MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF KOGENERACJA S.A. AND KOGENERACJA GROUP

Transcription

1 MANAGEMENT BOARD S REPORT ON THE ACTIVITIES OF KOGENERACJA S.A. AND KOGENERACJA GROUP

2 Table of contents I. Group profile Legal basis Group characteristics KOGENERACJA Group Employment... 8 II. Key production and financial figures Suppliers of KOGENERACJA Group Key products and services and buyers of KOGENERACJA Group Key products Key financials of KOGENERACJA Group 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

3 11. Description of key risks and threats Changes in the key principles of the Company and Group management 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 Management Board, Supervisory Board principles of operation of the governing bodies 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 Tender offer for the shares of KOGENERACJA S.A. announced by PGE S.A swig80 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 Statement on disclosure of non-financial data Introduction I. Management area Business model Group structure Certified management systems Risk management Key non-financial performance indicators relating to the operations of KOGENERACJA Group

4 II. Environmental area Policy and area management Environment Fuels, energy and other raw materials Emissions to the atmosphere Waste III. Social and work area Occupational health & safety Work area policies and management Relations with trade unions Development and education Employment level Diversity management Corruption prevention and human rights Local communities and social commitment

5 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 Journal of Laws no. 121 item 591, ( 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 (EC Wrocław), located in Wrocław at ul. Łowiecka 24 Czechnica Heat and Power Plant (EC Czechnica), located in Siechnice near Wrocław Zawidawie Heat and Power Plant (EC Zawidawie), located in the southern part of Wrocław, Psie Pole district. The plants have a total electric capacity of MW and heat capacity of MWt, which puts them in the top position among 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. 5

6 3. KOGENERACJA Group a. Ultimate parent As at 31 December 2017, KOGENERACJA S.A. and its subsidiary EC Zielona Góra S.A. were companies consolidated line-byline by PGE Energia Ciepła S.A. and its ultimate parent PGE Polska Grupa Energetyczna S.A. (PGE S.A.) with its registered office in Warsaw. PGE S.A. PGE Group is the largest vertically integrated producer and a leading supplier of electricity in Poland. The parent entity of PGE Group is PGE Polska Grupa Energetyczna S.A. (PGE S.A.) a company listed on Warsaw Stock Exchange. The activities of PGE Group are currently grouped into five segments: Conventional Generation, i.e. extraction of lignite, production of electricity and heat from conventional sources as well as transmission and distribution of heat. The Conventional Generation segment includes PGE Energia Ciepła S.A., Renewable Energy, i.e. electricity generation from renewable sources and in pumped-storage power plants, Supply, i.e. trading of electricity across the country, wholesale trading of electricity on domestic and international market, provision of services to companies from the PGE Group related to commercial management of generation capacities of the Group and electricity produced, as well as trading of CO 2 allowances and energy certificates and fuels, Distribution, i.e. supply of electricity to final off-takers though the grid and HV, MV and LV infrastructure, Other operations include services, through the subsidiaries, to PGE Group, which includes organisation of capital raising projects and provision of IT, telecommunications, payroll and HR services. Its activities also include subsidiaries formed to prepare and implement a project to build a nuclear power plant, invest in start-ups and build an electromobility system. EDF S.A. Until 13 November 2017, the ultimate parent was EDF S.A. with its registered office in France. EDF S.A. is an integrated enterprise, with a 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. 6

7 Subsidiary - consolidated Associated companies - not consolidated Management Board s Report on the Activities of KOGENERACJA S.A. and KOGENERACJA Group in 2017 b. Group structure The parent of KOGENERACJA Group is Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. with its registered office in Wrocław, an entity listed on Warsaw Stock Exchange. The Group includes a subsidiary EC Zielona Góra S.A. with its registered office in Zielona Góra (KOGENERACJA S.A. has a 98.4% in its share capital and voting power). Chart: Graphical structure of KOGENERACJA Group As at 31 December 2017 KOGENERACJA S.A. 98,4 % EC Zielona Góra S.A. PGE Paliwa Sp. z o.o. PGE Energia Ciepła S.A. LEGEND: Shares of KOGENERACJA S.A. PGE Energia Ciepła S.A. and PGE 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 2017, included one subsidiary in its consolidated financial statements: EC Zielona Góra S.A. (full consolidation). d. Subsidiaries Table: Share in the share capital of the subsidiary and the nominal value of the shares held by KOGENERACJA S.A. As at 31 December 2017 and 31 December 2016 Share capital Number of shares (pcs.) Nominal value of a share (PLN) No. of shares held by KOGENERACJA S.A. (directly) Number of shares (pcs.) Nominal value of shares (PLN) % 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, and produces and distributes heat. 7

8 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 MWt, 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 2017, KOGENERACJA S.A. did not have shares in other connected companies. g. Activities of the other connected entities PGE Paliwa Sp. z o.o. The company s activities include acquisition and supply of fuel (coal and biomass) for all branches of PGE Energia Ciepła S.A. and its subsidiaries, as well as supply of sorbents for the installation of desulphurisation of flue gases, mazut and light oils. The company also sells coal to external customers. In addition, it offers logistics services contracted with the largest logistics firms in Poland. PGE Energia Ciepła S.A. PGE Energia Ciepła S.A. is a producer of combined (cogenerated) electricity and heat. It supplies heat to: Kraków, Gdańsk and Gdynia (Branches of PGE Energia Ciepła). PGE Energia Ciepła also owns a baseload coal-fired power plant in Rybnik (Branch of PGE Energia Ciepła) and subsidiaries: PGE Toruń heat and power plant, and a heat and power plant in Zielona Góra, which have heating networks in Toruń and Zielona Góra. The company also has service-providing subsidiaries: PGE Paliwa, which purchases and supplies production fuel, and PGE Ekoserwis, which manages combustion waste and provides other comprehensive services (in the area of coal handling, ash removal and landfill management) to CHP and power plants. In addition, PGE Energia Ciepła trades in electricity generated by the plants owned by PGE Energia Ciepła. PGE Energia Ciepła also sells engineering services and electricity to business customers. h. Changes in the Group structure In 2017, no changes took place in the Group structure. i. Equity investments within the Group In 2017, no equity investments were made within KOGENERACJA Group. j. Other equity investments As at 31 December 2017 and 2016, KOGENERACJA Group did not have shares in other companies. 4. Employment As at 31 December 2017, the employment in the Parent Company was 356 persons, including 53 women and 303 men (as at 31 December 2016, there were 347 persons working for the Company, including 52 women and 295 men). The employment decrease in the period of was an effect of an 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 in Kraków, which provided services to the EDF Group, Poland (now PGE Energia Ciepła S.A.). 8

9 No. of employees Management Board s Report on the Activities of KOGENERACJA S.A. and KOGENERACJA Group in 2017 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 PGE Ekoserwis Sp. z o.o.) while Internal Communication was transferred to EDF Polska S.A. (now PGE Energia Ciepła S.A.). In 2014, the Coal Handling Area was transferred to EDF Ekoserwis Sp. z o.o. (now PGE Ekoserwis Sp. z o.o.). Chart: Employment in The decrease in employment in the Group is a result of 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 in Kraków in 2010, 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. Chart: Employment in the Group in Year 9

10 II. Key production and financial figures 1. Suppliers of KOGENERACJA Group Table: Key suppliers within the Group and the products supplied SUPPLIERS PRODUCTS/SERVICES BUYERS PGE Paliwa Sp. z o.o. ORLEN Południe S.A. PGNiG S.A. OT Logistics PGE Energia Ciepła S.A. PGE Ekoserwis Sp. z o.o. PGNiG S.A. PGE Energia Ciepła 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 cogeneration, 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 2017, the Group s main buyer was PGE Energia Ciepła S.A., an intermediary in the sale of electricity and energy certificates. Table: Products/services of the Group companies divided into buyers in the domestic market SUPPLIERS PRODUCTS/SERVICES BUYERS % of income KOGENERACJA S.A. heat domestic-local market Fortum Wrocław S.A. 92,7% heating network in Siechnice 7,0% other buyers 0,3% electricity domestic market PGE Energia Ciepła S.A. 99,9% final clients 0,1% EC Zielona Góra S.A. electricity domestic market PGE Energia Ciepła S.A. 36% PSE-Operator S.A. 1% TGE S.A. 63% heat (production and distribution) domestic-local market multifamily residential development 70% public utility buildings 26% industry 4% 10

11 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. Table: KOGENERACJA S.A. - Product sales volume in 2017 and 2016 Unit to 31 December 2017 to 31 December 2016 Change (number) Sales of heat TJ Sales of electricity MWh (18 206) Totale sales of products in units TJ Sales of heat in 2017 increased by 1% (139 TJ) year-on-year. Heat sales increased in 2017 as a result of an increase in the power contracted by new buyers. Sales of electricity in 2017 fell by 2% ( MWh). The decrease in electricity sales is an effect of lower on demand sales (forced generation) in 2017, and lower production and sales of electricity in pseudo-condensation due to the low prices in the electricity market. Total sales of finished goods in the reporting period was TJ (including TJ for heat) and was by 1% higher year-on-year. The value and structure of product sales in 2017 and 2016 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 (vs. PLN thousand in 2016) and PLN thousand in revenue from the sale of electricity (vs. PLN thousand in 2016). Table: KOGENERACJA S.A. - The value and structure of revenue from the sale of finished goods in 2017 and in December December 2016 Value (in PLN thousand) Structure (%) Value (in PLN thousand) Structure (%) Change (value) Sales of heat Sales of electricity (9 442) Ancillary services - electricity (2 503) Certificates (7 742) Other revenues (475) Revenues from the sale of finished goods (15 434) 11

12 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 is also an owner of a heating network and a distributor of heat in Zielona Góra. Table: EC Zielona Góra S.A. - Product sales volume in 2017 and 2016 Unit to 31 December 2017 to 31 December 2016 Change (number) Sales of heat TJ Sales of electricity MWh cc gas unit MWh resale MWh (62 353) Totale sales of products in units TJ In 2017, sale of heat was at 1,281 TJ and increased by 9 TJ (0.7%) 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 2017, sale of electricity was at MWh and was higher by MWh, i.e. by 0.6%, year-on-year. In 2016, a general overhaul of the CC Gas Unit was carried out. Its resulting downtime was 25 days longer than in 2017, which caused sales to be lower in the corresponding period. As the period of operation of the CC Gas Unit was longer in 2017, the volume of purchase and resale of electricity was 50% lower. Total sale of finished goods in the reporting period was TJ, up 0.6% (37 TJ) on Table: EC Zielona Góra S.A. - The value and structure of revenue from the sale of finished goods in 2017 and in December December 2016 Value (in PLN thousand) Structure (%) Value (in PLN thousand) Structure (%) Change (value) Sales of heat Sales of electricity Certificates Other revenues Revenues from the sale of finished goods The main item of other revenues from the sale of finished goods mainly included the estimated gas compensation payable under Article 46(5) of the LTC Act. In 2017, the subsidiary's revenue from gas compensation was PLN thousand compared with PLN thousand in

13 4. Key financials of KOGENERACJA Group Table: KOGENERACJA S.A. - Key financials and ratios for in PLN thousand to 31 December 2017 to 31 December 2016 to 31 December 2015 to 31 December 2014 to 31 December 2013 to 31 December 2012 to 31 December 2011 to 31 December 2010 to 31 December 2009 to 31 December 2008 Revenue from sales, including: Sales of electricity Sales of heat Certificates Cost of sales ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Gross profit on sales General and administrative expenses (5 064) (3 966) (3 834) (4 294) (3 887) (5 317) (6 294) (6 916) (7 135) (7 340) Selling expenses (2 276) (1 761) (1 736) (1 489) (1 394) (1 558) (1 023) (939) (920) (1 009) Other operating income/expenses (366) (15 877) (7 440) (7 265) 155 (6 136) (4 538) Operating profit (EBIT) (6 200) Net finance income Income tax (16 569) (15 796) (11 681) (2 972) (4 456) (9 788) (13 438) (17 680) (8 266) Net profit Non-current assets Current assets Total assets Non-current liabilities Current liabilities Equity Net cash from operating activities Net cash used in investing activities (21 216) (39 694) ( ) (75 643) (38 495) (35 428) (37 517) ( ) ( ) (72 549) Net cash from financing activities ( ) ( ) ( ) (25 578) (57 847) (28 161) Total net cash flows (387) 255 (3 230) (9 389) CAPEX (%) Return on assets (ROA) 5,87 8,48 7,94 10,35 5,14 4,87 7,19 7,03 8,26 4,52 Return on equity (ROE) 7,37 10,87 10,77 14,35 7,25 7,42 10,57 10,52 12,25 6,17 Return on capital employed (ROCE) 6,50 6,62 4,14 (0,53) 2,52 2,29 7,13 11,05 11,98 5,05 Current liquidity 1,70 1,44 1,24 1,32 0,86 0,76 0,87 0,89 1,01 0,94 Quick liquidity 1,28 1,08 0,84 0,64 0,48 0,41 0,45 0,51 0,52 0,48 Sales of heat (TJ) Sales of electricity (MWh) including biomass production (MWh) Dividend paid (PLN per share) 6,58 6, ,41 3,50 3,50 2,05 2,05 The ratio calculation methodology was presented in point V.10 of this report. 13

14 5. Key economic and financial figures of the Group Table: KOGENERACJA Group - Key financials and ratios for in PLN thousand to 31 December 2017 to 31 December 2016 to 31 December 2015 to 31 December 2014 to to to to 31 December December December December 2010 to to 31 December December 2008 (restated) (restated) (restated) Revenue from sales Revenue from compensation for stranded costs (27 180) Cost of sales ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Gross profit on sales Selling expenses (3 236) (2 903) (3 002) (3 226) (3 828) (8 164) (10 083) (3 859) (12 412) (12 609) General and administrative expenses (7 139) (6 500) (6 189) (5 874) (14 139) (28 304) (29 113) (31 527) (37 966) (36 985) Other operating income/expenses (7 042) (10 192) 576 (7 666) Operating profit (EBIT) Net finance revenues (570) (4 326) (10 630) (9 403) (1 083) (16 400) (20 730) (15 429) (18 012) (16 122) Income tax (32 269) (35 301) (31 665) (9 173) (22 717) (24 127) (34 101) (30 758) (37 276) (15 887) Net profit Other comprehensive income (124) (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 (77 361) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Net cash from financing activities ( ) ( ) ( ) ( ) ( ) ( ) (650) (20 244) Total net cash flows ( ) (85 482) (79 643) (7 559) (%) Return on assets (ROA) 5,68 6,72 5,62 2,41 4,14 5,08 6,50 7,53 9,24 3,97 Return on equity (ROE) 8,77 10,24 9,25 4,02 6,67 8,39 11,20 13,53 17,64 7,39 Return on capital employed (ROCE) 10,61 13,24 11,01 4,10 9,23 9,85 12,56 12,62 16,15 7,63 Current liquidity 2,30 1,78 1,45 1,52 1,36 0,87 1,10 1,28 1,32 1,21 Quick liquidity 1,92 1,52 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) 6,58 6, ,41 3,50 3,50 2,05 2,05 The ratio calculation methodology was presented in point V.10 of this report. 14

15 a. Change of methodology of calculating LTC compensations During the preparation of the consolidated financial statements as at and for the year ended 31 December 2017, the accounting and reporting treatment of the compensation settlements under the LTC was verified. The change in the manner of recognition of the LTC settlements introduced by the Group reflects the methodology of the LTC settlements adopted by the new Parent Company of the Group PGE S.A. As part of the adjustment in the methodology, the so-called restrictive condition was applied, which consisted of imposing the following restriction as at each balance sheet date: the accumulated net profit/loss on the LTC must not exceed the value of the funds expected to be received from the Settlements Manager as part of the total settlement. Once this value has been exceeded, the LTC funds do not constitute the Company s revenue, and because it will be subject to reimbursement it is recognized in the final adjustment liability. The adjustment consisted of changing the manner of recognition of revenue from LTC compensation, estimating a provision for the settlement of the final adjustment and the manner of recognition of the related costs. The accounting treatment presented in the consolidated financial statements as at and for the year ended 31 December 2016 was considered different from the provisions of the accounting policies of the PGE S.A. Group. Therefore, in the consolidated financial statements as at and for the year ended 31 December 2017 the methodology of the accounting treatment of the LTC was changed and the opening balances were adjusted accordingly. Table: Consolidated statement of comprehensive income of 2016 after restatements in PLN thousand to 31 December 2016 (audtied data) Resteatments to 31 December 2016 (transformed data) Revenue from sales Revenue / (costs) from compensation for stranded costs (14 304) Cost of sales ( ) - ( ) Gross profit on sales (14 304) Selling expenses (2 903) - (2 903) General and administrative expenses (6 500) - (6 500) Other operating income/expenses Operating profit (EBIT) (14 304) Net finance costs (9 652) (4 326) Income tax (37 007) (35 301) Net profit (7 272) Other comprehensive income (73) - (73) Total comprehensive income (7 272) Table: Consolidated statement of financial position as at 31 December 2016 (adjusted items) in PLN thousand to 31 December 2016 (audtied data) Resteatments to 31 December 2016 (transformed data) Total assets, incl (9 225) Deferred tax assets (9 225) Total equity and liabilities, incl (9 225) Equity (retained earnings) Deferred income (66 708) Other long-term liabilities Trade and other payables (18 418)

