred tax liabilities ...... 25
12. CO2 emission rights for own use ...... 25 13. Other current and non-current assets ...... 26 13.1 Other non-current assets ...... 26 13.2 Other current assets ...... 26 14. Selected financial assets ...... 26 14.1 Trade and other financial receivables ...... 26 14.2 Cash and cash equivalents ...... 27 15. Derivatives...... 27 16. Equity ...... 28 16.1 Share capital ...... 28 16.2 Hedging reserve...... 29 16.3 Dividends paid and dividends declared ...... 29 17. Provisions ...... 30 17.1 Provision for employee benefits...... 31 17.2 Rehabilitation provision ...... 31 17.3 Provision for deficit of CO2 emission rights ...... 31 17.4 Provision for energy origin rights held for redemption ...... 31 17.5 Provision for non-contractual use of property ...... 31 17.6 Other provisions ...... 31 18. Financial liabilities ...... 31 18.1 Loans, borrowings, bonds and lease ...... 32 18.2 Trade and other financial liabilities ...... 32
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
OTHER EXPLANATORY NOTES ...... 33 19. Contingent liabilities and receivables. Legal claims ...... 33 19.1 Contingent liabilities ...... 33 19.2 Other significant issues related to contingent liabilities ...... 33 19.3 Contingent receivables ...... 34 19.4 Other legal claims and disputes ...... 34 20. Tax settlements ...... 35 21. Information on related parties ...... 36 21.1 Associates and joint arrangements ...... 36 21.2 Subsidiaries of the State Treasury ...... 36 21.3 Management personnel remuneration ...... 37 22. Significant events of the reporting period and subsequent events ...... 37 22.1 Compensation resulting from termination of long term contracts ...... 37 22.2 Capital investment in Polska Grupa Górnicza S.A...... 39 22.3 Submission of offer for acquisition of EDF assets in Poland ...... 39 22.4 Capital investment in Polimex-Mostostal S.A...... 40 22.5 Subsequent events after the reporting period ...... 41 23. Half-year condensed separate financial information of PGE Polska Grupa Energetyczna S.A...... 42 SEPARATE STATEMENT OF COMPREHENSIVE INCOME ...... 42 SEPARATE STATEMENT OF FINANCIAL POSITION ...... 43 SEPARATE STATEMENT OF CHANGES IN EQUITY ...... 44 SEPARATE STATEMENT OF CASH FLOWS ...... 45 23.1 General information ...... 46 23.2 Professional judgment of management and estimates ...... 46 23.3 The influence of new regulations on future financial statements of the Company ...... 46 23.4 Fair value hierarchy ...... 47 23.5 Sales revenues ...... 47 23.6 Cost by nature and function ...... 47 23.7 Financial income and expenses ...... 48 23.8 Shares in subsidiaries ...... 48 23.9 Financial assets ...... 49 23.10 Cash and cash equivalents ...... 50 23.11 Derivatives ...... 50 23.12 Other current assets ...... 51 23.13 Selected financial assets ...... 51 23.14 Loans, borrowings, bonds, cash-pooling ...... 51 23.15 Contingent liabilities ...... 52 23.16 Other significant issues related to contingent liabilities ...... 52 23.17 Other legal claims and disputes ...... 53 23.18 Information on related parties...... 53 23.19 Subsidiaries within the PGE Group ...... 53 23.20 Subsidiaries of the State Treasury ...... 54 23.21 Management personnel remuneration ...... 54 23.22 Significant events of the reporting period ...... 54 24. Approval of the financial statements ...... 55
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Period ended Period ended Note June 30, 2017 June 30, 2016 (reviewed) (reviewed) STATEMENT OF PROFIT OR LOSS
SALES REVENUES 5.1 10,620 13,666 Cost of goods sold 5.2 (7,872) (11,822) GROSS PROFIT/(LOSS) ON SALES 2,748 1,844 Distribution and selling expenses 5.2 (600) (727) General and administrative expenses 5.2 (345) (399) Other operating income 5.3 202 325 Other operating expenses 5.3 (73) (91) OPERATING PROFIT/(LOSS) 1,932 952 Financial income 5.4 144 49 Financial expenses 5.4 (266) (204) Share of profit/(loss) of entities accounted for under the equity method 5.5 1 (42) PROFIT/(LOSS) BEFORE TAX 1,811 755 Current income tax 7 (248) (227) Deferred income tax 7 (68) 15 NET PROFIT/(LOSS) FOR THE REPORTING PERIOD 1,495 543
OTHER COMPREHENSIVE INCOME Items, which may be reclassified to profit or loss, including: Valuation of hedging instruments 16.2 (72) 40 Foreign exchange differences from translation of foreign entities (6) 4 Deferred tax 7 14 (8) OTHER COMPREHENSIVE INCOME FOR THE REPORTING PERIOD, NET (64) 36
TOTAL COMPREHENSIVE INCOME 1,431 579
NET PROFIT/(LOSS) ATTRIBUTABLE TO: – equity holders of the parent company 1,497 546 – non-controlling interests (2) (3)
COMPREHENSIVE INCOME ATTRIBUTABLE TO: – equity holders of the parent company 1,433 582 – non-controlling interests (2) (3)
EARNINGS AND DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY 0.80 0.29 HOLDERS OF THE PARENT COMPANY (IN PLN)
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at As at As at Note June 30, 2017 December 31, 2016 June 30, 2016 (reviewed) (audited) (reviewed) NON-CURRENT ASSETS Property, plant and equipment 8 52,095 51,365 48,833 Investment property 26 27 31 Intangible assets 8 645 653 635 Financial receivables 14.1 245 237 148 Derivatives 15 209 356 197 Available-for-sale financial assets 37 37 15 Shares in entities accounted for under the equity method 10 615 402 327 Other non-current assets 13.1 609 730 909 Deferred tax assets 11.1 253 268 253 54,734 54,075 51,348 CURRENT ASSETS Inventories 1,693 1,596 1,799
CO2 emission rights for own use 12 1,406 2,349 1,888 Income tax receivables 13 19 15 Derivatives 15 - 9 16 Trade and other financial receivables 14.1 3,689 6,325 3,705 Available-for-sale financial assets 5 4 4 Other current assets 13.2 460 416 473 Cash and cash equivalents 14.2 5,117 2,669 1,712 Assets classified as held-for-sale 12 12 20 12,395 13,399 9,632 TOTAL ASSETS 67,129 67,474 60,980
EQUITY Share capital 16.1 19,165 19,165 18,698 Hedging reserve 16.2 89 147 11 Foreign exchange differences from translation (3) 3 3 Reserve capital 15,328 13,730 14,310 Retained earnings 9,535 9,634 7,412 EQUITY ATTRIBUTED TO EQUITY HOLDERS OF THE PARENT COMPANY 44,114 42,679 40,434
Non-controlling interests 88 96 88 TOTAL EQUITY 44,202 42,775 40,522
NON-CURRENT LIABILITIES Non-current provisions 17 5,106 5,004 6,185 Loans, borrowings, bonds and lease 18.1 8,368 9,603 5,638 Derivatives 15 29 30 51 Deferred tax liabilities 11.2 1,260 1,191 786 Deferred income and government grants 1,077 1,141 1,180 Other financial liabilities 18.2 28 33 22 15,868 17,002 13,862 CURRENT LIABILITIES Current provisions 17 1,751 2,181 1,841 Loans, borrowings, bonds and lease 18.1 1,392 411 308 Trade and other financial liabilities 18.2 2,686 3,556 2,830 Income tax liabilities 28 6 14 Deferred income and government grants 114 119 121 Other current non-financial liabilities 1,088 1,424 1,482 7,059 7,697 6,596 TOTAL LIABILITIES 22,927 24,699 20,458 TOTAL EQUITY AND LIABILITIES 67,129 67,474 60,980
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
EQUITY ATTRIBUTED TO EQUITY HOLDERS OF THE PARENT COMPANY Foreign exchange Non- Hedging Reserve Retained Share capital differences TOTAL controlling TOTAL reserve capital earnings from interests translation Note 16.1 16.2 AS AT JANUARY 1, 2016 18,698 (21) (1) 13,009 8,636 40,321 96 40,417 Net profit for the reporting period - - - - 2,568 2,568 (2) 2,566 Other comprehensive income - 168 4 - 200 372 - 372 COMPREHENSIVE INCOME - 168 4 - 2,768 2,940 (2) 2,938 Retained earnings distribution - - - 1,301 (1,301) - - - Dividend - - - - (467) (467) (4) (471) Increase of share capital 467 - - (467) - - 10 10 Tax on increase of share capital - - - (110) - (110) - (110) Acquisition of additional shares in - - - - (2) (2) (4) (6) subsidiaries Other changes - - - (3) - (3) - (3) TRANSACTIONS WITH OWNERS 467 - - 721 (1,770) (582) 2 (580) AS AT DECEMBER 31, 2016 19,165 147 3 13,730 9,634 42,679 96 42,775 Net profit for the reporting period - - - - 1,497 1,497 (2) 1,495 Other comprehensive income - (58) (6) - - (64) - (64) COMPREHENSIVE INCOME - (58) (6) - 1,497 1,433 (2) 1,431 Retained earnings distribution - - - 1,598 (1,598) - - - Dividend ------(2) (2) Acquisition of additional shares in - - - - 2 2 (3) (1) subsidiaries Other changes ------(1) (1) TRANSACTIONS WITH OWNERS - - - 1,598 (1,596) 2 (6) (4) AS AT JUNE 30, 2017 19,165 89 (3) 15,328 9,535 44,114 88 44,202
Foreign exchange Non- Hedging Reserve Retained Share capital differences TOTAL controlling TOTAL reserve capital earnings from interests translation Nota 16.1 16.2 AS AT JANUARY 1, 2016 18,698 (21) (1) 13,009 8,636 40,321 96 40,417 Net profit for the reporting period - - - - 546 546 (3) 543 Other comprehensive income - 32 4 - - 36 - 36 COMPREHENSIVE INCOME - 32 4 - 546 582 (3) 579 Retained earnings distribution - - - 1,301 (1,301) - - - Dividend - - - - (467) (467) (4) (471) Acquisition of additional shares in - - - - (1) (1) (2) (3) subsidiaries Other changes - - - - (1) (1) 1 - TRANSACTIONS WITH OWNERS - - - 1,301 (1,770) (469) (5) (474) AS AT JUNE 30, 2016 18,698 11 3 14,310 7,412 40,434 88 40,522
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
CONSOLIDATED STATEMENT OF CASH FLOWS Period ended Period ended June 30, 2017 June 30, 2016 (reviewed) (reviewed) CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax 1,811 755 Income tax paid (340) (129)
Adjustments for: Share of profit of associates consolidated under the equity method (1) 42 Depreciation, amortization, disposal and impairment losses 1,513 2,192 Interest and dividend, net 65 63 Profit / loss on investment activities 43 (57) Change in receivables 348 47 Change in inventories (99) 152 Change in liabilities, excluding loans and borrowings (465) (710)
Change in other non-financial assets, prepayments and CO2 emission rights 830 348 Change in provisions (367) 115 Other (56) 39 NET CASH FROM OPERATING ACTIVITIES 3,282 2,857
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment and intangible assets (2,948) (4,228) Deposits with a maturity over 3 months (202) (524) Termination of deposits over 3 months 2,485 513 Acquisition of financial assets / increase in shareholding in the PGE Group companies (218) (382) Acquisition /proceeds from sales of subsidiaries after deduction of acquired/returned cash 272 - Interest received 10 - Other 10 20 NET CASH FROM INVESTING ACTIVITIES (591) (4,601)
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans, borrowings and issue of bonds 8 510 Repayment of loans, borrowings, bonds and finance lease (91) (98) Interest paid (156) (103) Grants received for non-current assets - 48 Other (3) (3) NET CASH FROM FINANCING ACTIVITIES (242) 354
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,449 (1,390) Effect of movements in exchange rates on cash held (3) 1 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 2,666 3,101 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 5,115 1,711 Restricted cash 82 216
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
GENERAL INFORMATION, BASIS FOR PREPARATION OF THE FINANCIAL STATEMENTS AND OTHER EXPLANATORY INFORMATION 1. General information 1.1 Information about the parent company PGE Polska Grupa Energetyczna S.A. („parent company”, „the Company”, „PGE S.A.”) was founded on the basis of the Notary Deed of August 2, 1990 and registered in the District Court in Warsaw, XVI Commercial Department on September 28, 1990. The Company was registered in the National Court Register of the District Court for the capital city of Warsaw, XII Commercial Department, under no. KRS 0000059307. The parent company is seated in Warsaw, 2 Mysia Street. As at January 1, 2017 the composition of the Company’s Management Board was as follows:
Henryk Baranowski – the President of the Management Board, Marta Gajęcka – the Vice-President of the Management Board, Bolesław Jankowski – the Vice-President of the Management Board, Marek Pastuszko – the Vice-President of the Management Board, Paweł Śliwa – the Vice-President of the Management Board, Ryszard Wasiłek – the Vice-President of the Management Board, Emil Wojtowicz – the Vice-President of the Management Board.
On February 13, 2017 the Supervisory Board recalled all Members of the Company's Management Board effective from February 13, 2017. At the same time, the Supervisory Board appointed the following persons to the 10th term of the Management Board effective from February 14, 2017: Mr. Henryk Baranowski entrusting him the position of the President of the Management Board, Mr. Bolesław Jankowski, Mr. Wojciech Kowalczyk, Mr. Marek Pastuszko, Mr. Paweł Śliwa, Mr. Ryszard Wasiłek and Mr. Emil Wojtowicz entrusting them the positions of Vice-Presidents of the Management Board. As at June 30, 2017 the composition of the Company's Management Board was as follows: Henryk Baranowski – the President of the Management Board, Bolesław Jankowski – the Vice-President of the Management Board, Wojciech Kowalczyk – the Vice-President of the Management Board, Marek Pastuszko – the Vice-President of the Management Board, Paweł Śliwa – the Vice-President of the Management Board, Ryszard Wasiłek – the Vice-President of the Management Board, Emil Wojtowicz – the Vice-President of the Management Board. On June 20, 2017 Mr. Bolesław Jankowski submitted his resignation form the Management Board effective from July 1, 2017. As at the date of publication of these financial statements the composition of the Company's Management Board is as follows: Henryk Baranowski – the President of the Management Board, Wojciech Kowalczyk – the Vice-President of the Management Board, Marek Pastuszko – the Vice-President of the Management Board, Paweł Śliwa – the Vice-President of the Management Board, Ryszard Wasiłek – the Vice-President of the Management Board, Emil Wojtowicz – the Vice-President of the Management Board.
Separate half-year report of PGE S.A. Starting from the first half of 2017 the separate half-year report of PGE S.A. is included as a part of a condensed half-year report. This possibility results from § 83 of the Minister of Finance Regulation of February 19, 2009 on current and periodic information provided by issuers of securities and conditions of recognition as equivalent information required by the law of a non-Member State (Official Journal 2014, item 133, with amendments) and PGE S.A. declared that it will use this possibility in current report no. 3/2017 dated January 23, 2017. Therefore, note 23 of these consolidated financial statements includes the half-year condensed separate financial statements of PGE S.A.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Ownership structure As at June 30, 2017 the ownership structure of the parent company is as follows State Treasury Other shareholders Total As at December 31, 2016 57.39% 42.61% 100.00% As at June 30, 2017 57.39% 42.61% 100.00%
The ownership structure as at particular reporting dates was prepared on the basis of data available to the Company. According to information available in the Company as at the date of publication of these financial statements the sole shareholder who holds at least 5% of votes at the General Meeting of PGE S.A. is the State Treasury. 1.2 Information about the PGE Group PGE Polska Grupa Energetyczna S.A. Group („PGE Capital Group”, „PGE Group”, „Group”, „CG PGE”) comprises the parent company PGE Polska Grupa Energetyczna S.A., 50 subsidiaries, 3 associates and 1 joint arrangement. As described in note 22.4, in the current period, the Group gained significant influence on Polimex-Mostostal S.A. and accounts for this company under the equity method. For additional information about subsidiaries included in the consolidated financial statements please refer to note 1.3. These consolidated financial statements of the PGE Group comprise financial data for the period from January 1, 2017 to June 30, 2017 („financial statements”, „consolidated financial statements”) and include comparative data for the period from January 1, 2016 to June 30, 2016 and as at December 31, 2016. The financial statements of all affiliated companies were prepared for the same reporting period as the financial statements of the parent company, using consistent accounting principles. Core operations of the PGE Group companies are as follows: production of electricity, distribution of electricity, wholesale and retail sale of electricity, energy origin rights, CO2 emission rights and gas, production and distribution of heat, rendering of other services related to the above mentioned activities.
Business activities are conducted under appropriate concessions granted to particular Group companies.
