• Lower electricity prices and volumes are impacting financial and operating results
• Programmes to build new units and comprehensively modernise existing lignite-based assets are progressing according to plan
• Ordinary General Meeting has decided to set the dividend at PLN 0.25 per share
• Group’s updated strategy to be published in September 2016

The Company’s consolidated EBITDA for the first half of 2016 came to PLN 3.1 billion. The 26% decline in comparison with 2015 mainly results from a lower availability of lignite-based assets (comprehensive modernisation of units in Bełchatów), leading to a lower volume intended for sale, coupled with lower electricity prices realised on the wholesale market.

“In the first half of 2016, PGE Group operated on a market that exerted strong pressure on operating results because of the conditions on commodity markets – both raw materials and electricity. According to leading rating agencies, PGE remains Poland’s most credible energy group on the capital and credit markets and one of the leaders in the region,” said Emil Wojtowicz, CFO of PGE Polska Grupa Energetyczna.

The conventional energy segment was the largest contributor to the Group’s EBITDA in the first half-year, with PLN 1.6 billion. The distribution segment finished the first half of 2016 with a result in excess of PLN 1.1 billion. The combined wholesale and retail segments generated PLN 208 million, similar to the renewable energy segment, which was weighed by the lower prices of green certificates and brought in PLN 205 million. Net profit to equity came to PLN 546 million.

Decisions regarding the Company’s dividend were made in the second quarter. At the request of the majority shareholder, the general meeting approved a payout of PLN 0.25 per share.

The second quarter also brought changes in the regulatory environment, which constituted a direct reason for the Group to conduct impairment tests in the renewables segment. The impairment loss on wind assets, which reached PLN 783 million, is of a non-cash nature and largely concerns wind farms that are already operational in PGE’s portfolio.

Net electricity output in the first half of 2016 was 25.4 TWh, down 8% from the previous year. Lignite-based production declined by 13% y/y to 16.9 TWh. This is a result of a lower availability of lignite-based units at Bełchatów power plant, which is currently undergoing a comprehensive modernisation programme. Hard coal-based production reached 5.8 TWh (up 4% y/y). Wind energy output increased by 33% y/y to 0.5 TWh. This resulted from delivery of 218 MW of wind assets in the fourth quarter of 2015. Electricity distribution volume reached 16.9 TWh and was 3% higher than in the first half of the previous year due to higher demand. Retail volumes also increased year-on-year, by 11%, to 21.4 TWh.

Capital expenditures in the first half of 2016 amounted to PLN 3.7 billion, up 11% from the previous year. Of this amount, PLN 2.4 billion was deployed to new projects.

“PGE Group is consistently executing its investment programme, focusing on three key construction sites. Our flagship project – the construction of two energy units at Opole power plant – has passed the 50% completion mark. We have also cemented a symbolic cornerstone in one of the foundations for an engine room at a unit in Turów. The production of key machinery at the unit is progressing according to plan; earth works and foundation works are also ongoing. Construction of a gas-and-steam unit in Gorzów has reached its final phase – the unit is scheduled to go online in this year’s fourth quarter,” said Ryszard Wasiłek, vice president of PGE Polska Grupa Energetyczna’s management board, responsible for development.

Alongside the construction of new capacities, the Group is executing a comprehensive modernisation programme for existing units, including at Bełchatów and Turów power plants. These projects are intended to increase the production units’ lifecycle as well as increase their efficiency and output, allowing the Group to lower emissions in electricity production.

PGE Group is awaiting the final arrangements regarding the shape of the capacity market in Poland. According to the proposed schedule, legislative work on this project should be completed by the end of this year. According to PGE, solutions involving payments for both electricity and available capacities are the most optimal from the viewpoint of system stability and reliability.

PGE’s management board expects capital expenditures to be slightly lower in 2016 than in the previous year, and underscores that the Company is very well prepared to further pursue its strategic investment objectives thanks to operating cash flows and a secured external financing base.