16 The key factors of the model of calculating LTC compensations affecting the revenues, costs and settlements recognised in the financial statements are the electricity sales prices and the interest rate used for discounting the long-term obligation. The changes in estimates connected with the calculation of a final adjustment are treated prospectively by being recognised in the statement of comprehensive income in the period when the change took place and in future periods. In 2017, a new methodology of accounting for LTC compensations was adopted, and additionally changes in estimates were made. b. Components of comprehensive income In 2017, the Group s total comprehensive income fell by PLN thousand, i.e. by 12%. Table: Key economic and financial figures of the Group in 2017 and 2016 in PLN thousand to 31 December 2017 to 31 December 2016 Change (value) Revenue from sales (12 361) Revenue / (costs) from compensation for stranded costs ( ) ( ) Cost of sales (27 180) (31 711) Gross profit on sales (23 130) Selling expenses (3 236) (2 903) (333) General and administrative expenses (7 139) (6 500) (639) Other operating income/expenses (1 351) Operating profit (EBIT) (25 453) Net finance costs (570) (4 326) Income tax (32 269) (35 301) Net profit (18 665) Other comprehensive income (124) (73) (51) Total comprehensive income (18 716) 16

17 c. Impact of the performance of the Group companies on the consolidated net profit in 2017 and 2016 Total comprehensive income KOGENERACJA S.A. In 2017, the Parent Company generated a net profit of PLN thousand, down by PLN thousand compared with 2016 (PLN thousand). Table: The Company's key financials in 2017 and 2016 to 31 December 2017 to 31 December 2016 Change (value) in PLN thousand Revenue from sales (15 464) Cost of sales ( ) ( ) Gross profit on sales General and administrative expenses (5 064) (3 966) (1 098) Selling expenses (2 276) (1 761) (515) Other operating revenues/costs (2 885) Operating profit (EBIT) (2 999) Net finance revenues (44 045) Income tax (16 569) (15 796) (773) Net profit (47 817) Other comprehensive income, net of tax (124) (73) (51) Total comprehensive income (47 868) Revenue of KOGENERACJA S.A. Table: Company s revenue in 2017 and 2016 in PLN thousand Revenues (15 464) Revenues from the sale of finished goods (15 434) including certificates (7 742) including ancillary services (2 503) Revenues from the sale of merchandise and raw materials to 31 December 2017 to 31 December 2016 Change (value) (30) In 2017, the Company generated revenue from sales that was by PLN thousand lower (i.e. by 3%) than in The lower revenue from the sale finished goods achieved in 2017 is a net effect mainly resulting from: a) lower revenue from the sale of electricity (down by PLN thousand, i.e. by 4.6%), including: lower revenue from the sale of electricity (down by PLN thousand) and lower revenue from the sale of systemic services (down by 17

18 PLN thousand); the sales volume decreased by 1.7% with the average price of electricity being by 5.5% lower than in 2016; b) lower revenue from the sale of certificates (down by PLN thousand); in 2017, the Company s revenue from certificates was PLN thousand: green certificates (PLN thousand), red certificates (PLN thousand), yellow and white certificates (PLN thousand). In 2016, revenue from the sale of certificates was PLN thousand: green certificates (PLN thousand), red certificates (PLN thousand), yellow and white certificates (PLN thousand). c) lower other revenues from sales (down by PLN 475 thousand); d) higher revenue from the sale of heat (up by PLN thousand, i.e. 1%), as an effect of an increase in the volume of sales by approx. 1% at comparable prices resulting from the heat tariff. The production of green energy from the co-firing of biomass in 2017 fell by 29.8% ( MWh in 2017 vs MWh in 2016). The decrease was primarily caused by low prices of green certificates, which resulted in lower combustion of wet biomass at EC Czechnica, down to the level needed for maintaining production safety in the heating season. In 2017, the prices of green certificates were lower by 7% vs In 2017, the prices of red certificates increased by 4.3%. The volume of production of red certificates fell by 3% due to lower gross production of energy, mainly electricity in pseudo condensation. Fixed costs and variable costs KOGENERACJA S.A. In 2017, variable costs relating to the generation of the products sold were by 7% (i.e. by PLN thousand) lower than in The decrease is attributed to the lower fuel costs (down by PLN thousand) and an increase in the cost of purchase of emission allowances (up by PLN thousand) and other variable costs (up by PLN thousand). The increase in the cost of shortage and purchase of emission allowances (up by PLN thousand, including provision for the shortage of allowances higher by PLN thousand) is an effect of the higher purchase of emission allowances due to the year-on-year decrease in the limit of free CO 2 allowances granted to power generating units (in 2017: Mg, in 2016: Mg). CO 2 emissions in 2017 were lower due to lower gross energy production. The emission allowances received in 2017 covered 20% emissions; emission allowances received in 2016 covered 43% emissions. The prices of purchase of emission allowances in 2017 were 18% lower year-on-year. The decrease in fuel costs, down by PLN thousand, is mainly due to lower cost of coal and biomass purchase (down by PLN thousand and PLN thousand, respectively); lower cost of liquid fuels (down by PLN 665 thousand) coupled with higher cost of consumption of gas and other chemicals (up by PLN 366 thousand and PLN 113 thousand, respectively). The cost of utilisation of coal fell by PLN thousand, mainly due to lower coal prices coupled with a slightly higher volume of its consumption. Coal prices fell by approx. 9,8% (in 2017, the average price of coal combusted with additional costs was PLN 10.95/GJ and in 2016: PLN 11.93/GJ). The volume of coal used increased by approx. 0,9% and was TJ in 2017 and TJ in The cost of consumption of biomass fell by PLN thousand, mainly due to lower production of green energy due to low prices of green certificates. The volume of combusted biomass was 696 TJ in 2017 and 966 TJ in Unit prices of biomass fell by approx. 9%. In 2017, the average price of combusted biomass was PLN 23.12/GJ vs. PLN 25.49/GJ in 2016). Other variable costs increased by PLN thousand (PLN thousand in 2017 vs. PLN thousand in 2016), mainly due to: an increase in the cost of redemption of certificates (up by PLN thousand) a decrease in the costs related to the purchase of electricity in the balancing market (down by PLN 510 thousand) increase in other costs related to energy purchase (up by PLN 237 thousand) lower environmental protection costs (down by PLN 99 thousand) a decrease in the cost of other services (down by PLN 547 thousand). 18

19 Table: The Company s fixed and variable costs in 2017 and 2016 Cost of sales Administrative expenses Selling expenses Total in PLN thousand from to from to from to from to from to from to from to from to Variable costs ( ) ( ) ( ) ( ) fuel costs ( ) ( ) ( ) ( ) CO 2 allowances (35 569) (32 593) (35 569) (32 593) other variable costs (15 873) (14 720) (15 873) (14 720) Fixed costs ( ) ( ) (5 064) (3 966) (2 276) (1 761) ( ) ( ) staff costs (47 418) (41 468) (4 156) (3 348) (973) (936) (52 547) (45 752) overhauls (19 949) (17 786) (19 949) (17 786) depreciation ( ) ( ) (86) (95) - - ( ) ( ) services (52 039) (52 377) (641) (304) - - (52 680) (52 681) other fixed costs (20 367) (19 169) (181) (219) (1 303) (825) (21 851) (20 213) Value of goods and materials sold (240) (390) (240) (390) Total costs ( ) ( ) (5 064) (3 966) (2 276) (1 761) ( ) ( ) In 2017, fixed costs relating to generation of products increased by PLN thousand vs The increase in fixed costs was mainly affected by higher staff costs, higher overhaul costs and lower depreciation costs. The cost of depreciation of generating equipment fell by PLN thousand on the back of changes to the useful lives of fixed assets in 2017, which were made in September 2017 and took effect Adjustments were made to the useful lives of production-related equipment at the Wrocław CHP. The useful lives of the affected assets were brought in line with the useful lives of the key production equipment. Staff costs increased by PLN thousand in 2017, mainly due to: an increase in social security costs by PLN thousand and other staff benefits (up by PLN thousand), a total of PLN thousand higher salary payouts (up by PLN 759 thousand). The increase in staff benefits was affected by two non-recurring events: payment of social security obligations connected with agreements with trade union organisations relating to repurchase of staff benefits in 2015, and raising a provision for the voluntary terminations programmes until The higher level of salaries is an effect of an employment increase in 2017 by 9 persons (employment level as at 31 December 2017: 356 vs. 347 as at 31 December 2016; average employment in 2017 and 2016 was 352 and 357, respectively). The cost of overhauls increased by PLN thousand, mainly due to an increase in the scope of the overhaul programmes vs. 2016, including by the cost of maintaining the desulphurisation installation. The cost of external services fell by PLN 365 thousand. Other fixed costs increased by PLN thousand due to an increase in concession fees and transaction fees connected with the sale of certificates. Other operating profit of KOGENERACJA S.A. In 2017, other operating profit was PLN thousand vs. PLN thousand (down by PLN thousand), driven by the following events: 19

20 a) Events that had a negative impact on other operating profit: PLN thousand: PLN thousand representing an increase in provisions for reclamation of landfills in 2017; the corresponding provision was reduced in 2016 by PLN thousand lower revenues in respect of releasing provisions for the liquidation of fixed assets (PLN thousand) higher cost of maintaining the investment in ESP Młoty (PLN 797 thousand) lower value of compensations received in 2017 (PLN 719 thousand) lower other costs (PLN 174 thousand). b) Events that had a positive impact on other operating profit: PLN thousand is a net balance of raised and released impairment charges (including a lower charge for available-for-sale assets in 2017: down by PLN thousand) PLN thousand: net result on the sales of fixed assets (including PLN thousand in respect of the sale of a switching station to the distributor). Net finance income KOGENERACJA S.A. The lower net finance income in 2017 (down by PLN thousand) was primarily due to the lower finance revenues, mainly because of lower dividend (down by PLN thousand) received from EC Zielona Góra S.A. (PLN thousand in 2017 vs. PLN thousand in 2016). Finance revenues fell by PLN thousand due to a lower dividend (down by PLN thousand). On the other hand, 2017 saw an increase in finance revenue (discounting effect) due to changes in the schedule of interest payments on equipment lease (up by PLN thousand), and interest calculated in the cash pool system and interest on receivables, PLN 635 thousand in total. Finance expenses were slightly lower vs. 2016, amounting to PLN thousand. Net profit of KOGENERACJA S.A. In 2017, the Company earned a net profit of PLN thousand compared with PLN thousand earned in Net profit decreased by PLN 32%, i.e. by thousand as a result of: lower net finance revenue (down by PLN thousand), due to lower dividend received from EC Zielona Góra S.A. (down by PLN thousand) higher cost of purchase of emission allowances (up by PLN thousand) due to lower limits of free allowances lower fuel costs (down by thousand) and higher fixed costs (up by PLN thousand) higher result on sales (up by PLN thousand) vs as a result of an increase in the revenue from the sale of heat, coupled with lower volumes and prices of electricity prices. Key ratios: ROA, ROE, ROCE KOGENERACJA S.A. Table: Key ratios for the Company in 2017 and 2016 (%) to 31 December 2017 to 31 December 2016 Change (%) Return on assets (ROA) 5,87 8,48 (31) Return on equity (ROE) 7,37 10,87 (32) Return on capital employed (ROCE) 6,50 6,62 (2) 20

21 Change of methodology of calculating LTC compensations at EC Zielona Góra S.A. Following an analysis of accounting for compensations for stranded costs, it was determined that the accounting treatment presented in the financial statements of EC Zielona Góra S.A. for the year ended 31 December 2016 was considered different from the provisions of the accounting policies of the PGE S.A. Group. Therefore, in the financial statements as at and for the year ended 31 December 2017 the methodology of the accounting treatment of the LTC was changed and the opening balances were adjusted accordingly. The LTC compensation in 2016 was reduced by PLN thousand (with an impact on EBITDA). In 2017, the company presented the costs of LTC compensations of PLN thousand. The change in the methodology of accounting for LTC compensations and the impact on the results for 2017 and for previous years are presented in Note 5 Key economic and financial figures of the Group. Net profit (loss) of EC Zielona Góra S.A. In 2017, the company generated net profit of PLN thousand, down by PLN thousand compared with the corresponding period of the previous year. Table: Key economic and financial figures of EC Zielona Góra in 2017 and 2016 in PLN thousand to 31 December 2017 to 31 December 2016 Change (value) Revenues Revenues (27 181) (31 712) Cost of sales ( ) ( ) Gross profit on sales (24 931) Selling expenses (960) (1 142) 182 Administrative expenses (2 139) (2 891) 752 Other operating revenues/costs Operating profit (EBIT) (22 414) Net finance costs (1 684) (3 458) Income tax (15 052) (18 848) Net profit (16 844) The subsidiary s financials are based on the unconsolidated financial statements prepared in accordance with the Accounting Act, adapted to the Group s accounting policy. Revenue of EC Zielona Góra S.A. Table: Revenue of EC Zielona Góra S.A. in 2017 and 2016 in PLN thousand to 31 December 2017 to 31 December 2016 Change (value) Revenues Revenues from the sale of finished goods including certificates Revenues from the sale of merchandise and raw materials (10 361) Revenue from compensation for stranded costs (4 531) 21

22 In 2017, EC Zielona Góra S.A. achieved revenue from the sale of finished goods of PLN thousand, up by PLN thousand (3%) on 2016, when PLN thousand was reported. The higher revenue from the sale of finished goods mainly resulted from: a) higher revenue from white certificates (up by PLN thousand) as a result of a higher sales volume b) higher revenue from the sale of heat (up by PLN 910 thousand), due to a higher sales volume (up by 0.7%) and the higher sales prices resulting from the new heat tariff approved by the Energy Regulatory Authority (URE) in November 2016 c) higher revenue from yellow certificates (up by PLN 478 thousand), as the volume of certificates generated increased by 2.7% due to higher heat production, while the cost of generating the certificates fell by 2.1% d) higher revenue from the sale of electricity (up by PLN thousand), mainly due to the higher volume of electricity production e) higher other revenues from sales (up by PLN thousand), mainly the higher revenue from gas compensation (up by 3%). Revenue from the sale of merchandise and raw materials was PLN thousand, down by PLN thousand on the previous year, which was due to the lower volume of electricity purchased in 2017 for resale. In 2016, the company completed a general overhaul of the CC Gas Unit, which, given a lack of own electricity production, obliged the company to purchase and resell electricity. As a result of a change in the methodology of accounting for LTC in 2017, the company did not post revenue from compensations for stranded costs, and the related costs were PLN thousand. In 2016, this revenue was PLN thousand. Net difference in respect of settlement of LTC compensations was PLN thousand. Fixed costs and variable costs of EC Zielona Góra S.A. In 2017, variable costs of generating the finished goods sold were PLN thousand, up by PLN thousand vs The increase in variable costs was particularly noted in the area of fuel consumption and other variable costs. Table: Fixed costs and variable costs of EC Zielona Góra S.A. in 2017 and 2016 Cost of sales General and administrative expenses Selling expenses Total in PLN thousand from to from to from to from to from to from to from to from to Variable costs ( ) ( ) ( ) ( ) fuel costs ( ) ( ) ( ) ( ) CO 2 allowances (13 764) (16 458) (13 764) (16 458) other variable costs (11 017) (9 619) (11 017) (9 619) Fixed costs (93 746) (94 867) (2 139) (2 891) (960) (1 142) (96 845) (98 900) staff costs (17 563) (18 609) (1 302) (1 738) - - (18 865) (20 347) overhauls (11 193) (11 854) (11 193) (11 854) depreciation (41 369) (40 614) - - (14) (17) (41 383) (40 631) services (15 658) (16 084) (113) (380) (10) (6) (15 781) (16 470) other fixed costs (7 963) (7 706) (724) (773) (936) (1 119) (9 623) (9 598) Value of goods and materials sold (9 260) (21 557) (9 260) (21 557) Total costs ( ) ( ) (2 139) (2 891) (960) (1 142) ( ) ( ) This higher cost of consumption of natural gas was mainly caused by a higher volume of gas used in 2017 (up by 5%) due to higher electricity production vs. 2016, and higher gas price. The higher electricity production was due to higher availability of the CC Gas Unit (in 2017: 93.4%, vs % in 2016). In 2016, the CC Gas Unit was idle for a long time due to its general overhaul. 22

