Financing Model

TREASURY RULES

PGE's existing financing model takes into account the use of funds from its core activities, debt financing in the form of commercial bank credit facilities and bond programmes, credit facilities from Bank Gospodarstwa Krajowego, credit facilities from multilateral institutions such as the European Investment Bank or the European Bank for Reconstruction and Development as well as in the form of preferential financing. In order to effectively manage liquidity, we have introduced a cash-pooling system within the Group.

External financing

Until 2014, PGE maintained a net cash position and investment expenditures were financed from operating cash flows. However, an ambitious investment programme of approx. PLN 34 billion scheduled for 2016-2020 requires external financing.

The most important external financing sources for PGE Group are as follows:

• Domestic bond programme of PLN 5 billion.
• Euro Medium Term Note (EMTN) bond programme of up to EUR 2 billion.
• 2 credit facilities from Bank Gospodarstwa Krajowego as part of the "Inwestycje polskie" (“Polish investments”) programme, amounting to PLN 1.5 billion in total.
• Syndicated loan of PLN 5.5 billion, including a term facility of PLN 3.63 billion and revolving facility of PLN 1.87 billion.
• PLN 2 billion credit facility from the European Investment Bank - PLN 1.5 billion will be used for projects related to distribution network modernisation and expansion, while PLN 490 million will be used to finance and re-finance the construction of cogeneration units.
• PLN 500 million credit facility from the European Bank for Reconstruction and Development to support implementation of a long-term programme for distribution network development and modernisation.
• Current-account overdraft facilities.

Cash pooling

Cash pooling is a finance management method that was created for companies operating within a group that has an extensive organisational structure. To put it simply, cash deficits at some companies are covered with cash excesses from other companies within the group. This mechanism is based on aggregating the companies' cash in a single account, which is managed by the pool leader - in our case this is PGE S.A., and another 18 companies from the Group participate in the cash pooling process, which is provided by two banks: PKO BP S.A. and Bank Pekao S.A. Cash pooling allows us to optimise cash flows and effectively manage liquidity. By using intra-group financial surpluses, it reduces the need for external financing and lowers bank service costs. Depending on swings in financial liquidity, cash pooling may reduce the Group's external debt by even several hundred million zlotys.

DEBT STRUCTURE

PGE Group finances its expenditures with funds from on-going operations, i.e. revenue from sales, with a relatively stable structure. We are currently implementing a capital-intensive investment programme, which also requires external financing. Our aim is to build and maintain a diverse debt structure allowing us to flexibly manage financing costs.

Our debt structure is presented below, by type of financing, maturity, currency and type of interest as well as changes in gross and net debt in successive periods.

Debt and available financing by type of financing (guaranteed funds) as at 31 December 2017, in PLN million

PGE Group's debt maturities as at 31 December 2017, in PLN million

Currency profile of drawn debt as at 31 December 2017

Debt with fixed and variable interest (drawn debt)

Changes in gross and net debt (in PLN million)

RATING

In 2017, two rating agencies: Moody's and Fitch, maintained PGE S.A.'s long-term rating at investment level

As an entity using various types of external financing, including debt securities, PGE uses the services of rating agencies, which assign credit ratings to borrowers. In order to assess creditworthiness, rating agencies have adopted multi-step grading scales that are based on letter designations (triple letters traditionally, with AAA or Aaa being the highest rating).

PGE S.A. has ratings assigned at its request by two rating agencies: Fitch Ratings Ltd. ("Fitch") and Moody's Investors Service Limited ("Moody's").

PGE's rating against other Polish energy groups

TAX POLICY

PGE Group is a responsible taxpayer at both national and local level. We are an important partner for local communities and authorities. Taxes that we pay to the municipalities in which we operate often account for a significant part of their budget. (more: Local communities).

From the point of view of PGE Group companies - as business entities - the most important is taxation of incomes (corporate income tax), taxation of turnover (value added tax, excise tax) followed by taxation of assets (real estate tax and vehicle tax).

