KOGENERACJA S.A. - Management Board s Report on the Group Activities in 2016 MANAGEMENT BOARD'S REPORT ON THE ACTIVITIES OF KOGENERACJA GROUP

Transcription

1 MANAGEMENT BOARD'S REPORT ON THE ACTIVITIES OF KOGENERACJA GROUP

2 Table of contents I. Group profile Legal basis Group characteristics KOGENERACJA Group Employment... 7 II. Key production and financial figures Suppliers of the KOGENERACJA Group Key products and services and buyers of KOGENERACJA Group Key products Key economic and financial figures of the Group Market and regulatory environment Structure of assets and liabilities in the consolidated statement of financial position Significant agreements concluded in Key domestic and foreign investments Related party transactions Loans incurred and terminated Loans granted Guarantees given and received Litigations Issue of securities Financial results presented in the report vs. the published performance forecast Assessment of financial resources management III. Investments and development in the Group Assessment of investment capacity Events with significant impact on the Group's activities Assessment of factors and extraordinary items affecting the Group's performance in Internal and external factors affecting the Group's development Sustainable development and social responsibility Sponsoring and corporate giving Diversity policy Environmental protection Outlook for the Group's development Key achievements in research and development Description of key risks and threats Changes in the key principles of the Company and Group management

3 IV. Statement of compliance with the corporate governance principles Corporate Governance Principles Internal control and risk management systems with regard to the financial reporting process Shareholders of the Company Preference shares Limitation on title transfer and voting Amending the Articles of Association General Meeting: operation, powers, shareholders' rights Changes in the Management Board and the Supervisory Board The rules of appointment and removal of executives Terms of reference of the Management Board and the Supervisory Board Remuneration system Shares of KOGENERACJA S.A. or its subsidiaries held by directors V. Share price Quotation of the KOGENERACJA shares on Warsaw Stock Exchange WIGG80 index Respect Index WIG-energy sector index Dividend policy Agreements vs changes in the proportion of shareholdings Control of Employee Share Programmes Agreement with the Auditor Ratio calculation methodology Glossary of industry terms and abbreviations

4 I. Group profile 1. Legal basis The Management Board's Report was prepared pursuant to 91 section 5 and 6 of the Finance Minister's Ordinance of 19 February 2009, Journal of Laws No. 33, item 259 ( Ordinance ) and the Accounting Act of 29 September 1994 Journal of Laws of 2016, item 1047, as amended (the Act ). 2. Group characteristics The parent company of KOGENERACJA Group ( the Group ) is Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. (KOGENERACJA S.A., Parent Company, Company ), joint stock company registered in Poland. having its registered office in Wrocław at Łowiecka 24. Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. Address: ul. Łowiecka 24, Wrocław Phone: 71/ Fax: 71/ Website: kogeneracja@kogeneracja.com.pl REGON: NIP: KRS: The Company comprises three production plants: Wrocław Heat and Power Plant, located in Wrocław at ul. Łowiecka 24 Czechnica Heat and Power Plant located in Siechnice near Wrocław Zawidawie Heat and Power Plant, located in the southern part of Wrocław, Psie Pole district. The plants have a total electric power of MW and heat power of MWt, which puts them in the top position among the industrial CHP plants. Both heat and power plants are the central heat sources for Wrocław and its surroundings, providing the city with heating, domestic hot water and industrial heat as well as with electricity as part of the national energy infrastructure. Heat and electricity are produced in co-generation, which ensures that the average yearly production capacity is high and the chemical energy of the primary fuels is the most effective in the sector. 4

5 Subsidiary - consolidated Associated companies - not consolidated KOGENERACJA S.A. - Management Board s Report on the Group Activities in KOGENERACJA Group a. Ultimate parent KOGENERACJA S.A. and its subsidiary EC Zielona Góra S.A. were in the reporting period consolidated by EDF S.A., France, using the full consolidation method. EDF S.A. is a key participant of the energy transformation process, an integrated entity with presence in all branches of the power sector: generation, transmission, distribution, trading and sale of energy. EDF is the world s leader in low-emission energy production and has a diversified mix of products with nuclear power plants, hydro power plants as well as plants using renewable and conventional sources. The Group acts as an intermediary is supplying energy and services to 37.6 million customers, including 28.3 million in France. In 2016, the Group's revenues amounted to EUR 71.2 billion. EDF is listed on Paris Stock Exchange. In Poland, EDF Group has approx. 10% share of the electricity market and 15% share of the network heat market. It is the leading producer of electricity and heat in high-efficiency cogeneration, providing heat to Kraków, Gdańsk i Gdynia, Wrocław, Zielona Góra and Toruń. It also has a systemic coal-fired power plant in Rybnik with a capacity of 1,780 MW. Through its subsidiaries EDF in Poland offers the local communities and business customers a wide range of services connected with energy efficiency. EDF also offers electricity and services to large corporations and small and medium-sized enterprises. In 2016, the Group employed people on average. b. Group structure The graphical Group structure and the share of KOGENERACJA S.A. the Parent Company in the net worth of its subsidiary and other associated entities are presented in the chart below. As at 31 December 2016 KOGENERACJA S.A. 98,4 % EC Zielona Góra S.A. EDF Paliwa Sp. z o.o. EDF Polska S.A. LEGEND: Shares of KOGENERACJA S.A. EDF Polska S.A. and EDF Paliwa Sp. z o.o. are reported as connected companies because KOGENERACJA S.A. enters into material transactions with these entities. c. Entities covered by the consolidated financial statements KOGENERACJA S.A., Parent of the Group, as at 31 December 2016, included one subsidiary in its consolidated financial statements: EC Zielona Góra S.A. (full consolidation). 5

6 d. Subsidiary The tables below show the percentage share in the share capital of the Group s subsidiary and the nominal value of the shares held by KOGENERACJA S.A. as at 31 December 2016 and 31 December As at 31 December 2016 and 31 December 2015 Share capital Number of shares Nominal value of a share No. of shares held by KOGENERACJA S.A. (directly) Number of shares Nominal value of shares % of capital/ votes EC Zielona Góra S.A ,40 e. Activities of the subsidiary EC Zielona Góra S.A. EC Zielona Góra S.A. produces electricity as well as produces and distributes heat. Until the end of July 2004, electricity and heat were co-generated using coal as production fuel. When in August 2004 the CC Gas Unit was commissioned, the proportions of electricity and heat reversed and currently predominantly electricity is produced in the CC Gas Unit in the process of partial co-generation using gas fuel (natural gas from local sources). The installed electricity generation capacity is 198 MW (CC Gas Unit). The installed heat generation capacity is MW t, including: MW t (CC Gas Unit), MW t (gas and oil boiler plant), MW t (local gas-fired boiler plants). The company is the key source of heat and domestic hot water supplies for the city of Zielona Góra, and since 1 April 2009 it has also been a heat distributor. f. Other connected companies As at 31 December 2016, KOGENERACJA S.A. did not have shares in other connected companies. g. Activities of other connected entities EDF Paliwa Sp. z o.o. The company s core business is the supply of steam coal and biomass for EDF Group companies in Poland. EDF Polska S.A. EDF Polska S.A. is the largest producer of combined electricity and heat, providing heat to Kraków, Gdańsk and Gdynia. It also has a systemic coal-fired power plant in Rybnik. The Group also includes EDF Paliwa, a service provider that purchases production fuel coal and biomass, and EDF Ekoserwis, which provides services relating to management of combustion waste as well as comprehensive services (in the area of coal-handling, ash removal and landfill management) to CHP and power plants. Furthermore, EDF in Poland trades in electricity produced by EDF Group companies in Poland and provides support services to EDF Group companies. h. Changes in the Group structure In 2016, no changes took place in the Group structure. 6

7 No. of employes No. of employees KOGENERACJA S.A. - Management Board s Report on the Group Activities in 2016 i. Equity investments within the Group In 2016, the Capital Group KOGENERACJA S.A. did not make any equity investments. j. Other equity investments As at 31 December 2016 and 2015, the Capital Group KOGENERACJA S.A. did not have shares in other companies. 4. Employment As at 31 December 2016, the employment in the Parent Company was 347 persons, including 52 women and 295 men (as at 31 December 2015, there were 361 persons working for the Company, including 56 women and 305 men). The employment decrease over the recent years is an effect of the employment restructure, and in the years this was an effect of hiving off production-related activities and a gradual transfer of support areas to the Shared Services Centre (CUW) in Kraków, which provides services to the EDF Group, Poland. In 2010, the following areas were outsourced: Engineering, Finance, Logistics and Procurement, IT, and in 2011: HR, Internal Audit, Research and Development; in 2012: Administration, Telecommunication Services, and in December 2013: Overhauls. In 2013, also the Ash Removal Area was transferred to the then subsidiary Renevis Sp. z o.o. (now EDF Ekoserwis Sp. z o.o.) while Internal Communication was transferred to EDF Polska S.A. In 2014, the Coal Handling Area was transferred to EDF Ekoserwis Sp. z o.o Year The decrease in employment in the Group results from the restructure in the Parent Company and in EC Zielona Góra S.A. (establishment of the Shared Services Centre for the EDF Group in Poland, Kraków, and transfer of employees under Article 23 1 of the Labour Code), the sale of PPO Siechnice Sp. z o.o. in 2012 and Renevis Sp. z o.o., and other changes in the Group composition Year 7