Going concern These consolidated financial statements were prepared under the assumption that the significant Group companies will continue to operate as a going concern in the foreseeable future. As at the date of the approval of these consolidated financial statements, there is no evidence indicating that the significant Group companies will not be able to continue its business activities as a going concern. The foregoing financial statements are prepared based on the same accounting principles (policy) and methods of computation as compared with the most recent annual financial statements. These financial statements are to be read together with the audited consolidated financial statements of the PGE Group for the year ended December 31, 2016. 1.3 Structure of the PGE Group During the reporting period, the PGE Group consisted of the enumerated below companies, consolidated directly and indirectly:
Share of the Group Share of the Group Entity Entity holding shares entities as at entities as at June 30, 2017 December 31, 2016 SEGMENT: SUPPLY PGE Polska Grupa Energetyczna S.A. 1. The Parent Company Warsaw PGE Dom Maklerski S.A. 2. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Trading GmbH 3. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Berlin PGE Obrót S.A. 4. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Rzeszów ENESTA sp. z o.o. 5. PGE Obrót S.A. 87.33% 87.33% Stalowa Wola SEGMENT: CONVENTIONAL GENERATION PGE Górnictwo i Energetyka 6. Konwencjonalna S.A. PGE Polska Grupa Energetyczna S.A. 100.00% 99.98% Bełchatów ELBIS sp. z o.o. 7. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Rogowiec
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Share of the Group Share of the Group Entity Entity holding shares entities as at entities as at June 30, 2017 December 31, 2016 MEGAZEC sp. z o.o. 8. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bydgoszcz MegaSerwis sp. z o.o. 9. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bogatynia „ELMEN” sp. z o.o. 10. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Rogowiec Przedsiębiorstwo Usługowo-Produkcyjne 11. „ELTUR -SERWIS” sp. z o.o. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bogatynia Przedsiębiorstwo Usługowo-Produkcyjne 12. „TOP SERWIS” sp. z o.o. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bogatynia Przedsiębiorstwo Transportowo-Sprzętowe 13. „BETRANS” sp. z o.o. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bełchatów Przedsiębiorstwo Wulkanizacji Taśm i Produkcji Wyrobów Gumowych 14. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% BESTGUM POLSKA sp. z o.o. Rogowiec RAMB sp. z o.o. 15. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Piaski EPORE sp. z o.o. PGE Górnictwo i Energetyka 16. 85.38% 85.38% Bogatynia Konwencjonalna S.A. „Energoserwis – Kleszczów” sp. z o.o. PGE Górnictwo i Energetyka 17. 51.00% 51.00% Rogowiec Konwencjonalna S.A. Przedsiębiorstwo Energetyki PGE Górnictwo i Energetyka 18. Cieplnej sp. z o.o. 50.98% 50.98% Konwencjonalna S.A. Zgierz SEGMENT: RENEWABLES PGE Energia Odnawialna S.A. 19. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw Elektrownia Wiatrowa Baltica-1 sp. z o.o. 20. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw Elektrownia Wiatrowa Baltica-2 sp. z o.o. 21. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw Elektrownia Wiatrowa Baltica-3 sp. z o.o. 22. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw PGE Energia Natury sp. z o.o. 23. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw PGE Energia Natury PEW sp. z o.o. 24. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw SEGMENT: DISTRIBUTION PGE Dystrybucja S.A. 25. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Lublin SEGMENT: OTHER OPERATIONS PGE EJ 1 sp. z o.o. 26. PGE Polska Grupa Energetyczna S.A. 70.00% 70.00% Warsaw PGE Systemy S.A. 27. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw EXATEL S.A. PGE Polska Grupa Energetyczna S.A. - 100.00% Warsaw PGE Sweden AB (publ) 28. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Stockholm PGE Obsługa Księgowo-Kadrowa sp. z o.o. 29. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw „Elbest” sp. z o.o. 30. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bełchatów Elbest Security sp. z o.o. 31. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Bełchatów PGE Inwest 2 sp. z o.o. 32. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 5 sp. z o.o. 33. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Share of the Group Share of the Group Entity Entity holding shares entities as at entities as at June 30, 2017 December 31, 2016 PGE Centrum sp. z o.o. 34. (formerly PGE Inwest 6 sp. z o.o.) PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Ventures sp. z o.o. 35. (formerly PGE Inwest 7 sp. z o.o.) PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 8 sp. z o.o. 36. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 9 sp. z o.o. 37. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 10 sp. z o.o. 38. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 11 sp. z o.o. 39. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 12 sp. z o.o. 40. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 13 S.A. 41. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 14 sp. z o.o. 42. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Nowa Energia sp. z o.o. 43. (formerly PGE Inwest 15 sp. z o.o.) PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 16 sp. z o.o. 44. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 17 sp. z o.o. 45. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 18 sp. z o.o. 46. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw PGE Inwest 19 sp. z o.o. 47. PGE Polska Grupa Energetyczna S.A. 100.00% - Warsaw PGE Towarzystwo Funduszy Inwestycyjnych S.A. 48. PGE Polska Grupa Energetyczna S.A. 100.00% 100.00% Warsaw ENERGO-TEL S.A. EXATEL S.A. - 100.00% Warsaw BIO-ENERGIA sp. z o.o. 49. PGE Energia Odnawialna S.A. 100.00% 100.00% Warsaw Przedsiębiorstwo Transportowo-Usługowe 50. „ETRA” sp. z o.o. PGE Dystrybucja S.A. 100.00% 100.00% Białystok Energetyczne Systemy Pomiarowe sp. z o.o. 51. PGE Dystrybucja S.A. 100.00% 100.00% Białystok
The table above includes the following changes in the structure of the PGE Group companies subject to full consolidation which took place during the reporting period ended June 30, 2017: On February 1, 2017 PGE Polska Grupa Energetyczna S.A. set up a company named PGE Inwest 19 sp. z o.o. which was registered in the National Court Register on February 24, 2017, On March 29, 2017 PGE S.A. concluded agreement for sale of 100% shares of EXATEL S.A. Together with the sale of shares of EXATEL S.A. the Group lost control over its subsidiary ENERGO-TEL S.A.
2. Basis for preparation of the financial statements 2.1 Statement of compliance These financial statements were prepared in accordance with International Accounting Standard 34 Interim Financial Reporting and in the scope required under the Minister of Finance Regulation of February 19, 2009 on current and periodic information provided by issuers of securities and conditions of recognition as equivalent information required by the law of a non-Member State (Official Journal 2014, item 133, with amendments). International Financial Reporting Standards (“IFRS”) include standards and interpretations accepted by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Standards Interpretations Committee (“IFRIC”).
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
2.2 Presentation and functional currency The functional currency of the parent company and presentation currency of these consolidated financial statements is Polish Zloty („PLN”). All amounts are in PLN million, unless indicated otherwise. For the purpose of translation of items denominated in currency other than PLN at the reporting date the following exchange rates were applied:
June 30, 2017 December 31, 2016 June 30, 2016 USD 3.7062 4.1793 3.9803 EUR 4.2265 4.4240 4.4255
2.3 New standards and interpretations published, not yet effective The following standards, changes in already effective standards and interpretations are not endorsed by the European Union or are not effective as at January 1, 2017:
Standard Description of changes Effective date IFRS 9 Financial Changes to the classification and measurement requirements – replacement of the January 1, 2018 Instruments existing categories of financial instruments with the two following categories: measured at amortized cost and at fair value. Changes to hedge accounting. IFRS 14 Regulatory Accounting and disclosure principles for regulatory deferral accounts. Standard in the Deferral Accounts current version will not be effective in the EU IFRS 15 Revenue from The standard applies to all contracts with customers, except for those within the scope January 1, 2018 Contracts with Customers of other IFRSs (e.g. lease contracts, insurance contracts and financial instruments). with explanations to IFRS 15 clarifies principles of revenue recognition. IFRS 15 IFRS 16 Lease The standard eliminates the classification of leases as either operating or finance lease January 1, 2019 in the lessee’s accounts. All contracts which meet the criteria of lease will be recognized as finance lease. Amendments to IAS 12 Clarification of the method of deferred tax asset settlement on unrealized losses. January 1, 2017 Amendments to IAS 7 The initiative on changes to disclosures. January 1, 2017 Amendments to IFRS 10 Deals with the sale or contribution of assets between an investor and its joint venture Has not been and IAS 28 or associate. determined Amendments to IFRS 2 Classification and measurement of share-based payment transactions January 1, 2018 Amendments to IFRS 4 Application of IFRS 9 Financial instruments jointly with IFRS 4 Insurance contracts January 1, 2018 Annual improvements to A collection of amendments dealing with: January 1, 2018/ IFRS (cycle 2014-2016) IFRS 1 – elimination of short-term exemption for entities using IFRS for the first time; January 1, 2017 IFRS 12 – clarification of the scope of disclosure requirements; IAS 28 – valuation of entities, in which an investment has been made, at fair value through profit or loss or using an individual method. Amendments to IAS 40 Changes to the classification of properties: i.e. transfer from investment property to January 1, 2018 other groups of assets. IFRIC 22 Foreign Currency Guidelines specifying determination of the date of a transaction and related spot January 1, 2018 Transactions and Advance foreign exchange rate to be used in case foreign currency payments are made or Consideration received in advance. IFRS 17 Insurance contracts Establishes new principles for recognition of revenues and profit/loss during the period January 1, 2021 of rendering insurance services. IFRIC 23 Uncertainty over The interpretation is to be applied to the determination of taxable profit (tax loss), tax January 1, 2019 income tax treatment bases, unused tax losses, unused tax credits and tax rates.
The PGE Group intends to adopt the above mentioned new standards, amendments to standards and interpretations published by the International Accounting Standards Board but not yet effective at the reporting date, when they become effective.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
The influence of new regulations on future financial statements of the PGE Group IFRS 9 Financial Instruments IFRS 9 introduces fundamental changes in respect of classification, presentation and measurement of financial instruments. As part of IFRS 9, new model for calculating impairment will be introduced that will require more timely recognition of expected credit losses and rules for hedge accounting will be updated. These changes are intended to allow preparers of financial statements to reflect entities’ actions more accurately. Current analysis of the standard indicates that possible changes may refer to the following areas: rules for calculating and recognition of impairment allowances concerning financial assets (change from incurred loss model to expected loss model), classification of financial assets, possible simplifications of hedge accounting.
Analysis of the impact of IFRS 9 has not been finished yet, nonetheless according to the PGE Group the standard should not have significant influence on the reported financial results. IRFS 15 Revenue from Contracts with Customers IFRS 15 is intended to unify and simplify principles of revenue recognition by introducing one model for revenue recognition. In particular, the standard will impact revenue recognition resulting from agreements or package agreements based on which clients are provided with separate services and/or goods. Analysis of the impact of the standard indicates that changes may concern mainly the following areas: revenues from connection to the distribution network. Currently, revenues from connection fees are recognized at one time when they become due i.e. at the moment of connection. The new standard may change principles for recognition of revenues from connection to the distribution network and related expenses depending on the final output of dependency analysis between connection agreement and distribution agreement concluded with the same client; acting as an intermediary in respect of selected, separate services and goods offered to clients on the basis of electricity or gas sale agreement, or distribution agreement. The change may result in a decrease of sales revenues and related expenses, but it will not affect the reported profit or loss; extending the scope of disclosures related to sales revenues.
Apart from the possible impact of changes in recognition of revenues and expenses resulting from connection to distribution network, the implementation of the standard should not significantly influence the Group’s financial statements. Analysis of the impact of the standard has not been finished yet.
IFRS 16 Lease The new standard changes principles for recognition of contracts which meet the criteria of a lease. The main change is to eliminate the classification of leases as either operating leases or finance leases in the lessee’s accounts. All contracts which meet the criteria of a lease will be recognized as a current finance lease. Adoption of the standard will have the following effect: in the statement of financial position: increase of non-financial non-current assets and financial liabilities, in the statement of comprehensive income: decrease of operating expenses (other than depreciation/amortization), increase of depreciation/amortization and financial expenses.
The PGE Group is in the process of analysis of IFRS 16’s impact on the future financial statements. Other standards and their changes should not have significant impact on future financial statements of the PGE Group.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
2.4 Professional judgment of management and estimates In the process of applying accounting rules with regards to the below issues, management has made judgments and estimates that have the most significant impact on the amounts presented in the consolidated financial statements, including in other explanatory information. These estimates were based on the best knowledge of the Management Board relating to current and future operations and events in particular areas. Detailed information on the assumptions taken was presented below or in the relevant explanatory notes. In the previous reporting periods the PGE Group raised impairment allowances of assets, in particular of property, plant and equipment. In the current reporting period the Group has not identified any impairment indicators nor indicators to reverse previously recognized impairment allowances. Estimate of recoverable amount of property, plant and equipment is based on a number of significant assumptions to the factors, realization of which is uncertain and mostly beyond the PGE Group's control. The Group believes that it has assumed the most accurate volumes and values. Nevertheless, realization of the particular assumptions may diverge from the ones established by the Group. Provisions are liabilities of uncertain amount or timing. During the reporting period, the Group changed estimates regarding the validity or amounts of some provisions. Changes in estimates are presented in note 17 of these financial statements. The Group’s estimates of compensation related to early termination of long-term contracts for sale of capacity and electricity resulting in recognition of related revenues and receivables are based on appropriate, in the Group’s opinion, interpretation of the Act dated June 29, 2007 on the principles for coverage of costs incurred due to early termination of long-term contracts for sales of capacity and electricity (Official Journal from 2007, No. 130, item 905) (" the LTC Act"), the anticipated outcome of disputes with the President of the Energy Regulatory Office and on a number of significant assumptions to the factors, some of which are beyond the Group’s control. An unfavorable outcome of the dispute with the President of the Energy Regulation Office, described in note 22.1, with respect to the interpretation of the LTC Act, and changes in assumptions used, including those resulting from mergers within the PGE Group, may significantly impact the estimates and as a consequence may lead to significant changes in the financial position and financial results of the PGE Group. It is not possible to predict the final outcome of the dispute with the President of the Energy Regulation Office as at the date of preparation of these consolidated financial statements.
3. Fair value hierarchy The principles for valuation of inventories, stocks, shares and instruments not quoted on active markets, for which fair value may not be determined reliably, are the same as presented in the financial statements for the year ended December 31, 2016. The Group measures derivatives at fair value using valuation models for financial instruments based on publicly available exchange rates, interest rates and discount curves in particular currencies (applicable also for commodities with prices denominated in these currencies) that derive from active markets. The fair value of derivatives is determined based on discounted future cash flows from concluded transactions, calculated based on the difference between the forward rate and transaction price. Forward exchange rates are not modelled as separate risk factor, but are derived from the spot rate and appropriate forward interest rate for foreign currencies in relation to PLN.
As at June 30, 2017 As at December 31, 2016 FAIR VALUE HIERARCHY Level 1 Level 2 Level 1 Level 2
CO2 emission rights - - 29 - Inventories - - 29 - Currency forward - - - 1 Commodity forward - - - 8 CCIRS valuation - 76 - 231 IRS valuation - 87 - 125 Derivatives - option - 46 - - Financial assets - 209 - 365 IRS valuation - 29 - 30 Financial liabilities - 29 - 30
During the current and comparative reporting periods, there have been no transfers of financial instruments between the first and the second level of the fair value hierarchy.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS EXPLANATORY NOTES TO THE OPERATING SEGMENTS 4. Information on operating segments The PGE Group companies conduct their business activities based on relevant concessions, including primarily concession on: production, trading and distribution of electricity, generation, transmission and distribution of heat, granted by the President of Energy Regulatory Office and concessions for the extraction of lignite deposits, granted by the Minister of the Environment. Concessions, as a rule, are being issued for the period between 10 and 50 years. Main concessions in the PGE Group expire in the years 2020-2038. Relevant assets are assigned to the held concessions on lignite mining and generation and distribution of electricity and heat, which is presented in detailed information on operating segments. For holding concessions concerning electricity and heat the Group incurs annual charges dependent on the level of turnover, whereas for conducting licensed extraction of lignite the exploitation charges as well as fees for the use of mining are borne. The exploitation charges depend on the current rate and the volume of the extraction. The PGE Group presents information on operating segments in the current and comparative reporting periods in accordance with IFRS 8 Operating Segments. The PGE Group’ segment reporting is based on the following business segments: Conventional Generation comprises exploration and mining of lignite and production of electricity in the Group’s power plants and heat and power plants as well as ancillary services. Renewables comprise generation of electricity in pumped-storage power plants and from renewable sources. Supply includes sales and purchases of electricity and gas on the wholesale market, trading in emissions certificates and energy origin rights, sales and purchases of fuel, as well as sales of electricity and rendering services to end users. Distribution comprises management over local distribution networks and transmission of electricity. Other operations comprise services rendered by the subsidiaries for the Group, e.g. fund raising, IT, telecommunication, accounting and HR, and transport services. Additionally, the other operations segment comprises the activities of a subsidiary whose main business is preparation and implementation of a nuclear power plant construction project.