23 The lower cost of shortage and purchase of emission allowances (down by PLN thousand) is mainly an effect of the lower price of the emission allowances purchased (down by 21.9%) coupled with higher CO 2 emissions due to higher volume of electricity and heat production. The level of allocation of free emission allowances to EC Zielona Góra S.A. was 13% lower vs Other variable costs increased by PLN thousand, mainly on the back of a higher cost of water used for production purposes, higher cost of managing waste and wastewater and environmental protection costs. Fixed costs in 2017 were PLN thousand, down by PLN thousand vs Fixed costs increased only in the area of depreciation (up by PLN 752 thousand), due to capitalisation of new investments connected with modernisation of the heating station. Other costs were at a similar level as in 2016, or indeed lower. In 2017, staff costs were by PLN thousand lower vs This was mainly an effect of a decrease in salaries (the employment level decreased by 15 persons, and the average employment decreased by 26 FTEs) and a decrease in employee benefits. In 2017, the cost of overhauls decreased by PLN 661 thousand vs. 2016, and mainly related to the general overhaul of the CC Gas Unit and capitalisation of capital expenditure rather than being a regular overhaul cost as in previous years. Costs of external services were lower year-on-year. The value of merchandise and raw materials sold in 2017 was PLN thousand, down PLN thousand vs. 2016, due to the lower volume of electricity purchased for resale. Other operating profit of EC Zielona Góra S.A. In 2017, other operating profit was PLN thousand, up by PLN thousand compared with the figure reported in In 2017, other operating income was affected by: settlement of subsidies, write-off of goodwill and compensation for turbine failure in 2015, while other operating costs were affected by a partial liquidation of fixed assets (heating networks) and donation costs. Net finance income of EC Zielona Góra S.A. In 2017, EC Zielona Góra S.A. posted a net finance loss of PLN thousand (vs. net finance loss of PLN thousand reported in 2016). In 2017, the company s finance revenue increased by PLN thousand (including an increase of PLN 998 thousand in respect of cash-pool interest). Finance expenses fell by PLN 744 thousand, mainly due to lower cost of discount in respect of stranded costs as a result of a change in the methodology of accounting for LTC compensations. Net profit (loss) of EC Zielona Góra S.A. In 2017, the company generated net profit of PLN thousand. In 2016, the company s net profit was PLN thousand. Net profit decreased by PLN thousand year-on-year mainly as a result of the negative effect of settlement of LTC compensations (PLN thousand), partly offset by the higher profit on the sale of heat, higher revenue from yellow certificates and higher revenue from gas compensations, coupled with a negative impact of lower electricity prices. Key ratios: ROA, ROE, ROCE EC Zielona Góra S.A. Table: Key ratios for Zielona Góra S.A. in 2017 and 2016 (%) to 31 December 2017 to 31 December 2016 Change (%) Return on assets (ROA) 8,43 11,74 (28) Return on equity (ROE) 24,85 42,59 (42) Return on capital employed (ROCE) 66,20 189,54 (65) 23

24 6. Market and regulatory environment a. Macroeconomic situation KOGENERACJA SA and EC Zielona Góra are entities operating in the Polish market. Accordingly, the pace of economic growth and the condition of the Polish economy affect 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. On 10 October 2016, the President of the Energy Regulatory Authority approved the Heat Tariff by decision No. OWR /2016/1276/XVII-A/AŁ. It became effective on 1 November 2016, and started to be applied on 31 December A new Heat Tariff was approved by the President of the Energy Regulatory Authority by decision No. OWR XVIII.A.GM, and entered into force as of 1 January As regards the Electricity Tariff, the Company was exempted from the requirement to submit it for 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 VI.B.RP of 4 January A new tariff request was submitted to the Energy Regulatory Authority on 18 January c. Industry and markets HEAT MARKET KOGENERACJA S.A. is the main producer of heat in Wrocław and a producer of electricity. The Poland s heat market is a well-developed sector of the economy. The heat market is a local market, as the transport of heat media is quite limited, unlike the transport of electricity or natural gas, which may be transmitted over long distances. Poland is among the top European countries where heat supply from existing heating systems constitutes a major share in the total heat supply. Heating systems account for approx. 40% of heat production in the country. At KOGENERACJA S.A. network heat is cogenerated with electricity in the process of high-efficiency cogeneration taking place in three plants: two CHP plants in Wrocław (EC Wrocław and EC Zawidawie) and a CHP plant in Siechnice (EC Czechnica). The Company covers 53% of the total heat demand in Wrocław, and 56% of the heat demand in Siechnice. Production plants of KOGENERACJA S.A. EC WROCŁAW EC CZECHNICA EC ZAWIDAWIE Coal-fired unit 812 MW t 263 MW e Local heat distributor s network (Fortum) Coal-fired unit 247 MW t 100 MW e Heating network: 27 km Gas-fired unit 21 MW t 3 MW e Heating network: 2.7 km The heat tariff is regulated (it is approved by the President of the Energy Regulatory Authority). The heat market develops mainly on the back of new connections made as new buildings are constructed and as local boiler stations and individual furnaces are liquidated (programmes of liquidation of low emission sources, carried out in cooperation with local authorities). 24

25 Chart: Buyers using the heat system Heat network in Siechnice ; 7,0% Heat network in EC Zawidawie; 0,3% Fortum Power and Heat Polska Sp. z o.o. O/ Wrocław; 92,7% Demand for heat The demand for heat is expected to increase over the next years due to the overall macroeconomic development of Poland, migration of people to urban areas, connecting semi-centralised sources of heat to a heating network, and limiting local emission sources through environmental protection regulations. At the same time, the increase in energy efficiency and limitation of losses in existing buildings and installations are expected to curb growth to a moderate level. Energy efficiency will reduce the use of heat in the primary and the secondary markets, but on the other hand it will be an opportunity for developing a centralised heating network with heat supplied by CHP plants using high-efficiency cogeneration. Support for high-efficiency cogeneration Poland has three programmes of certificates supporting the development of high-efficiency cogeneration (depending on the fuel used). Companies which sell energy to end buyers are legally required to purchase and redeem energy origin certificates up to a value corresponding to a stated part of electricity supplied, or to pay a substitution fee. Energy origin certificates are issued to CHP plants by the President of the Energy Regulatory Office as a proof of energy origin. Those certificates are converted into property rights and are traded on Energy Exchange (TGE). KOGENERACJA S.A. uses two types of support certificates for the energy generated using high-efficiency cogeneration red certificates for the energy produced by EC Wrocław and EC Czechnica, and certificates for the energy generated from gas by EC Zawidawie and the subsidiary EC Zielona Góra S.A. yellow certificates. ELECTRICITY MARKET The Polish electricity market is the sixth largest market in terms of generation volume and seventh in terms of total installed capacity in the European Union. The annual consumption of electricity in Poland in 2017 was TWh (vs. 167 TWh in 2016). According to the Energy Policy 2030, the consumption of electricity per capita in Poland is to increase by more than 50% by In Poland, electricity is mainly produced from hard coal and lignite. Four Polish energy companies (PGNiG, Enea, Energa, Tauron) have a total share of 60% in the market of electricity production. PGE Energia Ciepła Group, to which KOGENERACJA S.A. belongs, has a 9% market share, with 3% represented by CHP plants. KOGENERACJA S.A. is the largest producer of heat and electricity for Wrocław. EC Wrocław has a licence to generate electricity of 263 MWe. EC Chechnica has a licence to generate electricity of 100 MWe. This represents approx. 0.9% of installed power in Poland, which is now more than MWe. KOGENERACJA S.A. generates electricity together with network heat in the process of high-efficiency cogeneration. A part of it is produced from renewable energy sources (RES). Biomass is combusted in dedicated installations to replace coal and reduce CO 2 emissions. 25

26 Chart: Buyers of electricity Final client; 0,1% PGE Energia Ciepła S.A.; 99,9% KOGENERACJA S.A. also provides plant availability service to PSE Operator S.A. (systemic services). 7. Structure of assets and liabilities in the consolidated statement of financial position a. Structure of the Group assets In 2017, total assets increased by PLN thousand mainly as a result of an increase in current assets. Property, plant and equipment decreased as a result of lower capital expenditure spent by the Parent Company in Under current assets, an increase was noted in cash balances. Table: Statement of financial position of KOGENERACJA Group in 2017 and 2016 structure of assets in PLN thousand 31 December 2017 % of balance sheet total ASSETS I. Non-current assets 31 December 2016 % of balance sheet total current period current period previous period previous period 1. Property, plant and equipment , ,7 2. Intangible fixed assets, including: , ,8 - goodwill on related parties , ,8 3. Perpetual usufruct of land , ,6 4. Investment property , ,7 5. Long-term receivables , ,4 6. Other long-term investments 4 0,0 4 0,0 7. Deferred tax assets , ,8 Total non-current assets , ,0 II. Current assets 1. Inventories , ,5 2. Short-term investments 12 0,0 12 0,0 3. Income tax receivables ,1 4. Trade and other receivables , ,7 5. Cash and cash equivalents and cash-pool , ,6 6. Assets held for sale , ,1 Total current assets , ,0 Total assets

27 b. Structure of the Group equity and liabilities In the structure of equity and liabilities, an increase was noted in long-term liabilities, mainly due to the change in the manner of recognition of the LTC settlements. In addition, the obligations on loans fell on account of the upcoming end of repayments of the loan from the Provincial Environmental Protection and Water Management Fund (WFOŚiGW) (which is due in 2019). Table: Statement of financial position of KOGENERACJA Group in 2017 and 2016 structure of equity and liabilities in PLN thousand EQUITY AND LIABILITIES I. Equity 31 December 2017 % of balance sheet total 31 December 2016 % of balance sheet total current period current period previous period previous period 1. Share capital , ,2 2. Share premium , ,2 3. Other reserve capital , ,5 4. Retained earnings , ,5 Equity attributable to ordinary shareholders , ,4 Non- controlling interests , ,2 Total equity , ,6 II. Liabilities Non-current liabilities 1. Loans, borrowings and debt instruments , ,2 2. Employee benefit liabilities , ,4 3. Deferred income , ,3 4. Deferred tax liability , ,3 5. Other long-term liabilities , ,8 6. Long-term provisions , ,5 Total non-current liabilities , ,5 Current liabilities 1. Loans, borrowings and debt securities , ,1 2. Other short-term financial liabilities 230 0, ,0 3. Income tax liabilities , ,1 4. Trade and other payables , ,6 5. Employee benefit liabilities , ,9 6. Short-term provisions , ,2 Total current liabilities , ,9 Total liabilities , ,4 Total equity and liabilities

28 8. Significant agreements concluded in 2017 In 2017, no agreements were concluded that were considered significant for the Group or the Company. 9. Key domestic and foreign investments In 2017, the Group did not invest in any securities or shares in non-related parties, or in intangible assets or properties. 10. Related party transactions The key related party transactions completed in 2017 are presented in the Consolidated Financial Statements of KOGENERACJA Group for the year ended 31 December 2017: III Notes, Note 24 Related party transactions and in the Unconsolidated Financial Statements of KOGENERACJA S.A. for the year ended 31 December 2017: III Notes, Note 37 Related party transactions. Transactions between the Group companies are made and performed on an arm's length. 11. Loans incurred and terminated Table: Specification of loan agreements as at 31 December 2017 As at 31 December 2017 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 2017 In 2017, the Group companies 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) 28

29 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 2017, the Company s and the Group s debt on this account was PLN 0. 2) Loan from the Provincial Environmental Protection and Water Management Fund On 29 October 2013, the Company entered into a loan agreement of PLN 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 starting 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 PGE Energia Ciepła 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 2017, the outstanding balance was PLN thousand. 12. Loans granted a. Loans granted in 2017 In 2017, the Parent Company did not make any loans to its subsidiaries. b. Loans granted to Directors of the Company In 2017, no loans were given to Directors (Management Board or Supervisory Board members) as part of the Company Social Fund. 29

30 13. 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 2017, further annexes were signed, changing the structure of the companies participating in the cash-pool system and extending (excluding FENICE Poland Sp. z o.o.) and extending the agreement termination periods. ING Bank Śląski S.A. waived the requirement of providing guarantees by all companies for the obligations of PGE Energia Ciepła S.A. (previously EDF Polska S.A.) under the Loan Agreement, and reduced the collateral under the Guarantee Line Agreement to a corporate guarantee of PGE Energia Ciepła S.A. (previously EDF Polska S.A.). The existing guarantee is a guarantee up to the maximum amount of PLN thousand to ING Bank Śląski S.A. securing the lender against default on the existing obligations, including in respect of the Daily Limits under the Daily Limits Liquidity Management Agreement, by the debtors PGE Energia Ciepła companies, namely: - PGE Energia Ciepła S.A. - PGE Paliwa Sp. z o.o. - PGE Toruń S.A. - EC Zielona Góra S.A. - PGE Gaz Toruń Sp. z o.o. The guarantee expires on 31 August The total amount 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, PGE Energia Ciepła Group companies in Poland will provide cross-guarantees to each other so that cash transfers can be made between them. 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 2017, III Notes, Note 35 Contingent claims and liabilities. b. Guarantees received In 2017, the Parent Company did not receive any guarantees (for loans or other), whose total value would exceed 10% of its equity. 14. Litigations In 2017 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. 15. Issue of securities As at 31 December 2017, the Company did not have any securities in issue. The Parent Company also did not capitalise its bond issue programme. 16. Financial results presented in the report vs. the published performance forecast Neither the Company nor the Group published any projections for On 12 February 2018, the Company published estimates of its selected consolidated financial and operating results for 2017 (Current Report 4/2018). 30

31 17. Assessment of financial resources management a. Elements of the consolidated statement of cash flows Table: Cash flows of KOGENERACJA Group for 2017 and 2016 in PLN thousand for the period 2017 to 31 December 2017 for the period 2016 to 31 December 2016 Change (value) Net cash from operating activities (98 801) Net cash used in investing activities (77 361) ( ) Net cash from financing activities ( ) ( ) Total net cash flows Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year In 2017, the operating cash flows decreased by PLN thousand compared with Operating cash flows decreased as a result of a decrease in pre-tax profit (down by PLN thousand), the difference arising from adjustments (down by PLN thousand, including decreases in depreciation/amortisation, taxes and gains on fixed asset disposals) and in net working capital (down by PLN thousand). In 2017, cash flows from investing activities were negative, like in 2016, but the negative figure was by PLN thousand lower. The decrease resulted from lower spend on the purchase of fixed assets, mainly by the Parent Company, and the higher proceeds from the sale of tangible assets (up by PLN thousand). Cash flows from financing activities were negative in 2017 at PLN thousand (in 2016, they were also negative, at PLN thousand). The difference of PLN thousand was an effect of lower cost of debt service (down by PLN thousand) and slightly higher financial inflows (up by PLN thousand). In 2016, the Parent Company made a one-off repayment of an investment loan from EDF IG SA (PLN thousand). In 2017, total net cash flows were positive and amounted to PLN thousand. In 2016, the value was positive at PLN thousand. Financial management in 2017 allowed the Company to balance the Group s cash flows, i.e. to use its operating cash flows to cover investment and financial expenses. b. Liquidity ratios of the Group Table: Liquidity ratios of KOGENERACJA Group in 2017 and 2016 As at 31 December 2017 As at 31 December 2016 Change (%) Current liquidity 2,30 1,78 29 Quick liquidity 1,92 1,52 27 The current ratio rose by 29% and the quick ratio increased by 27% as a result of: a comparable level of short-term liabilities coupled with a 28% increase in current assets, mainly cash and cash equivalents. 31