Commentary to the published results by Henryk Baranowski, CEO of PGE Polska Grupa Energetyczna: https://youtu.be/nitEkA1-0y4

• Lower electricity prices and volumes impact financial and operating results
• Investment programme progressing as planned
• Strategy review targeting higher effectiveness to be completed in Q3

The Company’s consolidated EBITDA reached PLN 1.8 billion in the first quarter of 2016 (down 17% from 2015), while net profit was PLN 870 million (down 21% from the previous year), i.e. PLN 0.47 per share.

“PGE Group is operating in an increasingly difficult market environment therefore our current strategy review is focusing on improving effectiveness, among other things. The results of this work will be presented in the third quarter of this year,” says Henryk Baranowski, CEO of PGE Polska Grupa Energetyczna.

In the first quarter of 2016, PGE Group operated on a market that exerted pressure on its financial results because of the situation on commodity markets – both raw materials and electricity. The Conventional Generation segment had the largest contribution to the Group’s EBITDA, at approximately PLN 1 billion (down 23% from 2015). The Distribution segment generated in excess of PLN 550 million, which is more than PLN 70 million less than in the base quarter, largely due to a change in strategy for remunerating distribution grid operators.

The Renewables segment recorded profit of more than PLN 110 million in this year’s first quarter, down by about PLN 10 million from the prior year. This is despite a substantial increase in energy production by newly-commissioned wind farms, largely because of lower prices of green certificates. The combined wholesale and retail segments brought in about PLN 140 million, down by about PLN 20 million from the same period last year.

Net electricity production in the first quarter of 2016 was 13.2 TWh, down 9% from the previous year. This resulted from a lower availability of lignite-fired units due to extended downtime forced by planned repairs and modernisations. Hard coal-based production reached 3 TWh (up 5%). Production from wind assets grew by 30%, resulting from the commissioning of 218 MW in new wind capacities. Distribution volume exceeded 8.6 TWh (up 3% y/y), while volume of electricity sold to end customers reached 10.7 TWh (up 9% y/y).

Capital expenditures in the first quarter of 2016 reached PLN 1.8 billion, which is 32% higher than in the previous year. PGE Group is consistently implementing its investment programme, focusing on three main construction sites: Opole, Turów and Gorzów.

“The construction of new conventional capacities is our objective number one however we are also implementing a comprehensive modernisation programme for our existing units, including at Bełchatów power Plant and Turów power plant. These projects will extend the lifecycle of our production units, improve their efficiency and output as well as allow the Group to produce a more ecological energy from coal,” says Henryk Baranowski, CEO of PGE Polska Grupa Energetyczna.

PGE’s management sees outlays on investments in 2016 slightly below last year’s levels and emphasises that the Company is very well prepared to continue pursuing its strategic investment goals thanks to cash flows from on-going operating activities and having secured external financing sources.

PGE GiEK, a PGE Group company, has signed an agreement to purchase ultimately a 17.1% stake in Polska Grupa Górnicza (PGG). This financial investment will be carried out on market terms and is in line with PGE Group’s strategy as it secures a raw material base with parameters complying with the Group’s energy units, both existing and those currently under construction.

Aside from PGE GiEK, other parties to the investment agreement are: Energa Kogeneracja, PGNiG Termika, Węglokoks, Towarzystwo Finansowe Silesia, Fundusz Inwestycji Polskich Przedsiębiorstw FIZAN and Polska Grupa Górnicza. The recapitalisation of PGG, amounting to a total of PLN 2.417 billion, will take place in three stages, in which PGE GiEK will contribute a total of PLN 500 million, eventually bringing its stake in PGG’s share capital to 17.1%.

The agreement is based on the market principles pertaining to implementing such projects and is aimed at ensuring an expected rate of return on investment, through improving the effectiveness of the mines belonging to PGG among others and – as a consequence – having them reach specified profitability levels.

“PGE Group is the leader of the energy industry in Poland, manufacturing about 40% of electricity consumed in the country, therefore an investment designed to secure supply of highly-energetic coal for the Group’s asset base is well in line with our business strategy. Once two new highly efficient units at Opole power plant with total capacity of 1,800MW are commissioned, the Group’s demand for coal will increase from about 5.6 million tonnes currently to approximately 7.5 million tonnes,” says Henryk Baranowski, CEO of PGE Polska Grupa Energetyczna.