Organization and management over the PGE Group is based on segment reporting separated by nature of the products and services provided. Each segment represents a strategic business unit, offering different products and serving different markets. Assignment of particular entities to operating segments is described in note 1.3 of these financial statements. As a rule, intersegment transactions are disclosed as if they were concluded with third parties – under market conditions. The exception to this rule were new bonds issued by subsidiaries belonging the tax group with interest rates below market rates and settlements of tax losses within the tax group. When analysing the results of particular business segments the management of the PGE Group draws attention primarily to EBITDA reached. Seasonality of business segments Main factors affecting the demand for electricity and heat are: weather conditions – air temperature, wind force, rainfall, socio- economic factors – number of energy consumers, energy carriers prices, growth of GDP and technological factors – advances in technology, product manufacturing technology. Each of these factors has an impact on technical and economic conditions of production, distribution and transmission of energy carriers, thus influences the results obtained by the PGE Group. The level of electricity sales is variable throughout a year and depends especially on weather conditions - air temperature and the length of the day. Increase in demand for electricity is particularly visible in winter and decline is observed in summer. Moreover, seasonal changes are evident among selected groups of end users. In particular, seasonality effects are more significant for households than for the industrial sector. Sales of heat depend in particular on air temperature and are higher in winter and lower in summer.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
4.1 Information on business segments Information on business segments for the period ended June 30, 2017 Conventional Other Consolidation Renewables Supply Distribution Total Generation operations adjustments STATEMENT OF PROFIT OR LOSS Sales revenues from external customers 2,201 306 6,889 1,093 113 18 10,620 Sales revenues from inter-segment 3,449 63 741 2,082 138 (6,473) - transactions TOTAL SEGMENT REVENUES 5,650 369 7,630 3,175 251 (6,455) 10,620 Cost of goods sold (4,466) (294) (6,599) (2,396) (242) 6,125 (7,872) EBIT *) 855 37 409 642 (31) 20 1,932 Financial income / (expenses), net (122) Share of profit /(loss) of entities 1 accounted for under the equity method PROFIT/(LOSS) BEFORE TAX 1,811 Income tax (316) NET PROFIT/(LOSS) FOR THE 1,495 REPORTING PERIOD Depreciation, amortization, disposal and impairment losses recognized in 757 132 13 580 51 (20) 1,513 profit or loss EBITDA **) 1,612 169 422 1,222 20 - 3,445 ASSETS AND LIABILITIES Segment assets excluding trade 35,903 3,459 4,021 16,623 540 (3,612) 56,934 receivables Trade receivables 750 88 2,409 726 69 (1,713) 2,329 Shares in entities accounted for under 615 the equity method Unallocated assets 7,251 TOTAL ASSETS 67,129 Segment liabilities excluding trade 9,680 341 1,137 2,583 82 (2,685) 11,138 liabilities Trade liabilities 471 27 1,612 225 22 (1,645) 712 Unallocated liabilities 11,077 TOTAL LIABILITIES 22,927 OTHER INFORMATION ON BUSINESS
SEGMENT Capital expenditure 1,906 28 5 629 53 (26) 2,595 Impairment allowances on financial and 121 1 5 5 - - 132 non-financial assets Other non-monetary expenses ***) 875 14 412 51 14 - 1,366 *) EBIT = operating profit (loss) **) EBITDA = EBIT + depreciation, amortization, disposal and impairment losses (PPE, IA, goodwill) that are recognized in profit or loss
***) Non-monetary expenses include mainly changes in provisions such as: rehabilitation provision, provision for CO2 emission rights, provision for jubilee awards and employee tariff that are recognized in profit or loss and other comprehensive income.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Information on business segments for the period ended June 30, 2016 Conventional Other Consolidation Renewables Supply Distribution Total Generation operations adjustments STATEMENT OF PROFIT OR LOSS Sales revenues from external customers 5,364 332 6,791 966 195 18 13,666 Sales revenues from inter-segment 288 38 1,256 1,956 138 (3,676) - transactions TOTAL SEGMENT REVENUES 5,652 370 8,047 2,922 333 (3,658) 13,666 Cost of goods sold (4,493) (1,045) (7,106) (2,233) (304) 3,359 (11,822) EBIT *) 915 (720) 195 557 (29) 34 952 Financial income / (expenses), net (155) Share of profit/(loss) of entities (42) accounted for under the equity method PROFIT/(LOSS) BEFORE TAX 755 Income tax (212) NET PROFIT/(LOSS) FOR THE 543 REPORTING PERIOD Depreciation, amortization, disposal and impairment losses recognized in 653 925 13 560 62 (22) 2,191 profit or loss EBITDA **) 1,568 205 208 1,117 33 12 3,143 ASSETS AND LIABILITIES Segment assets excluding trade 33,309 3,773 2,270 16,126 923 (1,833) 54,568 receivables Trade receivables 294 76 2,381 688 119 (1,199) 2,359 Shares in entities accounted for under 327 the equity method Unallocated assets 3,726 TOTAL ASSETS 60,980 Segment liabilities excluding trade 8,417 391 1,940 2,897 221 (1,037) 12,829 liabilities Trade liabilities 550 32 1,109 235 66 (1,160) 832 Unallocated liabilities 6,797 TOTAL LIABILITIES 20,458 OTHER INFORMATION ON BUSINESS
SEGMENT Capital expenditure 2,855 95 7 713 68 (48) 3,690 Impairment allowances on financial and 26 788 8 6 1 (3) 826 non-financial assets Other non-monetary expenses***) 779 11 529 60 26 - 1,405 *) EBIT = operating profit (loss) **) EBITDA = EBIT + depreciation, amortization, disposal and impairment losses (PPE, IA, goodwill) that are recognized in profit or loss
***) Non-monetary expenses include mainly changes in provisions such as: rehabilitation provision, provision for CO2 emission rights, provision for jubilee awards and employee tariff that are recognized in profit or loss and other comprehensive income.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
EXPLANATORY NOTES TO THE STATEMENT OF COMPREHENSIVE INCOME
Q1 Q2 Period ended not reviewed not reviewed June 30, 2017 Sales revenues 5,741 4,879 10,620 Cost of goods sold (4,149) (3,723) (7,872) GROSS PROFIT / (LOSS) ON SALES 1,592 1,156 2,748 Other operating income / (expenses), net 89 40 129 EBIT – OPERATING PROFIT / (LOSS) 1,201 731 1,932 Financial income / (expenses), net (63) (59) (122) Share of profit/(loss) of entities accounted for under the equity method 9 (8) 1 PROFIT / (LOSS) BEFORE TAX 1,147 664 1,811 Income tax (184) (132) (316) NET PROFIT / (LOSS) FOR THE REPORTING PERIOD 963 532 1,495
Q1 Q2 Period ended not reviewed not reviewed June 30, 2016 Sales revenues 7,133 6,533 13,666 Cost of goods sold (5,605) (6,217) (11,822) GROSS PROFIT / (LOSS) ON SALES 1,528 316 1,844 Other operating income / (expenses), net 157 77 234 EBIT – OPERATING PROFIT / (LOSS 1,123 (171) 952 Financial income / (expenses), net (48) (107) (155) Share of profit/ (loss) of entities accounted for under the equity method - (42) (42) PROFIT / (LOSS) BEFORE TAX 1,075 (320) 755 Income tax (206) (6) (212) NET PROFIT / (LOSS) FOR THE REPORTING PERIOD 869 (326) 543
5. Revenues and expenses 5.1 Sales revenues
Q1 Q2 Period ended not reviewed not reviewed June 30, 2017 SALES REVENUES Sales of merchandise and finished goods with excise tax 5,743 4,949 10,692 Excise tax (125) (116) (241) Revenues from sale of merchandise and finished goods, including 5,618 4,833 10,451 Sale of electricity 3,221 2,814 6,035 Sale of distribution services 1,574 1,453 3,027 Sale of heat 285 129 414 Sale of energy origin rights 158 87 245 Regulatory system services 147 125 272 Sale of gas 146 135 281 Other sale of merchandise and materials 87 90 177 Revenues from sale of services 123 46 169 TOTAL SALES REVENUES 5,741 4,879 10,620
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Q1 Q2 Period ended not reviewed not reviewed June 30, 2016 SALES REVENUES Sales of merchandise and finished goods with excise tax 7,001 6,400 13,401 Excise tax (126) (120) (246) Revenues from sale of merchandise and finished goods, including: 6,875 6,280 13,155 Sale of electricity 4,678 4,608 9,286 Sale of distribution services 1,433 1,332 2,765 Sale of heat 283 119 402 Sale of energy origin rights 185 (39) 146 Regulatory system services 137 113 250 Sale of gas 73 58 131 Other sale of merchandise and materials 86 89 175 Revenues from sale of services 128 130 258 Revenues from LTC compensations 130 123 253 TOTAL SALES REVENUES 7,133 6,533 13,666 The decline in sale of electricity in the period ended 30 June, 2017 in comparison to the corresponding period of the previous year is mainly due to lower so called “power exchange obligation” and lower average selling price of electricity. Lower power exchange obligation starting from 2017 resulted in increased volume of electricity sales within the PGE Group. Such transactions are subject to eliminations on the level of consolidated financial statements. Revenues from LTC compensations are described in note 22.1 of these financial statements. 5.2 Cost by nature and function Q1 Q2 Period ended not reviewed not reviewed June 30, 2017 COST BY NATURE Depreciation, amortization and impairment losses 778 797 1,575 Materials and energy 758 589 1,347 External services 671 642 1,313 Taxes and charges 863 727 1,590 Employee benefits expenses 1,098 1,094 2,192 Other cost by nature 53 53 106 TOTAL COST BY NATURE 4,221 3,902 8,123 Change in inventories (18) 2 (16) Cost of products and services for the entity’s own needs (190) (246) (436) Distribution and selling expenses (304) (296) (600) General and administrative expenses (176) (169) (345) Cost of merchandise and materials sold 616 530 1,146 COST OF GOODS SOLD 4,149 3,723 7,872
Decrease of sales of merchandise and finished goods (mainly purchased electricity) in the period ended June 30, 2017 in comparison to the corresponding period of the previous year is mainly due to lower revenues from sale of electricity (described in the table above).
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Q1 Q2 Period ended not reviewed not reviewed June 30, 2016 COST BY NATURE Depreciation, amortization and impairment losses 731 1,522 2,253 Materials and energy 840 655 1,495 External services 593 617 1,210 Taxes and charges 811 773 1,584 Employee benefits expenses 1,117 1,059 2,176 Other cost by nature 63 65 128 TOTAL COST BY NATURE 4,155 4,691 8,846 Change in inventories (29) 19 (10) Cost of products and services for the entity’s own needs (264) (269) (533) Distribution and selling expenses (379) (348) (727) General and administrative expenses (183) (216) (399) Cost of merchandise and materials sold 2,305 2,340 4,645 COST OF GOODS SOLD 5,605 6,217 11,822
5.2.1 Depreciation, amortization, disposal and impairment losses Recognition of depreciation, amortization, disposal and impairment losses of property, plant and equipment and intangible assets in the statement of comprehensive income is presented below.
Period ended Depreciation, amortization and disposal Impairment losses June 30, 2017 Property, Intangible TOTAL Property, Intangible TOTAL plant assets plant assets and and equipment equipment Cost of goods sold 1,406 40 1,446 42 - 42 Distribution and selling expenses 6 2 8 - - - General and administrative expenses 11 6 17 - - - TOTAL DEPRECIATION, AMORTIZATION 1,423 48 1,471 42 - 42 AND IMPAIRMENT LOSSES RECOGNIZED IN PROFIT OR LOSS Cost of products and services for the 62 - 62 - - - entity’s own needs TOTAL DEPRECIATION, AMORTIZATION 1,485 48 1,533 42 - 42 AND IMPAIRMENT LOSSES
Period ended Depreciation, amortization and disposal Impairment losses June 30, 2016 Property, Intangible TOTAL Impairment Intangible TOTAL plant assets losses assets and equipment Cost of goods sold 1,287 40 1,327 524 282 806 Distribution and selling expenses 6 2 8 - - - General and administrative expenses 43 6 49 - 1 1 TOTAL DEPRECIATION, AMORTIZATION 1,336 48 1,384 524 283 807 AND IMPAIRMENT LOSSES RECOGNIZED IN PROFIT OR LOSS Cost of products and services for the 62 - 62 - - - entity’s own needs TOTAL DEPRECIATION, AMORTIZATION 1,398 48 1,446 524 283 807 AND IMPAIRMENT LOSSES
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
5.3 Other operating income and expenses Period ended Period ended June 30, 2017 June 30, 2016 OTHER OPERATING INCOME Adjustment of revenues from LTC compensations 83 148 Penalties, fines and compensations received 29 64 Reversal of other provisions 21 22 Grants received 14 34 Reversal of impairment allowances on receivables 9 13 Profit on disposal of property, plant and equipment / intangible assets 7 3 Property, plant and equipment, intangible assets received free of charge 6 5 Revenues from illegal energy consumption 4 3 Surpluses / recognition of assets 3 2 Refund of legal proceedings’ costs 2 2 Tax refund 2 5 Other 22 24 TOTAL OTHER OPERATING INCOME 202 325
Revenues from LTC compensations are described in note 22.1 of these financial statements.
Period ended Period ended June 30, 2017 June 30, 2016 OTHER OPERATING EXPENSES Recognition of impairment allowances on receivables 17 25 Donations granted 11 3 Compensations 9 4 Recognition of other provisions 7 25 Liquidation of damages / breakdowns 6 9 Legal proceedings’ costs 3 3 Liquidation of property, plant and equipment and intangible assets associated with other 3 2 operations Other 17 20 TOTAL OTHER OPERATING EXPENSES 73 91
5.4 Financial income and expenses
Period ended Period ended June 30, 2017 June 30, 2016 FINANCIAL INCOME ON FINANCIAL INSTRUMENTS Dividends 4 1 Interest 50 22 Revaluation of financial instruments / reversal of impairment allowances 50 10 Foreign exchange gains 37 14 FINANCIAL INCOME ON FINANCIAL INSTRUMENTS 141 47 OTHER FINANCIAL INCOME Interest on budget receivables 2 - Reversal of provisions - 2 Other 1 - OTHER FINANCIAL INCOME 3 2 TOTAL FINANCIAL INCOME 144 49
The Group recognizes interest income primarily on cash deposits and receivables. Increase of "Revaluation of financial instruments" is mainly due to revaluation of an option to acquire Polimex shares.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Period ended Period ended June 30, 2017 June 30, 2016 FINANCIAL EXPENSES ON FINANCIAL INSTRUMENTS Interest 75 59 Revaluation of financial instruments 4 4 Loss on the disposal of an investment 92 - Impairment loss 3 2 Foreign exchange losses 3 29 FINANCIAL EXPENSES ON FINANCIAL INSTRUMENTS 177 94 OTHER FINANCIAL EXPENSES Interest expenses, including unwinding of the discount 84 88 Recognition of provisions (interest) 3 21 Other 2 1 OTHER FINANCIAL EXPENSES 89 110 TOTAL FINANCIAL EXPENSES 266 204
Interest expenses relates mainly to issued bonds, loans and borrowings. Interest expense (unwinding of the discount) on non-financial items relates mainly to rehabilitation provision and provision for employee benefits. Loss on the disposal of an investment in the amount of PLN 92 million is related to the sale of EXATEL S.A. shares. 5.5 Share of profit of associates and joint arrangements accounted for under the equity method Polska Grupa ElectroMobility Polimex Mostostal PEC Bogatynia Górnicza Poland SHARE IN VOTES 15.76% 16.48% 25.00% 34.93% PERIOD ENDED JUNE 30, 2017 Revenues 3,716 933 - 8 Result from continuing operations 12 27 - - Share of profit of associates and joint arrangements 2 4 - - Elimination of unrealized losses (5) - - - SHARE OF PROFIT OF ASSOCIATES AND JOINT (3) 4 - - ARRANGEMENTS
The PGE Group has made a consolidation adjustment related to margin on sales of coal sale between Polska Grupa Górnicza and the Group. Purchase of shares in Polimex Mostostal is described in more detail in note 22.4 of these financial statements. 6. Impairment allowances on assets
Period ended Period ended June 30, 2017 June 30, 2016 IMPAIRMENT ALLOWANCES ON PROPERTY, PLANT AND EQUIPMENT Impairment allowances raised 42 524 IMPAIRMENT ALLOWANCES ON INTANGIBLE ASSETS Impairment allowances raised - 283 IMPAIRMENT ALLOWANCES ON INVENTORIES Impairment allowances raised 6 16 Impairment allowances reversed 2 13
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
7. Tax in the statement of comprehensive income Main elements of income tax expense for the periods ended June 30, 2017 and June 30, 2016 are as follows:
Period ended Period ended June 30, 2017 June 30, 2016 INCOME TAX RECOGNIZED IN THE STATEMENT OF PROFIT OR LOSS Current income tax 247 207 Previous periods current income tax adjustments 1 20 Deferred income tax 68 (15) INCOME TAX EXPENSE RECOGNIZED IN THE STATEMENT OF PROFIT OR LOSS 316 212 INCOME TAX RECOGNIZED IN OTHER COMPREHENSIVE INCOME From valuation of hedging instruments (14) 8 TAX BENEFIT RECOGNIZED IN OTHER COMPREHENSIVE INCOME (14) 8
Previous periods current income tax adjustments relate mainly to sales of electricity for the previous year invoiced in the first half of the current year. In the previous period sales were recognized based on estimates, on which deferred tax was recognized.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 8. Significant additions and disposals of property, plant and equipment and intangible assets During the current reporting period, the PGE Group purchased property, plant and equipment and intangible assets of a total amount of PLN 2,595 million. The largest expenditures were incurred by Conventional Generation segment (PLN 1,906 million) and Distribution segment (PLN 629 million). The main items of expenditure were: construction of units 5 and 6 in Opole power plant (PLN 1,018 million), construction of unit 11 in Turów power plant (PLN 129 million), construction of gas and steam unit in Gorzów heat and power plant (PLN 58 million) and modernization of units 1-3 in Turów power plant (PLN 55 million). During the current reporting period, the Group sold 100% of EXATEL S.A. shares. At the same time, the Group lost control over its subsidiary ENERERGO-TEL S.A. As a result, property, plant and equipment and intangible assets decreased by PLN 340 million. 9. Future investment commitments As at June 30, 2017 the PGE Group committed to incur capital expenditures on property, plant and equipment of approximately PLN 7,800 million. These amounts relate mainly to construction of new power units, modernization of Group’s assets and purchase of machinery and equipment.
As at As at December 31, 2016 June 30, 2017 restated* Conventional Generation 6,474 7,647 Distribution 1,086 796 Renewables 35 38 Supply 2 2 Other operations 203 201 TOTAL FUTURE INVESTMENT COMMITMENTS 7,800 8,684
* optional scope of advisory agreement concluded by PGE EJ1 sp. z o.o. was excluded from information presented as at December 31, 2016
The most significant future investment commitments involve: Conventional Generation: Branch Opole Power Plant – construction of power units no. 5 and 6 – approximately PLN 1,954 million, Branch Turów Power Plant – construction of a new power unit – approximately PLN 2,976 million, Branch Turów Power Plant – modernization of power units no. 1-3 – approximately PLN 477 million, Branch Rzeszów Heat and Power Plant - construction of Thermal Processing Installation with Energy Recycling – approximately PLN 265 million, Distribution – investment commitments related to network distribution assets with total value of approximately PLN 1,086 million, Other operations, PGE EJ1 sp. z o.o. – agreement for owners engineer in the investment process related to construction of the first Polish nuclear power plant – basic scope of PLN 183 million. The optional scope of the agreement amounts to PLN 1,100 million.
