Polenergia & ZE PAK. Where (Investment) Eagles Dare. Polenergia BUY ZE PAK BUY. Overweight. Portfolio weighting

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1 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Polenergia & ZE PAK Poland, Independent Utilities Reuters: PEPP.WA, ZEEP.WA Bloomberg: PEP PW, ZEP PW 1 February 216, 8: Where (Investment) Eagles Dare Polenergia: Recommendation BUY; Target Price: PLN17.2 ZE PAK: Recommendation BUY; Target Price: PLN21.3 Polenergia and ZE PAK have both proven their operating excellence, with opex optimization offering strong support to their results. Most importantly, their 217E EBITDAs and bottom lines are set to expand despite a very discouraging environment. Tough negotiations on EU s winter package might force the Polish government to offer some concessions in renewables, which, together with a potential upside to the CO2 certificate price, represent the two key drivers of Polenergia. As for ZE PAK, its lignite fleet offers a massive upside should the electricity price grow and every quarter of capex at nil boosts its cash position significantly. The latter has also made ZE PAK vastly inexpensive on ratios, at 217E P/E and EV/EBITDA just above 2x. Last but not least, both independent utilities might pay dividends in 217, a very uncommon feature within the Polish utility universe. While our sensitivity analysis highlights major differences in the two companies profiles, fundamentals support their investment stories we maintain Buy for Polenergia (23% upside) and upgrade ZE PAK to Buy (52% upside). High valuation sensitivity. Polenergia s and ZE PAK s Target Prices are positively correlated with electricity price changes, and a PLN2/MWh change in the black electricity price would result in ZE PAK s TP per share ranging from negative PLN6 (at PLN14/MWh) to positive PLN4 (at PLN18/MWh). While a high CO2 certificate price would be a blessing for Polenergia (TP PLN32 at EUR3/t), ZE PAK s bankruptcy would be almost certain at this price (TP at negative PLN83). Finally, growth of the green certificate s price supports Polenergia, but weakens ZE PAK valuation-wise. Forecasts upped. We have applied no changes to our core market assumptions, and increased E forecasts for both companies stem from their operating excellence. Both companies have applied heavy opex optimisation schemes (striking in ZE PAK s generation / mining) and both have successfully taken advantage of market opportunities (hedging in ZEP and PEP, optimisation of distribution and conventional generation segments in PEP). In both cases our EBITDA forecasts grow by a high single-digit growth rate in the forecasting period, implying double-digit growth of the companies bottom lines. Risk is still on We believe that the electricity prices offer little upside from their current levels. The EU s proposal of the winter package (forbidden support to generation units with a pollution factor above.55/t) could prove disastrous for the Polish utilities, as absence of state support would make the Polish electricity price fall by some 1% from the current levels. Finally, while the sky is the limit for the renewable segment (Poland might be forced to make some concessions to avoid some winter package clauses), the current certificate prices and official rhetoric fail to support the renewable story much. Valuations & Recommendations. ZE PAK s DCF valuation points to a 12-month TP of PLN17 per share (a 21% upside). A straight comparison with the company s dirtiest peer suggests a price of PLN31.3 a share, ZE PAK s weighted valuation implies a TP of PLN21.3, a decent 52% upside. Polenergia s sum of projects NPVs yield a valuation of PLN 17 per share, with the comparative approach implying a share price at PLN17.7. Polenergia s weighted valuation points to a Target Price of PLN17.2 per share, a 23% upside. We see the investment stories of the two independent utilities vastly differing from the State-run companies. As they both offer a decent share price upside, we keep Polenergia at Buy and raise ZE PAK to Buy. Polenergia & ZE PAK: Financial summaries PLNmn Polenergia ZE PAK +23% upside +52% upside E 217E 218E E 217E 218E Revenues 2,772 2,582 2,716 2,718 2,978 2,872 2,921 2,371 EBITDA EBIT Net profit P/E (x) 9.4 n.a EV/EBITDA (x) Source: Company data, BZ WBK Brokerage Research. Polenergia Portfolio weighting BUY Overweight Price (PLN, 8 February 217) 14. Target price (PLN 12M) 17.2 Market cap. (PLNmn) 636 Free float (%) 33.8 Number of shares (mn) Buy Hold Sell Under Review / Suspended PEP WIG Relative The chart measures performance against the WIG index. On 8/2/217, the WIG index closed at 55,642 ZE PAK Portfolio weighting TP BUY Price (PLN, 8 February 217) 14.4 Target price (PLN 12M) 21.3 Market cap. (PLNm) Free float (%) 48.4 Number of shares (m) Buy Hold Sell Under Review / Suspended ZEP WIG Relative The chart measures performance against the WIG index. On 8/2/217, the WIG index closed at 55,642 Research team: Paweł Puchalski, CFA TP Head of Equity Research pawel.puchalski@bzwbk.pl - DISCLAIMER: Disclosure statements provided on the last page of this report are an integral part of this document. Throughout the report we use share prices as of February 8, 217.