8 II. Key production and financial figures 1. Suppliers of the KOGENERACJA Group The table below shows the main suppliers of the Group, supplied products and buyers Group companies. SUPPLIERS PRO DUCTS/SERVICES BUYERS EDF Paliwa Sp. z o.o. ORLEN Południe S.A. PGNiG S.A. OT Logistics EDF Polska S.A. EDF Ekoserwis Sp. z o.o. PGNiG S.A. EDF Polska S.A. coal and biomass mazout natural gas operation of railway sidings, coal transport non -technical and support functions services coal handling,ash removal and waste management services natural gas non -technical and support functions services KOGENERACJA S.A. EC Zielona Góra S.A. 2. Key products and services and buyers of KOGENERACJA Group Key products/services and buyers of the Group and the share in revenues The key products of the Group are electricity and heat, produced chiefly in co-generation, and the energy origin certificates. The key buyers of the Group's products and services are the companies operating in the domestic market, and in the case of heat in the local market. In 2016, the Group s main buyer was EDF Polska S.A., intermediary in the sale of electricity and energy certificates. The table below shows the products/services of the Group companies divided into buyers in the domestic market. SUPPLIERS PRO DUCTS/SERVICES BUYERS % of income KOGENERACJA S.A. heat domestic-local market Fortum Wrocław S.A. 92,5% heating network in Siechnice 7,3% other buyers 0,2% electricity domestic market EDF Polska S.A. 99,9% final clients 0,1% EC Zielona Góra S.A. electricity domestic market EDF Polska S.A. 34% PSE-Operator S.A. 1% TGE S.A. 65% heat (production and distribution) domestic-local market multifamily residential development 56% public utility buildings 23% industry 21% 8

9 3. Key products a. Key products KOGENERACJA S.A. The company's key products are heat and electricity as well as energy origin certificates: green, red and yellow and white certificates. Unit from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (number) Sales of heat TJ Sales of electricity MWh Totale sales of products in units TJ Sale of heat in 2016 increased by 14% (1 150 TJ). The increase observed in 2016 was caused by the lower air temperatures in the heating season compared with 2015 and by an increase in the power contracted by new buyers. Sale of electricity in 2016 increased by 6% ( MWh). The increase is an effect of higher heat sales volumes, taking into account the higher sales in the "on demand" system (forced generation) in Total sale of finished goods in the reporting period was TJ (including TJ for heat) and was by 11% higher year-on-year. The value and structure of product sales in 2016 and 2015 were as presented in the table below (the revenue from distribution of heat and electricity was posted as follows: PLN thousand in revenues from the sale of heat and PLN thousand in revenues from the sale of electricity). Wartość (tys. zł) Struktura (%) Wartość (tys. zł) Struktura (%) Zmiana (wartość) Ciepło Energia elektryczna Usługi systemoweenergia elektryczna 31 grudnia 2016 r. 31 grudnia 2015 r (15 575) Certyfikaty Pozostałe (3 837) Przychody ze sprzedaży produktów

10 b. Key products EC Zielona Góra S.A. The company's key products are: heat and electricity as well as energy origin certificates: so called yellow certificates. Like KOGENERACJA S.A., EC Zielona Góra S.A. produces electricity and heat, but in different proportions, i.e. with the predominance of electricity. EC Zielona Góra S.A. also uses different production fuel as it operates the gas-fired CC Gas Unit. The company also owns the heating network and distributes heat in Zielona Góra. Unit from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (number) Sales of heat TJ Sales of electricity MWh (8 841) -cc gas unit resale MWh (74 390) Totale sales of products in units TJ In 2016, the sale of heat was at TJ and increased by 117 TJ (10%) year-on-year. The higher sale of heat mainly resulted from an increased demand for network heat in the periods of favourable weather (low average temperatures). In 2016, the sale of electricity was at MWh and was lower by MWh, i.e. by 0.6%, year-on-year. It was a result of two opposite operating factors: a higher production of electricity in CC Gas Unit in 2016 due to favourable weather conditions and a lower volume of resale of electricity in 2016 compared to the previous year due to lower unavailability of CC Gas Unit (1 failure and 1 stopped hour in 2016; 3 failures and 17 stopped days in 2015). Total sale of finished goods in the reporting period was TJ, up 1% (85 TJ) on The value and structure of the sales of finished goods by the subsidiary in 2016 and 2015 were as presented in the table below. The main item in other revenues from the sale of products is the gas compensation payable under Article 46(5) of the PPA Act. In 2016, the subsidiary's income from the gas compensation was PLN thousand compared with PLN thousand in December December 2015 Value (in PLN thousand) Structure (%) Value (in PLN thousand) Structure (%) Change (value) Sales of heat Sales of electricity (5 839) Certificates Other revenues Revenues from the sale of finished goods

11 4. Key economic and financial figures of the Group a. Key financials and ratios for in PLN thousand from 1 January to 31 December 2016 from 1 January to 31 December 2015 from 1 January to 31 December 2014 from 1 January to 31 December 2013 from 1 January to 31 December 2012 from 1 January to 31 December 2011 from 1 January to 31 December 2010 from 1 January to 31 December 2009 from 1 January to 31 December 2008 (restated) (restated) (restated) Revenue from sales Revenue from compensation for stranded costs ( ) ( ) Cost of sales ( ) ( ) ( ) ( ) ( ) ( ) ( ) Gross profit on sales (12 412) (12 609) Selling expenses (2 903) (3 002) (3 226) (3 828) (8 164) (10 083) (3 859) (37 966) (36 985) General and administrative expenses (6 500) (6 189) (5 874) (14 139) (28 304) (29 113) (31 527) Other operating income/expenses (7 042) (10 192) 576 (7 666) Operating profit (EBIT) (18 012) (16 122) Net finance revenues (9 652) (10 630) (9 403) (1 083) (16 400) (20 730) (15 429) (37 276) (15 887) Income tax (37 007) (31 665) (9 173) (22 717) (24 127) (34 101) (30 758) Net profit Other comprehensive income (73) (5) Profit from discontinued operations (20 345) (1 167) (5 525) Total comprehensive income Non-current assets Current assets Total assets Non-current liabilities Current liabilities Equity Net cash from operating activities Net cash used in investing activities ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Net cash from financing activities ( ) ( ) ( ) ( ) ( ) (650) (20 244) Total net cash flows ( ) (85 482) (79 643) (7 559) (%) Return on assets (ROA) 6,92 5,62 2,41 4,14 5,08 6,50 7,53 9,24 3,97 Return on equity (ROE) 11,03 9,25 4,02 6,67 8,39 11,20 13,53 17,64 7,39 Return on capital employed (ROCE) 13,60 11,01 4,10 9,23 9,85 12,56 12,62 16,15 7,63 Current liquidity 1,59 1,45 1,52 1,36 0,87 1,10 1,28 1,32 1,21 Quick liquidity 1,28 1,07 0,94 1,01 0,51 0,72 0,91 0,93 0,82 Sales of heat (TJ) Sales of electricity (MWh) including biomass production (MWh) Dividend paid (PLN per share) 6, ,41 3,50 3,50 2,05 2,05 The ratio calculation methodology was presented in point V.9 of this report. 11

12 b. Elements of comprehensive income In 2016, the Group s comprehensive income increased by PLN thousand, i.e. by 25%. in PLN thousand from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (value) Revenue from sales Revenue from compensation for stranded costs Cost of sales ( ) ( ) (24 266) Gross profit on sales Selling expenses (2 903) (3 002) 99 General and administrative expenses (6 500) (6 189) (311) Other operating income/expenses Operating profit (EBIT) Net finance costs (9 652) (10 630) 978 Income tax (37 007) (31 665) (5 342) Net profit Other comprehensive income (73) (5) (68) Total comprehensive income c. Impact of the performance of the Group companies on the consolidated net profit in 2016 and 2015 Total comprehensive income of KOGENERACJA S.A. In 2016, the Parent Company recorded a net profit of PLN thousand, which is by PLN thousand higher than in 2015, when a profit of PLN thousand was posted. The key financials of the Company are presented and discussed below. from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (value) in PLN thousand Revenue from sales Cost of sales ( ) ( ) (21 601) Gross profit on sales General and administrative expenses (3 966) (3 834) (132) Selling expenses (1 761) (1 736) (25) Other operating revenues/costs (366) Operating profit (EBIT) Net finance revenues (18 591) Income tax (15 796) (11 681) (4 115) Net profit Other comprehensive income, net of tax (73) (5) (68) Total comprehensive income

13 Revenues of KOGENERACJA S.A. in PLN thousand Revenues Revenues from the sale of finished goods including certificates including ancillary services (15 575) Revenues from the sale of merchandise and raw materials from 1 January to 31 December 2016 from 1 January to 31 December (709) In 2016, the Company generated revenue from sales that was by PLN thousand higher than in The higher revenue from the sale of finished goods achieved in 2016 mainly resulted from: Change (value) a) higher revenues from the sale of heat (up by PLN thousand) as a result of the approx. 14% increase in the sales volume, the 2.4% increase in the price of heat and the 1.4% increase in the price of heat power; this was affected by the prices and tariff rates for the heat generated by KOGENERACJA S.A., introduced on 1 November 2016 by the decision of the President of the Energy Regulatory Office of 7 October 2016; b) higher revenue from the sale of electricity (up by PLN thousand in total, including; higher revenues from the sale of electricity (up by PLN thousand) and lower revenues from the sale of systemic services (down by PLN thousand). The sales volume increased by 6% with the average price of electricity being by approx. 0.2% higher than in 2015; c) lower other revenue from the sale of heat (down by PLN thousand); d) higher revenue from the allocated certificates (up by PLN thousand); in 2016, the Company obtained certificates for energy produced from renewable sources: PLN thousand in respect of co-firing of biomass (green certificates); PLN thousand in respect of red certificates and PLN thousand in respect of yellow and white certificates; the total value of the certificates was PLN thousand (PLN thousand in 2015: green certificates of PLN thousand; red certificates of PLN thousand and yellow and white certificates of PLN thousand). The production of green energy from the co-firing of biomass in 2016 fell by 9.3% ( MWh vs MWh). The decrease was mainly caused by technological conditions, which led to a reduction in the combustion of wet biomass in EC Czechnica. In 2016, the prices of green certificates were lower by 2% vs In 2016, the prices of red certificates increased by 2%. The volume of production of red certificates was 8% higher due to the higher production of co-generated heat. Fixed costs and variable costs KOGENERACJA S.A. In 2016, variable costs relating to the generation of the products sold were by 5% (i.e. by PLN thousand) higher than in The increase is attributed to the higher cost of missing CO 2 allowances (up by PLN thousand), lower fuel costs (down by PLN thousand) and lower other variable costs (down by PLN thousand). The increase of PLN thousand in the costs related to the shortage and purchase of CO 2 allowances (including the provision for the shortage of allowances, which increased by PLN thousand) is an effect of three factors: the lower limits of free CO 2 allowances, which decrease year over year (in 2016: Mg, in 2015: Mg), the higher CO 2 emission, caused by the higher production of heat (in 2016, the allowances received covered 43% of the CO 2 emission, while in 2015: 64%) and the higher cost of purchase of CO 2 allowances (up by 29%). Fuel costs decreased by PLN thousand, mainly due to lower gas consumption costs (down by PLN thousand), an effect of lower gas prices at a volume of consumption similar in 2016 coupled with lower cost of liquid fuels (down by PLN 985 thousand). On the other hand, as a result of launch of the desulphurisation installation, the cost of chemicals and sorbents used increased by PLN thousand. 13