10. Shares in associates and joint arrangements accounted for under the equity method
As at As at
June 30, 2017 December 31, 2016 Polska Grupa Górnicza Sp. z o.o. 519 391 Polimex Mostostal S.A. 85 - ElectroMobility Poland S.A. 3 3 PEC Bogatynia Sp. z o.o. 8 8 INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD 615 402 The Group is currently working on allocating the purchase price of Polimex. As a result, the aforesaid investment is recognized in the financial statements of the PGE Group for the first half of 2017 at acquisition cost, adjusted by valuation under the equity method for the period of having significant influence on Polimex-Mostostal Group. The acquisition of shares in Polimex Mostostal S.A. is described in note 22.4 of these financial statements. New investment agreement concerning Polska Grupa Górnicza is described in note 22.2.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
11. Deferred tax in the statement of financial position 11.1 Deferred tax assets As at As at June 30, 2017 December 31, 2016 Difference between tax value and carrying amount of property, plant and equipment 1,538 1,559 Difference between tax value and carrying amount of financial assets 13 16 Difference between tax value and carrying amount of liabilities 230 272 Difference between tax value and carrying amount of inventories 16 15 LTC compensations 251 253 Rehabilitation provision 490 472
Provision for CO2 emission rights 112 220 Provisions for employee benefits 545 529 Other provisions 129 129 Energy infrastructure acquired free of charge and connection payments received 116 129 Other 18 15 DEFERRED TAX ASSETS 3,458 3,609 11.2 Deferred tax liabilities As at As at June 30, 2017 December 31, 2016 Difference between tax value and carrying amount of property, plant and equipment 3,137 2,945 Difference between tax value and carrying amount of energy origin rights 46 65 Difference between tax value and carrying amount of financial assets 316 377
CO2 emission rights 261 439 LTC compensations 674 680 Other 31 26 DEFERRED TAX LIABILITIES 4,465 4,532
AFTER OFF-SET OF THE ASSET AND THE LIABILITY IN PARTICULAR COMPANIES THE GROUP’S DEFFERED TAX IS PRESENTED AS: Deferred tax assets 253 268 Deferred tax liabilities (1,260) (1,191)
12. CO2 emission rights for own use Power generating units belonging to the PGE Group, which are covered by the provisions of the Act dated June 12, 2015 on a scheme for greenhouse gas emission allowance trading, receive CO2 emission rights (EUA). Starting from 2013, only part of EUA allowances will be granted unconditionally, namely those to cover CO2 emissions resulting from production of heat, while, as a rule, there are no free of charge EUA allowances to cover CO2 emissions resulting from production of electricity. Article 10c of Directive 2009/29/EC introduced the possibility of a derogation from the rule of lack of free of charge EUA allowances to cover CO2 emissions connected with production of electricity providing the realization of investment tasks included in the National Investment Plan (“NIP”). The condition under which free of charge EUA to cover CO2 emissions connected with production of electricity can be obtained is annual submission of factual- financial statements from realization of tasks included in the NIP. In September 2016 the PGE Group submitted subsequent reports on the realization of the investments included in the NIP in order to obtain EUA to cover CO2 emissions connected with production of electricity in 2016. The allowances were issued in April 2017 and were used to cover CO2 emissions in 2016 (approximately 19 million of EUA). The schedule of granting EUA to cover CO2 emissions resulting from production of heat is different - in February 2017 EUA allowances were issued in order to cover CO2 emissions in 2017 (approximately 750 thousand of EUA). Currently, all companies belonging to the PGE Group are preparing reports on the implementation of the investments recognized in NIP, which will be submitted by September 30, 2017.
As at June 30, 2017 As at December 31,2016 EUA Amount (Mg million) Value Amount (Mg million) Value AS AT JANUARY 1 85 2,349 77 2,172 Purchase 10 213 40 937 Granted free of charge 20 - 26 - Redemption (56) (1,156) (58) (760) AS AT THE REPORTING DATE 59 1,406 85 2,349
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
13. Other current and non-current assets 13.1 Other non-current assets As at As at June 30, 2017 December 31, 2016 Advances for construction in progress 595 713 Other non-current assets 14 17 OTHER ASSETS, TOTAL 609 730
Advances for construction in progress relate mainly to investment projects conducted by Conventional Generation segment. 13.2 Other current assets As at As at
June 30, 2017 December 31, 2016
restated PREPAYMENTS Social Fund 51 2 Fees and commissions 45 34 Fees for the exclusion of land from agricultural production / forestry 24 4 IT services 10 6 Perpetual usufruct of land 8 - Fees for occupation of the roadway with equipment 6 - Property and tort insurance 4 2 Concessions 3 - Other prepayments 26 19 OTHER CURRENT ASSETS VAT receivables 210 222 Excise tax receivables 51 100 Advances for deliveries 7 6 Other current assets 15 21 OTHER ASSETS, TOTAL 460 416
Fees and commissions include agency commissions, fees for the use of mining and bank loan commissions. Other prepayments include costs of energy infrastructure collisions, maintenance services, licenses and long-term contracts. The amount of excise tax receivables regards the exemption from excise tax of electricity generated from renewable energy sources on the basis of a document confirming the redemption of the certificate of origin. 14. Selected financial assets The carrying amount of financial assets measured at amortized cost is a reasonable estimate of their fair value. 14.1 Trade and other financial receivables
As at June 30, 2017 As at December 31, 2016 Non-current Current Non-current Current Trade receivables - 2,329 - 2,705 LTC compensations - 1,270 - 1,241 Debt securities, including bonds 89 5 89 - Deposits 146 3 136 2,300 Bails and security deposits 1 6 2 12 Other financial receivables 9 76 10 67 FINANCIAL RECEIVABLES, TOTAL 245 3,689 237 6,325
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
14.2 Cash and cash equivalents Short-term deposits are made for different periods, from one day up to one month, depending on the Group’s needs for cash, and are deposited at individually agreed interest rates.
As at As at June 30, 2017 December 31, 2016 Cash on hand and cash at bank 704 808 Overnight deposits 125 42 Short-term deposits 4,288 1,819 TOTAL 5,117 2,669 Interest accrued on cash, not received at the reporting date (1) (2) Exchange differences on cash in foreign currencies (1) (1) Cash and cash equivalents presented in the statement of cash flows 5,115 2,666 including restricted cash 82 107
Undrawn borrowing facilities 6,573 6,081 including overdraft facilities 2,001 2,001
For detailed description of bank agreements please refer to note 18.1 of these financial statements. Restricted cash disclosed in the consolidated statement of cash flows relates primarily to: cash received as a guarantee of proper execution of the contract and cash received as a tender deposit; cash deposit securing the settlements of the PGE Group entities with Izba Rozliczeniowa Giełd Towarowych S.A. (Warsaw Commodity Clearing House).
15. Derivatives
As at June 30, 2017 As at December 31, 2016 Assets Liabilities Assets Liabilities DERVATIVES AT FAIR VALUE THROUGH PROFIT OR LOSS Currency forward - - 1 - Commodity forward - - 8 - IRS transactions - 20 - 30 Options 46 - - - HEDGING DERIVATIVES CCIRS hedging transactions 76 - 231 - IRS hedging transactions 87 9 125 - DERIVATIVES, TOTAL 209 29 365 30 current - - 9 - non-current 209 29 356 30
Options On January 20, 2017 the PGE Group acquired from Towarzystwo Finansowe Silesia Sp. z o.o. a call option for purchase of Polimex- Mostostal S.A. shares. Dates of realization of the option were set at: July 30, 2020, July 30, 2021 and July 30, 2022. IRS transactions In the current reporting period, PGE S.A. entered into an IRS transaction hedging the interest rate on a bank loan with a nominal value of PLN 500 million. For the recognition of this IRS transaction, the Company applies hedge accounting. In 2016 the PGE Group concluded IRS transactions hedging the interest rate on bank loans with a total nominal value of PLN 4,630 million. For recognition of these IRS transactions the Company applies hedge accounting. The impact of hedge accounting is described in note 16.2 of these financial statements. In 2014 PGE S.A. concluded IRS transactions hedging the interest rate on bonds issued with a total nominal value of PLN 1 billion. Payments arising from the IRS transactions are correlated with interest payments on bonds. Change in fair value of these IRS transactions is fully recognized in profit or loss. In 2003, Elektrownia Turów S.A. (currently a branch of PGE Górnictwo i Energetyka Konwencjonalna S.A.) concluded IRS-swap hedge transaction. This transaction is aimed to hedge variable interest rates (USD LIBOR 6m) on investment loan of USD 80 million drawn from Nordic Investment Bank to finance investments in Turów power plant. Change in fair value of this IRS transaction is fully recognized in profit or loss.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
CCIRS hedging transaction In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions, hedging both the exchange rate concerning payments of principal and interest and interest rate. In these transactions, banks-contractors pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. In the consolidated financial statements the relevant part of CCIRS transactions is recognized as a hedge of bonds issued by PGE Sweden AB (publ). The Group applies hedge accounting to the above CCIRS transactions. The impact of hedge accounting is presented in note 16.2 of these financial statements. 16. Equity The basic assumption of the Group’s policy regarding equity management is to maintain an optimal equity structure over the long term perspective in order to assure a good financial standing and secure equity structure ratios that would support the operating activity of the PGE Group. It is also crucial to maintain a sound equity base that would be the basis to win confidence of potential investors, creditors and the market and assure further development of the Group. 16.1 Share capital As at As at
June 30, 2017 December 31, 2016 1,470,576,500 Series A ordinary Shares with a nominal value of PLN 10.25 each 15,073 15,073 259,513,500 Series B ordinary Shares with a nominal value of PLN 10.25 each 2,660 2,660 73,228,888 Series C ordinary Shares with a nominal value of PLN 10.25 each 751 751 66,441,941 Series D ordinary Shares with a nominal value of PLN 10.25 each 681 681 TOTAL SHARE CAPITAL 19,165 19,165
All shares of the Company have been paid up. After the reporting date until the date of preparation of these financial statements there have been no changes in the amount of the Company’s share capital.
Rights of the shareholders – Rights of the State Treasury regarding the Company’s operations The Company is a part of the PGE Polska Grupa Energetyczna S.A. Group, to which State Treasury holds special rights as long as it remains a shareholder. Special rights of the State Treasury that are applicable to the PGE Group entities derive from the Act of March 18, 2010 on special rights of the minister competent for energy and their performance in certain companies and groups operating in the electricity, oil and gaseous fuels sectors (Official Journal from 2016, item 2012). The aforesaid Act specifies the particular rights entitled to the minister competent for energy related to companies and groups operating in the electricity, oil and gaseous fuels sectors whose property was disclosed within the register of buildings, installations, equipment and services included in critical infrastructure. Based on this act the minister competent for energy has the right to object to any resolution or legal action of the Management Board that relates to the ability to dispose a part of company’s property, which may result in threat to functioning, continuity of operations and integrity of critical infrastructure. The objection can also be expressed against any resolutions adopted that relates to: liquidation of the Company, changes of the use or discontinuance of exploitation of the company’s asset, which is a component of critical infrastructure, change in the scope of activities of the Company, sale or lease of the enterprise or its organized part or establishment of legal restrictions, approval of operational and financial plan, investment plan, or long-term strategic plan, movement of the Company’s seat abroad, if the enforcement of such a resolution resulted in an actual threat to the operation continuity or integrity of the critical infrastructure. The objection is expressed in the form of an administrative decision.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
16.2 Hedging reserve Period ended Year ended
June 30, 2017 December 31, 2016 AS AT JANUARY 1 147 (21) Change of hedging reserve (72) 207 Valuation of hedging instruments, including: (72) 206 Deferral of changes in fair value of hedging instruments recognized as an effective hedge (202) 313 Accrued interest on derivatives transferred from hedging reserve and recognized in interest 2 1 expense Currency revaluation of CCIRS transaction transferred from hedging reserve and recognized in 130 (107) the result on foreign exchange differences Ineffective portion of change in fair value of hedging derivatives recognized in profit or loss (2) (1) Valuation of other financial instruments - 1 Deferred tax 14 (39) HEDGING RESERVE INCLUDING DEFERRED TAX 89 147
Hedging reserve includes mainly valuation of hedging instruments to which cash flow hedge accounting is applied. 16.3 Dividends paid and dividends declared Dividend paid or declared from the profit for the period ended June 30, 2017 December 31, 2016 December 31, 2015 CASH DIVIDENDS FROM ORDINARY SHARES Dividend paid from retained earnings - - 467 Cash dividends per share (in PLN) - - 0.25
Dividend from the profit for the year 2017 During the reporting period and until the date of preparation of these financial statements the Company has made no advance payments of dividends. On May 11, 2017, the Management Board of the Company decided to change dividend policy. Taking into consideration the ambitious development plan and limitations of debt ratio growth, the Management Board of the Company recommended suspension of dividends payments for the years 2016, 2017 and 2018. After that period, the Management Board of the Company intends to provide a recommendation for the General Shareholders’ Meeting of the Company to pay dividends at the level of 40-50% of the consolidated net profit attributable to equity holders of the parent, adjusted by impairment allowances on property, plant and equipment and intangible assets. Every dividend payment will depend on total debt amount of the Company, expected capital expenditures and potential acquisitions. Dividend from the profit for the year 2016 According to the updated dividend policy, on June 27, 2017 the Ordinary Shareholders' Meeting of PGE S.A. resolved to allocate the whole net profit for 2016 of PLN 1,598 million to reserve capital. Dividend from the profit for the year 2015 On June 28, 2016, the General Shareholders’ Meeting of PGE S.A. resolved to distribute PLN 467 million from the net profit of 2015 as a dividend (that comprises dividend of PLN 0.25 per share). Dividend was paid off on October 14, 2016.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
17. Provisions The carrying amount of provisions is as follows:
As at June 30, 2017 As at December 31, 2016 Non-current Current Non-current Current Employee benefits 2,158 674 2,148 543 Rehabilitation provision 2,766 4 2,666 4
Provision for deficit of CO2 emission rights - 587 - 1,154 Provisions for energy origin units held for redemption - 418 - 416 Provision for non-contractual use of property 79 11 91 12 Other provisions 103 57 99 52 TOTAL PROVISIONS 5,106 1,751 5,004 2,181
Changes in provisions
Provision for Provisions for Provision for Employee Rehabilitation deficit of CO energy origin Other 2 non-contractual Total benefits provision emission units held for provisions use of property rights redemption JANUARY 1, 2017 2,691 2,670 1,154 416 103 151 7,185 Current service costs 32 - - - - - 32 Interest costs 40 44 - - - - 84 Benefits paid / Provisions (267) - (1,156) (377) - (8) (1,808) used Provisions reversed (14) - - (7) (19) (5) (45) Provisions raised in 367 15 589 386 6 18 1,381 correspondence with costs Provisions raised in correspondence with - 40 - - - - 40 property, plant and equipment Change in the Group (8) - - - - (4) (12) composition Other changes (9) 1 - - - 8 - June 30, 2017 2,832 2,770 587 418 90 160 6,857
Provision for Provisions for Provision for Employee Rehabilitation deficit of CO energy origin Other 2 non-contractual Total benefits provision emission units held for provisions use of property rights redemption JANUARY 1, 2016 3.013 3.350 760 380 117 233 7.853 Actuarial gains and losses excluding discount rate (175) - - - - - (175) adjustment Current service costs 74 - - - - - 74 Past service costs (23) - - - - - (23) Interest costs 82 99 - - - - 181 Discount rate and other (121) (460) - - - - (581) assumptions adjustment Benefits paid / provisions (691) (1) (760) (336) - (104) (1.892) used Provisions reversed (59) (449) - (3) (30) (27) (568) Provisions raised in 577 34 1.154 375 16 67 2.223 correspondence with costs Provisions raised in correspondence with - 92 - - - - 92 property, plant and equipment Other changes 14 5 - - - (18) 1 DECEMBER 31, 2016 2.691 2.670 1.154 416 103 151 7.185
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
17.1 Provision for employee benefits The PGE Group companies raise provisions for: post-employment benefits – PLN 1,577 million (PLN 1,570 million as at December 31, 2016); jubilee awards – PLN 794 million (PLN 788 million as at December 31, 2016); other benefits (bonuses, unused holidays, etc.) – PLN 461 million (PLN 333 million as at December 31, 2016).
17.2 Rehabilitation provision Provision for rehabilitation of post-exploitation mining properties After the completion of the lignite mining, the area of the surface mines belonging to the PGE Group will be rehabilitated. According to the current plans, costs will be incurred in the years 2023 - 2069 (in case of PGE Górnictwo i Energetyka Konwencjonalna S.A. Branch Bełchatów Lignite Mine) and in years 2045-2087 (in case of PGE Górnictwo i Energetyka Konwencjonalna S.A. Branch Turów Lignite Mine). The PGE Group creates provisions for rehabilitation of post-exploitation mining properties. The amount of the provision recognized in the financial statements includes also the value of Mine Liquidation Fund created in accordance with the Geological and Mining Law Act. The value of the provision as at June 30, 2017 amounted to PLN 2,459 million and as at December 31, 2016 to PLN 2,366 million. Provision for rehabilitation of ash storages The PGE Group power generating units raise provision for rehabilitation of ash storages. As at the reporting date, the value of provision amounted to PLN 102 million and as at December 31, 2016 to PLN 98 million. Provisions for rehabilitation of post-construction grounds of wind farms The companies which own wind farms raise provisions for rehabilitation of post-construction grounds of wind farms. As at the reporting date, the value of provision amounted to PLN 50 million and as at December 31, 2016 to PLN 49 million. Liquidation of property, plant and equipment The obligation to liquidate assets and rehabilitate the area results from „The integrated permission for running electric energy and heat energy producing installation” in which the restitution of the area was specified. As at the reporting date, the value of the provision amounts to PLN 159 million (PLN 157 million as at December 31, 2016) and refers to some assets of Conventional Generation and Renewables segments.