2 Polish Independent Utilities 1 February 217 Valuation sensitivity Fig. 1. Polish Independent Utilities Target Prices at different black electricity price* ZEP valuation PEP valuation PLN14 / MWh PLN15 / MWh PLN16 / MWh PLN17 / MWh PLN18 / MWh Source: BZ WBK Brokerage Research. * applied terminally in the forecasting period. Fig. 2. Polish Independent Utilities Target Prices at different CO2 certificate price* ZEP valuation PEP valuation -83 EUR2 / t EUR5.6 / t EUR8 / t EUR15 / t EUR3 / t Source: BZ WBK Brokerage Research. * applied terminally in the forecasting period. Fig. 3. Polish Independent Utilities Target Prices at different green certificate price* 3 25 ZEP valuation PEP valuation PLN4 PLN6 PLN8 PLN1 PLN15 Source: BZ WBK Brokerage Research. * applied terminally in the forecasting period. 2

3 Polish Independent Utilities 1 February 217 Polenergia and ZE PAK differ extremely at their core business Polenergia is the Polish greenest utility with minor distribution exposure, while ZE PAK is undoubtedly the dirtiest one, with no exposure to any other segment. Both are positively correlated to electricity price changes, but PLN2/MWh change in black electricity price may result in ZE PAK s TP per share ranging from NEGATIVE PLN6 (PLN14/MWh) to POSITIVE PLN4 (PLN18/MWh). While high CO2 certificate price would be blessing for Polenergia (TP PLN32 at EUR3/t), ZE PAK s bankruptcy would certain at this price (TP at NEGATIVE PLN83 at EUR3/t). Finally green certificate price growth supports Polenergia but weakens ZE PAK valuation-wise. 3

4 Polish Independent Utilities 1 February 217 Fig. 4. ZE PAK: 4Q16 Results Preview Quarterly previews (PLN mn) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E y/y q/q Sales % -5.1% EBITDA % -48.6% EBITDA margin 16.6% 17.2% 12.4% 15.4% 22.5% 25.7% 22.3% 21.% 11.4% EBIT % -75.5% EBIT margin 4.9% 5.% -.6% 2.7% 6.6% 16.8% 15.3% 13.5% 3.5% Net profit % -81.1% Net margin 1.3% 4.5% -2.6%.8% 4.2% 11.% 9.5% 11.5% 2.3% Source: Company data, BZWBK Brokerage research. Fig. 5. Polish Utilities: ZE PAK s Key Volume Trends (TWh) 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E Generation (conventional) % -16% Electricity sales %.% Lignite usage % -4.1% CO2 emission % -15% Source: Company data, BZ WBK Brokerage Research. Fig. 6. Polish Utilities: ZE PAK s EBITDA by Segment (PLN mn) 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E Trade % -24% Distribution % -69% Total generation n.a. n.a. Other n.a. n.a. Mining (LWB) n.a. n.a. Total % -52% Source: Company data, BZ WBK Brokerage Research. We expect that 4Q16 s full-quarter modernization of Patnow unit with heavily weigh on the reported results of ZE PAK. The company s own electricity production should come smaller by some.7twh q/q, down 28% q/q. As Patnow unit is the youngest one, its beneficial impact on average lignite usage and average CO2 pollution factor should disappear as well both these shall fall to a smaller degree, to the detriment of reported results. Finally, the company s fixed costs of lignite are truly fixed, and lower amount of lignite output may leave quarterly cost of lignite production barely changed q/q. operating leverage is very heavy, and we assume the lack of Patnow may erase PLN7mn off ZE PAK s quarterly EBITDA. NEGATIVE outcome. q/q chg. q/q chg. y/y chg. y/y chg. Fig. 7. Polenergia: 4Q16 Results Preview (PLN mn) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16E y/y q/q Sales % -16.8% EBITDA % 52.% EBITDA margin 8.8% 9.5% 6.5% 7.8% 7.9% 12.2% 4.9% 4.7% 8.7% EBIT n.a. n.a. EBIT margin 4.9% 6.5% 3.5% 4.6% 4.6% 8.5% -7.9% -5.1% -8.1% Net profit n.a. n.a. Net margin 2.6% 3.9% 1.4% 2.5% 2.% 5.% -9.5% -6.2% -9.2% Source: Company data, BZ WBK Brokerage Research. Very strong and favourable wind conditions in 4Q16 should turn on-shore wind into quarter s key driver with expected EBITDA at PLN3mn (priced at certificate prices of PLN4). Nowa Sarzyna (gas-fired conventional generation) should contribute stable at over PLN2mn, while distribution s results may come a bit weaker due to seasonal factors. Finally, sales segment used to deliver poor result in 2Q/3Q16 exclusively due to marking-to-marked of green certificates held in 4Q16 we expect that sound margin and lack of marking-to-market will result in decent EBITDA. PLN8mn one-off non-cash provision (preannounced by the company) will 4