According to the investment agreement, PGG will operate based on a business plan with the aim to optimise production costs, improve the company’s operational effectiveness and reach specified profitability levels. PGG’s business plan sees the company generating positive cash flows for investors in 2017. These cash flows will make it possible to generate a rate of return above the cost of capital employed.

The investment agreement contains a number of mechanisms designed to allow investors to monitor PGG’s financial situation, including business plan implementation as well as further optimisation activities, also in the event of adverse changes in market conditions. Moreover, the investors will appoint their representatives to PGG’s supervisory board, further enhancing oversight.

The investment agreement is another step following an agreement reached on 26 April 2016 in Katowice regarding the launch of PGG, which comprises 11 mines, 4 facilities and parts of the headquarters of Kompania Węglowa. Aside from the investors, the agreement was signed by banks – Kompania Węglowa’s bondholders – Alior Bank, BGK, BGŻ BNP Paribas, PKO BP, Bank Zachodni WBK, and 13 trade union organisations at Kompania Węglowa.

On 26 April 2016, an agreement was reached regarding the launch of Polska Grupa Górnicza (PGG). The investors are entering PGG on market terms and will rigorously supervise the company in implementing its business plan. Analyses show that the investment will generate positive rates of return for investors.

The parties to the agreement are Energa Group, PGE Group, PGNiG Group, Węglokoks, Towarzystwo Finansowe Silesia (TFS), Fundusz Inwestycji Polskich Przedsiębiorstw (FIPP) FIZAN, as well as banks – Kompania Węglowa’s bondholders – Alior Bank, BGK, BGŻ BNP Paribas, PKO BP, Bank Zachodni WBK, and 13 trade union organisations at Kompania Węglowa.

PGG, which is set to become the largest producer of hard coal in Poland and in Europe, will comprise 11 mines, 4 facilities and parts of the headquarters of Kompania Węglowa. PGG’s shareholders from the energy sector will gain access to rich thermal coal resources with parameters corresponding to the needs of their existing and planned production units, which is in line with the energy groups’ strategic objectives. Furthermore, cooperation between the generation sector and mining sector guarantees that recipients of energy services will gain stable partners capable of ensuring uninterrupted electric and thermal energy supplies at predictable prices.

The investors have committed to purchasing new shares of PGG for a total of PLN 2,417 billion, of which PLN 1,800 billion will be paid in cash, while the remaining PLN 617 million will be a conversion of debt owed to TFS and Węglokoks. Energa Kogeneracja, an Energa Group company, is investing PLN 500 million in PGG, PGE GiEK, part of PGE Group, PLN 500 million, PGNiG Group’s PGNiG Termika PLN 500 million, FIPP FIZAN PLN 300 million, TFS PLN 400 million and Węglokoks PLN 217 million (Węglokoks’ total exposure to PGG, together with previous capital commitments of PLN 500 million, will reach PLN 717 million).

The investors are not planning on fully consolidating PGG’s results. Under refinancing of Kompania Węglowa’s existing bond issue programme, the banks and Węglokoks are declaring to purchase new bonds issued by PGG worth PLN 1,037 billion in three tranches, to be repaid over 2019-2026. Węglokoks’s investment will reach PLN 421.5 million, while the banks will invest PLN 615,5 million.

Financial creditors took part in talks to reach the agreement, therefore showing readiness to participate over the long term in the changes occurring in key sectors of the Polish economy, which resulted in all of the bondholders accepting the agreement aimed at reaching profitability and improving the company’s effectiveness.

PGG will operate based on a business plan that is aimed at maintaining strict control over coal production costs, improving the company’s operating effectiveness and reaching specified profitability levels. Details in this regard will be set out in the investment agreement, which is expected to be signed on Friday, 29 April 2016.