17.3 Provision for deficit of CO2 emission rights
As a general rule, the PGE Group entities recognize provision for the shortfall of CO2 emission rights granted free of charge. In estimating the value of the provision the Group takes into account EUA purchased. As described in note 12 of these financial statements the PGE Group is entitled to receive CO2 emissions rights granted free of charge in connection with expenditures incurred for investments included in the National Investment Plan. The calculation of the provision includes also these rights. 17.4 Provision for energy origin rights held for redemption Companies within the PGE Group create provision for energy origin rights related to sale realized during the reporting period or in prior reporting periods, in the amount of non-depreciated part until the reporting date. The total value of provision as at June 30, 2017, amounted to PLN 418 million (PLN 416 million in the comparative period) and was created mainly by PGE Obrót S.A. 17.5 Provision for non-contractual use of property Entities of the PGE Group recognize provision for damages related to a non-contractual use of property that are claimed under court proceedings. This issue mainly relates to distribution company, which owns distribution networks. As at the reporting date the provision amounted to approximately PLN 90 million (of which 42 million related to litigations). In the comparative period the provision amounted to PLN 103 million (of which PLN 43 million related to litigations). 17.6 Other provisions Other provisions comprise mainly provisions raised for claims relating to real estate tax of PLN 91 million (PLN 90 million in the prior year). These provisions mainly relate to PGE GiEK S.A. Branch Opole Power Plant. 18. Financial liabilities The value of financial liabilities measured at amortized cost is a reasonable approximation of their fair value, excluding bonds issued by PGE Sweden AB (publ). Bonds issued by PGE Sweden AB (publ) are based on a fixed interest rate. Their value at amortized cost presented in these financial statements as at June 30, 2017 amounted to EUR 641 million whereas their assessed fair value amounted to EUR 677 million. The indicators used in the valuation belong to Level 2 of the fair value hierarchy.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
18.1 Loans, borrowings, bonds and lease As at June, 30 2017 As at December 31, 2016 Non-current Current Non-current Current Loans and borrowings 5,711 341 5,839 332 Bonds issued 2,657 1,051 3,764 78 Lease - - - 1 TOTAL LOANS, BORROWINGS, BONDS AND LEASE 8,368 1,392 9,603 411
Loans and borrowings Among loans and borrowings presented above as at June 30, 2017, the PGE Group presents mainly the following facilities: investment credit facility taken out by PGE Górnictwo i Energetyka Konwencjonalna S.A. from Nordic Investment Bank to finance construction of 858 MW power unit in Bełchatów Power Plant of PLN 515 million; investment credit facilities taken out by PGE Górnictwo i Energetyka Konwencjonalna S.A. from Nordic Investment Bank and UBS Investment Bank AG to finance the modernization of power blocks no. 1-6 in Turów Power Plant of PLN 74 million; investment credit facility taken out by PGE S.A. from Bank Gospodarstwa Krajowego S.A. in total value of PLN 1,501 million; long-term loan agreement taken out by PGE S.A. from a syndicate of banks composed of: BNP Paribas S.A., Société Générale S.A., Bank Handlowy w Warszawie S.A., ING Bank Śląski S.A., Bank Zachodni WBK S.A., mBank S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Bank Polska Kasa Opieki S.A. concluded on September 7, 2015. Subject matter of the agreement is granting a loan in two parts, i.e. term loan facility and revolving loan facility. As at June 30, 2017 PGE S.A. used the whole term loan facility of PLN 3,647 million. The revolving loan facility of up to PLN 1,870 million is available, but not used by PGE S.A.
On June 7, 2017, PGE S.A. concluded loan agreement with European Bank for Reconstruction and Development Bank for the total amount of PLN 500 million with the maturity date of June 7, 2028. The funds obtained on the basis of the agreement will be used for projects relating to the modernization and development of distribution grid. As at June 30, 2017 the loan was not used.
Additionally, on October 27, 2015, PGE S.A. concluded two loan agreements with the European Investment Bank for the total amount of nearly PLN 2,000 million. The amount of PLN 1,500 million, obtained on the basis of the first of the two agreements, will be used for projects relating to the modernization and development of distribution grid. The funds from the second agreement, i.e. the remaining PLN 490 million, will be used to finance and refinance the construction of cogeneration units Gorzów Heat and Power Plant and Rzeszów Heat and Power Plant. The European Investment Bank loans will be available for disbursement over a period of up to 22 months from the date of signing of the agreements. The funds shall be repaid within 15 years from the date of the last tranche. As at June 30, 2017 the aforesaid loans were not used. The value of overdraft facilities at the disposal of significant PGE Group entities amounted to PLN 2,001 million as at June 30, 2017. Bonds issued The Group has the ability to finance its operations through two bond issue programs: The bond issue program for the amount of PLN 5 billion directed towards investors from the Polish capital market. On June 27, 2013, the first non-public issuance of 5-year bonds under this program took place, the coupon bearer bonds with a variable interest rate. The nominal value of the issue was PLN 1 billion and the maturity of the bonds is June 27, 2018. On August 29, 2013, the bonds were floated in the Alternative Trading System organized by BondSpot S.A. and Giełda Papierów Wartościowych w Warszawie S.A. (Warsaw Stock Exchange). The medium term Eurobonds Issue Program of EUR 2 billion established on May 22, 2014 by PGE S.A. together with PGE Sweden AB (publ), a 100% subsidiary of PGE S.A. Under the Program, PGE Sweden AB (publ) may issue eurobonds up to the amount of EUR 2 billion with a minimum maturity of 1 year. On June 9, 2014, PGE Sweden AB (publ) issued Eurobonds in the total amount of EUR 500 million and a five year maturity and on August 1, 2014 it has issued bonds in the amount of EUR 138 million and fifteen-year maturity.
18.2 Trade and other financial liabilities As at June 30, 2017 As at December 31, 2016 Non-current Current Non-current Current Trade liabilities - 712 - 976 Purchase of property, plant and equipment and 5 624 12 1,225 intangible assets Bails and security deposits received 23 70 21 65 Liabilities related to LTC - 1,246 - 1,253 Other - 34 - 37 TOTAL TRADE AND OTHER FINANCIAL LIABILITIES 28 2,686 33 3,556
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OTHER EXPLANATORY NOTES 19. Contingent liabilities and receivables. Legal claims 19.1 Contingent liabilities
As at As at
June 30, 2017 December 31, 2016 Contingent return of grants from environmental funds 473 469
Contingent return of CO2 emission rights received free of charge 112 115 Legal claims 117 73 Employees’ claims 1 1 Contractual fines and penalties 12 12 Other contingent liabilities 39 61 TOTAL CONTINGENT LIABILITIES 754 731
Contingent return of grants from environmental funds The liabilities represent the value of possible future reimbursements of funds received by the PGE Group companies from environmental funds for the particular investments. The funds will be reimbursed, if investments for which they were granted, will not bring the expected environmental effect.
Contingent return of CO2 emission rights received free of charge
The contingent liability results from the risk of a return of the equivalent of CO2 emission rights (including interest) balanced in 2013 and 2014 by capital expenditure that may not obtain the approval of compliance indicators. Legal claims The contingent liability is mainly related to the dispute with WorleyParsons. WorleyParsons made a claim for the remuneration of PLN 59 million due to the claimant in the claimant’s opinion, and for the return of the amount that in the claimant’s opinion was unduly collected by PGE EJ 1 sp. z o.o. from a bank guarantee. PGE EJ 1 sp. z o.o. filed a response to the lawsuit. Moreover, the value of the claims mentioned in the WorleyParsons’ lawsuit of PLN 54 million has been included in a request for payment of PLN 92 million related to termination of the agreement, that was filed by WorleyParsons on March 13, 2015. On March 24, 2017 WorleyPersons extended its claim from PLN 59 million up to PLN 104 million (i.e. by PLN 45 million). The Group does not accept the claim and regards its possible admission by the court as unlikely. The next hearing was set for September 13, 2017. Claims related to contractual fines and penalties The contingent liability comprises mainly accrued contractual fines relating to the delay in realization of the investment issued by the Mayor of the City and Municipality of Gryfino to Zespół Elektrowni Dolna Odra S.A. (currently PGE Górnictwo i Energetyka Konwencjonalna S.A.). The Group committed to the Municipality of Gryfino to accomplish two investments with the total value of not less than almost PLN 8 million until the end of 2018. Failure to realize investments included in the agreement will result in claims relating to contractual fines and penalties by the Municipality of Gryfino. 19.2 Other significant issues related to contingent liabilities Non-contractual use of property As described in note 17.5, the PGE Group recognizes provision for disputes under court proceedings, concerning non-contractual use of properties utilized for distribution activities. In addition, in the PGE Group, there are disputes at an earlier stage of proceedings and it cannot be excluded that the number and value of similar disputes will grow in the future. Contractual liabilities related to purchase of fuels According to the concluded agreements on the purchase of fuels (mainly coal and gas), the PGE Group companies are obliged to collect the minimum volume of fuels and not to exceed the maximum level of collection of gas fuel in particular hours and months. A failure to collect a minimum volume of fuels specified in the contracts, may result in a necessity to pay some extra fee (in case of gas fuel, the volume not collected by power plants but paid up, may be collected within the next three contractual years). In the PGE Group’s opinion, the terms described above and conditions of fuel deliveries to its power generating units do not differ from terms and conditions of fuel deliveries to other power generating units on the Polish market.
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19.3 Contingent receivables As at reporting date, the PGE Group did not have significant contingent receivables. 19.4 Other legal claims and disputes The issue of compensation for conversion of shares Former shareholders of PGE Górnictwo i Energetyka S.A. present to the courts a motions to summon PGE S.A. to a conciliation hearing concerning payment of compensation for incorrect (in their opinion) determination of the exchange ratio of shares of PGE Górnictwo i Energetyka S.A. into shares of PGE S.A. during consolidation process that took place in 2010. The total value of claims resulting from summons to a conciliation hearing directed by the former shareholders of PGE Górnictwo i Energetyka S.A. amounts to over PLN 10 million. Regardless of the above, on November 12, 2014 Socrates Investment S.A. (an entity which purchased claims from former PGE Górnictwo i Energetyka S.A. shareholders) filed a lawsuit to impose a compensation in the total amount of over PLN 493 million (plus interest) for damages incurred in respect of incorrect (in their opinion) determination of the exchange ratio of shares in the merger of PGE Górnictwo i Energetyka S.A. and PGE S.A. The Company has responded to the lawsuit. Currently the proceedings before the court of first instance are in progress. Additionally, Pozwy sp. z o.o. (an entity which purchased claims from former PGE Elektrownia Opole S.A.’s shareholders) filed a similar claim to the District Court in Warsaw. It demands payment of over PLN 260 million (plus interest) from PGE Górnictwo i Energetyka Konwencjonalna S.A., PGE S.A. and PwC Polska sp. z o.o. based on “in solidum” rule alternatively based on joint and several liability. The claim concerns compensation for the allegedly incorrect (in their opinion) determination of the exchange ratio of shares of PGE Elektrownia Opole S.A. into shares of PGE Górnictwo i Energetyka Konwencjonalna S.A. in the process of merging these companies. The lawsuit was received by PGE S.A. on March 9, 2017. The date to respond to the lawsuit was established by the court for July 9, 2017. On July 8, 2017 PGE S.A. and PGE GiEK S.A. filed a response to the lawsuit. The PGE Group entities do not recognize the claims of Socrates Investment S.A., Pozwy Sp. z o.o. and other shareholders who call for trial settlements. These claims are unfounded. In PGE S.A.’s opinion the consolidation process was conducted fairly and properly. The value of shares which were subject to the process of consolidation (merger) was established by an independent company PwC Polska sp. z o.o. Additionally, merger plans of the companies mentioned above, including the share exchange ratios were examined for accuracy and reliability by an expert appointed by the registration court. No irregularities were found. Then, the court registered the merger of the companies mentioned above. For the reported claims, the Company has not created any provision. Claims for annulment of the resolutions of the General Shareholders’ Meetings On April 1, 2014, PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolutions 1, 2 and 4 of the Extraordinary General Shareholders’ Meeting of the Company held on February 6, 2014. The Company filed a response to the claim. On June 22, 2015, the District Court in Warsaw issued a judgment dismissing the shareholder’s claim in its entirety. The shareholder filed an appeal and the Company filed a response to the appeal. On March 24, 2017 a hearing was held before the Court of Appeal in Warsaw. The Court discontinued the proceedings due to withdrawal of a legal action without waiving the claim. On August 21, 2015, PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 5 of the Ordinary General Shareholders’ Meeting of the Company held on June 24, 2015. The Company filed a response to the lawsuit. The District Court in Warsaw dismissed the shareholder’s claim in its judgement issued on April 26, 2016. On April 3, 2017, the shareholder filed an appeal. The District Court dismissed the appeal on April 18, 2017 due to failure to meet the deadline for submitting of the appeal. On September 17, 2014 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuits, the shareholder is seeking for annulment of the resolution 4 of the Ordinary General Shareholders’ Meeting of the Company held on June 6, 2014. The Company filed a response to the lawsuit. On August 13, 2015, the District Court in Warsaw issued a judgment dismissing the shareholder’s claim in its entirety. The shareholder appealed and the Company filed a response to the appeal. On March 2, 2017 the Court of Appeal in Warsaw dismissed the appeal. The shareholder filed a cassation appeal dated 10 June 2017. On October 23, 2015 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 1 of the Extraordinary General Shareholders’ Meeting of the Company held on September 14, 2015. The Company filed a response to the lawsuit. On April 24, 2017 the hearing was conducted before the District Court in Warsaw. The court dismissed the shareholder's claim in its judgement issued on May 8, 2017. The shareholder filed an appeal on July 3, 2017. On May 20, 2016 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 1 of the Extraordinary General Shareholders’ Meeting of the Company held on March 1, 2016. The Company filed a response to the lawsuit. On March 14, 2017, the proceedings were discontinued due to withdrawal of a legal action before the first trial.
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On September 12, 2016 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 1 of the Ordinary General Shareholders’ Meeting of the Company held on June 28, 2016. The Company filed a response to the lawsuit. On March 17, 2017, the proceedings were discontinued due to withdrawal of a legal action before the first trial. On December 30, 2016 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 1 of the Extraordinary General Shareholders’ Meeting of the Company held on September 5, 2016. The Company filed a response to the lawsuit. On March 16, 2017, the proceedings were discontinued due to withdrawal of a legal action before the first trial. On March 15, 2017 PGE S.A. received a copy of a lawsuit filed to the District Court in Warsaw by one of the shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 4 of the Extraordinary General Shareholders' Meeting held on September 5, 2016. The Company filed a response to the lawsuit. Termination of long-term contracts for purchase of energy origin rights by Enea S.A. On October 28, 2016 and October 31, 2016 PGE Górnictwo i Energetyka Konwencjonalna S.A., PGE Energia Odnawialna S.A. and PGE Energia Natury PEW sp. z o.o. received from Enea S.A. termination of long-term contracts for purchase of renewable energy origin rights, so called “green certificates”. In the opinion of the PGE Group, notices of termination of contracts presented by Enea S.A. were filled in with a violation of terms of the agreements. The companies took appropriate steps to enforce their rights. In particular, in the opinion of the Management Board of PGE GiEK S.A. the termination of the contract by Enea S.A. is ineffective and against the earlier agreement between the parties (a letter of intent) and on that ground PGE GiEK S.A. will demand compensation for termination of the long-term contract. Estimated volume of the green certificates, covered by the contracts with Enea S.A., amounts to approximately 3,115 thousand MWh. The above amount was calculated for the period from December 2016 (i.e. the month from which Enea S.A. stopped purchasing of green certificates - after taking into account the notice period) until the initial maturity dates of the contracts. Additionally, PGE Górnictwo i Energetyka Konwencjonalna S.A. is a part to the dispute with ENEA S.A. in connection to damage resulting from inadequate (according to ENEA) execution of agreement for sales of energy origin rights by not participating in renegotiations of the agreement within a contract procedure. In PGE GiEK S.A.’s opinion, there is no reasonable basis to acknowledge ENEA S.A.’s viewpoint that inadequate execution of any contractual obligations by PGE GiEK S.A. occured. Therefore, the Company does not accept the claim in principle, nor the amount. ENEA S.A. disagrees with the opinion of PGE GiEK S.A. and thus it deducted the amount of its claim from its liabilities to PGE GiEK S.A. The parties did not reach an agreement in mediation proceedings, therefore court proceedings were instituted. The disputed amount is PLN 42 million. In the PGE Group's opinion, notices of termination of contracts presented by Enea S.A. were filed in with a violation of terms of the agreements. Therefore, as at the reporting date, the Group has not created any impairment allowances, nor revalued inventories or trade receivables. 20. Tax settlements Tax obligations and rights are specified in the Constitution of the Republic of Poland, tax regulations and ratified international agreements. According to the tax ordinance, tax is defined as public, unpaid, obligatory and non-returnable cash liability toward the State Treasury, provincial or other regional authorities resulting from the tax regulation. Taking into account the subject criterion, current taxes in Poland can be divided into five groups: taxation of incomes, taxation of turnover, taxation of assets, taxation of activities and other, not classified elsewhere. From the point of view of economic units, the most important is the taxation of incomes (corporate income tax), taxation of turnover (value added tax, excise tax) followed by taxation of assets (real estate tax and vehicle tax). Other payments classified as quasi – taxes cannot be omitted. Among these there are social security charges. Basic tax rates were as follows: in 2017 corporate income tax rate – 19%, for small entrepreneurs income tax rate of 15% is possible, basic value added tax rate – 23%, lowered: 8%, 5%, 0%, furthermore some goods and services are subject to the tax exemption. The tax system in Poland is characterized by a significant changeability of tax regulations, their high complexity, high potential fees foreseen in case of commitment of a tax crime or violation. Tax settlements and other activity areas subject to regulations (customs or currency controls) can be subject to controls of respective authorities that are entitled to issue fines and penalties with penalty interest. Controls may cover tax settlements for the period of 5 years after the end of calendar year in which the tax was due.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Tax Group On September 18, 2014 an agreement concerning a tax group, named “TG PGE 2015” was executed for a 25-year period. PGE S.A. is the representing company of this group. The companies forming a tax group are obligated to meet a number of requirements including: the appropriate level of equity, the parent company’s share in companies included in the group at least at the level of 95%, no equity relationships between subsidiaries, no tax arrears and share of profits in revenues at least at the level of 3% (calculated for the whole Tax Group) as well as concluding transactions with entities not belonging to Tax Group solely on market terms. The violation of these requirements will affect in termination of the Tax Group and the loss of status of the taxpayer. Since the termination, each of the companies included in the tax group becomes an independent taxpayer for CIT tax purpose. Real estate tax Taking into account pending disputes the PGE Group created at the reporting date the provision for property tax of PLN 91 million. The provision relates mainly to tax proceedings with regards to property tax in PGE GIEK S.A. Branch Opole Power Plant. The dispute is related to the subject of taxation and concerns mainly a decision whether installations in buildings and detached technical machinery should be taxed as autonomous constructions. Tax proceedings are currently at various stages of tax authorities proceedings, i.e. in front of first instance authorities (village mayor, mayor), local government board of appeals and administrative courts. 21. Information on related parties The PGE Group’s transactions with related entities are concluded based on market prices for provided goods, products and services or are based on the cost of manufacturing. 21.1 Associates and joint arrangements The total value of transactions with such entities is presented in the table below.