5 Polish Independent Utilities 1 February 217 depress Polenergia s results down EBIT, but core EBITDA and cash flow generation should remain solid. POSITIVE outcome. Fig. 8. Polish Utilities: Polenergia s EBITDA by Segment (PLN mn) 4Q13 1Q14 2Q14* 3Q14 4Q14 1Q15 2Q15 3Q15* 4Q15 1Q16 2Q16 3Q16 4Q16E Generation (conventional) % 4.5% Development n.a. n.a. Biomass % 87.5% Renewables - on-shore wind % -32% Distribution % 8.7% Electricity sales n.a. 4.4x Other n.a. n.a. Total % -3.3% Source: Company data, BZ WBK Brokerage Research. * total EBITDA adjusted for major one-offs in 2Q14 (PLN338mn) and 3Q15 (PLN294mn). q/q chg. y/y chg. 5

6 EBITDA 215E Systemic generation Coal extraction Free LTCs Others EBITDA 216E Systemic generation Coal extraction Free LTCs Others EBITDA 217E Systemic generation Coal extraction Free LTCs Others EBITDA 218E Systemic generation Coal extraction Free LTCs Others EBITDA 218E EBITDA 215E Wind-auction Conventioal generation Other EBITDA 216E Wind-auction Conventioal generation Other EBITDA 217E Wind-auction Conventioal generation Other EBITDA 218E Windoperational Windoperational Windoperational Windoperational Wind-auction Conventioal generation Other EBITDA 218E Polish Independent Utilities 1 February 217 Changes to forecasts Fig. 9. Polish Independent Utilities Key Assumptions (PLN/MWh) E 217E 218E 219E 22E 221E 222E 223E Electricity black price [PLN / MWh] CO 2 price [EUR / t] Green certificate [PLN] Source: BZ WBK Brokerage Research. Fig. 1. Polenergia: Forecast changes We have applied no changes to our core market assumptions, and upsides to our E forecasts originate from two companies operating excellence. Both companies have applied heavy opex optimization, and both have been successfully taking advantage of market opportunities (hedging in ZE PAK and Polenergia resulting in strong electricity sales results; optimization of distribution and conventional generation segments in Polenergia). In both cases our EBITDA forecasts grow by high single digit in the entire forecasting period, implying doubledigit growth at companies bottom lines. 217E 218E 219E PLNmn New Previous Change New Previous Change New Previous Change Sales 2,716 2,796-3% 2,718 2,798-3% 2,727 2,87-3% EBITDA % % % EBIT % % % Net profit % % % Source: BZ WBK Brokerage Research Fig. 11. ZE PAK: Forecast changes 217E 218E 219E PLNmn New Previous Change New Previous Change New Previous Change Sales 2,921 2,92 % 2,371 2,374 % 2,129 2,14 % EBITDA % % % EBIT % % % Net profit % % % Source: BZ WBK Brokerage Research Fig. 12. Polenergia: Drivers of annual EBITDA changes Source: Polenergia, BZ WBK Brokerage Research. Fig. 13. ZE PAK: Drivers of annual EBITDA changes Source: ZE PAK, BZ WBK Brokerage Research. 6