32 III. Investments and development in the Group 1. Assessment of investment capacity a. Key investments in the Group in 2017 Tangible investments in the Group are focused on development, including environmental protection, modernisation and replacement of fixed assets. In turn, the purpose of external investments is to make inroads into new energy markets, consolidate 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, the loan from WFOŚiGW (Provincial Environmental Protection and Water Management Fund) for KOGENERACJA S.A. and subsidies from the NFOŚiGW (National Environmental Protection and Water Management Fund). In 2017, the Group spent PLN thousand on the purchase of intangible and tangible fixed assets (compared with PLN thousand in 2016). Table: Capital expenditure in 2017 and 2016 for the period 2017 to 31 December 2017 for the period 2016 to 31 December 2016 KOGENERACJA S.A Internal investments External investments EC Zielona Góra S.A Total capital expenditures b. Internal investments Internal investment initiatives focus on growth, taking into account ecological solutions, and on upgrade and replacement of fixed assets. These investments are aimed at phased replacement of decapitalised production assets as well as their modernisation. They are also to increase the efficiency and availability and reduce the failure rate of production facilities, and to increase work safety. In 2016, a major portion of the overall spend was used to continue the adaptation of the boilers at EC Wrocław to the new SO x and NO x emission standards: adaptation of boilers at EC Wrocław to comply with new SO 2 emission standards (PLN thousand) and adaptation of boilers at EC Wrocław to comply with NO x emission standards (PLN thousand). The key initiatives completed in 2017 include: modernisation of the new compressor facility at EC Wrocław upgrade of selected facilities outside of energy generation units at EC Wrocław capitalised overhaul of the mill installations at EC Czechnica demolition of chimney H-120 at EC Wrocław. The investments delivered in 2017 were mainly financed from the Company's own funds and partly from external sources as part of the 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 2017: III Notes, Note 29 Deferred income. 32

33 c. Internal investments planned in the Group for 2018 Other key tasks planned for 2018 include: capitalised overhaul of the Turbine TG1 in EC Wrocław capitalised overhaul of the Turbine TG1 in EC Czechnica capitalised overhaul of mill installations on the K-2 boiler in EC Wrocław upgrade of selected flue gas cleaning installations at EC Wrocław installation of protective coatings on the K-1 boiler at EC Wrocław capitalised overhaul of the K-1 boiler at EC Czechnica. The investments to be delivered in 2018 will be financed from the Company's own funds. 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 2017, new buyers were connected to the heat network and a total power of 15.7 MW t was provided to them (compared with MW t in 2016): 15,7 MW t 35 heat stations in Wrocław (12.3 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 8.9 MW t in the primary market and 3.4 MW t in the secondary market. At the same time, in Siechnice and Święta Katarzyna, 26 heat stations were built and were connected to the Company's own heating network, with a total capacity of 3.4 MW t. New capacity of 8.3 MW t was delivered to Zielona Góra. The investments to be delivered in 2018 will be financed from the Company's own funds and from external sources, including subsidies from NFOŚiGW. On 21 December 2017, the Parent Company signed two agreements with the NFOŚiGW for delivery of projects connected with development of the heating system. The value of subsidies under those agreements is PLN thousand, with capital expenditure of PLN thousand over an investment period of On 16 October 2017, EC Zielona Góra entered into subsidy agreements with the NFOŚiGW fund as part of Integrated Territorial Investments in relation to four projects connected with development of the heating system. On 19 December 2018, EC Zielona Góra entered into three agreements with the NFOŚiGW fund for delivery of projects connected with development of the heating system. The value of subsidies for seven projects under the above agreements signed is PLN thousand, with capital expenditures of PLN thousand (the investments are financed with subsidies at 46% on average), over an investment period of The above subsidy agreements are secured with blank bills of exchange. e. External investments planned in the Group for 2018 In 2018, new connections will be continued. KOGENERACJA S.A. plans to connect 47.6 MW t and EC Zielona Góra S.A MW t. f. Equity investments In 2017, KOGENERACJA S.A. did not make any equity investments. 33

34 2. Events with significant impact on the Group's activities 1) Events significantly affecting the Group activities in the financial year In 2017, the following events significantly affected the Group s business: favourable weather conditions affecting a higher volume of heat production lower electricity prices 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. change of the dominant shareholder. Date Events Signing an agreement (Memorandum of Understanding) between EDF International and PGE Polska Grupa Energetyczna SA, ENEA SA, Energa SA and PGNiG Termika SA Ending a collective dispute and signing a salary agreement "Wrocław connected by heat start of an educational programme for children devoted to the fight against smog in the city in cooperation with the Open Mind Foundation Publication of the 2016 Annual Report on Warsaw Stock Exchange Management Board s declaration on the distribution of profit for Appointment of Management Board members for the next term of office with unchanged composition Opening of a Zero Accidents Training Centre at EC Wrocław Annual General Meeting Sale option agreement signed between PGE Polska Grupa Energetyczna SA and EDF International SAS and EDF Investment II B.V Publication of the Q report on Warsaw Stock Exchange Financial Conference in Warsaw Annual Report published online (second edition) White CSR Leaf from the Polityka weekly for KOGENERACJA SA A conditional share purchase agreement signed between EDF International SAS and EDF Investment II BV and PGE Polska Grupa Energetyczna SA Aid Programme for Socially Sensitive Consumers (Agreement with the Siechnice Municipality) th edition of the International Wheelchair Tennis Tournament, Wroclaw CUP Aid Programme for Socially Sensitive Consumers (Agreement with the Wrocław Municipality) Dividend payment day: PLN 6.58/share Publication of the H report on Warsaw Stock Exchange Extraordinary General Meeting KOGENERACJA awarded with an Eagle statuette by the Wprost weekly as a Regional Leader in the field of business st edition of the Open Door Days at KOGENERACJA SA Occupational Health & Safety Week: a healthy and safe workplace , Safe at the start, healthy at the finish line Ending the demolition of a 120-metre chimney, started on 23 May Publication of the Q report on Warsaw Stock Exchange Closing of the purchase of EDF assets in Poland by PGE and indirect acquisition of KOGENERACJA shares by PGE Resignations of Supervisory Board members: Thierry Doucerain, Adriana Carrez, Nicolas Deblaye, Appointment of Supervisory Board members: Piotr Czak, Jakub Frejlich, Krzysztof Skóra and Radosław Woszczyk CEO of KOGENERACJA SA Wojciech Heydel awarded with the White Tiger of the Polish Power accolade Golden and Silver Clip 2017 for KOGENERACJA SA for the project Chimney demolition at EC Wrocław 34

35 Golden sponsor of the Santa Claus Factory Heat Tariff approved by the President of the Energy Regulatory Authority (effective from ) Approval of the Heating Strategy for PGE Group KOGENERACJA among the group of socially responsible companies: Respect Index Appointment of the Chairman of the Supervisory Board: Jakub Frejlich, and Deputy Chairman of the Supervisory Board: Radoslaw Woszczyk Resignation of a Supervisory Board member: Piotr Czak Subsidy agreement with the NFOŚ for heat network development (PLN 4.6 million) 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: On 29 January 2018, Laurent Guillermin filed his resignation from the Supervisory Board effective from 29 January 2018 (Current Report 2/2018). On 1 February 2018, PGE Polska Grupa Energetyczna S.A., acting via Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna, Brokerage House of PKO Bank Polski, made a tender offer for the sale of dematerialised ordinary bearer shares of KOGENERACJA S.A. at PLN per share (representing 16.00% of the total voting power at the Company s General Meeting). The acquirer is PGE Energia Ciepła S.A. The subscription period will continue from 21 February 2018 to 6 March 2018, unless prolonged (Current Report 3/2018). The Supervisory Board adopted a resolution on appointing one of its members, Radosław Woszczyk, to the Audit Committee as of 8 February 2018 (EBI Report 1/2018). On 15 February 2018, the Company s Management Board presented its opinion about the tender offer for the shares of KOGENERACJA S.A. (Current Report 5/2018). As at 6 March 2018, the Management Board of the Parent Company has not presented any declaration regarding the distribution of profit for Assessment of factors and extraordinary items affecting the Group's performance in 2017 In 2017, no extraordinary events were observed 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 combination 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 2017, connections of 15.7 MW t (vs. 12,08 MW t in 2016) were made in Wrocław and Siechnice, and 8.3 MW t (6.08 MW t in 2016) in Zielona Góra. 35

36 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 for carbon emissions for electricity production 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. Based on the regulations for the years , the allocated free allowances limits are increasingly lower. For 2017, the Company was granted a limit of Mg, however according to the value of capital expenditure which is a precondition for receiving the allowances, the volume of free allowances may be estimated at Mg. The free allocation of CO 2 emissions for electricity production, as estimated by the Company, is Mg, and the allocation for heat production is Mg (limit of Mg in 2016, Mg in 2015, Mg in 2014, in 2013, Mg in 2012, according to the National Plan of Distribution of Allowances (KPRU): actual emissions in Mg annual emission allowance Mg balance of 2017 after final settlement (shortfall) Mg forward transactions (net) contracted for March Mg The limit approved for EC Zielona Góra for 2017 was Mg, including solely free allowances for CO2 emissions for the production of heat of Mg (limit of in 2016, Mg in 2015, Mg in 2014, Mg in 2013 and Mg in 2012, according to KPRU II). actual emissions in Mg annual emission allowance Mg balance of 2017 after final settlement (shortfall) Mg forward transactions (net) contracted for March Mg In accordance with the existing accounting policy, the Group created a provision for the shortage of CO 2 allowances totalling PLN thousand (vs. PLN thousand in 2016), including PLN thousand by the Parent Company (vs. PLN thousand in 2016) and PLN thousand by the subsidiary (vs. PLN thousand in 2016). 3) Situation of the energy sector In 2017, 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 main factors affecting the demand for electricity included sustained level of industrial production and air temperatures in Q1 2017, which were lower than in prior years. Like in 2016, in December 2017, an oversupply of electricity was observed due to large production by wind turbines (a strong wind period), with a limited demand from buyers during the Christmas period. 36

37 - Electricity prices The period of low electricity prices continued, driven by: low valuation of CO 2, emission allowances, growing generation from renewable energy sources (an increase in installed power at wind turbines) and an increased possibility of electricity imports. - Prices of green and red certificates In 2017, the prices of green certificates fell again. This was mainly caused by the oversupply of certificates in the market carried over from prior years, and an increased supply of wind energy certificates. b. Internal factors The overarching goal of the Company is 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. In 2017, KOGENERACJA S.A. continued delivery of its strategy adopted in 2015, with the Company s overarching goal to achieve high profitability at the level expected by the shareholders. Accordingly, the following strategic objectives were pursued: 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 planned 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. These strategic objectives, translated into specific operational objectives, are specified in the detailed Operational Plan of KOGENERACJA S.A. for the years In accordance with the idea of management by objectives, strategic objectives are monitored and their progress is assessed through regular reviews of the actions points allocated to Management Board members and cascaded down to operational managers. Due to the change of the strategic investors on 13 November 2017, the Management Board of KOGENERACJA S.A. intends to update the Company s Strategy to reflect the District Heating Strategy announced by PGE Polska Grupa Energetyczna S.A. in December ) 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 the resulting organisational and technical actions. In 2017, the Company continued its campaign, started in 2015, titled Use Your Head at Work (Pracuj z głową), which is a part of the Partnership for Safety project, whereby working teams join efforts to elaborate a common safety culture to be equally high among employees and subcontractors. In 2017, employees suffered 2 accidents, with no accidents among subcontractors (in 2016: no accident among employees, and 1 accident among subcontractors; in 2015: 2 accidents among employees and 2 among subcontractors). 37

38 3) Management by Objectives MBO In 2013, KOGENERACJA S.A. introduced a new MBO Instruction, which created a link between the Objectives Contracts supporting the Strategy and 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 2017, detailed MBO Contracts were signed between the Managing Director and the individual Operational Directors. The tasks set out in the MBO Contracts for 2017 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 2017, no changes in integrated permits took place at the Parent Entity. By the decision of 28 December 2017, the Integrated Permit issued to EC Zielona Góra S.A. by the Marshall of the Lubuskie Province on 6 February 2012, was modified. The change was an effect of installation of a power generator. Other provisions of the Integrated Permit remained unchanged. The permit was issued for an indefinite period. 5) Integrated Management System KOGENERACJA S.A. holds the Integrated Management System certification, covering three systems: 1. Quality Management System compliant with the PN-EN ISO 9001:2009 standard 2. Environmental Management System compliant with the PN-EN ISO 14001:2005 standard 3. Health and Safety Management System compliant with PN-N-18001:2004 and OHSAS 18001:2004 standards. On May 2017, auditors from the Polish Research and Certification Centre (PCBC) carried out a certification audit of the Integrated System of Quality, Environment and Health & Safety Management at KOGENERACJA S.A. The Integrated Management System certification issued by the PCBC in Warsaw is valid until 15 September 2018 for the System of Quality Management and Environment Management, and until 5 May 2019 for the System of Health & Safety Management. EC Zielona Góra S.A. holds the Integrated Management System certification, covering three systems: 1. Quality Management System compliant with the PN-EN ISO 9001:2009 standard 2. Environmental Management System compliant with the PN-EN ISO 14001:2005 standard 3. Health and Safety Management System compliant with the PN-N 18001:2007 and OHSAS 18001:2004 standards. In June 2017, auditors from the Polish Research and Certification Centre (PCBC) carried out an audit of renewal of the certification for the Integrated System of Quality, Environment and Health & Safety Management at EC Zielona Góra S.A. The above certificates expire on 6 August ) 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 2017, these Support Programmes were used by 27 persons: 9 in the Parent Company and 18 in EC Zielona Góra S.A. (in 2016, 35 persons: 19 in the Parent Company and 11 in EC Zielona Góra S.A.). In 2017, there were 22 persons hired by the Parent Company (vs. 9 in 2016). 38

39 7) Centralisation of business areas In search of synergies in affiliated companies, the then EDF Group set up a Shared Services Centre (CUW) in Kraków (now CUW PGE Energia Ciepła 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. Due to the need to coordinate actions relating to the ash removal, the subsidiary Renevis Sp. z o.o. (now PGE Ekoserwis Sp z o.o.) took over the Ash Removal Area and started providing comprehensive services in this domain to then EDF Group in Poland. In 2014, the Coal Handling Area within the Technical Division, was transferred to EDF Ekoserwis Sp. z o.o. (now PGE Ekoserwis Sp. z o.o.). 8) Development of staff competencies In 2017, the average days of training per employee were approx. 3.6 days (2.8 days in 2016). In 2017, a total of 10.2 thousand training hours were delivered (7.9 thousand in 2016). Ready for the future project the initiative 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 2017, two training sessions were organised for control and maintenance experts, with the participation of companies from PGE Energia Ciepła Group. The purpose of the training was to make middle management familiar with production support processes (production economy, KPIs, etc.) and to promote bonding between individual locations. Summer Development Academy first organised four years ago for the Company s employees. Its purpose is to deepen people s understanding of the subjects with which employees normally do not become familiar during the year due to time constraints, and which matter a lot in their daily work, including: IT skills, persuasion techniques, presentation skills, assertiveness, self-motivation and life energy management in stress. 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. Key environmental investment completed At the end of 2015, EC Wrocław launched the desulphurisation installation. The project substantially improved the quality of air in addition to ensuring long-term safety of energy supplies for the Lower Silesia. Thanks to the installation, the emissions of sulphur oxides were reduced five times, while the denitrification installation reduced the emissions of nitrogen oxides three times. b. Actions promoting biodiversity Together with external institutions, KOGENERACJA S.A. delivered the following initiatives in the area of environmental education: Implementation of the programme Connecting Wrocław s historical buildings to the heating network, within the KAWKA Programme promoted by the Wrocław Municipality, designed to eliminate low emission sources and improve air quality in Wrocław. The programme uses funds from the National and Provincial Environmental Protection and Water Management Funds, and the budget of the local authorities. As part of the programme, KOGENERACJA S.A. supported projects of connecting buildings to the heating network. It also promoted network heat as the preferred alternative to individual coal-fired furnaces, disseminating knowledge about negative consequences of low emissions through training for housing managers, meetings with housing 39