14 The increase in the cost of coal consumption was offset by lower biomass costs in The cost of coal used increased by PLN thousand at lower coal prices and higher consumption volume. Coal price fell by approx. 8% (in 2016, the average price of coal combusted with additional costs was PLN 11.93/GJ vs. PLN 13.01/GJ in 2015). The volume of coal used increased by approx. 12% and was TJ in 2016 and TJ in It is important to note that due to finalisation of construction of the flue gases desulphurisation installation in 2015 it was possible to start a process of gradual transfer from low-sulphur coal to standard coal, which is a cheaper fuel. The process also had an impact on the price effect. The cost of biomass consumption fell by PLN thousand. Unit prices of biomass fell by approx. 9% (in 2016, the average price of combusted biomass was PLN 25.49/GJ vs. PLN 27.75/GJ in 2015) with a lower consumption of biomass due to technical conditions and optimisation of equipment. The volume of combusted biomass was 966 TJ in 2016 and TJ in Other variable costs fell to thousand in 2016 vs. PLN thousand in 2015, i.e. by PLN thousand, mainly due to: lower environmental protection costs: down by PLN thousand (as an effect of launching the desulphurisation installation); decrease in other costs related to energy purchase: down by PLN thousand; decrease in the costs related to the purchase of electricity in the balancing market: down by PLN 975 thousand; increase in the cost of other services by PLN 471 thousand. Cost of sales Administrative expenses Selling expenses Total in PLN thousand Variable costs ( ) ( ) ( ) ( ) fuel costs ( ) ( ) ( ) ( ) CO 2 allowances (32 593) (14 260) (32 593) (14 260) other variable costs (14 720) (18 603) (14 720) (18 603) Fixed costs ( ) ( ) (3 966) (3 834) (1 761) (1 736) ( ) ( ) staff costs (41 468) (43 685) (3 348) (3 297) (936) (1 202) (45 752) (48 184) overhauls (17 786) (15 290) (17 786) (15 290) depreciation ( ) (98 932) (95) (81) - - ( ) (99 013) services (52 377) (52 795) (304) (251) - - (52 681) (53 046) other fixed costs (19 170) (19 042) (219) (205) (825) (534) (20 214) (19 781) Value of goods and materials sold from to from to from to from to from to from to from to from to (390) (1 016) (390) (1 016) Total costs ( ) ( ) (3 966) (3 834) (1 761) (1 736) ( ) ( ) In 2016, fixed costs relating to generation of products increased by PLN thousand vs The increase in fixed costs was mainly driven by higher depreciation and higher overhaul costs. The increase in depreciation of the power-generating equipment (up by PLN thousand) results from new fixed assets being put in service in 2016, i.e. mainly the desulphurisation and denitrification installation, which caused depreciation to grow in the reporting period by PLN thousand, partly offset by changes in lifetime of fixed assets in 2016 (with a corresponding decrease in depreciation of PLN thousand). Staff costs fell by PLN thousand in 2016 mainly as a result of: lower salary and social security charges (down by PLN thousand) and other staff benefits (down by PLN thousand), with a total decrease of PLN thousand; higher volume of provisions and payouts connected with employment restructure (up by PLN thousand). In 2016, the cost of salaries and social security contributions decreased as a result of the agreements signed in 2015 between trade unions and the Company s Management Board re liquidation of some social benefits and due to reduction of employment in 2016 by 14 persons (347 persons employed as at 31 December 2016 vs. 361 as at 31 December 2015; average employment in 2016: 357 persons vs. 363 in 2015). Overhaul costs increased by PLN thousand mainly as the scope of overhauls schedule was expanded vs to include heating network repairs. The cost of external services decreased by PLN 365 thousand. 14

15 Other operating revenues (costs) of KOGENERACJA S.A. In 2016, other operating profit was PLN thousand vs. a negative result of PLN 366 thousand in 2015 and grew by PLN thousand driven by the following factors: a) Factors that had a positive impact on other operating profit: PLN thousand: decrease in the provision for landfill reclamation; not recorded in 2015; PLN thousand: decrease in provision for liquidation of fixed assets (chimney liquidation); not recorded in 2015; PLN 859 thousand: higher revenues from subsidies; PLN thousand, including: PLN thousand: impairment loss on the value of fixed assets under construction in 2015 and impairment loss of PLN thousand on the value of assets held for sale in b) Factors that had a negative impact on other operating profit: PLN thousand: reversal of impairment loss in 2015 after receipt of the full amount of the calculated liquidated damages; no similar events in 2016; PLN thousand, including: gain on the sale of non-financial fixed assets in 2015; no similar events in Net finance income - KOGENERACJA S.A. The lower net finance income in 2016 (down by PLN thousand) was primarily attributable to the lower financial revenues, mainly due to lower dividend (down by PLN thousand) received from EC Zielona Góra S.A. (PLN thousand in 2016 vs. PLN thousand in 2015). The value of financial expenses was higher, mainly due to higher interest on financial liabilities, which was driven by the PLN thousand increase in interest on the investment loan, recognised in 2016 in the statement on comprehensive income after capitalisation of the desulphurisation installation (in 2015, this item was recognised in capital expenditure as borrowing costs, in accordance with IAS 23). In addition, the interest revenue in the cash-pool system increased by PLN 906 thousand due to the positive balance in the system. Net profit of KOGENERACJA S.A. In 2016, the Company earned a net profit of PLN thousand compared with PLN thousand earned in The net profit increased by 5%, i.e. by PLN thousand, as a result of: higher net result on sales (up by PLN thousand) compared with 2015 as a result of increasing revenues from the sale of key products, mainly due to higher electricity and heat sales prices and higher prices of heat and electricity sold; higher cost of purchase of CO 2 allowances (up by PLN thousand) due to lower limits of free-of-charge allowances; lower fuel costs (down by PLN thousand); lower net finance income (down by PLN thousand) due to the lower dividend received from EC Zielona Góra S.A. (down by PLN thousand), coupled with higher interest on investment liabilities; positive result on other operations vs. a loss posted in 2015 (change of PLN thousand) due to the events described above. Key ratios: ROA, ROE, ROCE KOGENERACJA S.A. (%) from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (%) Return on assets (ROA) 8,48 7,94 7 Return on equity (ROE) 10,87 10,77 1 Return on capital employed (ROCE) 6,62 4,

16 Impact of the net profit of EC Zielona Góra S.A. on the Group s net profit In 2016, the company generated a net profit of PLN thousand, up by PLN thousand compared with the corresponding period of the previous year. The key financials of the subsidiary are presented in the tables below. Net profit of EC Zielona Góra S.A. in PLN thousand from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (value) Revenues Cost of sales ( ) ( ) (2 797) Gross profit on sales Selling expenses (1 142) (1 267) 125 Administrative expenses (2 891) (2 969) 78 Other operating revenues/costs Operating profit (EBIT) Net finance costs (8 784) (10 185) Income tax (20 554) (19 625) (929) Net profit The subsidiary s financials are based on the unconsolidated financial statements prepared in accordance with the Accounting Act, in accordance with the Group rules. Revenues of EC Zielona Góra S.A. in PLN thousand from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (value) Revenues Revenues from the sale of finished goods including certificates Revenues from the sale of merchandise and raw materials (13 776) Revenue from compensation for PPAs In 2016, EC Zielona Góra S.A. achieved revenues from the sale of finished goods of PLN thousand, up PLN thousand vs. 2015, when PLN thousand was reported. The higher revenues from the sale of finished goods achieved in 2016 mainly resulted from: a) higher revenues from the sale of heat (up by PLN thousand) as the sales volume increased by 10%, and the higher sales price resulting from the new heat tariff approved by the Energy Regulatory Office (starting from November 2016); b) lower revenues from the sale of electricity (down by PLN thousand); the decrease was mainly caused by the lower energy sales prices on the Energy Exchange; 16