Period ended Period ended June 30, 2017 June 30, 2016 Sales to associates and joint arrangements 5 35 Purchases from associates and joint arrangements 807 114
As at As at June 30, 2017 December 31, 2016 Trade receivables from associates and joint arrangements 1 41 Trade liabilities to associates and joint arrangements 84 16
The increase in turnover and balances results from the inclusion of Polska Grupa Górnicza sp. z o.o. and Polimex-Mostostal S.A. in these financial statements. 21.2 Subsidiaries of the State Treasury The State Treasury is the dominant shareholder of PGE Polska Grupa Energetyczna S.A. and as a result in accordance with IAS 24 Related Party Disclosures, the State Treasury companies are treated as related entities. The PGE Group entities identify in detail transactions with approximately 40 of the biggest State Treasury subsidiaries. The total value of transactions and balances with such entities is presented in the table below.
Period ended Period ended June 30, 2017 June 30, 2016 Sales to related parties 1,047 1,107 Purchases from related parties 1,921 1,638
As at As at June 30, 2017 December 31, 2016 Trade receivables from related parties 221 313 Trade liabilities to related parties 299 418
The largest transactions with the State Treasury companies involve Polskie Sieci Elektroenergetyczne S.A., Polskie Górnictwo Naftowe i Gazownictwo S.A., ENERGA S.A. Group companies, Zakłady Azotowe PUŁAWY S.A., PKN Orlen S.A., Enea S.A. Group companies and purchases of coal from Polish mines. Moreover, the PGE Group concludes significant transactions on the energy market via Towarowa Giełda Energii S.A. (Polish Power Exchange). Due to the fact that this entity only deals with the organization of trading, purchases and sales transacted through this entity are not recognized as transactions with related parties. On March 29, 2017 an agreement for sale of 100% shares of EXATEL S.A. to the State Treasury was signed. The sale revenue of PLN 369 million is not presented in the above tables.
Explanatory notes to the consolidated financial statements form an integral part thereof
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21.3 Management personnel remuneration The key management includes the Management Boards and Supervisory Boards of the parent company and significant Group entities.
Period ended Period ended PLN thousand June 30, 2017 June 30, 2016 Short-term employee benefits (salaries and salary related costs) 18,012 16,356 Post-employment benefits 1,488 6,894 TOTAL REMUNERATION OF KEY MANAGEMENT PERSONNEL 19,500 23,250 Remuneration of key management personnel of entities of non-core operations 7,204 7,063 TOTAL REMUNERATION OF MANAGEMENT PERSONNEL 26,704 30,313
Period ended Period ended PLN thousand June 30, 2017 June 30, 2016 Management Board of the parent company 4,573 7,211 Including post-employment benefits 20 3,066 Supervisory Board of the parent company 407 243 Management Boards – subsidiaries 13,205 14,708 Supervisory Boards – subsidiaries 1,315 1,088 TOTAL 19,500 23,250 Remuneration of key management personnel of entities of non-core operations 7,204 7,063 TOTAL REMUNERATION OF MANAGEMENT PERSONNEL 26,704 30,313 The Members of the Management Boards of some of the Group companies are employed on the basis of civil law contracts for management (so called management contracts). The above remuneration is included in other cost by nature disclosed in note 5.2 Cost by nature and function. 22. Significant events of the reporting period and subsequent events 22.1 Compensation resulting from termination of long term contracts Due to the termination of long-term contracts for sale of capacity and electricity (“LTC”), pursuant to the LTC Act, power generating units who once served as parties to such contracts have acquired the right to compensations for the coverage of the so-called stranded costs. Stranded costs are the expenses of the power generating units, borne until May 1, 2004 for property, plant and equipment related to the production of electricity, uncovered by revenue from the sales of the electricity produced, capacity reserves and system services on the competitive market, after the premature termination of the long-term contract. The LTC Act limits the total resources which can be paid out to all power generating units to cover stranded costs discounted as of January 1, 2007 to the sum of PLN 11.6 billion, with PLN 6.3 billion attributable to PGE. The table below presents basic data for Group power generating units assumed with the LTC Act.
Maximum stranded and Power generating unit Effective term of LTC extra costs (in PLN million) Turów Power Plant Until 2016 2,571 Opole Power Plant Until 2012 1,966 Dolna Odra Power Plant Complex (“ZEDO”) Until 2010 633 Lublin Wrotków Heat and Power Plant Until 2010 617 Rzeszów Heat and Power Plant Until 2012 422 Gorzów Heat and Power Plant Until 2009 108 TOTAL 6,317 Within the term stipulated by the LTC Act, i.e. until December 31, 2007, PGE S.A. signed contracts terminating its long-term capacity and electricity sales contracts with power generating units that once served as parties to the then effective LTC. Therefore, the power generating units have gained the right to receive resources to cover stranded costs. In December 2016, the adjustment period for power generating units involved in the compensation system in PGE GiEK S.A. ended. On April 5, 2017 PGE GiEK S.A. received information about the initiation of proceedings regarding the amount of annual adjustment of stranded costs for 2016. On July 31, 2017 the President of the Energy Regulatory Office (“ERO President”) issued a decision concerning annual adjustment of stranded costs for 2016. Pursuant to the decision, the adjustment of stranded costs arising in power generating units of PGE GiEK S.A. for 2016 amounted to PLN (+) 276 million. On April 10, 2017 PGE GiEK S.A. received information about the initiation of proceedings regarding the value of the final adjustment of stranded costs. According to the provisions of the LTC Act, the process of establishing the final adjustment of stranded costs should be completed by August 31, 2017. If no disagreements arise in this process, the decision issued by the ERO President will terminate the participation of PGE GiEK S.A. in the compensation system.
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Decisions of the President of the Energy Regulatory Office related to realization of the LTC Act Until the date of preparation of these financial statements, power generating units received decisions on annual adjustments of stranded costs and costs generated in gas-fired units for the years 2008-2015. In part, these decisions were unfavourable for the particular units, and, in the opinion of the Group, were issued in violation of the LTC Act. In consequence, since 2009, a number of proceedings have been pending before the District Court in Warsaw - Competition and Consumer Protection Court ("CCP Court") and before the Court of Appeal, regarding appeals of power generating units from the PGE Group against the Decision of the ERO President. As at the date of preparation of these financial statements, majority of the proceedings are conducted before the Supreme Court. In the period from 2009 to the date on which these financial statements were prepared: 19 court cases were initiated by PGE GiEK S.A., including: (i) regarding unfavourable decisions relating to the amounts of annual adjustments of stranded costs – 14 cases, (ii) regarding unfavourable decisions relating to the amounts of annual adjustments of gas costs – 5 cases, 7 proceedings ended with favourable verdict for PGE GiEK; 5 proceedings ended with favourable verdict for the ERO President; 7 proceedings ended with partly favourable verdict for PGE GiEK. During the reporting period and until the date of preparation of these financial statements, the following events took place regarding annual adjustments of stranded costs and costs generated in gas-fired units: On January 10, 2017, the Supreme Court: (i) refused to accept for examination the cassation appeal of PGE GiEK S.A. against the judgement of the Court of Appeal concerning the determination of annual adjustment of stranded costs for Branch ZEDO for 2008. The verdict ended the proceedings in that case, (ii) overruled judgement of the Court of Appeal regarding the determination of annual adjustment of stranded costs for Branch Gorzów Heat and Power Plant for 2009. The case was submitted for re-examination by the Court of Appeal. On May 25, 2017, the Court of Appeal revoked the sentence of the CCP Court and discontinued the proceedings. The above means validation of the ERO President's decision. As a result of the above Zarządca Rozliczeń S.A. returned the amount of approx. PLN 8 million. On January 26, 2017, the Supreme Court issued an alter decision concerning: (i) the annual adjustment of stranded costs for Branch Lublin Wrotków Heat and Power Plant for 2008 in which it determined its value at approx. PLN (+) 9 million. As a result, PGE GiEK S.A. returned to Zarządca Rozliczeń S.A. the amount of approx. PLN 1 million, (ii) the annual adjustment of stranded costs for Branch Rzeszów Heat and Power Plant for 2009, in which it determined its value at PLN 0. As a result, PGE GiEK S.A. returned to Zarządca Rozliczeń S.A. the amount of approx. PLN 7 million. On March 14, 2017, the Supreme Court, as a result of examination of a cassation appeal of the ERO President issued a judgement regarding the determination of annual adjustment of the stranded costs for 2008 for Branch Opole Power Plant, in which it determined its value at approximately PLN (+) 129 million. As a result, PGE GiEK S.A. returned to Zarządca Rozliczeń S.A. approximately PLN 6 million. On April 11, 2017, the Court of Appeal issued a ruling regarding refusal to issue a decision on a final adjustment for Branch Gorzów Heat and Power Plant, which was in line with the position of PGE GiEK S.A., through which: (i) it annulled the contested ruling of the CCP Court in its entirety and (ii) discontinued the proceedings in this case. This ruling ended the proceedings in this case. On April 27, 2017, the Court of Appeal issued a verdict regarding determination of annual adjustment of the stranded costs for 2009 for Branch Lublin-Wrotków Heat and Power Plant, in which it determined its value at PLN 0. As a result, the Branch will receive from Zarządca Rozliczeń S.A. the amount of PLN 61 million. The verdict is final and binding, however the ERO President is entitled to file a cassation appeal to the Supreme Court. On May 11, 2017, the PGE Group filed an appeal to the Court of Appeal from the decision of the District Court in the case against the State Treasury - the ERO President for compensation for lost profits as a result of unfavourable decision issued by the ERO President regarding stranded costs for 2008. Value of the subject matter of the dispute amounts to PLN 57 million. Impact on the financial statements for the period ended June 30, 2017 In the financial statements for the period ended June 30, 2017 the PGE Group did not recognize revenues from LTC compensations in sales revenues due to the termination of the adjustment period in December 2016. The Court of Appeal’s verdict in case of Branch Lublin-Wrotków Heat and Power Plant and Gorzów Heat and Power Plant resulted in recognition of LTC adjustment of PLN 83 million in the financial statements for the period ended June 30, 2017. The adjustment is presented in the statement of comprehensive income in other operating income.
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22.2 Capital investment in Polska Grupa Górnicza S.A. On March 31, 2017, PGE GiEK S.A. signed the subsequent investment agreement determining the conditions of the financial investment in Polska Grupa Górnicza Sp. z o.o. (“PGG”) (“Investment”) (“Investment Agreement”). The parties of the Investment Agreement are PGE GiEK S.A., Enea S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A., Węglokoks S.A., Towarzystwo Finansowe Silesia sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (jointly referred later to as the “Investors”) and PGG. The Investment Agreement provides that PGG will acquire selected mining assets from Katowicki Holding Węglowy S.A. ("KHW") on the ground of the promised contract, which was signed on April 1, 2017. The Investment Agreement determines method of investment, operating rules of PGG and its bodies, as well as rules for withdrawal from the Investment. The Investment Agreement assumes recapitalisation of PGG in three stages by PGE GiEK, Enea S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A. and Towarzystwo Finansowe Silesia sp. z o.o. with total amount of PLN 1 billion. Within the recapitalisation of PGG, PGE GiEK committed itself to acquire new shares of PGG with a total nominal value of PLN 100 million in exchange for the cash contribution of PLN 100 million, in three stages: within the first stage PGE GiEK S.A. acquired new shares in PGG in exchange for the cash contribution of PLN 50 million. Recapitalisation within the first stage took place on April 6, 2017, within the second stage PGE GiEK S.A. acquired new shares in PGG in exchange for the cash contribution of PLN 20 million. Recapitalisation within the second stage took place on June 23, 2017, within the third stage PGE GiEK S.A. will acquire new shares in PGG in exchange for the cash contribution of PLN 30 million. Recapitalisation within the third stage will take place in the first quarter of 2018. After acquisition of the above mentioned shares within the third stage PGE GiEK S.A. will have 15.3% in the share capital of PGG in comparison to 15.8% as at June 30, 2017. As in the case of the Agreement from 2016, the Investment Agreement determines the rules for appointing the Supervisory Board members, according to which each Investor and the State Treasury will be entitled to appoint one member in the Supervisory Board which will consist of up to 8 members. Additionally, key decisions concerning equity management and transformation require Investors permission. Taking into account the entitlements mentioned above, the investment in PGG is recognized as joint arrangement and accounted for under the equity method. 22.3 Submission of offer for acquisition of EDF assets in Poland On May 11, 2017, PGE S.A. together with EDF International SAS and EDF Investment II BV (together „EDF”) signed Put Option Agreement (“POA Agreement”) concerning sale of EDF’s assets in Poland. Pursuant to the POA Agreement, EDF obtained option to call PGE S.A. to sign up agreement concerning sale of shares in respect of assets described below after meeting certain conditions, including obtaining corporate permission of EDF for the sale transaction. On May 19, 2017, as a result of execution of put option resulting from the POA Agreement by EDF, EDF and PGE signed a conditional sale agreement („Sale Agreement”). The Sale Agreement concerns mainly (“Transaction”): purchase of 99.51% shares of EDF Polska S.A., purchase of 100% shares of EDF Investment III B.V., indirect purchase of 50% and 1 share of ZEW Kongeneracja S.A. (shares owned by EDF Polska S.A. and EDF Investment III B.V.) and purchase of shares in subsidiaries of EDF Polska, providing auxiliary activities. As a result of the Agreement, PGE S.A. will acquire a series of manufacturing assets, including: 4 heat and power plants (Kraków, Gdańsk, Gdynia, Toruń), heat distribution grid in Toruń and Rybnik power plant (currently controlled by EDF Polska S.A.) as well as 4 heat and power plants (Wrocław, Zielona Góra, Czechnica, Zawidawie) and heat distribution grids in Zielona Góra, Siechnice and Zawidawie (currently controlled by EDF Polska S.A. and EDF Investment III B.V.). The Enterprise Value for all assets was established under the Locked-Box Date formula as at December 31, 2016 and amounts to PLN 4.51 billion, of which PLN 2.45 billion stands for the share capital and PLN 2.06 billion stands for the net debt. Total PGE S.A. expenses related to the Transaction will include: share capital amount of PLN 2.45 billion (“Share Capital Amount”), interest costs from the Share Capital Amount, settled pro-rata starting from January 1, 2017 until the end of the Transaction, in the maximum amount of PLN 107 million due to economic benefits achieved by the Company from the operation of the subject of the Sale Agreement after the date of price settlement, intergroup debt as at the closing date of the Transaction, at the maximum amount of PLN 1.68 billion and approximately USD 40 million (“Intergroup debt”), outstanding Intergroup debt interest as at the closing date of the Transaction. After closing of the Transaction, according to the Polish regulations regarding the capital market, as a consequence of purchase of ZEW Kogeneracja S.A. shares, the PGE Group will be obligated to announce a tender offer to subscribe for the sale of shares in ZEW Kogeneracja S.A. in quantity sufficient to exceed the 66% threshold of voting rights in ZEW Kogeneracja S.A. The costs of announcement are not included in the value of the Transaction.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
It is anticipated that the Transaction will be closed not later than on January 2, 2018. Payments for assets will be proceeded at the moment of the Transaction’s closure. Closing of the Transaction requires the following conditions to be fulfilled: PGE S.A. obtains an approval of the Office of Competition and Consumer Protection, PGE S.A. obtains an approval of the Minister of Energy, pursuant to the Act of July 24, 2015 related to control of particular investments, PGE S.A. obtains a waiver of pre-emption right from the President of the Agricultural Property Agency, EDF obtains an approval for transaction from certain governments in France concerning supervision over State Treasury companies and transactions involving their shares.
22.4 Capital investment in Polimex-Mostostal S.A. On January 18, 2017, PGE S.A. signed the following agreements concerning capital investment in Polimex-Mostostal S.A. („Polimex”): investment agreement with ENEA S.A., Energa S.A., PGNiG Technologie S.A. (jointly with PGE referred to as “Investors”) and Polimex, on the basis of which, subject to conditions precedent specified in the agreement, Investors are obligated to make an investment in Polimex. The investment includes taking by Investors up to 150,000,000 of series T ordinary shares with a nominal value of PLN 2 each and an issue price of PLN 2 each (“New Shares”) issued by Polimex as the increase of share capital of Polimex by up to PLN 300 million (“Investment Agreement”). Under the terms of the Agreement PGE committed to purchase 37,500,000 New Shares at the total issue price amounting to PLN 75 million; agreement between Investors, defining the terms of cooperation together with mutual rights and obligations of Investors relating to the investment carried out on the basis of Investment Agreement; agreement between Investors and SPV Operator Sp. z o.o. (“SPV Operator”) obliging the parties, subject to fulfillment of conditions precedent, to conduct a sale transaction of 6,000,001 Polimex shares by SPV Operator to Investors, whereas PGE obligated to acquire a number of 1,500,001 aforesaid shares; agreement between Investors and Towarzystwo Finansowe Silesia (“TFS”) whereby TFS granted Investors, for remuneration, a possibility to acquire Polimex shares provided that TFS realizes conversion right in respect of convertible bonds issued by Polimex. Moreover, TFS has committed not to converse possessed convertible bonds of series A issued by Polimex without prior written request made by Investors.