40 communities and participation in events organised in the Nadodrze housing district, where EC Wrocław is located and where there is a large group of buildings which use solid fuel furnaces. Continuation of cooperation with the Lower-Silesian Ecological Club (with classes on ecology at Wrocław primary and secondary schools, ecological workshops for students on ecological aspects of network heat, co-organisation of an Ecological Competition for students of Wrocław s secondary schools). c. Cooperation with housing cooperatives to obtain white certificates In 2017, the initiatives submitted for the Fifth Bidding of the President of the Energy Regulatory Authority, No. 1/2016, earned the Company 20 energy efficiency certificates for a total value of toe, including toe for initiatives completed on own assets. The initiatives included: modernisation of heating networks and pipelines, compressor facilities, insulation of buildings, modernisation of an industrial plant, replacement of low-efficiency heat substations and replacement of local, low-efficiency heat sources with modern heat substations. In 2017, KOGENERACJA S.A. continued initiatives to improve energy efficiency of own assets and resources owned by the end buyers of heat. The Company submitted to the Energy Regulatory Authority six collective requests for energy efficiency certificates for a total of 490 toe, including 244 toe relating to energy efficiency improvement initiatives relating to own assets. The completed and planned initiatives focused on: modernisation of lighting and equipment for own purposes, thermal modernisation and replacement of old, low-efficiency heating substations. SOCIAL ENVIRONMENT The Company s corporate social responsibility, which follows the rules of Sustainable Development, is expressed by the PGE Group values: Partnership, Growth, Responsibility. Partnership We undertake pre-emptive actions and ensure social support for any restructuring planned We make preparations for generational change with our Ready for the Future initiative We listen to what our people say (Staff Opinion Survey, 2017) We cooperate with four representative Trade Unions We fund the Employee Pension Scheme We co-finance the Association of Seniors, retired employees of KOGENERACJA S.A. We get employees, including retired employees, engaged in organisation of Open Door Days We cooperate with the KARAN Association in Wrocław as part of the programme of helping people with psychoactive substances abuse problems We prevent social exclusion with regard to energy through the following initiatives: - Programme of Aid for Socially Sensitive Buyers* - Support for the SIEMACHA Association, which looks after youth from socially sensitive communities - Energy and educational patronage over the Youth Social Therapy Centre No. 2 in Wrocław, in cooperation with the MiserArt Foundation (bread-baking workshops and screen printing techniques) - Józef Pupka Foundation supporting economically disadvantaged, gifted students Employee initiatives: - Kropelka Blood Donors Club of KOGENERACJA S.A. (3 initiatives completed, with 40 litres of blood obtained at the 46th anniversary in 2017) - Charitable events arranged at the initiative of employees for local beneficiaries, including the Wrocław Aid and Education Centre under the Patronage of the Mayor of Wrocław * Programme of Aid for Socially Sensitive Buyers for the residents of Wrocław and Siechnice. The programme is based on agreements signed with the authorities of Wrocław and Siechnice in KOGENERACJA S.A. supports consumers with heat bill payments. The programme is designed for economically disadvantaged persons and educational facilities which have sales agreements with the Wrocław-based heat producer. The distribution of funds is decided by the local Social Aid Centres. Development We conduct annual performance reviews, which are the basis for the Annual Training Plan We promote the activity of the disabled through: 40

41 - educating children at Wrocław s schools in cooperation with the L Arche Foundation - etudes with theatrical dolls, dealing with the subject of disability; In 2017, 110 performances were held at schools, pre-schools and education centres for 3.5 thousand children from Wrocław - patronage over the International Wheelchair Tennis Tournament Wrocław Cup in 2017, the 15th edition of the Tournament took place We mobilise local communities: - Wrocław Connected by Heat starting an educational programme for children, devoted to the fight against smog, in cooperation with the Open Mind foundation. Responsibility We care about the highest Occupational Health and Safety standards through: - awareness-raising programmes for employees, subcontractors and guests - management field visits (WMT) - daily Safety News - nominations for the Safe employee of the quarter/year at the Company - promoting the OSHA Campaign We promote a healthy lifestyle among employees through: - a package of additional medical services (an tripartite agreement between the insurer, medical services provider and KOGENERACJA S.A.) - Sports and Travel Association - health promotion initiatives as part of the Healthy Week campaign We plan and ensure security of electricity and heat supplies We promote improvement of air quality in Wrocław with the KAWKA programme (replacement of furnaces with network heat) We educate local communities by delivering sweeping communication campaigns promoting our environmentally-friendly production through: - Open Door Days visits arranged at production plants for the general public connected with ecological education; 21st edition was held on 29 September 2017 at EC Wrocław - workshops for secondary school students held in cooperation with the Lower-Silesian Ecological Club. a. Code of Ethics 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. In January 2018, the Management Board of KOGENERACJA S.A. adopted the PGE Group's Code of Ethics. Furthermore, the Company introduced the Corruption and Fraud Prevention Policy and Anti-Mobbing Rules. b. Respect Index On 14 December 2017, the Warsaw Stock Exchange announced the new list of socially responsible companies. For the eight time, KOGENERACJA S.A. found itself among the most responsible companies listed on the Warsaw Bourse. c. Other initiatives The Company was among the 38 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. 41

42 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 values and the values of PGE Group, such as: Partnership, Growth, Responsibility. On 30 January 2018, the Management Board of KOGENERACJA S.A. adopted the General procedure on the sponsoring activity rules at PGE Polska Grupa Energetyczna S.A. and other companies of PGE Group. 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 socially sensitive groups of 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 Promoting the activities of 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 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 Implementation of the 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: Creating a Women s Network was created, which is aimed at supporting professional development of women in the organisation through: a cycle of specialist upskilling training courses, conferences, etc. Adopting the rule of promoting diversity in recruitment processes at the Company Starting the Ready for the future project as a response to a generational change at the Company Healthy Week building a community that promotes initiatives favouring health and work-life balance. 42

43 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 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. issued the Practical diversity management guide for managers conducted a campaign devoted to stereotypes about gender, disabilities and access to promotions arranged annual celebrations of the Diversity Day implemented a process of monitoring and reporting by age, gender, employment, education and salaries issued Anti-bullying Rules, held training for managers, Management Board members and Ethics Council members on the idea of bullying-free work environment promoted physical activity, work life balance, stress prevention, healthy eating habits under the Healthy Spring and Health Week programmes organised conferences, training courses and networking; issued the Four Pillars of Female Success as part of the Women s Network Diversity policy in relation to supervisory, management and administration bodies As at the date of publication of this report, the Company had not yet established a formal diversity policy for supervisory, management and administrative bodies. Since November 2017, the Company has been a member of and is in the process of integration with PGE Group. As a listed company, PGE Polska Grupa Energetyczna S.A., declares that the process of electing people to management positions takes into account such factors as relevant education, professional experience, qualifications and skills of the candidates, and does not disadvantage any candidates in relation to the elements of the diversity policy indicated in Rule I.Z.1.15 of the Best Practices for WSE Listed Companies. In accordance with the current version of the Articles of Association of KOGENERACJA S.A., PGE Group companies have the key influence on filling key managerial positions, which in the light of the above declaration of PGE Polska Grupa Energetyczna S.A. ensures that the above rule will also be followed in practice at the Company. 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. On 21 November 2017 and on 5 February 2018, updates were made to the Quality, Environment and Health & Safety Management Policy of KOGENERACJA S.A. and the Health & Safety Policy of KOGENERACJA S.A. Chart: Actual emissions in 2017 and 2016, and permitted emissions in KOGENERACJA S.A. Actual emissions in 2017 Actual emissions in 2016 Permitted emissions in

44 9. Outlook for the Group's development The development outlook for Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. and its subsidiary EC Zielona Góra S.A. is closely related to the implementation of the District Heating Strategy of the new business line PGE District Heating of PGE Polska Grupa Energetyczna S.A. (the ultimate parent). Maintenance of high profitability and stable EBITDA remains on top of the agenda of KOGENERACJA S.A. and EC Zielona Góra S.A. as driver of the value of the two companies. This goal will be achieved by further optimisation of revenue streams of both companies, minimising variable costs, keeping fixed costs down, increasing the sales of heating-related and multi-energy services and asset optimisation. The Group s performance will also be affected by the settlement of compensation for stranded costs at EC Zielona Góra S.A.. Taking into account the available forecasts of electricity prices, the compensation amounts received will be subject to a partial reimbursement in the future. An increase in energy efficiency remains an important goal for the Group companies. The consistent upgrade of assets have a positive impact on the efficiency of production. As a result, in the following years, high reliability of production assets will be maintained to guarantee energy security for customers, as well as competitiveness of the Group s products: heat and electricity. The key issue for the future of KOGENERACJA S.A. is the decision to build new facilities at the EC Czechnica, which should enter service before 1 January Currently, advanced analytical work is under way on this project, and an investment decision is expected to be taken by the end of The position of EC Zielona Góra S.A. is different. The company has modern production facilities (CC Gas Unit, and gas and oil boilers), which ensure that it will remain an environmentally friendly and reliable producer of heat and electricity also in the future. Currently, the Group also conducts analyses with regard to adaptation of its assets to the requirements of the BAT/BREF conclusions, which will come into force in After completion of the planned modernisations projects, the companies will comply with all the stringent norms in this area. Both KOGENERACJA S.A. and EC Zielona Góra S.A. are leaders of the local heat markets and intend to remain heating companies of the first choice for heat buyers also in the future. Thanks to efficient flue gas desulphurisation and denitrification installations in Wrocław, KOGENERACJA S.A. is poised to remain an ecological producer of heat for the city's residents. Promoting network heat is an important part of the efforts to limit low emission sources and smog, thus contributing to the improvement of air quality in the region. In this respect, KOGENERACJA will continue to maintain partner relationships and work closely with local authorities and with the heat distributor. Joint activities will result in the annual connection of MW to the heating network for new buyers, also thanks to financing under the KAWKA programme and the Integrated Territorial Investments (ITI). Similarly, EC Zielona Góra S.A., as the owner of the municipal heating network in Zielona Góra, intends to upgrade and expand its network in the following years. Both companies will invariably follow the overarching rule of responding to emerging challenges and taking advantage of development opportunities. Safety of employees and contractors will be a priority for the Group. The goal is the same: zero accidents. In this area, activities will be continued to improve safety and increase employee involvement in building a safe work culture. The positive involvement of KOGENERACJA S.A. and EC Zielona Góra S.A. in the life of the regions will not change. The Group companies will continue to engage in a partner dialogue with local communities and support sustainable development based on corporate social responsibility and the values of the entire PGE Group. The Management Board of the Parent Company is convinced that the implementation of all the activities described above is a firm guarantee that the companies of KOGENERACJA Group will continue robust performance going forward as well. 10. Key achievements in research and development In 2017, under the Agreement for the provision of research and development services with PGE Energia Ciepła S.A., KOGENERACJA S.A. participated in the implementation of research projects in the following areas: 1. Actions related to energy efficiency 2. Actions related to environmental efficiency 3. Activities related to optimisation of useful lives of assets 4. Actions related to reliability, diagnostics and measurements 5. Activities related to heating networks, renewable energy and new technologies. 44

45 In 2017, the following research projects were carried out: The use of network heat for the production of cold Examination of mercury emissions in terms of new environmental requirements and Best Available Technologies (BREF/BAT) Optimisation of the quality of combustion by-products Limiting the contamination of heating surfaces in the BFB-100 type boiler at EC Czechnica Optimising the work of gypsum hydrocyclones Examining the catalyst for reducing nitrogen oxides without the use of ammonia Development of thermal peak power Optimising the operation of steam blowers based on online measurement of pollution levels Analysis and verification of new cleaning techniques for boiler heating surfaces Development of an anti-slag additive based on sewage sludge from the Wet Flue Gas Treatment Installation Measurement and control of ammonia content in fly ashes Development of a continuous wall monitoring system for corrosion risk assessment Reduction of nitrates in wastewater from the Flue Gas Treatment Installation Optimisation of water consumption for energy purposes Optimisation of the Flue Gas Treatment systems and preparation for meeting the requirements of the Best Available Technologies (BREF/BAT). 11. Description of key risks and threats Key risks and threats relating to the operations of KOGENERACJA S.A. are as follows: 1) Dependence on buyers; plans to construct a competitive CHP plant With respect to heat sales, the Company's operations are to a large extent dependent on Fortum Power and Heat Polska Sp. z o.o. (Fortum), the operator of the heat distribution network. A significant risk factor for KOGENERACJA S.A. is posed by the following Fortum s initiative: - in Version I: construction of a CHP plant with a CC Gas Unit of 400 MW located in Wrocław at ul. Obornicka in Version II: construction of a combustion installation with heat power of 225 MWt, based on the use of alternative fuel, hard coal and biomass, located in Wrocław at ul. Obornicka 195. The Management Board of KOGENERACJA undertook an information campaign addressed to the Wrocław Municipality authorities and the Energy Regulatory Office, describing the effects of such a decision that would lead to excessive volume of power in the system and the potential growth of network heat prices. In 2017, the Regional Environmental Protection Director decided to suspend the issue of a decision on arrangement re construction of the combustion installation at ul. Obornicka as the documents received for that purpose were not compliant with the Provincial Waste Management Plant. On 7 August 2017, the Mayor of Wrocław Rafał Dutkiewicz made a statement addressed to the representatives of residents (Social Committee: OUR HOUSING ESTATE STOP the Waste Incineration Plant ), ensuring, among other things, that no investment is planned that would involve construction of a waste incineration plant at ul. Obornicka in Wrocław. The mayor also said that binding social consultations must be made before any such project is implemented. 2) Change of Energy Law The Energy Law and its implementing regulations give shape to Poland's energy policy and determine the rules and conditions of the supply and use of fuels and energy, and indicate competent authorities to decide on matters of fuel and energy trade. In 2017, the Energy Law Act was amended several times: - Amendments of 1 January 2017 arising from the Act of 16 December 2016 Legal provisions introducing the Act on managing state-owned assets - Amendments of 10 January 2017 arising from the Act of 23 September 2016 on out-of-court resolution of consumer disputes 45

46 - Amendments of 1 March 2017 arising from the Act of 16 November 2016 Legal provisions introducing the Act on National Tax Administration - Amendments of 29 April 2017 arising from the Act of 9 March 2017 on amendments to the Act on trading in financial instruments and certain other acts - Amendments of 21 June 2017 arising from the Act of 11 May 2017 on statutory auditors, audit firms and public oversight - Amendments of 2 August 2017 arising from the Act of 7 July 2017 on the amendment of the Act on crude oil, petroleum and natural gas reserves and the rules of conduct in the event of a threat to fuel security of the state and disruptions in the oil market, and certain other acts. 3) CO 2 emissions The risk associated with CO 2 emissions and the need to use an appropriate amount of emission allowances was not so severe in the previous years, as the actual CO 2 emissions were lower than the limits allocated to the Company under the National Plan of Distribution of Allowances (KPRU). The low amount of emission allowances granted under KPRU III for means: - changes in the method of distribution of allowances into an auction system according to the new Directive on emission allowances - only a part of the allowances will be received by the Company free-of-charge - under the National Implementing Measures and the National Investment Plan, the allocations for heat and electricity, respectively, will need to be evidenced with completed projects - starting from 2020, all the allowances will be acquired through auctions. All this will lead to an increase in the production costs as emission allowances will need to be purchased or extra investments will be needed to increase the generation efficiency. The instability of prices of CO 2 emission allowances is seen as another risk. 4) Factors connected with changes in the demand for heat by buyers The decrease in demand for heat, which was due to, among other things, upgraded insulation of houses and apartments, reduced heat losses during transmission and installation of weather sensors in the central heat stations, has been stopped in the recent years. The active steps taken by KOGENERACJA S.A. to acquire new buyers, especially its co-operation with the Wrocław Municipality with regard to connection of new and existing buildings to the network compensate for the reduced demand and help stabilise the sale of heat. Last year, the sale of contracted heat power increased by MW t, i.e. by 1.35%. 5) Factors connected with fluctuating heat and electricity sales The Company's sales are characterised by seasonality. In the period from October to April the demand for heat is much higher than in other months. This means that the possibility to generate electricity in the combined system is also seasonal. The Company does have the technological capacity to generate electricity also in the period of a lower demand for heat (through the so called "pseudo-condensation") but this has been significantly limited since 1 July 2007, i.e. after ratification of another revision of the Energy Law, due to the requirement to keep the minimum gross efficiency of transformation of chemical energy into electricity and heat in the cogenerated system at 75%. In 2017, EC Wrocław achieved the efficiency of 84.9%, (82.5% in 2016), while EC Czechnica achieved 76.2% (78.0% in 2016). 46

47 12. Changes in the key principles of the Company and Group management In 2017, there were no changes in the principles of management of the Company and the Group. On 1 July 2010, the Company began implementation of a multi-stage project associated with a transfer of non-technical areas to the Shared Services Centre (CUW) in Kraków. As a result of establishment of the Shared Services Centre, the organisation structure of KOGENERACJA S.A. was modified. Subsequent changes were implemented in December The Communication Department was separated from the Company's organisational structure, and its role was taken over by the Corporate Communications Directorate of EDF Polska S.A. (now PGE Energia Ciepła S.A.). Due to the need to co-ordinate actions relating to the ash removal, EDF Ekoserwis Sp. z o.o. (now PGE Ekoserwis Sp. z o.o.) took over the Ash Removal Area and started providing the services to the Group. In 2014, the Coal Handling Area within the Technical Division, was transferred to EDF Ekoserwis Sp. z o.o. (now PGE Ekoserwis Sp. z o.o.). Chart: Organisational structure of KOGENERACJA S.A. as at 31 December 2017 Organisational Structure of KOGENERACJA S.A. 47