7 Polish Independent Utilities 1 February 217 Choose your preferred utility Fig. 14. Polenergia: EBITDA forecasts [PLNmn] Fig. 15. ZE PAK: EBITDA forecasts [PLNmn] 25 2 Wind - operating Conventional generation Others Wind - auctions Trading Systemic generation Coal extraction Free LTCs Others Source: Polenergia, BZ WBK Brokerage Research Source: ZE PAK, BZ WBK Brokerage Research. Fig. 16. Polenergia: EBITDA forecasts breakdown Fig. 17. ZE PAK: EBITDA forecasts breakdown 1% 1% 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% % % Wind - operating Wind - auctions Conventional generation Trading Systemic generation Coal extraction Free LTCs Others Source: Polenergia, BZ WBK Brokerage Research Source: ZE PAK, BZ WBK Brokerage Research. Fig. 18. Polenergia: Dividend Yield forecasts Fig. 19. ZE PAK: Dividend Yield forecasts 14.% 12.% 14.% 12.% 1.% 8.% 7.% 6.8%6.8%6.6% 7.1%7.% 7.5% 1.% 8.% 8.6% 8.6%8.6%8.6%8.6%8.6%8.6%8.6%8.6%8.6% 6.% 6.% 4.9% 4.% 3.4% 4.% 2.% 1.7%1.9% 2.%.%.%.%.%.%.%.% Source: Polenergia, BZ WBK Brokerage Research Source: ZE PAK, BZ WBK Brokerage Research. 7

8 Polish Independent Utilities 1 February 217 Fig. 2. Polenergia: Indebtedness forecasts Fig. 21. ZE PAK: Indebtedness forecasts Net Debt [PLNmn, lhs] Net Debt to EBITDA [rhs] ,8 1,6 1,4 1,2 1, Net Debt [lhs] Net Debt to EBITDA [rhs] Source: Polenergia, BZ WBK Brokerage Research Source: ZE PAK, BZ WBK Brokerage Research. Fig. 22. Polenergia: OpCF & FCF forecasts 3.% 2.% 15.1% 1.%.% 1.8% 9.6% 8.9% 9.6% 12.5% 25.2% 18.1% 18.5% 21.4% 16.5% Fig. 23. ZE PAK: OpCF & FCF forecasts 3.% 25.1% 25.3% 25.% 2.5% 2.% 15.6% 15.% 2.7% 18.5% 14.8%14.8%15.2%15.6% 13.% -1.% 1.% 5.% -2.%.% -3.% -5.% -4.% Operating CF to EV -1.% Operating CF to EV Free Cash Flow* to EV Free Cash Flow* to EV -5.% -15.% Source: Polenergia, BZ WBK Brokerage Research Source: ZE PAK, BZ WBK Brokerage Research. * Free Cash Flow calculated as Operating cash Flow adjusted for CAPEX and Dividends. 8

9 Polish Independent Utilities 1 February 217 Valuations & Financials Fig. 24. Polenergia: SoTP valuation (sum of NPV valuations by segments) Segment Valuation Valuation Share in valuation* Previous valuation [Nov 216] Change vs. previous valuation PLNmn PLN per share PLNmn On-shore wind: working and under construction % % Off-shore wind % 4.4 % Conventional energy % % Biomass production % % Distribution % 3. 11% Trading % 3.8 7% Alternative projects. %. - Headquarters & Others Net Debt Total % Source: BZ WBK Brokerage Research. * under assumption of proportionate allocation of Headquarter & Net Debt negative values across segments. Fig. 25. Polenergia: Valuation changes PLN New Previous Change DCF valuation % Comparable valuation (based on E) % Weighted valuation* ** -6%** Source: Company data, BZ WBK Brokerage Research. * 7% DCF, 3% comparable valuation; ** in previous report we relied 1% on DCF valuation. Fig. 26. Polenergia: Income statement forecast PLNmn E 217E 218E 219E Net sales, incl.: 2,772 2,582 2,716 2,718 2,727 Trading 2,73 1,929 2,82 2,63 2,63 Wind Conventional generation Others COGS, excl. depreciation 2,553 2,547 2,497 2,494 2,59 Depreciation Other operating income, net -179 EBITDA Trading Wind Conventional generation Others Operating profit Net financial income (costs) Profit before tax Income tax Net profit Gross margin 7.9% 15.2% 8.% 8.2% 8.% EBITDA margin 7.9% 8.3% 8.% 8.2% 8.% Operating margin 4.8% -3.2% 3.7% 3.9% 3.7% Net profit margin 2.5% -6.% 1.3% 1.7% 1.6% Source: Company data, BZ WBK Brokerage Research Fig. 27. Polenergia: Balance Sheet forecast PLNmn E 217E 218E 219E Current assets Fixed assets 2,448 2,346 2,233 2,121 2,8 Total assets 3,199 2,865 2,75 2,636 2,547 Current liabilities bank debt Long-term liabilities 1,33 1,193 1, bank debt 1, Equity 1,397 1,219 1,243 1,276 1,275 share capital Minority Interest Total liabilities 3,199 2,865 2,75 2,636 2,547 Net debt Source: Company data, BZ WBK Brokerage Research Fig. 28. Polenergia: Cash flow forecast PLNmn E 217E 218E 219E CF from operations n.a CF from investment n.a CF from financing, incl. n.a dividends n.a Net change in cash n.a Source: Company data, BZ WBK Brokerage Research 9