The amount of income tax paid by PGE Group companies in 2017 was PLN 570 million, at an effective tax rate of 19%, which was equal to the corporate income tax rate.

Tax group

From September 18, 2014, PGE S.A. and 30 PGE Group companies are members of a tax group entitled PGK PGE 2015. The tax group agreement was executed for 25 years and is effective from January 1, 2015. PGE S.A. represents the tax group.

The act on corporate income tax treats tax groups as separate payers of corporate income tax (CIT). This means that companies within PGK PGE 2015 are not treated as separate entities for corporate income tax purposes, with PGK PGE 2015 being treated as one whole entity instead. PGK PGE 2015’s tax base will constitute the group’s aggregate income, calculated as the excess of the income of the companies that make up the group over their losses. PGK PGE 2015 is a separate taxpayer only for the purposes of corporate income tax. This should not be construed as a separate legal entity. It also does not apply to other taxes, especially each of the companies within PGK PGE 2015 continues to be a separate payer of VAT, civil law transaction tax and payer of personal income taxes.

Pursuant to the agreements, when a given company within a tax group shows a tax profit, it provides the relevant amount of income tax to PGE S.A., which as representative settles with the tax office. When a company that is a member of PGK PGE 2015 incurs a tax loss, the related tax benefit is attributable to the representing company, i.e. PGE S.A. This also means that in the case of tax settlement corrections for companies incurring a tax loss, such corrections have a direct impact on the separate financial results of PGE S.A.

Flows between companies belonging to PGK PGE 2015 are settled during the year, within deadlines preceding the payment of advances for income tax. Final settlement between tax group member companies occurs after the representing company files the annual return.

INSURANCE POLICY

As an energy group, we own a range of high-value assets and our activities cover a very broad spectrum of operations. As a company aware of accident risk, forces of nature, damage or theft of assets, we try to address these risks - to this end, we introduced an insurance management procedure at the Group. Its introduction was aimed to create a harmonised system for managing insurance within the Group - management is exercised in a consistent manner by the PGE Corporate Centre, i.e. PGE Polska Grupa Energetyczna S.A. Thanks to these activities, we have standardised and consistent rules, forms and procedures related to obtaining insurance and removing damages and we also strengthened PGE Group's position with regard to the insurance market.

PGE Group's significant insurance areas include insurance for its key assets against natural disasters and failures and the related revenue loss. We also insure the Group for civil liability related to our business and assets.

From 2016, PGE is a member of TUW PZUW, a mutual insurance society. TUW is an alternative to classic insurance societies that operate as joint stock companies and are intended to generate profits. TUW is a grouping of people/entities who share a common objective and interest and who are involved in it not through capital (as a joint stock company) but through membership and shared objectives - TUW's key objective is to meet the insurance needs of its members rather than generate profits. By becoming a member of TUW, PGE co-decides on its policy, strategy and actual activities. 7 PGE Group companies are currently members of TUW PZUW. Contracts executed within TUW include comprehensive insurance for coal-fired units (PGE GiEK - branches Bełchatów power plant, Turów power planr, Dolna Odra power plants), insurance for the property of Bełchatów lignite mine (PGE GiEK), insurance for hydro-power plants (PGE EO) and insurance for the modernisation of units 1-3 at Turów power plant as regards all construction and assembly risk and business interruption risk. In 2017, a contract for comprehensive insurance of open-pit lignite mine Bełchatów was executed for 2017-2020. Moreover, other PGE Group companies joined TUW, including PGE Dystrybucja and PGE Obrót. Thanks to the TUW PZUW membership, the insurance costs of our power plants declined by approx. 10% in 2017.

It should however be emphasised that the TUW PZUW membership does not mean that we do not use other forms of insurance - depending on the needs and estimated costs, we work with insurance firms and use the services of insurance brokers on a wide range of issues.

In 2017, the procurement of new insurance in the process of acquiring EDF's assets in Poland by PGE was also a significant event.