48 IV. Statement of compliance with the corporate governance principles 1. Corporate Governance Principles a. Collection of the corporate governance principles As a company listed on Warsaw Stock Exchange, KOGENERACJA S.A. is subject to the Best Practice for the WSE Listed Companies 2016, which came into force on 1 January The following Statement provides details of the Company s compliance with this Code of Best Practice. The documents are available at the dedicated WSE website b. Application of best practice in corporate governance and election not to use the corporate governance principles The Company published information about its compliance with the recommendations and principles contained in the document Best Practice for the WSE Listed Companies 2016 in the form of EBI 2/2016 report. At present, the Company does not adhere to the following two recommendations: IV.R.2. and VI.R.3 and seven specific principles: I.Z.1.20., II.Z.2., II.Z.3., II.Z.7., II.Z.8., IV.Z.2., V.Z.5. All the relevant details are available on the Company s corporate website. In accordance with the comply or explain rule, below is an explanation regarding the principles set out in the Best Practice for the WSE Listed Companies 2016 that the Company does not comply with.. PRINCIPLE 1 I.Z Audio or video record of the General Meeting. 2 II.Z.2. A company s management board members may sit on the management board or supervisory board of companies other than members of its group subject to the approval of the supervisory board 3 II.Z.3. At least two members of the supervisory board should meet the criteria of being independent referred to in principle II.Z.4. 4 II.Z.7. Annex I to the Commission Recommendation referred to in principle II.Z.4 applies to the tasks and the operation of the committees of the Supervisory Board. Where the functions of the audit committee are performed by the supervisory board, the This principle is not followed This principle is not followed This principle is not followed This principle is not followed COMMENT OF KOGENERACJA S.A. Due to the ownership structure, the Company does not plan to record the proceedings of General Meetings. The obligations re approval to be obtained by management board members to sit on supervisory boards of other companies were expressed by the Shareholders in the Company s Articles of Association. The Shareholders will was that management board members should obtain approval to sit on supervisory boards of Group companies such a principle was established and is followed. At present, one member of the management board of KOGENERACJA S.A. sits on supervisory boards of two companies from outside the Group, and one member of the management board of KOGENERACJA S.A. sits on a supervisory board of one company from outside the Group. This principle is followed but the Company has not presented its current statement at the date of publication of the annual report. The principle may not be followed as at present only one supervisory board member of KOGENERACJA meets the independence criteria referred to in principle II.Z.4. Hence it is impossible for most of the Remuneration Committee to be independent. 48

49 5 II.Z.8. The chair of the audit committee should meet the independence criteria referred to in principle II.Z.4. 6 IV.Z.2. If justified by the structure of shareholders, companies should ensure publicly available real-time broadcasts of general meetings This principle is not followed This principle is not followed This principle is followed but the Company has not presented its current statement at the date of publication of the annual report. The management board of the Company decided not to use electronic means of communication during general meetings due to the cost of such solutions (which are out of proportion to the potential benefits for shareholders). Furthermore, such a solution is not justified by the present ownership structure and the Company s prior experience in this regard. The Company complies with all legal provisions relating to the organisation of General Meetings and makes every effort to ensure that its disclosures policy is full, transparent and effective. In the opinion of the Company s management board, the above measures mitigate any potential impact of noncompliance with this principle. 7 V.Z.5. Before the company concludes a significant agreement with a shareholder who holds at least 5% of the total vote in the company or with a related party, the management board should request the supervisory board s approval of the transaction. Before giving its approval, the supervisory board should evaluate the impact of the transaction on the interest of the company. The foregoing does not apply to typical transactions and transactions at arm s-length made as part of the company s operations between the company and members of its group. If the decision concerning the company s significant agreement with a related party is made by the general meeting, the company should give all shareholders access to information necessary to assess the impact of the transaction on the interest of the company before the decision is made. This principle is not followed Investors interest is secured by 7section 8 of the Terms of Reference of the Management Board of KOGENERACJA S.A., which says that when making transactions with shareholders or other persons whose interests affect the Company s interests, the management board should act with due care to ensure that transactions are made on an arm s length basis. 49

50 2. Internal control and risk management systems with regard to the financial reporting process a. Internal control system The Parent Company has an internal control system that gives reasonable assurance about the following areas of the Parent Company's business: operating effectiveness and efficiency reliability of financial reporting compliance with the applicable laws and regulations. The Parent Company uses the COSO model to build and develop its internal control model. Internal control as per the COSO mode consists of 5 linked elements: control environment, risk assessment, control activities, information and communication, internal control management. The internal control system of KOGENERACJA S.A. includes functional and institutional control. Functional internal control, exercised by all the Company's employees, is regularly assessed and monitored as part of the institutional internal control exercised by the Risk Management and Security Oversight Directorate of PGE Energia Polska S.A. under an SLA. Each year the Company performs a self-assessment of its internal control system, a process that is co-ordinated by the Risk Management and Security Oversight Directorate of PGE Energia Ciepła S.A. Under the SLA, internal audits at the Parent Company and monitoring of compliance with post-audit recommendations is the responsibility of the Internal Audit Department and the Risk Management Systems and Security Oversight Directorate of PGE Energia Ciepła S.A., respectively. The 2017 Audit Plan for KOGENERACJA S.A. was drafted using the Risk Map and the results of the Self-Assessment of the Company's internal control system. The Audit Plan was approved by the Management Board. Internal audit results were reported to the Management Board. The Company and the Group have appropriate procedures in place to check the financial statements to ensure they are complete and reliably reflect all the economic transactions occurring in the particular period. The Company's accounting policy on financial reporting is used both in the process of budget preparation, forecasting and preparation of periodic management information. The financial data underlying financial statements and periodic reports are prepared by the medium and senior management after the close of each calendar month. The Company maintains its books in the SAP IT system, which facilitates analysis of all the economic / financial aspects, which pertain to all the organisational units of the Company. SAP contains full technical documentation, and access to its resources is duly protected. For the purpose of the Stock Exchange, all subsidiaries of KOGENERACJA S.A use the same consolidation system and apply the same presentation rules. The consolidation at the Stock Exchange is performed by KOGENERACJA S.A. and is each time verified in the event of changes in the shareholding structure. KOGENERACJA S.A. has a system for gathering and processing data received from subsidiaries. Preparation of the financial statements of the Company and the Group is the responsibility of the Controlling and Stock Exchange Department in the Finance Directorate. Expert and organisational supervision over preparation of the financial statements is exercised by the Finance Director member of the Company's Management Board. Financial statements are reviewed by the Management Board, and then examined by an independent auditor and assessed by the Supervisory Board. b. Risk management system The risk management system covers all the areas of the operations of KOGENERACJA S.A., including its financial activities, and is operated in accordance with the applicable rules. A Risk Map for the Company and the Group companies is created and updated on an on-going basis. Risks identified for all the operating areas are assessed and prioritised using the following 3 criteria: impact likelihood control level. Where the risk is assessed as high, an owner of the risk is appointed and a mitigation plan is prepared. For the main risks, a periodic assessment of the risk mitigation plans is performed. Risk Controllers and Directors are involved in the risk assessment process. Under the SLA, the Risk Management and Security Oversight Directorate of PGE Energia Ciepła S.A. coordinates the process of reporting the Company s risks to the owner. To determine the financial threats connected with the Company's market environment, counterparty risks are analysed (in the form of a table) to quantify the potential losses, e.g. those arising from bankruptcy of the counterparty. 50

51 The Company exercises control functions over its subsidiary, which is consolidated for the purpose of financial reporting by the Group. Such control is exercised through the Company's representatives on the supervisory board of such a subsidiary. 3. Shareholders of the Company As at 31 December 2017 No. of ordinary bearer shares Voting power % of share capital % of voting power PGE Energia Ciepła S.A ,26 32,26 Investment III B.V ,74 17,74 Aviva OFE BZ WBK ,99 9,99 OFE PZU "Złota Jesień" ,79 7,79 Nationale-Nederlanden OFE ,38 7,38 Aegon OFE ,45 6,45 Others ,39 18,39 Total ,00 100,00 On 13 November 2017, PGE Polska Grupa Energetyczna S.A. acquired EDF s assets in Poland (Current Report 26/2017) and following indirect acquisition of shares of KOGENERACJA S.A. holds 50% plus 1 share and 50% plus 1 vote at the General Meeting. On 30 January 2018, a subsidiary of PGE Energia Ciepła S.A. was renamed from EDF Investment III B.V. to Investment III B.V., and the change was recorded in the official register. 4. Preference shares All the shares of KOGENERACJA S.A. are ordinary bearer shares with no preference features. 5. Limitation on title transfer and voting There are no limitations on the transfer of title to shares or on the right to exercise voting power from the Company's shares. 6. Amending the Articles of Association Changes to the Company's Articles of Association (Statutes) are made pursuant to Article 430 and of the Commercial Companies Code. The last changes to the Company s Articles of Association were made under Resolution No. 3/2014 of the Extraordinary General Meeting of 9 April 2014 (Current Report 6/2014). The changes were recorded in the Register of Entrepreneurs of National Court Register (KRS) on 26 May General Meeting: operation, powers, shareholders' rights The brief of the General Meeting and its main powers are laid down in the Articles of Association (Statutes) of KOGENERACJA S.A. and in the Terms of Reference of the General Meeting. 51

52 Pursuant to 24 of the Company's Articles of Association, the remit of the General Meeting includes in particular: reviewing and approving the Management Board's report on the Company's operations for the previous financial year and granting discharge to the members of the Company's governing bodies for performance of their duties making decisions on distribution of profit or loss cover changing the objects of the Company changing the statutes of the Company increasing or reducing the share capital deciding on the manner and conditions of redeeming the Company's shares merging, de-merging or transforming the Company winding up / liquidating the Company issuing convertible bonds or bonds with pre-emptive rights disposing or leasing the company or its organised part; encumbering the company's assets making decisions regarding the claim for damage caused by the formation of the Company or performance of the management or supervisory duties by the Company's bodies creating and eliminating components of equity approving the sale or disposal of properties, perpetual usufruct rights or interest in properties whose value exceeds PLN equivalent of EUR 5,000 thousand deciding on other matters which fall within the remit of the General Meeting by virtue of the Commercial Companies Code Shareholders exercise their rights in accordance with the Commercial Companies Code a. The Extraordinary General Meeting of KOGENERACJA S.A. On 21 September 2017, an Extraordinary General Meeting (EGM) of the Company took place. It made changes to the Company s Supervisory Board, charged the Company with the cost of announcing and convening the EGM, and changed the rules for remunerating Supervisory Board members. b. Annual General Meeting of KOGENERACJA S.A. On 20 April 2017, an Annual General Meeting (AGM) of the Company was held, to transact the business stipulated in Article 395(2) of the Commercial Companies Code (Current Report 9/2017). The AGM granted discharge to all the Management Board and Supervisory Board members for the performance of their duties (Current Report 9/2017), decided on a profit distribution (Current Report 11/2017), and appointed new members of the Supervisory Board (Current Report 12/2017). 8. Changes in the Management Board and the Supervisory Board a. Changes in the Management Board Since 26 June 2014, the Management Board composition has remained unchanged and is as follows: 1. Wojciech Heydel Management Board President 2. Marek Salmonowicz Management Board Member 3. Maciej Tomaszewski Management Board Member 4. Krzysztof Wrzesiński Management Board Member Experience and competences of the Management Board members of KOGENERACJA S.A. Wojciech Heydel Management Board President Graduated from Silesian University of Technology, the Faculty of Vehicle Transport, specialization: combustion engines. Academic Staff Member at Oil and Gas Institute in Kraków ( ). 52

53 Gained experience at BP by working in different management roles (14 years of service), including as CEO of BP POLSKA, 4 years at the company s London headquarters ( ). Vice-President responsible for sales at PKN ORLEN S.A. ( ). CEO of PKN ORLEN S.A. (2008). CEO of Ruch S.A. ( ). In , member of the Management Board of EC Zielona Góra S.A. From June 2016 until present, member of the Supervisory Board of EC Zielona Góra S.A. Former member of Supervisory Boards of: BP Gaz, Orlen Gaz, Orlen Deutschland AG, Orlen Oil, Unipetrol Rafinerie, Możejki Nafta, Equus SA, Polkomtel SA, KOELNER S.A. (now Rawlplug S.A.). In November 2012, appointed member of the Supervisory Board of Renevis Sp. z o.o. (now EDF Ekoserwis Sp. z o.o.), including: between November 2012 and December 2014: Chairman of the Supervisory Board. Since June 2016 member of the Supervisory Board of Elektrotim S.A. Appointed CEO of KOGENERACJA S.A. in October At present, he is responsible for supervising the entire operations of the Company and the Company s external contacts. He manages the work of the Management Board, is in charge of the Support Directorate and Health & Safety Area and has oversight over development of the Company s HR and payroll policy. He is responsible for the social policy and for social relations inside and outside the Company. Marek Salmonowicz Management Board member Graduated from the Wrocław University of Technology, specialisation: Mechanical and Power Engineering; completed post-graduate studies Management systems and new technologies in power engineering ; graduated from the Wrocław University of Economics, post-graduate studies Analysis and economic evaluation of economic organizations. Joined Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. in 1986 as Operator of Power Industry Equipment, progressing to Boiler Room Shift Master, Senior Master of Boiler Room, Production Unit Manager in EC Czechnica, ( ); Manager of Production Engineering (EC Wrocław and EC Czechnica) ( ); Deputy Director of Production ( ); Deputy Director of Industrial Development for EC Czechnica Infrastructure ( ); Chief Engineer of EC Czechnica ( ); Production Engineering Manager ( ) and Technical Director (since 2013). Former member of Supervisory Boards of: PPO Siechnice Sp. z o.o., KOGENERACJA S.A. (Supervisory Board member and then Supervisory Board Chairman), Diagpom Sp. z o.o. Appointed to the Management Board of KOGENERACJA S.A. on 24 September At present is in charge of the Technical Directorate. Maciej Tomaszewski Management Board member Graduated from the Academy of Economics in Wrocław (1996), completed post-graduate studies: Management of Industrial Systems Polish Studies Wrocław University of Technology Ecole Nationale Superieure des Mines de Saint Etienne ( ). Since graduation, worked with EC Zielona Góra S.A., originally in the finance area. In 1997, participated in the preparation and implementation of controlling at EC Zielona Góra and in 2004 became Head of the Budget and Controlling Department. In 2009, became Deputy Director for Trade and Quality. Trade and Quality Director at EC Zielona Góra S.A. in In , he served as the chairman of the Supervisory Board of ECeRemont Sp. z o.o. Engaged in the development of cogeneration, acting, inter alia, for the Polish Association of Professional Heat and Power Plants. He took part in the legislative works on the law terminating LTC in Led many projects within EDF Group. Appointed Management Board member of KOGENERACJA S.A. in 26 June At present, he is in charge of the Trade and Development Directorate, including operation of the heat system's power equipment owned by the Company. He is particularly responsible for the trading effects in the markets of electricity, heat, certificates and CO 2 emission allowances. Krzysztof Wrzesiński Management Board member Graduated from the Mikołaj Kopernik University in Toruń, Faculty of Mathematics, Physics and Chemistry, specialization: experimental physics, and the Faculty of Economical Science and Management, specialization: Finance Management. Completed postgraduate management studies at Wielkopolska Business School of the Poznań University of Economics, earned Master of Business Administration degree from the Nottingham Trent University. 53