10 Fig. 29. ZE PAK: DCF valuation PLNmn 217E 218E 219E 22E 221E 222E 223E 224E 225E 216E Net sales 2,872 2,921 2,371 2,129 2,86 1,938 1,936 1,935 1,933 1,933 EBIT Cash taxes on EBIT NOPAT Depreciation Change in operating WC Capital expenditure Free cashflow PV FCF PV TV Total Regulated businesses Distribution Heat Renewables Sub-total Non-regulated businesses Systemic generation ,79 Coal extraction Sales & others Sub-total 1, ,585 Net Debt, provisions, other* 797 Total DCF Valuation [PLNmn, Jan215] 788 Number of shares [mn] 5.8 SOPT / DCF valuation per share [PLN, Jan217] 15.5 SOTP / DCF valuation per share - current [PLN, Feb217] month Target Price [PLN] 17. Source: Company data, BZ WBK Brokerage Research. * includes PLN416mn of provisions,.9m of green certificates in stock and PLN8mn in assets for sale. Fig. 3. ZE PAK: Valuation changes PLN New Previous Change DCF valuation % Comparable valuation (based on E)** % Weighted valuation* *** 61.3%*** Source: Company data, BZ WBK Brokerage Research. * based on 7% DCF valuation and 3% comparative valuation; ** ZE PAK compared to the dirties EU peer Public Power Corp (pollution factor 1.1x). *** in Nov216 our valuation based exclusively on DCF valuation. 1

11 Polish Equity Research Fig. 31. ZE PAK: Income statement forecast PLNmn E 217E 218E 219E Net sales 2,978 2,872 2,921 2,371 2,129 COGS 2,483 2,329 2,283 1,953 1,725 EBITDA Generation Mining Other Operating profit Net financial income (costs) Profit before tax Income tax Minorities Net profit Gross margin 16.6% 18.9% 21.8% 17.6% 19.% EBITDA margin 16.6% 18.9% 21.8% 17.6% 19.% Operating margin 3.9% 11.6% 14.8% 1.3% 11.2% Net profit margin 2.% 7.7% 11.4% 7.7% 8.2% Source: Company data, BZ WBK Brokerage Research Fig. 32. ZE PAK: Balance Sheet forecast PLNmn E 217E 218E 219E Current assets 1,439 1,27 1,362 1,424 1,239 Fixed assets 5,73 5,622 5,566 5,516 5,679 Total assets 7,168 6,83 6,928 6,941 6,919 Current liabilities 1,265 1,244 1,254 1,145 1,97 bank debt Long-term liabilities 2,83 1,545 1,363 1,362 1,274 bank debt 1, Equity 3,819 4,41 4,311 4,434 4,548 share capital Total liabilities 7,168 6,83 6,928 6,941 6,919 Net debt Source: Company data, BZ WBK Brokerage Research Fig. 33. ZE PAK: Cash flow forecast PLNmn E 217E 218E 219E CF from operations CF from investment CF from financing, incl dividends Net change in cash Source: Company data, BZ WBK Brokerage Research 11