Energy-sector investors are aware of the changes happening on the energy market and are actively diversifying their energy mix, however it is the national coal resources that remain a guarantor of the state’s energy security and constitute the main source of electricity and heat in Poland. This status will be maintained for many decades to come.

An agreement reached with trade unions on 19 April 2016 regarding employee rights, constituted an important condition for establishing PGG and bringing in the investors. This agreement sees PGG implement its business plan, leading to more efficient mining operations by merging mines and temporarily suspending certain employee benefits.

• PGE Group posts good financial and operating results despite unstable market conditions

• Highest EBITDA in history (PLN 8.2 billion) and strong earnings per share (PLN 2.29)

• Substantial impairment of asset book value, mainly in the conventional energy segment, resulting in a net loss of PLN 3 billion

The Group’s EBITDA for 2015 reached PLN 8.2 billion (up 1% from 2014), while net profit adjusted for impairment was approximately PLN 4.3 billion (up 14% from the previous year), i.e. PLN 2.29 per share.

Last year saw PGE Group operate on a fluctuating market, a situation that is expected to continue to challenge energy companies in subsequent periods. Deteriorating conditions on commodity markets, particularly hard coal, and climate protection policy, which affects perspectives for the CO2 emission allowance market, combined with a growing share of generation from renewable sources, resulted in a close to PLN 9 billion impairment of fixed assets, largely in the conventional energy segment.

Because of the impairment charge, the company for the first time in its history posted a net loss, amounting to PLN 3 billion. Adjusted profit, which is the basis for dividend payment, is PLN 4.3 billion.

Operating results in the conventional energy segment, at PLN 4 billion (up 29% from 2014), had the largest contribution to the Group’s EBITDA. The distribution segment generated PLN 2.5 billion (up 2% on the previous year), the renewable energy segment accounted for PLN 390 million (a level comparable to 2014), and the combined wholesale and retail segments brought in PLN 600 million.

Operating in an increasingly tough market environment, PGE generated very good operating and financial results last year, with record EBITDA of PLN 8.228 billion. The Group is consistently and successfully executing key projects under our 2020 strategy, which include new units in Opole and Turów – says Marek Woszczyk, CEO of PGE Polska Grupa Energetyczna.

In the renewables segment, we executed an ambitious plan, delivering 218 MW of new wind capacity, covered by a support mechanism. Expenditures on improving the reliability of energy supply to our existing and future clients exceeded PLN 1.8 billion. Despite record levels of investment, which normally necessitates shutdowns, we managed to reduce average interruption in electricity supply by 7% - adds Marek Woszczyk.

Net electricity production in 2015 was 55.6 TWh, up 1% from the previous year. Lignite – and hard coal – based production was at a level similar to 2014, reaching 38.6 TWh and 11.9 TWh, respectively. Gas-fired generation substantially increased, to 2.1 TWh. Production from renewable sources grew to 2.4 TWh. Distribution volume was 33.4 TWh (3% growth y/y) and volume of electricity sold to end customers was 39 TWh (down 2% y/y).

Expenditures on investments reached a record PLN 9.4 billion in 2015 and was higher by a half than in the previous year. The Group spent close to PLN 3.5 billion on a repair and modernisation programme for conventional generation assets, PLN 3 billion on new conventional capacities, PLN 1.8 billion on modernising and expanding its distribution network and over PLN 900 million on renewable energy sources.

PGE’s Management Board expects investment in 2016 to be slightly lower than in 2015 and underscores that the company is very well prepared to further pursue its strategic objectives, having secured external financing sources ensuring safe development.

Financing for the investment programme for the upcoming quarters has already been secured. Proper diversification of financing sources from Polish and foreign bondholders combined with loans from institutions with a local and global footprint have brought the Group significantly closer to an optimal financing structure – says Magdalena Bartoś, CFO of PGE Polska Grupa Energetyczna.

The company expects 2016 to be marked by pressure on financial results originating from the situation on commodity and electricity markets.

We are well prepared in operating terms, meaning the operating continuity of our generation and distribution assets. I also consider the maintenance and investment schedules to be well designed and progressing in line with the plan – says Marek Woszczyk.