17 c) higher revenues from certificates (up by PLN thousand); higher volume of generated certificates due to higher heat production in 2016; d) higher other revenues from sale (up by PLN thousand); the increase in revenues from the gas compensations (up by 21% vs. 2015) was an effect of higher market prices, which are the basis for calculation of compensations. Revenues from the sale of merchandise and raw materials were PLN thousand vs. PLN thousand in the previous year, which was due to the lower volume of electricity purchased for resale in Revenues from compensations for termination of the PPAs in 2016 were PLN thousand vs. PLN thousand in Fixed costs and variable costs of EC Zielona Góra S.A. in PLN thousand Cost of sales from to from to General and administrative expenses from to from to Selling expenses from to from to from to Total from to Variable costs ( ) ( ) ( ) ( ) fuel costs ( ) ( ) ( ) ( ) CO 2 allowances (16 458) (8 940) (16 458) (8 940) other variable costs (9 619) (13 790) (9 619) (13 790) Fixed costs (94 867) (94 941) (2 891) (2 969) (1 142) (1 267) (98 900) (99 177) staff costs (18 609) (19 930) (1 738) (1 662) - - (20 347) (21 592) overhauls (11 854) (12 976) (11 854) (12 976) depreciation (40 614) (38 139) - - (17) (24) (40 631) (38 163) services (16 084) (16 331) (379) (712) (6) (7) (16 469) (17 050) other fixed costs (7 706) (7 565) (774) (595) (1 119) (1 236) (9 599) (9 396) Value of goods and materials sold (21 557) (27 479) (21 557) (27 479) Total costs ( ) ( ) (2 891) (2 969) (1 142) (1 267) ( ) ( ) In 2016, variable costs relating to the generation of the products sold amounted to PLN thousand, up by PLN thousand year-on-year (in 2015, PLN thousand was recorded). The increase in variable costs was mainly observed in the area of fuel consumption and purchase of CO 2 allowances. The increase in gas consumption was mainly caused by the approx. 5% increase in the volume of gas used, an effect of higher heat production. The increase of PLN thousand in the costs related to the shortage and purchase of CO 2 allowances is an effect of three factors: the lower limits of free CO 2 allowances, which decrease year over year (in 2016: Mg, in 2015: Mg), the higher CO 2 emission, caused by the higher production of heat (in 2016, the allowances received covered 12% of the CO 2 emission, while in 2015: 36%) and the higher cost of purchase of CO 2 allowances (up by 30%). Other variable costs were lower by PLN thousand, affected by the lower cost of water used for production purposes, lower waste and wastewater management costs and lower cost connected with operations in the energy market (due to the failure of the CC Gas Unit in 2015, the company had to purchase electricity to cover the contracted volume). In 2016, fixed costs stood at PLN thousand and were stable, lower by PLN 277 thousand vs

18 The increase in fixed costs was observed with regard to depreciation (up by PLN thousand) and other fixed costs (up by PLN 203 thousand). The increase in depreciation was caused by the capitalisation of new investment tasks, including: modernisation of the main network, modernisation of the pumping station, purchase of a TP rotor and new heat stations and connections. Fixed costs decreased in the area of staff costs, overhauls and services. In 2016, staff costs decreased by PLN thousand vs This was due to the decrease in the cost of salaries (at at 31 December 2016, the employment level was 144 persons vs. 157 persons employed as at 31 December 2015; average employment in 2016 and 2015: 151 and 165 persons, respectively) as well as lower costs of employee benefits. In 2016, overhaul costs decreased by PLN thousand vs. 2015, mainly due to the major overhaul of the CC Gas Unit and capitalisation of investment expenditures rather than due to the regular overhaul costs like in previous years. Cost of external services were lower year-on-year. The value of merchandise and raw materials sold decreased by 22 % vs. 2015, which was due to the lower purchase of electricity for resale as part of the measures taken to optimise the gross margin on electricity. Other operating profit of EC Zielona Góra S.A. In 2016, other operating profit was at PLN thousand, up by PLN 429 thousand year-on-year. In 2015, the company s other operating profit was PLN thousand. In 2016, the company achieved higher revenues from the settlement of grants (up by PLN 969 thousand). Net finance income of EC Zielona Góra S.A. In 2016, EC Zielona Góra S.A. posted a net finance loss of PLN thousand (vs. net finance loss of PLN thousand reported in 2015). In 2016, the company s financial revenues increased by PLN 300 thousand (with the cash-pool interest received higher by PLN 391 thousand). Financial expenses decreased by PLN thousand, mainly due to the lower cost of discount in respect of stranded costs (down by PLN 968 thousand). Net profit of EC Zielona Góra S.A. In 2016, the company generated a net profit of PLN thousand. In 2015, the net profit was PLN thousand. The increase of PLN thousand was mainly due to the higher result on the sale of heat and the generated yellow certificates as well as higher revenues from gas compensation. Key ratios: ROA, ROE, ROCE EC Zielona Góra S.A. (%) from 1 January to 31 December 2016 from 1 January to 31 December 2015 Change (%) Return on assets (ROA) 12,80 12,91 (1) Return on equity (ROE) 46,44 44,92 3 Return on capital employed (ROCE) 215,91 85,

19 5. Market and regulatory environment a. Macroeconomic situation KOGENERACJA SA and EC Zielona Góra operate in the Polish market. Accordingly, the economic growth in Poland and the health of the Polish economy have a material impact on the Group s performance. b. Regulatory environment KOGENERACJA S.A. complies with the requirements of Article 32 and Article 47 of the Energy Law. The Company has the required licences issued by the President of the Energy Regulatory Authority for production of electricity and heat as well as for transmission and distribution of heat. In its settlements with energy buyers, the Company uses the prices set in the tariffs. In 2016, the Heat Tariff was approved by the President of the Energy Regulatory Office on 10 October, by decision No. OWR /2016/1276/XVII-A/AŁ and came into force on 1 November As regards the electricity tariff, the Company was exempted from the requirement to obtain regulatory approval (decision No. OWR (4)/2005/1276/SS of the President of the Energy Regulatory Office of 23 June 2005). Furthermore, the Company received a decision on the change of electricity distribution tariff, reference No. OWR (2)/2016/1276/V- B/RP of 8 December c. Industry and sales markets KOGENERACJA S.A. is the main producer of heat in Wrocław and a producer of electricity. HEAT MARKET The heat market in Poland is a well-developed sector of the economy. The heat market is a local market as the transport of heat media is seriously limited unlike the transport of electricity or natural gas, which can be transported over long distances. Poland is among top European countries where there is a significant share of heat from the existing heat systems in the total heat supply. Approx. 40% of heat production comes from heating systems. At KOGENERACJA S.A., network heat is produced together with electricity in high-efficiency cogeneration at the following three plants: two CHP plants (EC Wrocław and EC Zawidawie) and a CHP plant in Siechnice (EC Czechnica). The Company covers 53% of the total demand for heat in Wrocław and 60% of the demand for heat in Siechnice. Production plants of KOGENERACJA S.A. EC WROCŁAW EC CZECHNICA EC ZAWIDAWIE Coal-fired unit 812 MWt 263 MWe Network of the local heat distributor (Fortum) Coal-fired unit 247 MWt 100 MWe Heating network: 27 km Gas-fired unit 21 MWt 3 MWe Heating network: 2.7 km The heat price is regulated (tariffs for heat are subject to approval by the President of the Energy Regulatory Office). Development of the heat market is mainly the result of new connections made as new buildings are put on the market and as local boiler plants and individual furnaces are put out of use (the programmes of liquidation of the low emission sources conducted in cooperation with local authorities). 19

20 Buyers using the heat system Heat network in Siechnice 7,3% Heat network in EC Zawidawie 0,2% Fortum Power and Heat Polska Sp. z o.o. O/Wrocław 92,5% The demand for heat is expected to increase over the coming years due to the overall macroeconomic growth of Poland, migration of people to urban areas, connection of semi-centralised heat sources with the heating network and limitation of local emission sources by the environmental protection legislation. At the same time, as a result of higher energy efficiency, limitation of heat losses in existing buildings and installations, the growth rate will should remain moderate. Energy efficiency will cause heat consumption to be reduced in the primary and secondary market, but on the other hand it will be an opportunity to develop a centralised heating network that will receive heat from CHPs using high-efficiency cogeneration processes. Support for high-efficiency cogeneration Poland has three programmes of certificates supporting the development of cogeneration (depending on the type of fuel used). The companies that sell energy to end buyers are legally required to purchase and redeem certificates of origin in the value corresponding to an agreed portion of electricity supplied or to pay a substitution fee. The certificates of origin are issued to CHPs by the President of the Energy Regulatory Office as evidence of the energy s origin. Having been converted into property rights, the certificates can be traded on the Energy Exchange (TGE). KOGENERACJA S.A. uses two types of support certificates for the energy produced in high-efficiency cogeneration the so-called red certificates for the energy produced EC Wrocław and EC Czechnica, and certificates for the energy produced from gas by EC Zawidawie yellow certificates. ELECTRICITY MARKET Since 2014, the Polish electricity market has been ranked sixth in terms of the volume of electricity generated and seventh in the EU in terms of total installed generation capacity. In 2016, the annual electricity consumption in Poland was 167 TWh (vs. 161 TWh in 2015). According to the Energy Policy until 2030 the use of electricity per capita in Poland is to grow by more than 50% until Electricity production in Poland is predominantly based on hard coal and lignite. Four Polish energy companies (PGNiG, Enea, Energa, Tauron) have a combined share of 60% in the electricity generation market. EDF Poland Group, which comprises KOGENERACJA S.A., has a 9% market share, including 3% represented by CHPs and 6% by the Rybnik power plant. KOGENERACJA S.A. is the largest producer of heat and electricity for Wrocław. EC Wrocław has a licence for electricity production with a capacity of 263 MWe. EC Czechnica has a licence for electricity production with a capacity of 100 MWe. This represents approx. 0.7% of the installed capacity in Poland, which at present is more than MWe. KOGENERACJA S.A. produces electricity in association with network heat in the process of high-efficiency cogeneration. A part of it is produced from renewable energy sources. Biomass is combusted in dedicated installations as an alternative to coal, which helps reduce CO 2 emissions. 20

21 Buyers of electricity EDF Polska S.A. 99,9 % Final client 0,1% KOGENERACJA S.A. also provides plant availability service to PSE Operator S.A. (ancillary services). 6. Structure of assets and liabilities in the consolidated statement of financial position a. Structure of the Group assets In 2016, the Group s balance sheet total increased by PLN thousand, mainly as a result of an increase in the value of non-current assets. The value of property, plant and equipment increased as a result of major capital expenditure incurred by the Parent Company in the recent period. In the group of current assets, the value of cash increased as a result of reduced inventories, an effect of optimisation of the working capital. In addition, a decrease was recorded in the level of receivables due to the lower estimated gas compensation in the subsidiary. in PLN thousand 31 December 2016 % of balance sheet total 31 December 2015 % of balance sheet total ASSETS I. Non-current assets current period current period previous period previous period 1. Property, plant and equipment , ,7 2. Intangible fixed assets, including: , ,9 - goodwill on related parties , ,8 3. Perpetual usufruct of land , ,6 4. Investment property , ,8 5. Long-term receivables , ,4 6. Other long-term investments 4 0,0 4 0,0 7. Deferred tax assets , ,5 Total non-current assets , ,9 II. Current assets 1. Inventories , ,7 2. Carbon-dioxide emission rights acquired for redemption ,5 3. Short-term investments 12 0,0 12 0,0 4. Income tax receivables , ,1 5. Trade and other receivables , ,8 6. Cash and cash equivalents , ,8 7. Assets held for sale , ,2 Total current assets , ,1 Total assets