12 Dom Maklerski BZ WBK Jana Pawla II Avenue Warszawa fax. (+48) Equity Research Department Dariusz Górski, Director, Equity Research tel. (+48) dariusz.gorski@bzwbk.pl Strategy, Banks, Financials Paweł Puchalski, CFA, Head of Equity Research Team tel. (+48) pawel.puchalski@bzwbk.pl Telecommunications, Metals & Mining, Power Grzegorz Balcerski, Securities Broker, Investment Adviser tel. (+48) Equity Analyst, Industrials grzegorz.balcerski@bzwbk.pl Artur Hess, Securities Broker tel. (+48) artur.hess@bzwbk.pl Research Associate Łukasz Kosiarski, Equity Analyst tel. (+48) lukasz.kosiarski@bzwbk.pl Media, IT, IT distribution, Video Games, Health Care Adrian Kyrcz, Equity Analyst tel. (+48) adrian.kyrcz@bzwbk.pl Construction, Real Estate Tomasz Sokołowski, Equity Analyst tel. (+48) tomasz.sokolowski@bzwbk.pl Pharma, Retail Michał Sopiel, Equity Analyst tel. (+48) michal.sopiel@bzwbk.pl Industrials, TSL, Quantitative Analysis Sales & Trading Department Kamil Kalemba, Head of Institutional Equities tel. (+48) kamil.kalemba@bzwbk.pl Robert Chudala tel. (+48) robert.chudala@bzwbk.pl Alex Kamiński tel. (+48) alex.kaminski@bzwbk.pl Marcin Kuciapski, Securities Broker tel. (+48) marcin.kuciapski@bzwbk.pl Błażej Leśków, Securities Broker tel. (+48) blazej.leskow@bzwbk.pl Michał Stępkowski, Securities Broker tel. (+48) michal.stepkowski@bzwbk.pl Marek Wardzyński, Securities Broker tel. (+48) marek.wardzynski@bzwbk.pl Wojciech Wośko, Securities Broker tel. (+48) wojciech.wosko@bzwbk.pl 12

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The recommendation system of BZ WBK Brokerage S.A. is based on determination of target prices and their relations to current prices of financial instruments; in addition, when recommendations are addressed to a wide range of recipients, two methods of valuation are required. Overweight/Underweight/Neutral information contained herein does not meet any of the aforementioned requirements. Furthermore, depending on the situation, it can be grounds for taking different (including opposing) investment action in the case of particular investors. Mid-caps if a stock is included into a mid-cap portfolio it means that, according to the authors of this document, a particular stock price may outperform the WIG2 index during one month. Stocks are added to or deleted from the list on the basis of the requirement to rotate the stocks included in the list. Any change in weight of stocks already included in the portfolio should not be construed as investment recommendation. Such changes are aimed exclusively at making the total weight of all stocks equal 1%. DM BZ WBK confirms that the adjustment for dividend paid, adjustment for preemptive rights, share split or merger, or any other purely technical adjustments to the share price will result in corresponding changes in the stocks target prices - such situations must be considered within purely technical context and should not be considered as changes to recommendations in the meaning of the law. Explanations of special terminology used in the recommendation: EBIT earnings before interest and tax EBITDA earnings before interest, taxes, depreciation, and amortization P/E price-earnings ratio EV enterprise value (market capitalisation plus net debt) PEG - P/E to growth ratio EPS - earnings per share CPI consumer price index WACC - weighted average cost of capital CAGR cumulative average annual growth 13

