CR no 29/2020 on 19.10.2020 10:33 Adoption of the PGE Group’s strategy until 2030 with prospects until 2050

The Management Board of PGE Polska Grupa Energetyczna S.A. ('PGE', the 'Company') disloses that on October 19, 2020 the Management Board of PGE adopted and the Supervisory Board approved PGE Group's (the 'Group') Strategy until 2030 with prospects until 2050 ('Strategy'). In the report below, we present the most important elements of the new Strategy. At the same time, the Management Board of the Company informs that the presentation on the Strategy will be published on the PGE website.

Objectives of the Strategy

The Strategy is a response of the PGE Group to deep changes in the sector that have occurred in recent years, as well as to the social expectations, which according to the assessment of the Management will determine the sector's future. PGE wants to play a leadership role in the transition and modernisation of the energy sector in Poland and support building a market environment conducive to energy transition. PGE Group's objective is to balance all aspects of the business, maximizing the added value for stakeholders.

Key directions in development and areas of activity restriction.

Key directions in development of the PGE Group will be offshore, onshore, PV, low-emission heating and energy services. Divestment areas and activity restrictions will include coal generation, nuclear energy program, hard coal trading and support areas outside the core business.

Mission and vision.

PGE's mission is to provide energy for a safe future. In accordance with its long term vision PGE is to become a leader in sustainable energy transition in Poland. Vision of the PGE Group translates into three strategic priorities, including:

- generation of environmentally friendly energy

- rendering of modern energy services

- efficient and effective functioning of the Group

Environmentally friendly energy.

As a leader of transition, PGE declares to reduce its impact on the natural environment by achieving climate neutrality by 2050. We plan to reduce the production emissions by changing the technology, expanding the renewable energy portfolio and enabling our clients to participate in the transition thanks to attractive product offerings. By 2030 zero- and low-emission sources will constitute 85% of the generation portfolio and share of renewable energy will amount to 50% of the total generation. PGE wants to achieve climate neutrality by 2050 and provide 100% RES energy for PGE's customers.

The PGE Group is ready to carry out the transition process of the sector: preparing the conventional electrical power system base to function in a new ownership structure. The PGE Group will be a pioneer in development and exploitation of offshore wind energy sector. Offshore wind capacity installed in the Baltic Sea should amount to 2.5 GW in 2030 and thanks to preparation of further projects in new locations- exceed 6.5GW by 2040. At the same time the programme of building power in onshore wind farms and photovoltaics will be continued and expected new capacity should be increased by 2030 by more than 1 GW and more than 3 GW respectively. In the District Heating segment the Group plans transition of district heating towards low and zero-emission sources (share in heat production over 70% in 2030). At the same time PGE will promote connections of individual heat sources or replacement for environmentally friendly installations.

Important role in energy transition is performed by implementation of the principles of circular economy in all areas and minimization of the impact on the natural environment.

Modern energy services.

Reliable network infrastructure and partnership with customers are the foundation of the energy transition. In Distribution segment the improvement of quality of services in the field of energy supplies is assumed (the time of interruptions in energy supplies will be reduced by 8% in the cities and by 50% in other areas in 2025, cost efficiency, efficiency of performance and transparency of connection processes will be streamlined).

Grid modernisation and new energy storage units (planned 800 MW by 2030) are needed for the full use of distributed power sources and ensuring a secure operation of the transmission system. Financial stability and developing a new DSO regulatory model that guarantees meeting the challenges of transition are necessary to purse those goals, which should improve expected FCFF (Free Cash Flow to Firm) by PLN 0.7 bn.

PGE wants to maintain the highest in the market customer satisfaction level resulting from the quality of energy offerings and services. The issue is addressed by development of professional energy services and integration of contact and service channels. Assumed increase in margin in the retail segment amounts to PLN 0.4 bn (annual average).

The company plans to build additional value by enabling customers to actively participate in the energy transition offering among other things RES installations for the clients and market access services (1.0 GW in market services). The new services should contribute to 25% rise in EBITDA of retail sales.

Efficient and effective organisation.

In order to meet the challenges resulting from decarbonisation, decentralisation and competition, PGE Group must improve its operational efficiency. The Group assumes reduction of fixed cost by 15% until 2025 and 25% by 2030 (compared to 2019, the figures do not include the effect in the conventional energy segment). The PGE Group's business profile will evolve towards requiring less work and changing key competences. Effective ICT area will be a lever for improving the efficiency of the PGE Group's operations through process automation and digitisation. Demographic trends will affect the employment level in the PGE Group and employee career paths, which will require effective implementation of projects in the area of human capital management . Assumed employment reduction will be at 15% in 2030 and 50% in 2050. Further staff development will be oriented to renewable energy and modern energy services.

Investments.

Investments of the PGE Group will be focused on the development of renewable energy, transition of district heating and grid infrastructure. There will be no new coal investments (both mining and generation) and investment decisions on gas sources will be made in 2025 at the latest. Total expected capex in years 2021-2030 will amount to PLN 75bn and approx. 50% is allocated to renewable energy sources (offshore wind farms, onshore wind farms and photovoltaics, zero-emission cogeneration sources). Another key important area of spending is regulated activity, including grid infrastructure and low-emission cogeneration sources.

Expected financial results of the strategy.

As a result of the strategy PGE wants to build stable EBITDA with the evolution of the structure towards green and regulated directions and limit its exposure to market risks. EBITDA is expected to rise from over PLN 5bn in 2025 up to over PLN 6bn in 2030.

Implementation of an ambitious transition plan will be pursued while maintaining a stable level of debt and current rating score (BBB+/Baa1). The goal of the PGE Group is a full use of dedicated financing options for green investments and off-balance sheet financing. Share of aid funds in the financial needs of the PGE Group until 2030 should amount to at least 25%.

Alternative Performance Measure used in the strategy

EBITDA (Earnings before interest, taxes, depreciation and amortization) - operating profit before interest on debt (loans, bonds), taxes, amortization and depreciation.

Regulated EBITDA - EBITDA from regulated business activity, which parameters of income are regulated by tariffs approved by relevant regulatory body, (for example the President of Energy Regulatory Office approves tariffs for heat and Distribution System Operators.

Net financial debt - Short term financial debt and long term financial debt adjusted by cash and equivalents, short term deposits and restricted cash.