On January 18, 2017, the President of the Office for Competition and Consumer Protection issued a permission for Investors to take joint control over Polimex. On January 20, 2017, due to the fulfillment of conditions precedent specified in the Investment Agreement, PGE accepted the offer made by Polimex’s Management Board to acquire 37,500,000 series T ordinary shares issued by Polimex with a nominal value of PLN 2 each and an issue price of PLN 2 each and the total issue price of PLN 75 million. Additionally, on January 20, 2017, on the terms of agreement with SPV Operator and due to the fulfillment of conditions precedent specified in the Investment Agreement, the Company acquired 1,500,001 Polimex shares from SPV Operator at the total amount of approximately PLN 5.6 million. On March 21, 2017, the investors announced a tender offer to subscribe for the sale of Polimex shares in quantity sufficient to exceed the 66% threshold of voting rights pursuant to art. 73 sec. 2 of the Act of July 29, 2005, on public offerings and the terms for introducing financial instruments to an organised trading system and on public companies, as a result of which PGE will be able to purchase 42,102 shares of Polimex at the price of PLN 4.90. On March 28, 2017, the investors adjusted their price proposed in the tender offer from PLN 4.90 to PLN 4.91 per one share of Polimex. The settlement by the National Depository of Securities (KDPW) of purchase of shares under the tender offer took place on April 28, 2017. As a result of the tender offer PGE S.A. acuired 24 shares and currently holds 39,000,025 shares representing 16.48% of the share capital of Polimex and entitling to 16.48% of total votes at the General Meeting of Polimex. The investment agreement gives the investors influence over Polimex’s financial and operating policies. These entitlements are exercised by the Supervisory Board. Under the agreement, the Supervisory Board will consist of 7 members maximum, including 4 indicated by the investors. Moreover, the investors signed an agreement regarding the investment in Polimex (“Agreement”). The aim of the Agreement is to ensure greater control over Polimex to the Investors that hold together a majority stake in Polimex’s voting rights (65.93%). The Agreement addresses issues such as agreeing, by vote, of a joint position in making key decisions at General Meeting and Supervisory Board level, including the composition of Polimex’s Management Board. Given the investors’ entitlements mentioned above, which provide for significant influence, the stake in Polimex was classified as associate accounted for under the equity method. The Group is currently working on allocating the purchase price paid for Polimex in accordance with IFRS 3. Because of this, the aforesaid investment is recognized in the consolidated financial statements of the PGE Group for the first half of 2017 at acquisition cost adjusted by the Group’s share in Polimex’s result, without taking into account potential adjustments required to bring assets and liabilities to fair values.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
22.5 Subsequent events after the reporting period After the reporting period a series of significant events in regulation environment took place that might have an impact on future financial results of the PGE Group, in particular within Conventional Generation and Renewables segments. The most important changes are presented below: adoption of the Amendment to Act on renewable energy (“OZE Act”) on July 20, 2017. The Amendment anticipate a change in calculation of compensatory payments resulting in unit compensatory payment amounting to 125% of annual weighted average price of origin rights. This change may result in a decrease of compensatory payments, which may lead to lower average price of origin rights in the future. Additionally, the Polish Parliament is working on the project of OZE Act that is now subject to inter - departmental and public consultations. Other regulatory changes (e.g. project of regulation on higher redemption obligation) are also being proceeded. adoption of the Water Resources Law on July 20, 2017. The Water Resources Law Act determines new rules for usage of water resources. In particular, the Act implements charges (fixed and variable) for usage of water resources and higher maximum charges for water consumption and sewage insertion though installations belonging to the PGE Group’s entities. The Water Resources Law anticipates the maximum rates of variable charges, which might be lowered by means of the regulation. project of amendment of the Act on wind power plants (“Project of Wind Power Plants Act”). The project anticipates change in definition of wind power plant through reintroducing definition included in the Act of July 7, 1994 – Building Law. In case of introducing the change mentioned above, wind power plants will no longer be recognized as a construction, which will result in lower property tax. The Project of Wind Power Plants Act also predicts abolition of modernizations and reconstructions ban in respect of wind power plants functioning as at the date of entering into force of the Act and involves some modifications of distance criterion. project of Act on capacity market, approved on July 4, 2017 by the Council of Ministers. The Act aims to introduce the capacity market, with disposable energy as a commodity which can be offered only by producers, attaining remuneration for the willingness to provide energy, including an obligation to deliver energy in case of predicted unsatisfied consumers’ demands. According to the Act, the capacity market shall operate on the basis of auctions, organized by the operator of energy power transfer system, based on parameters established by the Minister of Energy.
Due to the legislation process (concerning inter alia executive acts to the amendments and projects of acts mentioned above) and reconciliations of the projects of acts with the European Commission it is not possible to estimate clear impact of regulatory changes on revenues and costs generated by the PGE Group, as well as on recoverable amount of assets. In the nearest future the PGE Group will proceed analytical work to establish the approximate influence of changes described above on the Group results.
Explanatory notes to the consolidated financial statements form an integral part thereof
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23. Half-year condensed separate financial information of PGE Polska Grupa Energetyczna S.A. SEPARATE STATEMENT OF COMPREHENSIVE INCOME
Period ended Period ended Note June 30, 2017 June 30, 2016 (reviewed) (audited) STATEMENT OF PROFIT OR LOSS
SALES REVENUES 23.5 4,591 5,626 Cost of goods sold 23.6 (4,212) (5,192) GROSS PROFIT ON SALES 379 434 Distribution and selling expenses 23.6 (10) (26) General and administrative expenses 23.6 (72) (71) Other operating income 1 2 Other operating expenses (8) (1) OPERATING PROFIT 290 338 Financial income 23.7 4,374 1,191 Financial expenses 23.7 (227) (100) PROFIT BEFORE TAX 4,437 1,429 Current income tax 18 (73) Deferred income tax (3) (4) NET PROFIT FOR THE REPORTING PERIOD 4,452 1,352
OTHER COMPREHENSIVE INCOME Items, which may be reclassified to profit or loss, including: Valuation of hedging instruments (70) 40 Deferred tax 13 (8) OTHER COMPREHENSIVE INCOME FOR THE REPORTING PERIOD, NET (57) 32
TOTAL COMPREHENSIVE INCOME 4,395 1,384
EARNINGS AND DILUTED EARNINGS PER SHARE (IN PLN) 2.38 0.72
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
SEPARATE STATEMENT OF FINANCIAL POSITION
As at As at Note June 30, 2017 December 31, 2016 (reviewed) (audited) NON-CURRENT ASSETS Property, plant and equipment 180 186 Intangible assets 4 5 Financial receivables 23.9 9,730 8,848 Derivatives 23.11 209 356 Available-for-sale financial assets 3 6 Shares in subsidiaries and associates 23.8 30,686 29,678 40,812 39,079 CURRENT ASSETS Inventories 70 76 Trade and other financial receivables 23.9 1,152 3,474 Derivatives - 9 Other current assets 23.12 2,945 81 Cash and cash equivalents 23.10 4,602 1,932 8,769 5,572 TOTAL ASSETS 49,581 44,651
EQUITY Share capital 19,165 19,165 Hedging reserve 92 149 Reserve capital 15,327 13,730 Retained earnings 4,449 1,594 39,033 34,638 NON-CURRENT LIABILITIES Non-current provisions 22 22 Loans, borrowings, bonds and cash-pooling 23.14 7,750 8,854 Derivatives 23.11 25 23 Deferred tax liabilities 23 33 7,820 8,932 CURRENT LIABILITIES Current provisions 26 30 Loans, borrowings, bonds and cash-pooling 23.14 2,090 704 Trade and other financial liabilities 531 189 Income tax liabilities 27 4 Other current non-financial liabilities 54 154 2,728 1,081 TOTAL LIABILITIES 10,548 10,013 TOTAL EQUITY AND LIABILITIES 49,581 44,651
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
SEPARATE STATEMENT OF CHANGES IN EQUITY
Hedging Reserve Retained Share capital Total equity reserve capital earnings AS AT JANUARY 1, 2016 18,698 (17) 13,009 1,764 33,454 Net profit for the reporting period - - - 1,598 1,598 Other comprehensive income - 166 - - 166 COMPREHENSIVE INCOME - 166 - 1,598 1,764
Retained earnings distribution - - 1,301 (1,301) - Dividend - - - (467) (467) Increase of share capital from the 467 - (467) - - Company’s own funds Tax on increase of share capital - - (110) - (110) Other changes - - (3) - (3) AS AT DECEMBER 31, 2016 19,165 149 13,730 1,594 34,638 Net profit for the reporting period - 4,452 4,452 Other comprehensive income - (57) - - (57) COMPREHENSIVE INCOME - (57) - 4,452 4,395
Retained earnings distribution - - 1,598 (1,598) - Other changes - - (1) 1 - AS AT JUNE 30, 2017 19,165 92 15,327 4,449 39,033
Hedging Reserve Retained Share capital Total equity reserve capital earnings AS AT JANUARY 1, 2016 18,698 (17) 13,009 1,764 33,454 Net profit for the reporting period - - - 1,352 1,352 Other comprehensive income - 32 - - 32 COMPREHENSIVE INCOME - 32 - 1,352 1,384
Retained earnings distribution - - 1,301 (1,301) - Dividend - - - (467) (467) AS AT JUNE 30, 2016 18,698 15 14,310 1,348 34,371
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
SEPARATE STATEMENT OF CASH FLOWS
Period ended Period ended June 30, 2017 June 30, 2016 (reviewed) (audited) CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 4,437 1,429 Income tax paid (82) (30)
Adjustments for: Depreciation, amortization and impairment losses 7 8 Interest and dividend, net (2,853) (1,069) Profit / loss on investment activities (1,267) (49) Change in receivables (49) 228 Change in inventories 7 98 Change in liabilities, excluding loans and borrowings 353 (172) Change in other non-financial assets 8 233 Change in provisions (4) (4) NET CASH FROM OPERATING ACTIVITIES 557 672
CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets (1) (5) Redemption of bonds issued within the PGE Group 70 1,179 Acquisition of bonds issued within the PGE Group (850) (3,180) Acquisition of shares in subsidiaries (103) (16) Proceeds from sale of other financial assets 368 - Deposits with a maturity over 3 months (50) - Termination of deposits with a maturity over 3 months 2,340 - Loans granted under cash-pooling agreement (246) Other loans granted (25) (16) Dividends received - 5 Interest received 24 10 Other - 1 NET CASH FROM INVESTING ACTIVITIES 1,773 (2,268)
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans, borrowings and issue of bonds - 518 Repayment of loans (17) - Proceeds from cash-pooling 507 - Interest paid (147) (89) Other (3) (2) NET CASH FROM FINANCING ACTIVITIES 340 427
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,670 (1,169)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 1,930 2,010 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 4,600 841
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
23.1 General information PGE Polska Grupa Energetyczna S.A. (“the Company”, “PGE S.A.”) was founded on the basis of the Notary Deed of August 2, 1990 and registered in the District Court in Warsaw, XVI Commercial Department on September 28, 1990. The Company was registered in the National Court Register of the District Court for the capital city of Warsaw, XII Commercial Department, under no. KRS 0000059307. The Company is seated in Warsaw, 2 Mysia Street. PGE S.A. is the parent company of PGE Polska Grupa Energetyczna S.A. Group (“PGE Group”, “Group”, “GK PGE”) and prepares separate and consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union („IFRS EU”). The State Treasury is the majority shareholder of the Company. Core operations of the Company are as follow: trading of electricity and other products of energy market, supervision over activities of central and holding companies, rendering of financial services for the companies from the PGE Group, rendering of other services related to the above mentioned activities. PGE S.A.’s business activities are conducted under appropriate concessions, including concession for electricity trading granted by the Energy Regulatory Office. The concession is valid until 2025. No significant assets or liabilities are assigned to the concession. Annual fees are paid in connection with the concession held depending on the level of trading. Revenues from sale of electricity and other products of energy market are the only significant items of operating revenues. These revenues are generated on the domestic market. As a result, the Company’s operations are not divided into operating or geographical segments. The accounts of PGE S.A. are kept by its subsidiary PGE Obsługa Księgowo-Kadrowa sp. z o.o. Going concern These interim condensed financial statements were prepared under the assumption that the Company will continue to operate as a going concern in the foreseeable future. As at the date of approval of these financial statements, there is no evidence indicating that the Company will not be able to continue its operations as a going concern. These financial statements comprise financial data for the period from January 1, 2017 to June 30, 2017 („financial statements”) and include comparative data for the period from January 1, 2016 to June 30, 2016 and as at December 31, 2016. The foregoing financial statements are prepared based on the same accounting principles (policy) and methods of computation as compared with the most recent annual financial statements. These financial statements are to be read together with the audited separate financial statements of PGE S.A. prepared in accordance with IFRS EU for the year ended December 31, 2016. Seasonality of business operations Main factors affecting demand for electricity and heat are: weather conditions – air temperature, wind force, rainfall, socio-economic factors – number of energy consumers, energy carriers prices, growth of GDP and technological factors – advances in technology, product manufacturing technology. Each of these factors has an impact on technical and economic conditions of production, distribution and transmission of energy carriers, thus influence the results obtained by the Company. The level of electricity sales is variable throughout a year and depends especially on weather conditions - air temperature and length of the day. Increase in demand for electricity is particularly visible in winter and decline is observed in summer. Moreover, seasonal changes are evident among selected groups of end users. Seasonality effects are more significant for households than for the industrial sector. Seasonality of sales of PGE S.A. results from the fact that the Company realized 84% of the electricity sales volume to PGE Obrót S.A. and PGE Dystrybucja S.A. whose demand for electricity is subject to seasonality. 23.2 Professional judgment of management and estimates In the previous reporting periods, PGE S.A. created an impairment allowance of shares in PGE Obrót S.A. In the current reporting period, due to an improvement of current and projected financial situation of PGE Obrót S.A., the Company conducted an impairment test and partly reversed the impairment allowance raised in the previous periods. Detailed information concerning this issue is described in note 23.8 of these financial statements. In the period covered by these financial statements there were no significant changes in estimates influencing the numbers presented in the financial statements. 23.3 The influence of new regulations on future financial statements of the Company New standards and interpretations published, but not yet effective, are described in note 2.3 of these financial statements. The analysis of new regulations has not been finished yet, however they shall not have a significant impact on future financial statements of the Company.
Explanatory notes to the consolidated financial statements form an integral part thereof
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23.4 Fair value hierarchy The principles for valuation of inventories, stocks, shares and instruments not quoted on active markets, for which fair value may not be determined reliably, are the same as presented in the financial statements for the year ended December 31, 2016. The Company measures derivatives at fair value using valuation models for financial instruments based on publicly available exchange rates, interest rates, discount curves in particular currencies (applicable also for commodities with prices denominated in these currencies) derived from active markets. The fair value of derivatives is determined based on discounted future cash flows from concluded transactions, calculated based on the difference between the forward rate and transaction price. Forward exchange rates are not modelled as separate risk factor, but are derived from the spot rate and appropriate forward interest rate for foreign currencies in relation to PLN. During the current and comparative reporting periods, there have been no transfers of financial instruments between the first and the second level of the fair value hierarchy. 23.5 Sales revenues Period ended Period ended June 30, 2017 June 30, 2016 SALES REVENUES Sale of electricity 3,751 4,413 Sale of energy origin rights 10 28 Sale of gas 296 329 Other sales of merchandise and materials 220 540 Revenues from sale of services 314 316 TOTAL SALES REVENUES 4,591 5,626 The decline in sale of electricity in the first half of 2017 in comparison to the corresponding period of the previous year is mainly due to decreased sales volume within the PGE Group resulting from lower demand of companies trading on retail market as well as lower transaction prices.
The decline in other sales of merchandise and materials results from lower volumes of CO2 emission rights and lower wholesale price of CO2 emission rights. Information regarding main customers The main business partners of the Company are subsidiaries in the PGE Group. In the first half of 2017 sales to PGE Obrót S.A. constituted 70% of sales revenues and sales to PGE Górnictwo i Energetyka Konwencjonalna S.A. accounted for approx. 11% thereof. In the first half of 2016, sales to these entities amounted to 75% and 15%, respectively. 23.6 Cost by nature and function Period ended Period ended June 30, 2017 June 30, 2016 COST BY NATURE Depreciation, amortization and impairment losses 7 8 Materials and energy 2 2 External services 30 48 Taxes and charges 2 2 Employee benefits expenses 55 48 Other cost by nature 26 37 TOTAL COST BY NATURE 122 145 Distribution and selling expenses (10) (26) General and administrative expenses (72) (71) Cost of merchandise and materials sold 4,172 5,144 COST OF GOODS SOLD 4,212 5,192
The decrease in cost of merchandise and materials sold (mainly purchased electricity and CO2 emission rights) in the first half of 2017 in comparison to the corresponding period of the previous year is directly related to the decline of revenues described above. Other cost by nature consists mainly of sponsorship, advertising and management’s payroll costs.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
23.7 Financial income and expenses Period ended Period ended June 30, 2017 June 30, 2016 FINANCIAL INCOME ON FINANCIAL INSTRUMENTS Dividends 2,872 1,063 Interest 166 110 Reversal of impairment allowances 1,289 Revaluation of financial instruments 47 7 Foreign exchange gains - 11 FINANCIAL INCOME ON FINANCIAL INSTRUMENTS 4,374 1,191 TOTAL FINANCIAL INCOME 4,374 1,191 In the period ended June 30, 2017, the Company recognized mainly dividends from PGE GiEK S.A. of PLN 2,019 million and from PGE Dystrybucja S.A. of PLN 808 million (in the corresponding period PLN 1,012 million from PGE Dystrybucja S.A. and PLN 35 million from PGE Energia Odnawialna S.A.). During the current reporting period, the Company partly reversed the impairment allowance of shares in PGE Obrót S.A., which was described in detail in note 23.8 of these financial statements. Interest income relates mainly to bonds issued by subsidiaries and cash deposits. Revaluation of financial instruments includes fair value valuation of an option to acquire Polimex-Mostostal shares, an ineffective portion of valuation of derivatives designated as hedging instruments in the cash-flow hedge accounting and total valuation of other derivatives.