14 ZE PAK 1 February 217 P/CE price to cash earnings (net profit plus depreciation and amortisation) ratio NOPAT net operational profit after taxation FCF - free cash flows BV book value ROE return on equity P/BV price-book value Recommendation definitions: Buy - indicates a stock's total return to exceed more than 15% over the next twelve months. Hold - indicates a stock's total return to be in range of %-15% over the next twelve months. Sell - indicates a stock's total return to be less than % over the next twelve months. In the opinion of DM BZ WBK., this document has been prepared with all due diligence and excludes any conflict of interests which could influence its content. DM BZ WBK is not obliged to take any actions which could cause financial instruments that are the subject of the valuation contained in this document to be valued by the market in accordance with the valuation contained in this document. Brokerage activity conducted by DM BZ WBK, which is a separate organizational unit of Bank Zachodni WBK S.A., is subject to the supervision of the Financial Supervision Commission with its headquarters in Warsaw, Plac Powstańców Warszawy 1, -3 Warszawa, NIP In BZ WBK there are implemented internal regulations, which are designed to prevent conflicts of interest concerning recommendations. Physical and logic barriers are established, and the principles of documentation adequate to the type of BZ WBK operations are implemented. Additionally, BZ WBK introduced a number of obligations and restrictions relating to the protection of confidential information flow between organizational units. The date and time on the first page of this report is the date and time of preparation of the report. The document is disseminated on the same day after the trading day, and no later than before the opening of the next trading day. All the prices of financial instruments which have been mentioned in the report correspond to the rates at which the last transactions on these financial instruments were realized during a given day. ANY PERSON WHO ACCEPTS THIS DOCUMENT AGREES TO BE BOUND BY THE FOREGOING DISCLAIMER AND LIMITATIONS. Dom Maklerski BZ WBK is a separate organizational unit of Bank Zachodni WBK S.A. with its registered office in Wrocław, ul. Rynek 9/11, 5-95 Wrocław, registered by the District Court in Wrocław - Fabryczna, VI Commercial Division of the National Court Register under the number Share capital PLN fully paid up. Taxpayer Identification Number (NIP) DISCLOSURES This report contains recommendations referring to company/companies: Polenergia S.A., Zespół Elektrowni "Pątnów-Adamów-Konin" S.A. ( Issuer ). DM BZ WBK emphasizes that this document is going to be updated at least once a year. This document has not been disclosed to Issuer. In preparing this document DM BZ WBK applied at least two of the following valuation methods: 1) discounted cash flows (DCF), 2) comparative, 3) mid-cycle, 4) dividend discount model (DDM), 5) residual income, 6) warranted equity method (WEV), 7) SOTP valuation, 8) liquidation value. The discounted cash flows (DCF) valuation method is based on expected future discounted cash flows. One advantage of the DCF valuation method is that it takes into account all cash streams reaching Issuer and the cost of money over time. Some disadvantages of the DCF valuation method are that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to changes in those parameters. The comparative valuation method is based on the economic rule of "one price". Some advantages of the comparative valuation method are that the analyst need only estimate a small number of parameters; the valuation is based on current market conditions; the relatively large accessibility of indicators for companies being compared; and that there is an extensive knowledge of the comparative method among investors. Some disadvantages of valuation by the comparative method are the considerable sensitivity of the results of the valuation on the choice of companies to the comparative group; the method can lead to a simplification of the picture of the company which in turn can lead to omitting certain important factors (e.g. growth dynamics, extra-operational assets, corporate governance, the repeatability of results, differences in applied accounting standards); and the uncertainty of the effectiveness of a market valuation of companies being compared. The mid-cycle valuation is based on long-term averages for the two-year forward consensus P/E and EV/EBITDA multiples for the members of the peer group. The methodology is aimed calculating a fair, through the cycle value of cyclical stocks. Among its shortfalls is that at peaks and/or troughs of the cycle, the implied fair value may deviate substantially from the market s value of an analysed stock as well as the methods reliance on the quality of external data (we use Bloomberg consensus here). Simplicity and average through-cycle value allowing to capture over as well as under-valuation of a given stock are the main advantages of this methodology. The dividend discount model (DDM) valuation is based on the net present value of the future dividends that are expected to be paid out by the company. Some advantages of the DDM valuation method are that it takes into account real cash flows to equity-owners and that the methodology is used in respect to companies with long dividend payout history. Main disadvantage of the DDM valuation method is that dividend payouts are based on a large number of parameters and assumptions, including dividend payout ratio. Residual income method is conceptually close to the discounted cash flows method (DCF) for non-financial stocks, the difference being that it is based on expected residual income (returns over COE) rather than expected future cash flows. One advantage of this valuation method is that it captures the excess of profit potentially available to shareholders and the cost of money over time. Main disadvantage of the valuation method is that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to changes in those parameters. The warranted equity method (WEV) is based on the formula P/BV = (two year forward ROE less sustainable growth rate)/(cost of equity less sustainable growth rate) which allows estimating a fair value (FV) of a given stock in two years time. Subsequently the FV is discounted back to today. The main advantage of the WEV method is that it is a transparent one and based on relatively short term forecasts, hence substantially reducing the margin of forecasting error. The main disadvantage in our view is that the model is based on the principle that stock price should converge towards its fair value implied by company s ROE and COE. SOTP valuation - different assets of a company are being valued according to different valuation methods, and the sum of these valuations represents the final valuation of the company. SOTP valuation advantages / disadvantages are identical to advantages and disadvantages of the specific valuation methods used. Liquidation value method liquidation value is the estimated amount of money that an asset or company could be quickly sold for, such as if it were to go out of business. Then, the estimated assets value is adjusted for liabilities and liquidation expenses. One advantage of this valuation method is its simplicity. This method does not account for intangible assets as goodwill, which is the main disadvantage. 14