54 Prior experience gained at e.g. PROFIL, PCV products factory in Piła, Philips Lighting Poland S.A. in Piła, Pomorski Bank Kredytowy S.A. and PKO BP S.A. In 2002, joined KOGENERACJA S.A. as Finance Director, and in also acted as Head of HR. Between July 2003 and July 2013, acted as a member of the Supervisory Board of EC Zielona Góra S.A. Member of the Management Board of Renevis Sp. z o.o. (now EDF Ekoserwis Sp. z o.o.) from 2012 to Appointed member of the Management Board of KOGENERACJA in At present, is in charge of the Finance Directorate (including the area of the Stock Exchange and the Company's strategy towards its controlled entities) and supervises IT services provided for the Company. b. Changes in the Supervisory Board From 1 January to 20 April 2017, the membership of the Supervisory Board was as follows: 1. Adriana Carrez Deputy Chairman of the Supervisory Board 2. Nicolas Deblaye Supervisory Board Member 3. Thierry Doucerain Supervisory Board Chairman 4. Raimondo Eggink Supervisory Board Member 5. Mariusz Grodzki Supervisory Board Member 6. Laurent Guillermin Supervisory Board Member 7. Roman Nowak Secretary of the Supervisory Board On 20 April 2017, as of the day of the AGM of KOGENERACJA S.A., due to expiry of the Board s tenure, the mandates of two Supervisory Board members expired. The AGM appointed two members of the Supervisory Board (Current Report 12/2017): 1. Adriana Carrez 2. Laurent Guillermin On 21 September 2017, resignations were submitted by Thierry Doucerain, Adriana Carrez and Nicolas Deblaye, conditional on the sale of all the registered shares held by EDF International SAS and EDF Investment II BV in EDF Polska S.A. to PGE Polska Grupa Energetyczna S.A. 1. Thierry Doucerain resigned as member of the Company s Supervisory Board and Chairman of the Supervisory Board and Chairman of the Remuneration Committee 2. Adriana Carrez resigned as member of the Company s Supervisory Board and Deputy Chairman of the Supervisory Board 3. Nicolas Deblaye resigned as member of the Company s Supervisory Board and Chairman of the Audit Committee and member of the Remuneration Committee (Current Report 21/2017). On 21 September 2017, the EGM appointed the following person to the Supervisory Board of KOGENERACJA S.A. as of 21 October 2017: 1. Krzysztof Skóra and, subject to receipt by the Company of written statements (i.e. copies certified as true copies of the original by a legal advisor or an attorney-in-law), made by or on behalf of the following shareholders of EDF Polska S.A.: (i) EDF International SAS and (ii) EDF Investment II BV, transferring the ownership of all their registered shares of EDF Polska S.A. and confirming the provision of the documents evidencing those registered shares to PGE Polska Grupa Energetyczna S.A., the EGM appointed the following Supervisory Board members (Current Report 22/2017): 2. Piotr Czak 3. Jakub Frejlich 4. Radosław Woszczyk. 54

55 On 13 November 2017, the Company was advised that EDF International SAS and EDF Investment II BV had sold all their registered shares of EDF Polska S.A. to PGE Polska Grupa Energetyczna S.A., which fulfilled, as of that date, the condition for resignation of the following persons from the Company s Supervisory Board: - Thierry Doucerain - Adriana Carrez - Nicolas Deblaye. On 14 November 2017, the Company received written statements made on behalf of EDF International SAS and EDF Investment II BV on the transfer of all their registered shares of EDF Polska S.A. and confirming the issue of documents evidencing those registered shares to PGE Polska Grupa Energetyczna S.A., which fulfilled the condition for appointing the following persons to the Company s Supervisory Board (Current Report 29/2017): - Piotr Czak - Jakub Frejlich - Radosław Woszczyk. Since 14 November 2017, the membership of the Supervisory Board was as follows: 1. Piotr Czak Supervisory Board Member 2. Jakub Frejlich Supervisory Board Member 3. Raimondo Eggink Supervisory Board Member 4. Mariusz Grodzki Supervisory Board Member 5. Laurent Guillermin Supervisory Board Member 6. Roman Nowak Secretary of the Supervisory Board 7. Krzysztof Skóra Supervisory Board Member 8. Radosław Woszczyk Supervisory Board Member On 18 December 2017, the Supervisory Board elected Chairman and Deputy Chairman of the Supervisory Board. At the same time, on 18 December 2017, Piotr Czaka filed his resignation from the Supervisory Board effective from 18 December 2017 (Current Report 35/2017). From 18 December 2017 to 29 January 2018, the membership of the Supervisory Board was as follows: 1. Jakub Frejlich Supervisory Board Chairman 2. Raimondo Eggink Supervisory Board Member 3. Mariusz Grodzki Supervisory Board Member 4. Laurent Guillermin Supervisory Board Member 5. Roman Nowak Secretary of the Supervisory Board 6. Krzysztof Skóra Supervisory Board Member 7. Radosław Woszczyk Deputy Chairman of the Supervisory Board On 29 January 2018, Laurent Guillermin filed his resignation from the Supervisory Board effective from 29 January 2018 (Current Report 2/2018). Experience and competences of the Supervisory Board members of KOGENERACJA S.A. Professional profiles of the Supervisory Board members are published on the Company s website at: 9. The rules of appointment and removal of executives Executives are appointed and removed in accordance with the Commercial Companies Code. The Company's Articles do not provide for other rules to this procedure. In 2017, no changes were made to the rules of appointing and removing the executives and the rights vested in them, particularly the rights to issue or redeem shares. 55

56 10. Management Board, Supervisory Board principles of operation of the governing bodies a. Terms of reference of the Management Board Detailed terms of reference of the Management Board and its powers are set out in the Statutes of KOGENERACJA S.A. and the Management Board Regulations: The Management Board represents the Company and runs all the Company s affairs that are not restricted to the remit of the General Meeting or the Supervisory Board. Management Board resolutions are required for any matters that go beyond the ordinary business of the Company, including in particular: adopting a strategic plan and area development plans for the Company; approving the budget and the Company s plans as well as risk maps and tables and internal control reports; adopting terms of reference that define how the Company s activities are organised; disposing of and acquiring properties, perpetual usufruct or interests in properties as well as fixed assets whose value exceeds PLN thousand; incurring bank and non-bank loans, granting loans and guarantees, issuing promissory noted and issuing bonds and commercial bills;. purchasing and redeeming participation units in mutual funds, whose value is not higher that PLN thousand on a non-aggregated basis, as well as purchase or sale of commercial papers or bonds of other issuers; entering into forward FX transactions whose value exceeds PLN thousand on a non-aggregated basis; incurring liabilities and entering into agreements providing for disposal, sale or purchase of energy, fuels or transport of fuels, CO 2, CER and energy certificates for a value exceeding PLN thousand; entering into connected transactions for a value exceeding PLN thousand or undertaking other measures that result in the Company incurring financial obligations for a value exceeding PLN thousand; making donations on behalf of the Company; purchasing and/or subscribing for any rights, shares and/or other participation units in any entity; appointing commercial proxies (prokurenci); determining the method of exercising voting rights at general meetings of the companies in which the Company has a stake; undertaking acts that require the prior consent of the Supervisory Board or the General Meeting. On the basis of the Commercial Companies Code, the Company s Management Board is required to draw up financial statements alongside a report on the Company s activities for the financial year and have the financial statements audited before their presentation to the Supervisory Board and the General Meeting. In accordance with the Articles of Association, the Company s Management Board is required to advise the Supervisory Board of any material transaction that is not included in the budget approved by the Supervisory Board, if such transaction may have a material impact on the Company s profitability or liquidity. The Management Board is also required to ensure that the subsidiaries executive bodies have the same disclosure obligations towards their supervisory bodies (Supervisory Board or General Meeting) as the obligations of the Company s Management Board towards its Supervisory Board. The Company s Management Board shall pay interim dividend to the shareholders at the end of the financial year if the Company has sufficient funds to make such payout. The payout must be approved by the Supervisory Board. b. Terms of reference of the Supervisory Board Detailed terms of reference of the Supervisory Board and its key powers are set out in the Statutes of KOGENERACJA S.A. and the Supervisory Board Regulations: Key duties of the Supervisory Board, as per the Company s Articles of Association, include: 1. Exercising a constant oversight over the Company s business in all its fields of activity. 2. Duties relating to the annual financial statements, including: Evaluating Management Board reports on the activities of the Company and the Management Board proposals regarding the distribution of profit or coverage of losses as well as evaluating financial statements for their conformity with both the books and documents and with the actual situation; 56

57 Submitting a written report to the General Meeting on results of the foregoing evaluations; Appointing a certified auditor to audit financial statements; Adopting the Company s budget and approving the strategic plan and areas of development of the Company. 3. Duties relating to Management Board and Management Board Members: Appointing, removing and suspending any or all members of the Management Board; delegating a member or members of the Supervisory Board to temporarily perform duties of a Company s Management Board member; Approving the Management Board Regulations and expressing opinion on the Company s organisational regulations; defining Management Board member remuneration rules and setting the amount of such remuneration; Giving authorisation, upon request of the Management Board, to members of the Management Board holding positions in the governing bodies of companies, in which the Company is a shareholder and to receiving remuneration on account of that; as well as giving consent (at the Management Board s request) to, inter alia: Disposal and acquisition of real property, perpetual usufruct rights or an interest in real property for values over PLN 1,000,000; Disposal of fixed assets exceeding a contractual value of PLN 20,000,000; Incurring credit and loans, providing loans, guaranties and sureties, issuance of promissory notes, issuance of bonds or commercial bills exceeding a single value of PLN 40,000,000;. Giving consent to implementing development investments resulting in the creation of new fixed assets, the value of which exceeds PLN 10,000,000; Purchase or sale of commercial papers and bonds exceeding a single contractual value of PLN 40,000,000. Giving consent to concluding FX forward transactions. In addition, duties connected with managing the Company s affaris and representing the Company (at the Management Board s request): Giving consent, upon request of the Management Board to establish or liquidate other companies or foreign branch offices of the Company; Authorising the Company, upon request of the Management Board, to initiate court or arbitration proceedings or to enter into settlement, provided that such proceeding or the settlement relate to cases where the total value of claims exceeds the amount of PLN 2,000,000; Consenting, upon the request of the Management Board, to the Company acquiring or disposing of shares in companies, as well as defining the conditions and procedure for such transactions; Granting consent, upon request of the Management Board, to the Management Board to pay interim dividend to the shareholders; Consenting, upon the request of the Management Board, to the exercise of the voting right attached to shares or other rights held by the Company in a given entity, in particular at shareholders meetings in other companies, if it was connected with the disposal of a right or assumption of an obligation by the given company, or in the case of development investments, as a result of which new fixed assets are to be created with aggregate value that would exceed PLN 10,000,000; Consenting, upon the request of the Management Board, to the conclusion of a social contract/adoption of a social plan and other regulations laying down the social policy and stipulating obligations on the part of the Company with a value exceeding PLN 20,000,000; Consenting, upon the request of the Management Board, to make a donation of value exceeding PLN 100,000 (one hundred thousand zloty) and approving the annual donations plan prepared by the Management Board. Other duties of the Supervisory Board: Providing opinion on all the Management Board's proposals submitted to the General Meeting; Accepting, in the form of a resolution, consolidated text of the Company s Articles of Association prepared by the Management Board; Expressing consent for adoption of the audit plan and risk maps and tables Expressing consent for the appointment of commercial proxies. The Supervisory Board members exercise their rights and obligations personally, subject to the provisions of the Articles of Association and applicable law. There are two permanent Supervisory Board committees, whose role is to provide advice to the Supervisory Board: Remuneration Committee Audit Committee. 57

58 Remuneration Committee The composition of the Remuneration Committee as at 31 December 2016 was as follows: 1. Thierry Doucerain Chairman of the Remuneration Committee 2. Nicolas Deblaye 3. Roman Nowak. Due to the resignations filed on 21 September 2017, effective from 14 November 2017: - by Thierry Doucerain, who resigned as member of the Company s Supervisory Board and Chairman of the Supervisory Board and Chairman of the Company s Remuneration Committee, and - by Nicolas Deblaye, who resigned as member of the Company s Supervisory Board and member of the Company s Remuneration Committee On 18 December 2017, the Supervisory Board complemented the composition of the Remuneration Committee (Resolution No. 27/645/2017) by appointing: - Jakub Frejlich - Radosław Woszczyk. The composition of the Remuneration Committee as at 31 December 2017 was as follows: 1. Jakub Frejlich Chairman of the Remuneration Committee 2. Radosław Woszczyk 3. Roman Nowak. The Remuneration Committee is responsible for: - creating draft agreements where new Management Board members are hired - tracking delivery of the Management Board's remuneration system in accordance with the Management Board Remuneration Regulations - recommending bonus payments to the Management Board - monitoring the payment of other contractual benefits to the Management Board members. Audit Committee Since 8 November 2016, the membership of the Audit Committee was as follows: 1. Nicolas Deblaye Chairman of the Audit Committee 2. Raimondo Eggink 3. Mariusz Grodzki 4. Laurent Guillermin. On 20 October 2017, the Company s Supervisory Board, acting on the basis of: Article 128(1) and 129 of the Act of 11 May 2017 on statutory auditors, audit firms and public oversight (Journal of Laws, item 1089), and the Terms of Reference of the Supervisory Board and the Terms of Reference of the Audit Committee, adopted a resolution, effective as of 21 October 2017, appointing from amongst its members Krzysztof Skóra as Chairman of the Audit Committee, a role previously held by Nicolas Deblaye. The Company received two resignations filed as at 21 October 2017 by: - Nicolas Deblaye, who resigned as Chairman and Member of the Supervisory Board s Audit Committee - Mariusz Grodzki, who resigned as member of the Supervisory Board s Audit Committee. Between 21 October 2017 and 29 January 2018, the membership of the Audit Committee was as follows: 1. Krzysztof Skóra - Chairman of the Audit Committee 2. Raimondo Eggink 3. Laurent Guillermin. On 29 January 2018, Laurent Guillermin filed his resignation from the Supervisory Board of KOGENERACJA S.A. effective from 29 January 2018 (Current Report 2/2018). The Supervisory Board complemented the membership of the Committee on the basis of 13(3) of the Terms of Reference of the Supervisory Board, appointing one of its members, Radosław Woszczyk, to the Audit Committee as of 8 February 2018 (EBI Report 1/2018). 58

59 Since 8 February 2018, the membership of the Audit Committee has been as follows: 1. Raimondo Eggink 2. Krzysztof Skóra - Chairman of the Audit Committee 3. Radosław Woszczyk. The Audit Committee is responsible in particular for: - monitoring the financial reporting process - monitoring the effectiveness of the internal control, internal audit and risk management systems - monitoring the financial oversight functions - monitoring the independence of the auditor - recommending an auditor to the Supervisory Board. Raimondo Eggink and Krzysztof Skóra are the Audit Committee members who meet the independence criteria referred to in Article 129(3) of the Act of 11 May 2017 on statutory auditors, audit firms and public oversight (Journal of Laws, item 1089), and in line with the European Commission recommendation (Annex II) of 15 February 2005 on the role of nonexecutive or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC). 11. Remuneration system a. Overview of the remuneration system adopted by the Company The documents that lay down the rules for remunerating the Company s employees include: the Collective Agreement for the employees of KOGENERACJA S.A., Social Fund Rules and additional agreements with employee representatives. The Company s employees receive the following components of remuneration: basic salary monthly bonus allowance for the employees who work in a shift system annual bonus Employee Pension Scheme (PPE) funded by the employer additional health insurance (PZU Package) awards for the Company s performance subsidies from the Social Fund. The rules for remunerating the Company's Management Board and Directors are laid down in individual employment contracts. b. Conditions and amount of remuneration for Management Board members The remuneration scheme for the Management Board members provides for fixed and variable components and benefits. Fixed remuneration of Management Board Members KOGENERACJA S.A. has a Remuneration Committee of the Supervisory Board. The role of the Remuneration Committee is to support achievement of the Company s strategic objectives by presenting opinions and proposals to the Supervisory Board in relation to the shape of the payroll policy and the remuneration system. The Remuneration Committee will in particular: periodically review and recommend the rules for determination of remuneration and payroll policy relating to Management Board members and presenting proposals in this regard to the Supervisory Board; presenting opinions to the Supervisory Board with respect to remuneration of individual Management Board members. Management Board members receive monthly remuneration for performance of their roles connected with representing the Company and running its affairs, under respective employment and other contracts (management contracts) with the Company s Supervisory Board. 59