22 b. Structure of the Group equity and liabilities In the liabilities structure, a major decrease was observed in the value of short-term liabilities due to repayment of an investment loan by the Parent Company. The decrease in liabilities on this account was compensated for by settlements of PPA compensations received by EC Zielona Góra S.A. and recognised under deferred income. The higher provisions result from an increase in the CO 2 provision as a result of lower value of free allowances allocated to power generators. in PLN thousand EQ UITY AND LIABILITIES I. Equity 31 December 2016 % of balance sheet total 31 December 2015 % of balance sheet total current period current period previous period previous period 1. Share capital , ,2 2. Share premium , ,1 3. Other reserve capital , ,2 4. Retained earnings , ,1 Equity attributable to ordinary shareholders , ,6 Non- controlling interests , ,1 Total equity , ,7 II. Liabilities Non-current liabilities 1. Loans, borrowings and debt instruments , ,3 2. Employee benefit liabilities , ,5 3. Deferred income , ,6 4. Deferred tax liability , ,7 5. Other long-term liabilities , ,3 6. Long-term provisions , ,8 Total non-current liabilities , ,2 Current liabilities 1. Loans, borrowings and debt securities , ,1 2. Other short-term financial liabilities 117 0, ,0 3. Income tax liabilities , ,3 4. Trade and other payables , ,1 5. Employee benefit liabilities , ,6 6. Short-term provisions , ,0 Total current liabilities , ,1 Total liabilities , ,3 Total equity and liabilities Significant agreements concluded in 2016 A significant agreement within the meaning of the Finance Minister's Ordinance is an agreement or a sum of agreements whose total value over 12 months exceeds 10% of the own funds of KOGENERACJA S.A. On 7 January 2016, the Parent Company signed Annex 7 to the Agreement of the Participants in the Daily Limits Liquidity Management Agreement, Annex 5 to the Framework Agreement and Annex 6 to Agreement of the EDF Group Companies in Poland, as part of the cash-pool service agreement package (Current Report 1/2016). Changes concerned the following parameters: the cumulative debt limit was reduced from PLN 290 million to PLN 250 million; the cumulative excess limit was increased from PLN 120 million to PLN 300 million, and the value of guarantee under the Framework Agreement and the Credit Agreement was reduced from PLN 33 million to PLN 0. 22

23 8. Key domestic and foreign investments In 2016, the Group did not invest in any securities or shares in non-related parties, or in intangible assets or properties. 9. Related party transactions The key related party transactions completed in 2016 are presented in the Consolidated Financial Statements of KOGENERACJA Group for the year ended 31 December 2016: III Notes, Note 24 Related party transactions and in the Unconsolidated Financial Statements of KOGENERACJA S.A. for the year ended 31 December 2015: III Notes, Note 37 Related party transactions. Transactions between the Group companies are made and performed on an arm's length. 10. Loans incurred and terminated Specification of loan agreements as at 31 December As at 31 December 2016 in PLN thousand Contractual amount Interest rate CCY Date borrowed Balance Date due Credits ING Cash-pool WIBOR 1M % PLN Loans WFOŚ i GW Investment loan % PLN a. Loan agreements concluded in 2016 In 2016, the Group did not conclude any loan agreements. b. Loan agreements concluded in the previous years KOGENERACJA S.A. and EC Zielona Góra S.A. 1) Cash-pool - ING Bank Śląski S.A. On 25 June 2012, the following significant agreements were signed as part of the agreements package for the cash-pool system: Framework agreement Daily Limits Liquidity Management Agreement Agreement of the Participants in the Daily Limits Liquidity Management Agreement (Current Report 14/2012), amended by subsequent annexes on 7 January 2016 (Current Report 1/2016). The interest rate on the debit balance was set at a variable rate linked to the base rate 1M WIBOR + the bank's margin of 0.53%. The loan agreement is secured by a system of mutual guarantees described in point 10 Guarantees given and received. As at 31 December 2016, the debt on this account was PLN 0. 23

24 2) Loan from the Provincial Environmental Protection and Water Management Fund On 29 October 2013, the Company entered into a loan agreement of PLN 99,000 thousand with the Provincial Environmental Protection and Water Management Fund (WFOŚiGW) to subsidise the project Design and construction of an installation for desulphurisation of flue gases using the wet method in the lime and gypsum technology in EC Wrocław (Current Report 27/2013). The loan was drawn in tranches over a period ending in The loan started to be repaid in semi-annual instalments in June 2016 and will end in December Based on the annex signed on 23 May 2014, the interest rate on the loan tranches paid after 16 June 2014 was changed from 3.5% to 3%. The loan is secured by: - blank bill of exchange for PLN thousand - assignment of receivables from the electricity sale agreement with EDF Energia Sp. z o.o. (now EDF Polska S.A.) - statement of voluntary submission to debt enforcement under Article 777(1) (5) of the Civil Proceedings Code, up to PLN thousand. As at 31 December 2016, the outstanding balance was PLN thousand. 3) Investment loan from EDF Investissements Groupe SA On 1 August 2014, an investment loan agreement was signed to finance the project: Design, construction, start-up and commissioning of flue gas denitrification installation in EDF Polska S.A. and Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. (to be set up on the premises on EC Wrocław) (Current Report 30/2014). The interest rate on the debit balance was set at a variable rate linked to the base rate 3M WIBOR + margin of 1.2% and mandatory fees, if applicable. The loan was secured by: a) Transfer of rights to EDF Investissements Groupe SA: - rights from the CAR/EAR insurance policy - rights from the EPC agreement signed on 23 October 2013 between Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. represented by EDF Polska SA as the Employer and the consortium of Fortum Power and Heat Oy and Instal Kraków S.A. (including performance guarantee and other bank guarantees); b) Pledge on rights from the insurance policy against all risks connected with property damage and business interruptions; c) Mortgage up to PLN on perpetual usufruct of the properties located in Wrocław, recorded in the land and mortgage register under nos. WR1K/ /4 and WR1K/ /8 maintained by the District Court for Wrocław-Krzyki, IV Land & Mortgage Division (Current Report 34/2014); d) Ordinary and registered pledge on the shares of EC Zielona Góra S.A. owned by the Company (Current Reports 31, 32/2014); e) Notarized statement of submission to debt enforcement up to PLN As at 31 December 2016, the debt on this account was PLN 0. In 2016, the entire loan of PLN thousand was repaid. 11. Loans granted a. Loans granted in 2016 In 2016, the Parent Company did not make any loans to its subsidiaries. b. Loans granted to Directors of the Company In 2016, no loans were given to Directors (Management Board or Supervisory Board member) as part of the Company Social Fund. Management Board or Supervisory Board members. 24

25 12. Guarantees given and received a. Guarantees given On 25 June 2012, the Company granted guarantees for obligations of the entities covered by the cash-pool system. The value of the guarantees was more than 10% of the equity of KOGENERACJA S.A. In 2016, further annexes were signed, changing the structure of the companies participating in the cash-pool system and extending the terms of the respective agreements. ING Bank Śląski SA decided to waive the requirement for guarantees to be provided by all the companies for the obligations of EDF Polska S.A. under the Loan Agreement and limited the collateral under the Guarantee Line Agreement to the corporate guarantee of EDF Polska S.A. The following security items remain in place: a. Guarantee up to the maximum amount of PLN 77,000 thousand to ING Bank Śląski S.A. securing against default on the existing obligations, including in respect of the Daily Limits and interest on Daily Limits under the Daily Limits Liquidity Management Agreement, by the debtors the EDF Group companies in Poland, namely: - EDF Polska S.A. - EDF Paliwa Sp. z o.o. - EDF Toruń S.A. - EC Zielona Góra S.A. - FENICE Poland Sp. z o.o. - EDF Gaz Toruń Sp. z o.o. The guarantee remains valid until 31 August The total value of the obligations that are partly guaranteed by the Company is PLN thousand. The guarantee was given for a fee. According to the operating model of the cash-pool service, EDF Group companies in Poland will provide cross-guarantees to each other whereby cash transfers will be made. Any potential risks attached to the cash-pool guarantee system and a detailed specification of all guarantees given to subsidiaries were presented in the Unconsolidated Financial Statements of KOGENERACJA S.A. for the year ended 31 December 2016, III Notes, Note 35 Contingent claims and liabilities. b. Guarantees received In 2016, the Parent Company did not receive any guarantees (for loans or other), whose total value would exceed 10% of its equity. 13. Litigations In 2016, there were no litigations pending before any court, arbitration or administration bodies involving KOGENERACJA S.A. or its Group companies with any liabilities or receivables exceeding 10% of the Parent Company's equity. 14. Issue of securities As at 31 December 2016, the Company did not have any securities in issue. The Parent Company also did not capitalise its bond issue programme. 15. Financial results presented in the report vs. the published performance forecast Neither the Company nor the Group published any projections for