Period ended Period ended June 30, 2017 June 30, 2016 FINANCIAL EXPENSES ON FINANCIAL INSTRUMENTS Interest 158 96 Revaluation of financial instruments 64 2 Foreign exchange losses 2 - Other 3 2 FINANCIAL EXPENSES ON FINANCIAL INSTRUMENTS 227 100 TOTAL FINANCIAL EXPENSES 227 100
Interest expenses relate mainly to bonds issued and bank loans incurred described in note 23.14 of these financial statements. Revaluation of financial instruments consists mainly of impairment allowance of Exatel S.A.'s shares of PLN 59 million. 23.8 Shares in subsidiaries In the current reporting period PGE S.A. disposed of 100% shares in EXATEL S.A. with the total carrying amount at the sale date of PLN 368.5 million and acquired 16.48% shares in Polimex-Mostostal S.A. for the total amount of PLN 80.9 million. The acquisition is described in detail in note 22.4 of these financial statements. Reversal of impairment allowance of shares in PGE Obrót S.A. In the previous reporting periods, PGE S.A. created an impairment allowance of shares in PGE Obrót S.A. of PLN 5,536 million. Impairment loss was triggered by donation of shares in PGE Dystrybucja S.A., which resulted in significant decrease of PGE Obrót S.A.’s equity. After the donation was granted, the value of shares in PGE Obrót S.A. was estimated based on discounted cash flows model pursuant to IAS 36. In the current reporting period, the Company conducted the analysis of impairment indicators concerning shares in PGE Obrót S.A. Due to an improvement of current and projected financial situation of PGE Obrót S.A. as compared to the previous projections, the Company identified indicators to reperform an impairment test of shares in PGE Obrót S.A. The impairment test was conducted in accordance with IAS 36 based on discounted cash flows model that was prepared using 5 - year financial projections of PGE Obrót S.A.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Key assumptions of the test are as follows: weighted average cost of capital (WACC) at 7.56%, decrease of the total sale volume in 2021 by approximately 8% in comparison to 2017, increase of wholesale prices of electricity in 2018 in comparison to 2017 and decrease in the period 2019-2021, correlation between electricity prices for retail consumers with electricity prices on the wholesale market and the impact on electricity prices of changed obligation for redemption of origin rights and changed origin rights prices. As a result, the recoverable amount of shares in PGE Obrót S.A. was estimated at PLN 2,406 million and consequently PGE S.A. reversed an impairment allowance of PLN 1,289 million. The sensitivity analysis indicated that the valuation is most vulnerable to changes in WACC and sale prices of electricity within particular rate groups, mainly within group B. The increase of WACC by 1 percentage point results in decreased value of shares by almost PLN 287 million, whereas the decrease of WACC by 1 percentage point results in increased value of shares by almost PLN 389 million. In turn, growth or decline of realized sale prices within group B by 1 percentage point results respectively in increased or decreased value of shares by almost PLN 246 million.
23.9 Financial assets As at June 30, 2017 As at December 31, 2016 Non-current Current Non-current Current Trade receivables - 586 - 523 Acquired bonds 9,609 16 8,751 21 Cash-pooling receivables - 550 - 628 Loans granted 121 - 97 - Deposits with a maturity over 3 month - - - 2,299 Other financial receivables - - - 3 TOTAL FINANCIAL RECEIVABLES 9,730 1,152 8,848 3,474
Trade receivables Trade receivables of PLN 586 million relate mainly to sale of electricity and services to subsidiaries in the PGE Group. As at June 30, 2017, the balance of the two most important debtors, i.e. PGE Obrót S.A., PGE Górnictwo i Energetyka Konwencjonalna S.A. constituted 81% of total balance of trade receivables. Acquired bonds
As at June 30, 2017 As at December 31, 2016
Non-current Current Non-current Current ACQUIRED BONDS - ISSUER PGE Górnictwo i Energetyka Konwencjonalna S.A. 8,145 6 7,236 7 PGE Energia Odnawialna S.A. and its subsidiaries 1,375 10 1,426 14 Autostrada Wielkopolska S.A. 89 - 89 - TOTAL ACQUIRED BONDS 9,609 16 8,751 21
PGE S.A. acquires bonds issued by the entities belonging to the PGE Group. Cash obtained from the issue of bonds is used for financing investments, repayment of financial liabilities as well as for financing current operations. The intergroup bonds acquired by the Company with interest rates lower than market interest rates, are recognized at the date of acquisition at fair value, lower than issue price. The difference between the issue price and the fair value at the date of acquisition is recognized as an increase in the value of shares in subsidiaries issuing the bonds. The difference is amortized using an effective interest rate and recognized in the statement of comprehensive income. Cash-pooling receivables In 2014, in order to centralize the management of financial liquidity in the PGE Group, agreements for real cash-pooling services were executed between 16 companies of the PGE Group and each bank separately, i.e. with Powszechna Kasa Oszczędności Bank Polski S.A. and Bank Polska Kasa Opieki S.A. PGE S.A. coordinates the cash-pooling service in the PGE Group. This means, among others, that certain entities settle with the Company and the Company settles with banks. In connection to the above, balances with related parties participating in cash-pooling are reported in financial receivables and financial liabilities of PGE S.A.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Loans granted
As at June 30, 2017 As at December 31, 2016
Non-current Current Non-current Current LOANS GRANTED - BORROWER PGE Systemy S.A. 104 - 80 - PGE Trading GmbH 13 - 13 - Bestgum sp. z o.o. 4 - 4 - TOTAL LOANS GRANTED 121 - 97 -
23.10 Cash and cash equivalents Short-term deposits are made for different periods, from one day up to one month, depending on the Company’s needs for cash, and are deposited at individually agreed interest rates. The balance of cash and cash equivalents comprise the following positions: As at As at June 30, 2017 December 31, 2016 Cash on hand and cash at bank 353 331 Overnight deposits - 1 Short-term deposits 4,249 1,600 TOTAL 4,602 1,932 Interest accrued on cash, not received at the reporting date (1) (1) Exchange differences on cash in foreign currencies (1) (1) Cash and cash equivalents presented in the statement of cash flows 4,600 1,930 including restricted cash - -
Undrawn borrowing facilities 6,360 5,860 including overdraft facilities 2,000 2,000
For detailed description of bank loan agreements please refer to note 23.14 of these financial statements. 23.11 Derivatives As at June 30, 2017 As at December 31, 2016 Assets Liabilities Assets Liabilities DERIVATIVES AT FAIR VALUE Currency forward - - 1 - Commodity forward - - 8 - IRS transactions - 16 - 23 Options 46 - - - HEDGING DERIVATIVES CCIRS hedging transactions 76 - 231 - IRS hedging transactions 87 9 125 - TOTAL DERIVATIVES 209 25 365 23 current - - 9 - non-current 209 25 356 23 Options On January 20, 2017, PGE S.A. acquired from Towarzystwo Finansowe Silesia Sp. z o.o. a call option for purchase of Polimex-Mostostal S.A. shares. Dates of realization for the option were set at: July 30, 2020, July 30, 2021, July 30, 2022. IRS transactions In the current reporting period, PGE S.A. entered into an IRS transaction hedging the interest rate on a bank loan with a nominal value of PLN 500 million. For recognition of this IRS transaction, the Company applies hedge accounting. The impact of hedge accounting is described in note 16.2 of these financial statements. In 2016 PGE S.A. concluded IRS transactions, hedging the interest rate on bank loans with a total nominal value of PLN 4,630 million. For recognition of these IRS transactions, the Company applies hedge accounting. The impact of hedge accounting is described in note 16.2 of these financial statements.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
In 2014 PGE S.A. concluded IRS transactions, hedging the interest rate on bonds issued with a nominal value of PLN 1 billion. Payments arising from the IRS transactions are correlated to interest payments on bonds. Change in fair value of these IRS transactions is recognized in profit or loss. CCIRS hedging transaction In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions, hedging both the exchange rate concerning payments of principal and interest and interest rate. In these transactions, banks-contractors pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. The Company applies hedge accounting to the above CCIRS transactions. The impact of hedge accounting is presented in note 16.2 of these financial statements. 23.12 Other current assets As at As at June 30, 2017 December 31, 2016 Dividend receivables 2,872 - Advance payments 27 39 Receivables from TG 23 11 VAT receivables 14 24 Other 9 7 TOTAL 2,945 81
Dividend receivables relate mainly to receivables from PGE GiEK and PGE Dystrybucja S.A. Advance payments comprise mainly funds transferred to the subsidiary PGE Dom Maklerski S.A. for the purchase of electricity and gas of PLN 27 million in the current reporting period as compared to PLN 38 million in the comparative period. 23.13 Selected financial assets The carrying value of financial assets measured at amortized cost is a reasonable approximation of their fair value. 23.14 Loans, borrowings, bonds, cash-pooling
As at June 30, 2017 As at December 31, 2016 Non-current Current Non-current Current Loans received 2,730 59 2,858 80 Bonds issued - 1,000 976 24 Bank loans 5,020 129 5,020 127 Cash-pooling liabilities - 902 - 473 TOTAL LOANS, BORROWINGS, BONDS AND CASH- 7,750 2,090 8,854 704 POOLING Loans received from PGE Sweden AB (publ) The carrying value of financial liabilities measured at amortized cost is a reasonable approximation of their fair value. The Company recognizes loans drawn from its subsidiary – PGE Sweden AB (publ) of EUR 660 million. PGE S.A. estimates the fair value of these loans at PLN 2.872 million (as compared to carrying value of PLN 2,789 million). The fair value was established using estimated credit risk of PGE S.A. The indicators used in the valuation belong to Level 2 of the fair value hierarchy. Issuance of bonds on the domestic market In addition to the above mentioned financing, the Company has the ability to finance its operations through the following two bond issue programs: The bond issue program for the amount of PLN 5 billion directed towards investors from the Polish capital market. In 2013, the first non-public issuance of 5-year bonds under this program took place, the coupon bearer bonds with a variable interest rate. The nominal value of the issue was PLN 1 billion and the maturity of the bonds is June 27, 2018. On August 29, 2013, the bonds were floated in the Alternative Trading System organized by BondSpot S.A. and Giełda Papierów Wartościowych w Warszawie S.A. (Warsaw Stock Exchange). The bond issue program in the amount of PLN 5 billion directed towards entities within the PGE Group.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Bank loans On June 7, 2017, the Company concluded loan agreement with European Bank for Reconstruction and Development for the total amount of PLN 500 million with the maturity date of June 7, 2028. The funds obtained on the basis of the agreement will be used for projects relating to the modernization and development of distribution grid. As at June 30, 2017 the loan was not used.
Additionally, the Company has contracted the following credit agreements: the Loan Agreement signed on December 17, 2014 with Bank Gospodarstwa Krajowego for the amount of PLN 1 billion with the maturity date of December 31, 2027. As at June 30, 2017, the Company used the whole available credit. long-term loan agreement concluded on September 7, 2015 with a syndicate of banks composed of: BNP Paribas S.A., Société Générale S.A., Bank Handlowy w Warszawie S.A., ING Bank Śląski S.A., Bank Zachodni WBK S.A., mBank S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Bank Polska Kasa Opieki S.A. Subject matter of the agreement is granting a loan in two parts, i.e. term loan facility of PLN 3,630 million and revolving loan facility of PLN 1,870 million. The maturity date for the revolving loan facility is April 30, 2019 and for the term loan facility is September 30, 2023. As at June 30, 2017 the term loan facility was used and the liability amounts to PLN 3,647 million. two loan agreements signed on October 27, 2015 with the European Investment Bank for the total amount of nearly PLN 2,000 million. The amount of PLN 1,500 million, obtained on the basis of the first of the two agreements, will be used for projects relating to the modernization and development of distribution grid. The funds from the second agreement, i.e. the remaining PLN 490 million, will be used to finance and refinance the construction of cogeneration units of Gorzów Heat and Power Plant and Rzeszów Heat and Power Plant. The European Investment Bank loans will be available for disbursement over a period of up to 22 months from the date of signing of the agreements. The funds shall be repaid within 15 years from the date of the last tranche. As at June 30, 2017 the aforesaid loans were not used. loan agreement signed on December 4, 2015 with Bank Gospodarstwa Krajowego S.A. for the amount of PLN 500 million with the maturity date of December 31, 2028. As at December 31, 2016, PGE S.A. used the whole available credit.
The value of overdraft facilities at the Company’s disposal amounted to PLN 2,000 million as at June 30, 2017. The aforesaid overdraft facilities consists of two credits agreements limited to the amount of PLN 1 billion each. Part of the facilities is available until February 22, 2018 and the second part until April 29, 2018. In the period covered by these financial statements and after the reporting date there were no cases of default of repayment or violation of other terms of credit agreements. 23.15 Contingent liabilities As at As at
June 30, 2017 December 31, 2016 Bank guarantees 11,189 11,908 Other contingent liabilities 1 1 CONTINGENT LIABILITIES, TOTAL 11,190 11,909
Surety for the obligations of PGE Sweden AB (publ) Due to establishment of the Eurobonds program in 2014, an agreement was concluded for the issue of guarantee by PGE S.A. for the liabilities of PGE Sweden AB (publ). The guarantee was granted to the amount of EUR 2,500 million (PLN 10,566 million) and will be valid until December 31, 2041. As at June 30, 2017, PGE Sweden AB (publ)’s liabilities due to bonds issued amounted to EUR 641 million (PLN 2,709 million), as at December 31, 2016 these liabilities amounted to EUR 642 million (PLN 2,842 million). Surety for the obligations of PGE Górnictwo i Energetyka Konwencjonalna S.A. In January 2014, the Company granted three sureties to the bank payment guarantee issued for PGE Górnictwo i Energetyka Konwencjonalna S.A at the total value of PLN 549 million. Granting sureties is related to the investment conducted by PGE Górnictwo i Energetyka Konwencjonalna S.A. concerning construction of new power units in Elektrownia Opole. 23.16 Other significant issues related to contingent liabilities Standby commitments to ensure financing of new investments in the PGE Group companies Due to planned strategic investments in the PGE Group, the Company committed to its subsidiaries, in the form of standby commitments, to ensure financing of the planned investments. The standby commitments relate to specific investments and may be used only for such purposes. As at June 30, 2017 and December 31, 2016 approximate value of standby commitments amounts to PLN 15 billion.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
Commitment to support liquidity at PGE Obrót S.A. Following the donation of shares in PGE Dystrybucja S.A. and PGE GiEK S.A. received by the Company in 2014 from PGE Obrót S.A., the Company committed to ensure the liquidity of PGE Obrót S.A. if this entity was to face insolvency. Ensuring liquidity can take a form of a capital increase, debt financing or other activities aimed at reducing the likelihood of insolvency. PGE Obrót S.A. and PGE S.A. executed also a debt subordination agreement pursuant to which, in case PGE Obrót S.A. becomes insolvent, PGE S.A.’s receivables from PGE Obrót S.A. will constitute subordinated debt. PGE Obrót S.A constitutes a party to the cash-pooling agreement established for the companies from the PGE Group and may use the financing available under the terms of this program. 23.17 Other legal claims and disputes The issue of compensation for conversion of shares and claims for annulment of the resolutions of the General Shareholders’ Meetings in described in note 19.4 of these financial statements. 23.18 Information on related parties Transactions with related entities are concluded based on market prices for provided goods, products and services or are based on the cost of manufacturing. Exception to this rule were: bonds issued by subsidiaries belonging to the tax group with interest rates below market rates, described in note 23.9 of these financial statements, tax losses settlements within the tax group, described in notes 7 and 20 of these financial statements.
23.19 Subsidiaries within the PGE Group Period ended Period ended June 30, 2017 June 30, 2016 Sales to related parties 3,984 5,303 Purchases from related parties 3,544 551 Financial income 3,004 1,167 Financial expenses 93 39
The Company recognizes sales revenue from subsidiaries within the PGE Group mainly due to sales of electricity.
As at As at June 30, 2017 December 31, 2016 RECEIVABLES FROM RELATED PARTIES Bonds issued by subsidiaries 9,537 8,683 Dividend receivables 2,871 - Trade receivables from subsidiaries 521 393 Loans granted to subsidiaries 121 97 Cash-pooling receivables 550 631 Receivables due to settlements within the Tax Group 23 11 RECEIVABLES FROM RELATED PARTIES, TOTAL 13,623 9,815
As at As at June 30, 2017 December 31, 2016 LIABILITIES TO RELATED PARTIES Loans received from subsidiaries 2,790 2,938 Trade liabilities to subsidiaries 475 74 Cash-pooling liabilities 902 473 Liabilities due to settlements within the Tax Group 17 18 LIABILITIES TO SUBSIDIARIES, TOTAL 4,184 3,503 Sureties and standby commitments granted to subsidiaries of PGE S.A. are described in note 23.15 of these financial statements.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
23.20 Subsidiaries of the State Treasury The State Treasury is the dominant shareholder of the PGE Group and as a result in accordance with IAS 24 Related Party Disclosures, the State Treasury companies are treated as related entities. The Company identifies in detail transactions with approximately 40 of the biggest State Treasury subsidiaries. The total value of transactions with such entities is presented in the tables below.
Period ended Period ended June 30, 2017 June 30, 2016 Sales to related parties 185 72 Purchases from related parties 148 71
As at As at June 30, 2017 December 31, 2016 Trade receivables from related parties 24 71 Trade liabilities to related parties 26 34
Moreover, the Company concludes significant transactions on the energy market via Towarowa Giełda Energii S.A. (Polish Power Exchange). Due to the fact that this entity only deals with the organization of trading, purchases and sales transacted through this entity are not recognized as transactions with related parties. 23.21 Management personnel remuneration The key management includes the Management Board and Supervisory Board.
Period ended Period ended PLN thousand June 30, 2017 June 30, 2016 Short-term employee benefits (salaries and salary related costs) 4,960 4,388 Post-employment and termination benefits 20 3,066 TOTAL REMUNERATION OF MANAGEMENT PERSONNEL 4,980 7,454
Period ended Period ended PLN thousand June 30, 2017 June 30, 2016 Management Board 4,573 7,211 Supervisory Board 407 243 TOTAL REMUNERATION OF MANAGEMENT PERSONNEL 4,980 7,454
The Members of the Company’s Management Board are employed on the basis of civil law contracts for management (so called management contracts). The above remuneration is included in other cost by nature disclosed in note 23.6 Cost by nature and function. 23.22 Significant events of the reporting period In the current reporting period, the Company recognized a partial reversal of an impairment allowance of shares in PGE Obrót S.A. raised in the previous periods. Detailed information was described in note 23.8. Other significant events of the reporting period are described in notes 22.3 and 22.4 of these financial statements.
Explanatory notes to the consolidated financial statements form an integral part thereof
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Condensed interim consolidated financial statements of the PGE Group for the 6-month period ended June 30, 2017 in accordance with IFRS EU (in PLN million)
24. Approval of the financial statements These consolidated financial statements, including half-year separate financial information, were authorized for issue by the Management Board on August 8, 2017.
Warsaw, August 8, 2017 Signatures of the Members of the Management Board of PGE Polska Grupa Energetyczna S.A.
President of the Management Board Henryk Baranowski
Vice-President of the Management Board Wojciech Kowalczyk
Vice-President of the Management Board Marek Pastuszko
Vice-President of the Management Board Paweł Śliwa
Vice-President of the Management Board Ryszard Wasiłek
Vice-President of the Management Board Emil Wojtowicz
Signature of the person responsible for preparation of the financial statements Michał Skiba - Director of Financial Reporting and Tax Department
Explanatory notes to the consolidated financial statements form an integral part thereof
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