60 Variable remuneration of Management Board Members The annual bonus (variable remuneration) is approved by the Supervisory Board by virtue of a resolution. The rules for granting annual bonuses are laid down in the Bonus Rules for the Management Board Members of KOGENERACJA S.A., adopted by a resolution of the Supervisory Board. Bonuses for Management Board members are granted on the basis of Supervisory Board s assessment of the Company s performance and the degree of achievement of other objectives of the Management Board, approved by a resolution of the Supervisory Board and consistent with the Company s strategy. The incentive-based bonus scheme for the Management Board members is MBO (Management by Objectives), which involves assessment of objective in the following five categories: financial results and operational ratios; development and risk management; strategic and development projects; safety; staff engagements and industrial relations and individual objectives. The amount of an annual bonus may not be higher than four times the monthly remuneration of a Management Board member. Non-financial benefits for the Management Board members In accordance with the General rules for remunerating Management Board members, they may become entitled to additional benefits, the details of which need to be laid down in an agreement between the Management Board member concerned and the Supervisory Board. The benefits include in particular: leasing an apartment for a Management Board member and covering the related expenses covering the cost of using private car for local travels and alternatively providing a business car for private use providing, free-of-charge, technical equipment needed for performance of the assigned role, including for example a mobile phone providing other benefits (Social Fund benefits, Employee Pension Scheme and additional health insurance) other benefits approved by a resolution of the Supervisory Board. Gross value of the remuneration paid to the Management Board members Table: Gross remuneration of Supervisory Board members for the period to 31 December 2017 For the year ended 31 December 2017 in PLN thousand For the period: Base salary Target bonuses for 2016 Other benefits Additional bonus Total benefits in 2017 Wojciech Heydel Marek Salmonowicz Maciej Tomaszewski Krzysztof Wrzesiński *) The additional bonus includes an advance payment for the part of the target bonus for 2017 and income obtained at associated companies. In 2016, Management Board members did not receive any remuneration in respect of the above. Table: Gross remuneration of Supervisory Board members for the period to 31 December 2016 in PLN thousand For the period: Base salary Target bonuses for 2015 Other benefits Total benefits in 2016 Wojciech Heydel Marek Salmonowicz Maciej Tomaszewski Krzysztof Wrzesiński

61 Agreements between the Company and the Executive Directors providing for payment of compensation Table: Remuneration potentially payable to the Management Board members as at 31 December 2017 in PLN thousand Target bonuses for 2017 Pension and retirement benefits Total Wojciech Heydel Marek Salmonowicz Maciej Tomaszewski Krzysztof Wrzesiński Between the Company and the CEO and Management Board members individual non-competition agreements were signed, which prohibit them from undertaking any activity that would be in competition against the Company during the term of their employment and within 12 months after termination of employment. The competition ban applies in the territory of Poland, except the companies listed in the agreement. The agreements provide for a compensation equal to 100% of the gross basic salary paid under the employment contract and the management contract for the last 12 months preceding the termination of such contracts. g. Significant changes to the remuneration policy during the last financial year In 2017, no significant changes were made to the remuneration policy. h. Assessment of the remuneration policy The remuneration policy of KOGENERACJA S.A. is based on competitiveness against the external market (to make remuneration attractive and build loyalty) and favours stability of the Company s operations. In particular, the variable component of remuneration emphasises the incentive nature of the pay, as it supports delivery of objectives by Management Board members, the Company s managers and staff. These objectives conform to the Strategy of KOGENERACJA S.A. and help create long-term value for the Company s shareholders. i. Remuneration of the Supervisory Board Members In accordance with 4 of the Regulations of the Supervisory Board, Supervisory Board members may receive remuneration for their roles. The value of the remuneration is determined by the General Meeting. Supervisory Board members may also claim reimbursement of expenses incurred in connection with their role on the Supervisory Board. Changes in the rules of remuneration for Supervisory Board members in 2017 Pursuant to Resolution No. 5/2017 of the Extraordinary General Meeting of 21 September 2017, the right to remuneration on account of membership in the Supervisory Board of the Company was granted to the Supervisory Board members who met the independence criteria determined in the corporate governance principles adopted by the Warsaw Stock Exchange Board. The monthly remuneration of the Supervisory Board members is calculated as the average monthly salary in the enterprise sector (excluding any rewards from profit obtained in Q4 of the previous year), announced by the President of the Central Statistics Office (GUS) multiplied by 1. The members are entitled to remuneration regardless of the number of meetings convened. The remuneration is not payable for the month in which the Supervisory Board member was not present at any duly convened meeting, and the absence was not justified. The absence of a Supervisory Board member at a meeting is justified or not justified by a decision taken by the Supervisory Board in the form of a resolution. Until 21 September 2017, the rules of remuneration of the Supervisory Board members of KOGENERACJA S.A. were regulated by a resolution of the Extraordinary General Meeting of 20 August 2013, whereby the right of membership in the Supervisory Board of KOGENERACJA S.A. was granted solely to the member of the Supervisory Board proposed by 61

62 minority shareholders. The remuneration was set as 1.1x the average monthly salary in the enterprise sector for the last month of the preceding quarter, as published by the President of the Central Statistics Office (GUS). Table: Gross remuneration of Supervisory Board members for the period to 31 December 2017 in PLN thousand For the period: Benefits for the year ended 31 December 2017 Additional benefits Total Benefits for the year ended 31 December 2017 Adriana Carrez Piotr Czak Nicolas Deblaye Thierry Doucerain Raimondo Eggink Jakub Frejlich Mariusz Grodzki Laurent Guillermin Roman Nowak Krzysztof Skóra Radosław Woszczyk Table: Gross remuneration of Supervisory Board members for the period to 31 December 2016 in PLN thousand For the period: Benefits for the year ended 31 December 2016 Additional benefits Total Benefits for the year ended 31 December 2016 Ryadh Boudjemadi Adriana Carrez Nicolas Deblaye Thierry Doucerain Raimondo Eggink Mariusz Grodzki Laurent Guillermin Roman Nowak Shares of KOGENERACJA S.A. or its subsidiaries held by directors Raimondo Eggink, Supervisory Board Member, holds shares with a nominal value of PLN , including: shares of the Company held directly, and 1000 shares held through a subsidiary. In 2017, no changes took place in the shareholdings by Directors. 62

63 V. Share price 1. Quotation of the KOGENERACJA shares on Warsaw Stock Exchange The shares of KOGENERACJA S.A. have been quoted on the main market of the Warsaw Stock Exchange since 26 May At the first session in 2017, on closing, the share price of KOGENERACJA S.A. was PLN per share. The highest price in the analysed period of 2017, i.e. PLN was achieved on 18 May The lowest price, i.e. PLN 74.10, was recorded on 25 October ended with a price of PLN 85 per share with shares traded. 2. Tender offer for the shares of KOGENERACJA S.A. announced by PGE S.A. On 1 February 2018, PGE Polska Grupa Energetyczna S.A., activing via Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna, Brokerage House of PKO Bank Polski, made a tender offer for the sale of dematerialised ordinary bearer shares of the Company at PLN per share, representing 16.00% of the total voting power at the Company s General Meeting. The acquirer is PGE Energia Ciepła S.A. The subscription period specified in the tender offer will continue from 21 February 2018 to 6 March 2018, unless prolonged. On 15 February 2018, the Company s Management presented its statement on the tender offer. In accordance with an opinion drafted by KMPG Advisory sp. z o.o. sp.k., the proposed price for the shares of KOGENERACJA S.A. (PLN 81.80) is within the fair value range for 100% of the Company s shares (calculated per one share of the Company), estimated by KPGM on the day of issue of their opinion, as seen from the point of view of the Company s minority shareholders. Based on the premises set out in the Management Board s statement (Current Report 5/2018), and also taking into account the independent opinion of KPMG, in the opinion of the Company s Management Board the price per share of the Company, i.e. PLN 81.80, corresponds to the Company s fair value. 3. swig80 index KOGENERACJA S.A. is a member of the swig80 index. Chart: Quotations of KOGENERACJA S.A. in 2017 vs. swig 63

64 4. Respect Index A new list of members of the Respect Index was set on 14 December 2017 (11th edition). For the eight time, KOGENERACJA S.A. found itself among the most responsible companies listed on the Warsaw Bourse. The Company became part of the prestigious index in February 2012 (4th edition) and successfully goes through subsequent verifications, maintaining a higher level of reporting quality, investor relations, corporate governance, also taking into account ecological, social and employment-related factors. Chart: Quotations of KOGENERACJA S.A. in 2017 vs. Respect Index 5. WIG-Energy sector index On 4 January 2010, the Warsaw Stock Exchange began calculation and publication of a tenth sector sub-index WIG-energy. At present, the index has the following members: Będzin, CEZ, Enea, Energa, Interaolt, KOGENERACJA, PEP, PGE, Tauron Polska Energia, Zespół Elektrowni Pątnów-Adamów-Konin. Chart: Quotations of KOGENERACJA S.A. in 2017 vs. WIG Energia 64

65 6. Dividend policy Dividend payment depends on the Parent Company's trading performance. The key factors include: capital expenditures, debt level and the resulting liquidity level. The Company s paid dividend for the years and Table: Dividend in Net profit (in PLN thousand) Profit devoted to dividend (in PLN thousand) Profit share devoted to dividend (in %) No. of shares (in thousand) Dividend per annum (in PLN per share) 6,58 6, ,41 3,50 3,50 2,05 2,05 1,85 0,80 On 2 June 2014, the Company's Management Board adopted a resolution approving the Dividend Policy of the Company (Current Report 18/2014). In accordance with the Policy, the Management Board wishes to regularly request the General Meeting to pay dividend of 65% of the net profit achieved by the Company is a particular year. However, implementation of the Policy will to a large extent depend on the current market situation, the Company's need for financing its growth and in particular the value of capital expenditure to be spent on the Company's strategic investments, as well as the Company's liquidity needs. For this reason, the Management Board's proposals on profit distribution for stipulated that all the profit would be allocated to reserves to be used to fund key strategic investments for the Company, including development of the desulphurisation and denitrification installation in EC Wrocław. By the date of publication of the report, the Company s Management Board had not yet presented a 2017 profit distribution proposal. In the previous years, when presenting to the General Meeting the proposed dividend record date and dividend payment date, the Company recommended, in accordance with point IV.16 of the Best Practices for WSE Listed Companies, that the gap between the two dates be no longer than 15 days. Table: Record date and dividend payment date Dividend settlement date 20 July 10 August August 22 June 22 September 22 September 8 July 13 July 14 July Dividend payment date 9 August 30 August August 10 August 13 October 13 October 8 August 24 August 28 August 7. Agreements vs changes in the proportion of shareholdings KOGENERACJA S.A. obtained no information on any agreements (including those signed after the balance sheet date) that in the future might affect the proportion of shareholdings of the existing shareholders and bondholders. 8. Control of Employee Share Programmes In the Parent Company there are no systems of control of employee share programmes. 65

66 9. Agreement with the Auditor The entity authorised to audit the unconsolidated financial statements of KOGENERACJA S.A. for 2017 and the consolidated financial statements of KOGENERACJA Group for 2017 is Ernst&Young sp. z o.o. sp. k. E&Y Report for 2017 Report for 2016 Date of the financial report review agreement - - Date of the financial report audit agreement 27 November Term of the audit agreement 30 September Total fee (in PLN, net of VAT): financial report audit certification services including review of the financial report - advisory services - - other services - - The entity authorised to audit the unconsolidated financial statements of KOGENERACJA S.A. for 2016 and the consolidated financial statements of KOGENERACJA Group for 2016, and for a limited review of the unconsolidated and consolidated financial statements for H1 2017, was KPMG Audyt sp. z o.o. sp. k. KPMG Report for 2017 Report for 2016 Total fee (in PLN, net of VAT): financial report audit certification services, including review of the financial report advisory services - - other services Ratio calculation methodology ROA = Net profit /Total assets ROE = Net profit/ Equity ROCE =EBIT/capital employed defined as equity + (long term and short term borrowings less short term investments less long term investments). Current liquidity = current assets / short-term liabilities Quick liquidity = (current assets inventory) / short-term liabilities EBIT operating profit (loss), EBITDA operating profit (loss) + Depreciation/Amortisation 66

67 11. Glossary of industry terms and abbreviations Biomass Capex Capital Expenditures Solid or liquid substances of plant or animal origin, which are biodegradable, derived from products, waste and residues from agricultural and forestry production as well as from the industries the process the sectors products, or part of the remaining waste that is biodegradable. At EC Wrocław, boiler K-1 is adapted to combust dry biomass (moisture content of 13 %) in the form of pellets. At EC Czechnica, boiler K-2 is adapted to combust wet biomass (moisture content from 30 to 50%) in the form of chips. CER Certified Emission Reduction unit representing one tonne of carbon dioxide-equivalent, sequestered or abated, stemming from the Clean Development Mechanism project. District heat CO 2 Cash pooling Certificates CSR CUW DeSOx installation DeNOx installation Heat produced in the cogeneration process, used for central heating, hot water, ventilation and technological processes Carbon dioxide A system of short-term financing whereby the demand for cash can be set off against cash surpluses of the companies belonging to the same group. Property rights resulting from certificates of origin for electricity generated in a method that is eligible for support, the colour-coded certificates: 1) green certificates certificates of electricity origin from renewable sources 2) red certificates certificates of electricity origin from cogeneration 3) yellow certificates of electricity origin from cogeneration, coming from gas-fired sources or sources with a total installed capacity < 1 MW 4) white certificates of electricity origin resulting from energy efficiency Corporate Social Responsibility Shared Services Centre of EDF Group in Kraków Flue gas desulphurisation installation; see: IMOS Flue gas denitrification installation, see: SNCR Good Practice 2016 Good Practice for WSE Listed Companies 2016 (effective since 1 January 2016) EC EDF EUA GJ WSE Forced generation GWh IMOS / IOS Investment III B.V. PPA Combined heat and power plant (CHP) Electricite de France- French integrated enterprise, active in production, transmission, distribution and sale of energy European Union Allowances emission allowances as part of the European emissions trading system Gigajoule million of kilojoules, a unit of work and energy corresponding to kwh. In the energy sector, the unit is used to define the amount of heat produced and the amount of chemical energy of the fuel used. Warsaw Stock Exchange, Giełda Papierów Wartościowych w Warszawie S.A. (GPW) headquartered in Warsaw Sales in the "on demand" system, i.e. generation of electricity required by the quality and reliability of the National Power System Gigawatt hour Flue gas desulphurisation installation Shareholder of the Company (until 30 January 2018, the company was regustered as EDF Investment III B.V. Power Purchase Agreement (relates to the subsidiary EC Zielona Góra S.A.) Cogeneration Technological process of simultaneous generation of electricity and useful heat in a CHP plant KPRU III National Plan of Distribution of CO2 Allowances for Ksh Mg IFRS MWe MWh MWt NFO ŚiGW EGM PGE Energia Ciepła S.A. PGE Ekoserwis RESPECT Index toe RES SNCR Heat tariff URE Commercial Companies Code Megagram million grams ( g), i.e. a tonne International Financial Reporting Standards Megawatt of power Megawatt hour Megawatt of heat power National Fund for Environmental Protection and Water Management Extraordinary General Meeting The Company's shareholder (previously EDF Polska S.A.) Subsidiary of PGE Energia Ciepła SA., dealing with management of by-products of combustion, providing comprehensive coal handling, ash removal and landfill management services, Stock exchange index that meets the ESG criteria Tonne oil equivalent Renewable Energy Sources Flue gas denitrification installation Tariff (price) approved by the President of the Energy Regulatory Office, a regulator for energy companies, which seeks to balance the interests of energy companies and energy buyers Energy Regulatory Office Low sulphur coal Hard coal (class M II A fine thermal coal) with sulphur content up to 0.6 %. Standard coal Hard coal (class M II A fine thermal coal) with sulphur content above 0.6 %. WFO ŚiGW Settlements Manager ZiT Provincial Fund for Environmental Protection and Water Management Zarządza Rozliczeń S.A., a company which since 2007 has been engaged in the aid programme provided for in the PPA Act of 29 June 2007 Integrated Territorial Investments 67

68 STATEMENT ON DISCLOSURE OF NON-FINANCIAL DATA KOGENERACJA GROUP

69 Introduction This statement was prepared in accordance with the requirements of the Accounting Act, which stipulates that public interest entities should disclose non-financial data. This statement includes non-financial information on KOGENERACJA Group for the period to 31 December 2017, as well as comparative data. It is an integral part of the report on the activities of KOGENERACJA Group. This statement covers selected own indicators based on the Company's strategy. Those indicators are regularly monitored, reported and adjusted in the management process. I. Management area 1. Business model Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. consists of three production plants with a total electrical capacity of MW and heating capacity of MW. KOGENERACJA S.A. is a producer of network heat and electricity through cogeneration. As a producer of heat for Wrocław and its surroundings, the Company caters to demand for heating, domestic hot water and technological heat. It also produces electricity as part of the national power system. Heat and electricity are produced in a combined process, which ensures high average production efficiency during a year, with the most efficient use of chemical energy of primary fuels among commercial power companies. Network heat and electricity are primarily produced using hard coal and biomass. Chart: The business model of KOGENERACJA S.A. 69