26 16. Assessment of financial resources management a. Elements of the consolidated statement of cash flows In 2016 and 2015, the Group s cash flows were as follows (selected data): in PLN thousand for the period from 1 January 2016 to 31 December 2016 for the period from 1 January 2015 to 31 December 2015 Change (value) Net cash from operating activities Net cash used in investing activities ( ) ( ) Net cash from financing activities ( ) ( ) Total net cash flows (4 204) Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year In 2016, the operating cash flows increased by PLN thousand compared with Operating cash flows increased as a result of higher net profit (up by PLN thousand), differences on adjustments (up by PLN thousand, including due to an increase in depreciation and a gain on fixed assets) and net current assets (up by PLN thousand). In 2016, cash flows from operations were negative, like in 2015, but the negative figure was by 43% lower than last year. The decrease resulted from lower spend on fixed assets due to continuation of the key investments: DeSo x and DeNo x installations at the Parent Company. Cash flows from financing activities were negative in 2016 (in 2015 they were positive at PLN thousand). The difference of PLN thousand was an effect of lower financial inflows (up by PLN thousand) and higher financial outflows (PLN thousand). In 2015, the Parent Company received another instalment of the investment loan of PLN thousand from the Provincial Environmental Protection and Water Management Fund (WFOŚiGW), and the Group received subsidies totalling PLN thousand, up by PLN thousand vs The higher financial expenses were mainly connected with repayment of the investment loan by the Parent Company to EDF IG SA (PLN thousand) and payment of dividend to shareholders (PLN thousand in 2016 vs. PLN 0 in 2015). In 2016, net cash flows were positive and amounted to PLN thousand. In 2015, the value was positive at PLN thousand. Financial management in 2016 allowed the Group to balance its cash flows, i.e. to use its operating cash flows to cover investment and financial expenses. b. Liquidity ratios of the Group As at 31 December 2016 As at 31 December 2015 Change (%) Current liquidity 1,59 1,47 9 Quick liquidity 1,28 1,07 19 Current liquidity ratio increased by 9% and quick ratio increased by 19% as a result of a decrease in short-term liabilities (bullet repayment of the investment loan from EDF Investissements Groupe SA by the Parent Company), a decrease in Parent Company s inventories (coal stock) as a result of working capital optimisation and a decrease in receivables of the subsidiary due to lower gas compensation. 26

27 III. Investments and development in the Group 1. Assessment of investment capacity a. Key investments in the Group in 2016 Tangible investments in the Group are focused on development, including environmental protection, modernisation and replacement of fixed assets. The purpose of external investments is to acquire new energy markets, strengthen the market position and increase production capacity. In the Parent Company's opinion, there are no obstacles that would prevent the Group from delivering its investment plans or make this task difficult. The planned spend is secured by own cash from different sources: own funds of the companies, the cash-pool system for the EDF Group companies in Poland, the loan from WFOŚiGW (National Environmental Protection and Water Management Fund) and subsidies from the NFOŚiGW (National Environmental Protection and Water Management Fund in Warsaw). In 2016, the Group spent PLN thousand on the purchase of intangible and tangible fixed assets (compared with PLN thousand in 2015). Below are the key capital expenditures of the Group spent or continued in 2016 and for the period from 1 January 2016 to 31 December 2016 for the period from 1 January 2015 to 31 December 2015 KOGENERACJA S.A Internal investments External investments EC Zielona Góra S.A Total capital expenditures b. Internal investments These investments are aimed at phased replacement of decapitalised production assets as well as their modernisation. In 2016, a major portion of the overall spend was used to continue the adaptation of the boilers in EC Wrocław to the new SOx and NOx emission standards: adaptation of the boilers in EC Wrocław to new SO 2 emission standards (PLN thousand) - contractors: consortium of Rafako PBG; adaptation of boilers in EC Wrocław to new NOx emission standards (PLN thousand) - contractors: consortium of Fortum Power and Heat Oy/Instal Kraków S.A. Other key initiatives completed in 2016 include: modernisation of selected auxiliary facilities at EC Wrocław and EC Czechnica capitalised overhaul of the K-1 boiler in EC Wrocław capitalised overhaul of mill installations on K-3 boiler in EC Wrocław capitalised overhaul of the mill installations at EC Czechnica capitalised overhaul of the K-2 boiler in EC Czechnica capitalised overhaul of the K-4 boiler in EC Czechnica replacement of corner burners on the K-3 boiler in EC Czechnica.. 27

28 In 2016, as part of a comprehensive modernisation at EC Zielona Góra S.A. 22 heating 22 heat stations were upgraded, 78 heat stations and 3 local boiler plants were renovated. A comprehensive upgrade was carried out on 4 chambers and selected sections of the heating network of meters. 31 new connections were made to the heating network, constructing hot water pipelines of meters. In addition, a concept and technical documentation was prepared for the tasks to be completed as part of the Integrated Territorial Investments in The investments delivered in 2016 were mainly financed from the Company's own funds and partly from external sources, including: subsidy from the National Environmental Protection and Water Management Fund and an investment loan from EDF Investissements Groupe SA towards flue gas denitrification installation in EC Wrocław for boiler no. 3 preferential loan from Provincial Fund for Environmental Protection and Water Management to fund the design and construction of the installation for wet flue gas desulphurisation using the lime & gypsum technology at EC Wrocław cash-pool system. A detailed description of the subsidies received is presented in the Consolidated Financial Statements of KOGENERACJA Group for the year ended 31 December 2016: III Notes, Note 29 Deferred income. c. Internal investments planned in the Group for 2017 Other key tasks planned for 2017 include: adaptation of boilers in EC Wrocław to the new NOx emission standards modernisation of the compressor facility in EC Wrocław demolition of the H-120 chimney at EC Wrocław capitalised overhaul of the mill installations at EC Czechnica. The investments to be delivered in 2017 will also be financed from the Company's own funds and from external sources, including: subsidy from NFOŚiGW and an investment loan from WFOŚiGW towards the flue gas desulphurisation installation. d. External investments KOGENERACJA S.A. delivers external investments with regard to new connections to the Wrocław heat network, which are aimed to increase the heat market and result from the Company's strategic goals. Both KOGENERACJA S.A. and EC Zielona Góra S.A. deliver external investments with regard to new connections to the Wrocław and Zielona Góra heat network, respectively, which are aimed to expand the heat market, and result from the companies strategic goals. Also, the Parent Company makes investments into development of own network and connection of new buyers in Siechnice. In 2016, new buyers were connected to the heat network and a total power of MW t was provided to them (compared with 19,3 MW t in 2015): MW t in Wrocław, 27 heat stations in Wrocław (8.93 MW t ), through construction of own heat stations for heat buyers funded from the Company's own funds and heat stations financed by buyers themselves, including 5.92 MW t in the primary market and 3.64 MW t in the secondary market. At the same time, in Siechnice and Święta Katarzyna, 9 heat stations with a total capacity of 3.15 MW t were built and connected to the Company's own heating network. New capacity of 7.08 MW t was delivered in Zielona Góra. e. External investments planned in the Group for 2017 In 2017, new connections will be continued. KOGENERACJA S.A. plans to connect 37.2 MWt and EC Zielona Góra S.A.6.65 MWt. f. Equity investments In 2016, KOGENERACJA S.A. did not make any equity investments. 28

29 2. Events with significant impact on the Group's activities 1) Events significantly affecting the Group activities in the financial year In 2016, the following events significantly affected the Group s business: favourable weather conditions that caused heat and electricity production to grow year-over-year reduction in the number of free-of-charge CO 2 emission allowances in the period of , and the need to purchase the missing allowances launch of the desulphurisation and denitrification installations. 2) Events significantly affecting the Group's activities after the end of the financial year until approval of the financial statements Events significantly affecting the Company's activities after the end of the financial year until approval of the financial statements: 18 January 2017 saw termination of the exclusive agreement for negotiating the sale of cogeneration assets of EDF Group in Poland, signed between EDF and IFM Investors (Current Report 1/2017) 27 January 2017 saw the signing of a Memorandum of Understanding between EDF International ( EDFI ) and PGE Polska Grupa Energetyczna S.A., ENEA S.A., Energa S.A. and PGNiG Termika S.A. concerning negotiations repurchase of assets of EDF International in Poland, including the Issuer s shares, by the above companies (Current Report 3/2017) 14 February 2017 was the end of the collective dispute re increase in salaries in 2016 (Current Report 4/2017), 6 March 2017, the Management Board of the Dominant Company presented a declaration regarding distribution of profit, with PLN thousand to be allocated to dividend (6.58 PLN per share) and PLN thousand to reserves (Current Report 5/2017). 3. Assessment of factors and extraordinary items affecting the Group's performance in 2016 In 2016, there were no unusual events that would affect the Group s activities. 4. Internal and external factors affecting the Group's development a. External factors 1) Downward trend in the consumption of heat and the sale of electricity As KOGENERACJA S.A. produces electricity energy in association with heat, stability of the volume of heat bought by customers is of key importance in the context of production. This is seen as a challenge due to the continuous investments in the insulation of buildings and the implementation of energy-saving technologies by buyers. In 2016, new connections of MW t (12.35 MW t in 2015) were made in Wrocław and Siechnice, with 6.08 MW t (6.95 MW t in 2015) in Zielona Góra. 29

30 2) Trading in emission allowances The free allocation of CO 2 emission allowances takes place under the National Plan of Distribution of Emission Allowances in accordance with the Ordinance of the Council of Ministers of 13 April 2015 on the list of installations that produce electricity and the Ordinance of 10 April 2015 on the list of installations other than those that produce electricity. The key condition for receiving the free allowances is to complete the investments included in the National Investments Plan and use the related expenditures to settle the allowances granted. The number of allowances granted may be lower than what is stipulated in the Ordinance. This happened in the settlement for 2015, when the Company received, in April, allowances for electricity, amounting to Mg, which was lower than provided for under the Ordinance of 2014 ( Mg). Based on the ordinance covering the years , the limit approved for the Company for 2016 is Mg, but based on the value of capital expenditure that pre-conditions the receipt of the allowances, the estimated free allowances are Mg, and the free CO 2 emission allowances for the production of electricity and heat, as estimated by the Company are Mg and Mg, respectively (limit for 2015: Mg; for 2014: Mg, for 2013: Mg; for 2012: Mg): CO 2 emissions in 2016: Mg annual emission entitlement Mg balance of 2016 after final settlement (shortfall) Mg forward transactions (net) contracted for March Mg The limit approved for EC Zielona Góra for 2016 was Mg, including free allowances for CO 2 emissions solely for the production of heat Mg (limit for 2015 was Mg; for 2014: Mg; for 2013: Mg and for 2012: Mg CO 2, according to KRPU II): CO 2 emissions in 2016: Mg annual emission entitlement Mg balance of 2016 after final settlement (shortfall) Mg forward transactions contracted for March Mg In accordance with the existing accounting policy, the Group created a provision for the shortage of CO 2 for a total amount of PLN thousand (in 2015: PLN thousand), including the Parent Company of PLN thousand (in 2015: PLN thousand) and the subsidiary of PLN thousand (in 2015: PLN thousand). 3) Situation of the energy sector In 2016, the situation in the electricity market was affected by the following external factors: - Demand for electricity The demand for electricity in the National Energy System (KSE) was stable and comparable to the previous year. The key factors affecting the demand for electricity included: the sustained level of industrial output and lower air temperatures in the first quarter of 2016 vs. previous years; also, electricity production from wind farms had a pronounced impact on the electricity market. December 2016 was special in that it saw an oversupply of electricity due to high generation from wind farms (a period of high windiness) coupled with a limited demand from buyers during the Christmas period. 30