15 ZE PAK 1 February 217 Global statistics: % of Companies Rating Covered with This Rating Provided with Investment Banking in Past 12M Buy 5, 13,33 Hold 17,78, Sell 16,67, Under Review 15,56 28,57 Definition of each rating was provided in the above section Limitation of liability. The Stock performance charts in this report include line graphs of the securities daily closing prices for one year period. Information relating to a longer period (max 3 years) is available upon request. Members of the Issuer s authorities or their relatives may be members of the management board or supervisory board of BZ WBK. Persons engaged in preparing the report or their relatives may be the members of the Issuer s authorities and may hold management position in this entity or may be party to any agreement with the Issuer, which would be concluded on different basis than agreements between Issuer and consumers. Among those, who prepared this document, as well as among those who didn t prepare it but had or might have had the access to it, there may be such individuals who hold a net long or net short position in shares of the Issuer or financial instruments whose value is connected with the value of the financial instruments issued by the Issuer. BZ WBK Group, its affiliates, representatives or employees may occasionally undertake transactions or may be interested in acquiring securities of companies directly or indirectly related to those being analysed. DM BZ WBK acts as market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Polenergia S.A. and holds financial instruments issued by the issuer. DM BZ WBK acts as issuer s market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Polenergia S.A. and holds financial instruments issued by the issuer. DM BZ WBK is not a party to the agreement with the Issuer related to issuing recommendations. During the last 12 months DM BZ WBK has received remuneration for acting as issuer s market maker for Polenergia S.A. The Issuer may hold shares of BZ WBK. Bank Zachodni WBK S.A., is indirectly connected with Polenergia S.A. and indirectly holds shares of Polenergia S.A. in the amount reaching at least 5% of the share capital. BZ WBK does not rule out that in the period of preparing this document any Affiliate of BZ WBK might purchase shares of the Issuer or any financial instruments being the subject of this document which may cause reaching at least,5% of the share capital. Subject to the above, the Issuer is not bound by any contractual relationship with BZ WBK, which might influence the objectivity of the recommendations contained in this document. However, it cannot be ruled out that, in the period of the next twelve months or the period in which this document is in force, BZ WBK will submit an offer to provide services for the Issuer or will purchase or dispose of financial instruments issued by the Issuer or whose value depends on the value of financial instruments issued by the Issuer. Except for broker agreements with clients under which DM BZ WBK sells and buys the shares of the Issuer at the order of its clients, DM BZ WBK is not party to any agreement which would depend on the valuation of the financial instruments discussed in this document. Remuneration received by the persons who prepare this document may be dependent, in an indirect way, from financial results gained from investment banking transactions, related to financial instruments issued by the Issuer, made by DM BZ WBK or its Affiliates. A list of all recommendations on any financial instrument or issuer that were prepared by the Analyst who prepared this document that were disseminated during the preceding 12 month period: Enea Sell % Sell % Sell %.22 Energa Sell % Buy % Sell % Buy % JSW Buy % Buy % Buy % Buy % 17.1 Hold %

16 ZE PAK 1 February 217 Buy % 7.9 KGHM Buy %.41 Buy % Sell % Under Review n.a. -6.9% Bogdanka Sell % -.68 Sell % Sell % Midas Dropped Coverage n.a. 1.3% Netia Sell % Sell %.2 Hold % Hold % 7.4 Sell % Orange Polska Sell % Sell % Sell % 2.42 Hold % 7.2 Sell % Under Review n.a. 1.5% Polenergia Buy % 7.72 PGE Sell % 3.63 Sell % Hold %

17 ZE PAK 1 February 217 Tauron Sell % Sell % Buy % ZE PAK Hold % Under Review n.a. 5.6%