31 - Electricity prices The period of low electricity prices has continued, driven by: low valuation of CO 2 certificates, growing power generation from the renewable energy sources (an increase in installed capacity of wind farms) and increased possibilities of electricity imports. - Prices of green and red certificates In 2016, the prices of green certificates decreased. The main reason for the situation was the decrease caused by an oversupply of certificates in the market from previous years and an increased supply of certificates of energy from wind farms. Another factor driving reduction of certificates value was uncertainty about legal developments due to delays in implementation of a new act on renewable energy sources and implementation of an auction system. In the case of red and yellow certificates for electricity produced in high-efficiency cogeneration, the support mechanism put in place in 2014 was continued. However, due to the fact that the substitution fee for red certificates was set at a minimum level and given the lack of solutions extending the existing system of cogeneration support after 2018, the prices are not sufficient to create an economic environment that would encourage new investments into cogeneration units. b. Internal factors The overarching objective of KOGENERACJA S.A. will be to achieve high profitability at the level expected by the shareholders, acting in line with Company's mission statement. 1) Strategy of KOGENERACJA S.A. Early in 2015, the Management Board of KOGENERACJA S.A. started work on the Strategy of KOGENERACJA S.A. for The document was approved by the Management Board on 4 May 2015 and on 21 May 2015 the Supervisory Board adopted a resolution accepting the Strategy as proposed by the Management Board. In accordance with the Strategy, the Company s overarching objective will be, now as before, to achieve high profitability as expected by the shareholders. Accordingly, in 2016 the Company continued delivery of its strategic objectives adopted in 2015, namely: 1. To develop safety culture 2. To secure the Company s future in the long-term perspective 3. To increase the competitiveness of assets and to limit the environmental footprint of the generation process 4. To develop the market and sales, including to end customers 5. To ensure the expected profitability 6. To be the preferred partner for the city of Wrocław and the region s authorities 7. To develop the organisation and its competences in accordance with the corporate social responsibility of EDF Group. These strategic objectives, translated into specific operational objectives, were brought together in the detailed Operational Plan of KOGENERACJA S.A. for In accordance with the idea of Management by Objectives continued by the Company, progress vs. strategic objectives is monitored and assessed by regular analysis of performance of the tasks allocated to individual Management Board members and cascaded down to operational managers. 2) Occupational Health & Safety The Company's priority is to reduce accidents at work to zero. The measures adopted to this end include constant raising of the safety culture among the employees of KOGENERACJA S.A. and its subcontractors working on the Company's premises, e.g. through delivery of the H&S Improvement Plan and its resulting organisational and technical actions. In 2016, the Company continued the campaign titled Use Your Head at Work (Pracuj z głową), which is a part of the Partnership for Safety project, as part of which working teams join efforts to elaborate a common safety culture to be equally high among employees and contractors. In 2016, one accident at work happened at one of the Company s subcontractors, and there were zero accidents among employees (in 2015: two accidents among employees and two among subcontractors). 31

32 3) Management by Objectives MBO In 2013, KOGENERACJA S.A. introduced the Management By Objectives Instruction MBO, which linked the objectives contracts supporting the Strategy with the periodic staff performance evaluation system. The document also specifies how the progress vs. objectives is assessed and how the weights allocated to the individual tasks are measured. Early in 2016, detailed MBO Contracts were signed between the Managing Director and the individual Operational Directors. The tasks set out in the MBO Contracts for 2016 resulted directly from the strategy of KOGENERACJA S.A. Further on, the tasks covered by the Contracts for the Operational Directors were cascaded down to the Unit Managers, who also signed MBO contracts in accordance with the method set out in the MBO Instruction. 4) Integrated Permits, environmental decisions In 2016, there were no changes to the existing integration permits. In August 2016, new decisions were received re permits for greenhouse gases emissions. The obligation was imposed by the Act of 12 June 2015 on the system of trading in greenhouse gases. Due to the expiry of the water and legal permit for EC Wrocław for discharging into the municipal network industrial wastewater containing substances that are particularly hazardous to the water environment, in October an application was made for a new decision in this regard for the time being, the proceedings are still under way. In June 2016, auditors from the Polish Centre of Research and Certification conducted an audit to renew the certificate. The audit ended with a positive outcome 5) Integrated Management System KOGENERACJA S.A. holds the Integrated Management System certification, covering three systems: 1. Quality Management System compliant with standard PN-EN ISO 9001: Environmental Management System compliant with standard PN-EN ISO 14001: Health and Safety Management System compliant with standard PN-N 18001:2004 and OHSAS 18001:2007. On April 2016, auditors from the Polish Research and Certification Centre (PCBC) conducted an audit at KOGENERACJA S.A. concerning renewal of the Integrated System for Quality, Environment and Health & Safety Management. The Integrated Management System Certificate issued by PCBC in Warsaw is valid until 15 September 2018, and the certificate for Quality Management System and Environmental Management System and for the Health and Safety Management System until 5 May ) Employment policy In 2013, new support programmes were adopted with a view to employment restructure: the Individual Terminations Programme, the Time to Retirement Programme, the Early Retirement Programme, the Staff Transfer Programme, the Worktime Reduction Programme and the Retirement Terminations Programme. In 2016, the Parent Company hired 9 persons: 3 chemical lab workers and 6 boiler maintenance specialists. In 2016, these Support Programmes were used by 35 persons: 19 in the Parent Company and 16 in EC Zielona Góra S.A. 7) Synergies in the EDF Group In search of synergies in its companies, the EDF Group set up the Shared Services Centres (CUW) in Kraków (now EDF Polska S.A.). Since 1 July 2010, the Centre has been providing services for all EDF Group companies in Poland in the area of Engineering, Procurement, Logistics, Finance and IT; since 2011: in the area of HR, Internal Audit and R&D and since in the area of Telecommunication and Administration. In 2013, the Communication area was transferred to EDF Head Office and the Overhauls area to CUW Engineering. 32

33 Due to the need to coordinate actions relating to the ash removal, the then subsidiary Renevis Sp. z o.o. (now EDF Ekoserwis Sp z o.o.) took over the Ash Removal Area and started providing comprehensive services in this domain to EDF Group in Poland. In 2014, the Coal Handling Area within the Technical Directorate, was transferred to EDF Ekoserwis Sp. z o.o. 8) Development of staff competencies In 2015, the average days of training per employee were 3.0 (4.0 in 2015). In 2016, a total of 7.9 thousand training hours were delivered (11.5 thousand in 2015). Ready for the Future the training programme has 107 participants. The training agenda is closely adjusted to the training needs of the training participants and the prospective organisation structure of the Company. In 2016, additional two training sessions were organised for Duty Operating Engineers and Masters, attended by employees from EDF Poland Group. The purpose of the training was to get management personnel acquainted with the production support processes (economics of production, KPIs, etc.) and to promote bonding between individual locations. Summer Development Academy the purpose of the project, started four years ago at EDF Group, is to ensure that the Company s employees have a better understanding of the subjects that they usually cannot develop sufficiently during the year due to lack of time, but which are essential in daily work, including: IT training, influencing and presentation techniques, assertiveness, self-motivation, life energy management in stress situations or business presentations. The development of management and expert skills was reinforced through a programme of versatile trainings in EDF Group. 5. Sustainable development and social responsibility Sustainable development is a philosophy that promotes combination of satisfactory trading performance with a profound care about social and natural environment. NATURAL ENVIRONMENT a. Finalised key environmental investments At the end of 2015, EC Wrocław launched the flue gas desulphurisation installation. The project substantially improved the quality of air and is expected to ensure long-term safety of energy supplies for the Lower Silesia. Thanks to the desulphurisation installation, the emissions of sulphur oxides were reduced five times, while the flue gas denitrification installation helped reduce the emissions of nitrogen oxides by three times. b. Actions promoting biodiversity Together with external institutions, KOGENERACJA delivered the following initiatives in the area of environmental education: The programme titled Connecting Wrocław s historical buildings to the heating network under the KAWKA programme. KAWKA is a programme funded by the National Fund for Environmental Protection and Water Management (NFOŚiGW) and local authorities that seeks to eliminate low emission sources and improve air quality in Wrocław. Under the programme, KOGENERACJA promoted the projects of connecting buildings to the heating network. KOGENERACJA also promoted network heat as the best alternative to coal-fired furnaces and disseminated knowledge about the negative effects of such emissions, including via trainings for building managers, meetings with housing communities and participation in events organised in the Nadodrze residential district (where the EC Wrocław is located and where there are many buildings that use solid fuel furnaces). Continuation of cooperation with the Lower Silesian Ecological Club (lessons on environmental protection in Wrocław's primary and lower secondary schools, ecological workshops for school students devoted to the environmental aspects of network heat, co-organisation of the Ecological Competition for students from Wrocław s lower secondary schools). 33

34 c. Cooperation with housing cooperatives to obtain white certificates In 2016, KOGENERACJA continued initiatives to improve energy efficiency of own properties and properties owned by the end buyers of heat. For the initiatives submitted in response to tender No. 1/2015 of the President of the Energy Regulatory Authority (URE), the Company received 22 energy efficiency certificates for a total value of toe (tonnes of oil equivalent), including toe for a initiative completed on the Company s own assets. The completed initiatives included: upgrade of heating networks, change in local low-efficiency heat sources with modern heating systems and replacement of old, low-efficiency heat stations. 30 September 2016 saw expiry of the Energy Efficiency Act of 15 April 2011 and on 1 October 2016 a new Energy Efficiency Act of 20 May 2016 came into force. In cooperation with the customers of KOGENERACJA S.A., there were 19 bids prepared in response to tender No. 1/2016 announced by the President of the Energy Regulatory Authority. The total value of the bids is toe, including 59 toe for the initiatives completed on own assets. The scope of the energy saving initiatives included: upgrade of heat network and pipelines; insulation of buildings; modernisation of the industrial plant; replacement of low-efficiency heat substations and replacement of local low-efficiency heat sources with modern heat stations. SOCIAL ENVIRONMENT The Company's social responsibility follows the principles of Sustainable Development and is embodied by the EDF Group Values: Respect, Responsibility and Solidarity. Respect We take pre-emptive steps and social measures to support the planned restructures We prepare ourselves for the so-called generation shift: Ready for the Future We gauge social moods (the My EDF survey) We cooperate with four representative Trade Unions We carry out the annual work quality assessment that is the basis for the Annual Training Plan We finance the Employee Pension Scheme We co-finance the activities of the Association of Seniors, retired employees of KOGENERACJA S.A. We get employees and retired employeed engaged in organisation of the Open Door Days We cooperate with the KARAN Association in Wrocław as part of the programme of assisting the persons who have problems with abuse of psychoactive substances. Responsibility We maintain the highest Health & Safety Standards by means of: - awareness-raising programmes for employees, subcontractors and guests - on-site management visits - daily Safety News - nominating the Safe Employee of the Quarter/Year at the Company - promoting the OSHA Campaign. We promote healthy lifestyle among employees, including by: - offering a package of additional medical services (as part of the tripartite cooperation between the insurer, medical centre and KOGENERACJA S.A.) - Sports and Travel Association; - health activities as part of the Healthy EDF initiative. We plan and ensure security of electricity and heat supplies We act for improvement of air quality in Wrocław the KAWKA programme (replacement of furnaces with network heat) We educate the local communities by sweeping communication campaign re our environmentally-healthy production, by: - Open Doors Days visits to the production plants available to wide public combined with ecological education; 20th edition held on September 2016 attracted persons to EC Wrocław - workshops for secondary school students in cooperation with the Lower Silesian Ecological Club - Date on the Chimney competition organised together with Radio Wrocław - presence in the Wrocław edition of the Monopoly board game - contributing to the NieMapa, a Wrocław city guide for families. 34

35 Solidarity We counteract social (energy) exclusion by means of the following initiatives: - Programme of Assistance to Socially Sensitive Buyers*; - support for the SIEMACHA Association that works with youth from socially sensitive communities; - energy and educational patronage over the 2 Social Therapy Centre for Youth in Wrocław, in cooperation with the Open Mind Foundation (Slow Food on the Plate culinary workshops, ReDesign - sowing workshops; workshops in computer design basics); - Józef Pupka foundation support for poor, gifted students. We help people with disabilities to be active: - educating children in Wrocław s schools in cooperation with the L Arche Foundation staging puppet performances dealing with the issue of disabilties. In 2016, there were 140 performances held at schools, pre-schools and education centres for 4.7 thousand children from Wrocław. - patronage over the the International Wheelchair Tennis Tournament: Wroclaw CUP in 2016, the 20th edition of the tournament took place. We help local communities to be active: - support for the European Capital of Culture 2016 active participation from the Company s employees in the opening ceremony: Innovation Spirit Parade; - partner for the MicroGrants ESK 2016 project special edition titled Share the Energy ; Solidarity of employees: - Club of Honorary Blood Donors Kropelka at KOGENERACJA S.A. (4 campaigns, about 45 litres of blood collected, 45th anniversary celebrated in 2016), - charitable initiatives by employees, targeted at local beneficiaries. * Programme of Aid for Socially Sensitive Customers for the residents of Wrocław and Siechnice. The basis of the programme is the agreements with the authorities of Wrocław and the Siechnice Municipality signed in KOGENERACJA S.A. supports its customers in paying their heat bills. The programme is addressed to persons in difficult financial conditions and to care and educational facilities that have heat purchase contracts with the Wrocław-based heat producer. The distribution of funds is decided by the local Social Aid Centres. a. Code and Board of Ethics In 2004, the Company established a Board of Ethics, comprising representatives of the Company's personnel. The Board operates outside the formal structures and its members are not remunerated. The role of the Board of Ethics is to promote ethical attitudes and behaviours among employees based on an internal Collection of Ethical Rules and Values of KOGENERACJA S.A. In 2013, the Management Board of KOGENERACJA S.A. adopted the Code of Ethics of EDF Group Poland as equivalent to the existing documents in this area. Furthermore, the Company introduced the Corruption and Fraud Prevention Policy and Anti-Mobbing Rules. b. Respect Index On 14 December 2016, the Warsaw Stock Exchange announced the new list of socially responsible companies. For the seventh time, KOGENERACJA S.A. found itself among the most responsible companies listed on the Warsaw Bourse. c. Other initiatives The Company was among the 41 companies awarded by the Polityka weekly with the White Leaf of CSR, in the fifth ranking of socially responsible companies published in The award is conferred on the companies that declare implementation of all the key management categories recommended by ISO and constantly improve their operations in this regard to manage the impact of their organisations more effectively. In 2014, KOGENERACJA S.A. joined the UN Global Compact, and thus undertook to support, adopt and apply, in all areas of its activity, human rights, work standards, environmental protection principles and anti-corruption policies. 35

36 6. Sponsoring and corporate giving The sponsoring and corporate giving activities of KOGENERACJA S.A. have a positive influence on the local community and build the Company s image as a socially responsible institution that operates in accordance with its Sustainable Development Policy, its ethical value and the values of EDF Group, such as: Respect, Responsibility and Solidarity. Assumptions and goals of the sponsoring and corporate giving activity The sponsoring and corporate giving activities of KOGENERACJA S.A. focus on the following areas: Providing support for vulnerable groups network heat buyers, i.e. those who are in a difficult financial situation Protecting and promoting health Supporting the education of gifted youth, particularly persons in a difficult financial or life situation Promoting a healthy and active lifestyle Encouraging the community of disabled persons Other promoting the activities of elderly people, acting as a culture and arts sponsor in the region. Beneficiaries The beneficiaries primarily include the public service entities from the Lower Silesia, mainly from Wrocław and the surrounding municipalities - especially in the locations where the Company carries on its production activity. We provide support only to legal persons. Regulations As per paragraph 17(5)(7) of the Company s Articles of Association, the Management Board prepared an annual donations plan that is adopted by way of a resolution. Next, the Company s Management Board applies to the Supervisory Board for signing off on the donations plan. Each donation made on behalf of the Company requires a resolution of the Management Board (as per paragraph 12(2)(12) of the Company's Articles of Association) and where the donation is higher than PLN 100 thousand it must be also approved by the Supervisory Board (at the request of the Company's Supervisory Board). 7. Diversity policy Promoting diversity includes any forms of activity designed to accept and effectively use diversity in the organisation, namely differences in such aspects as: gender, age, origin, skills, appearance, religion, opinions, sexual orientation, disability or work-life balance. By promoting the idea of diversity KOGENERACJA S.A. wishes in particular to draw its employees attention to the following four issues: 1. gender equality 2. age diversity at work 3. work-life balance 4. professional integration of the disabled. The purpose of diversity management is to create a working environment that will be conducive to professional and personal development, building an atmosphere of respect and tolerance for diversity, thus contributing the effectiveness of the organization and its capacity for innovation as well as being a response to the Company's CSR mission. The Company undertakes actions aimed at selected employee groups: EDF Group created the Interp elles Women s Network, which is aimed at supporting professional development of women in the organisation through: a cycle of specialist upskilling training courses and conferences; The Company adopted the rule of promoting diversity in its recruitment process; project Ready for the future as a response to generational replacement in the Company; Healthy EDF - building a community that promotes initiatives that favour health and work-life balance. 36

37 Emissions in Mg KOGENERACJA S.A. - Management Board s Report on the Group Activities in 2016 The Company s approach to the question of diversity is communicated both internally and externally: KOGENERACJA S.A. is a signatory of the Diversity Charter, an international initiative promoted by the European Commission, which imposes an obligation on the organisations to operate a policy of equal treatment and diversity management, to ensure equality of access to promotions and training courses and to actively counteract discrimination and bullying at the workplace; issuing the Practical diversity management guide for managers; conducting a campaign devoted to stereotypes about gender, disabilities and access to promotions; annual celebrations of the Diversity Day in EDF Group; reviewing the corporate social responsibility agreement of EDF in cooperation with the Company s trade unions (an annual exercise); implementing a process of monitoring and reporting by age, gender, employment, education and salaries; issuing Anti-bullying Rules, held training for managers, Management Board members and Ethics Council members on the idea of bullying-free work environment; promoting physical activity, work life balance, stress prevention, healthy eating habits under the Healthy Spring and Health Week programmes; organising conferences and training courses; issuing the Four Pillars of Female Success as part of the Interp elles Women s Network of EDF Polska S.A. 8. Environmental protection KOGENERACJA S.A. produces electricity and heat in a co-generation system, thus contributing to a fuller use of chemical energy of fuel and reduction of environmental pollution. The Company's underlying principle is Sustainable Development, a philosophy that promotes combination of satisfactory trading performance with a care about social and natural environment. Actual emissions in 2016 and 2015, and permitted emissions in KOGENERACJA S.A SO2 NOx Dusts Actual emissions in 2016 Actual emissions in 2015 Permitted emissions in 2016 Concentration of pollutants at KOGENERACJA S.A. in 2016: SO 2 concentration was 47% lower than in 2015 and 67% lower than the permitted value NO x concentration was 25% lower than in 2015 and 39% lower than the permitted value Dust concentration was 19% lower than in 2015 and 67% lower than the permitted value. 37