Acquisition of heating assets and Rybnik power plant and prospects for development of heat and cogeneration segment within PGE Group May 19, 2017
2 Agenda • Summary of the transaction • PGE Group after the transaction • Henryk Baranowski – President of the Board and CEO • Prospects for development of PGE Group on heat market • Ryszard Wasiłek – Vice- President of the Board for Operations
Transaction in a nutshell 3 • Successful acquisition of assets creating value of PGE at attractive price • Transaction value as at December 31, 2016: PLN 4.51 bn , including: • Equity value: PLN 2.45 bn • Value of debt: PLN 2.06 bn • Additional obligations resulting from the transaction: • Subscription tender for shares of Kogeneracja SA up to 66% of voting rights – within 3 months after closing of the transaction • Interests on the equity value amounting to no more than PLN 107 m from Jan. 1, 2017 until the closing of the transaction to be settled on a pro-rata basis • Financing – PGE’s own funds • Planned closing of the transaction: till Jan. 2, 2018 • Fulfilment of conditions precedent required • Payment for shares and debt subrogation at the closing of the transaction
Benefits for investors of PGE Group 4 • Transaction compliant with the Strategy of PGE Group • Increased share of EBITDA from stable regulated business • Lowering Group’s overall business risk • Safeguarding leadership position at the heating market in Poland • Moving towards more diversified fuel mix and balanced countrywide geografic presence • Accessing large urban areas (beyond PGE Distribution domain) with approx. 4.5 milion inhabitants within the range of locations to support market expansion for electricity from PGE • Cost synergies – management, fuel supply, sales network • Socially responsible policy – active fight with low-stack emission in order to improve air quality
Scope of investment 5 99.51% shares 100% shares EDF Polska S.A. EDF Investment III B.V. 17.74% shares 32.26% shares Total 50% +1 share CHP Kraków CHP Gdańsk ZEW Kogeneracja S.A. CHP Gdynia Rybnik Power Plant CHP Wrocław CHP Zawidawie Headquarters Shared Services Center CHP Czechnica DCO | SME 95.22% 84.08% EDF Toruń EDF Ekoserwis 98.40% shares 100% 50.04% Torec Utex-Serwis 50% 100% CHP Zielona Góra EDF Gaz Toruń Zower 100% 49.30% EDF Paliwa Pollytag EDF Foundation
Acquired assets - summary 6 • Installed electric capacity: 3.3 GW* Gdynia • Installed thermal capacity : 4.4 GW* Gdańsk • Annual electricity generation (net): 12.4 TWh • pomorskie Annual heat generation: 32.8 PJ warmi ń sko-mazurskie zachodnio- • District heating network: approx. 390 km Toruń pomorskie podlaskie kujawsko- pomorskie • 4 CHPs (Gdynia, Gdańsk , Kraków , Toruń ) wielkopolskie mazowieckie lubuskie • District heating network in Toruń ł ódzkie • lubelskie Rybnik power plant ś wi ę tokrzys dolno ś l ą skie • Kogeneracja S.A.: kie opolskie Zielona Góra • ś l ą skie 4 CHPs ( Wrocław , Zielona Góra , podkarpackie ma ł opolskie Zawidawie, Czechnica) • Wrocław 3 district heating networks (Zielona Góra , Kraków Siechnice, Zawidawie) Rybnik Czechnica Zawidawie CHP Power plant * Including gas units at CHP Toruń , commissioned in 2017
7 PGE Group after the transaction
PGE Group after the transaction – pro forma data 2016 8 Installed electric capacity Installed thermal Net electricity generation Heat generation (PJ) (GWe) (TWh) capacity (GWt) +25% +23% +177% +114% 51.37 15.95 7.57 66.07 12.75 53.67 3.55 18.57 PGE PGE + EDF PGE PGE + EDF PGE PGE + EDF PGE PGE + EDF EBITDA (PLN bn) +15% PGE EDF PGE+EDF 32.94 Revenues (PLN bn) 28.09 4.85 8.50 25.8% EBITDA margin 26.3% 23.2% 7.38 Net debt (PLN bn) 5.15 2.06 7.21 PGE PGE+EDF
PGE after transaction - organisation 9 • Implementation of programs integrating the assets in PGE’s structure • Detailed development plan for Rybnik power plant to be prepared • Acquired potential of heat to be included in PGE’s development plans with regard to district heating business
Heat in PGE Group after transaction 10 • PGE becomes market leader in heat generation and installed capacity • Integration and optimisation of CHPs operations at current locations Gdynia Gdańsk Installed capacity in heat in Bydgoszcz pomorskie Pomorzany Poland warmi ń sko-mazurskie zachodnio- Szczecin Toruń pomorskie podlaskie Dolna Odra kujawsko- PGE 15% pomorskie Gorzów Wlkp. Zgierz wielkopolskie mazowieckie lubuskie PGNiG Termika Bełchatów ł ódzkie 9% lubelskie Zielona Góra VEOLIA dolno ś l ą skie ś wi ę tokrzys 6% Other Lublin kie opolskie 68% TAURON Kielce ś l ą skie 2% podkarpackie Rzeszów Turów ma ł opolskie Wrocław Kraków Zawidawie Czechnica Opole Estimates Rybnik Current CHPs of PGE Group Current power plants of PGE Group Acquired CHPs and Rybnik power plant
11 Prospects for development of heat and cogeneration segment within PGE Group
Why heat? 12 • Poland is one the largest heat markets in Europe • Favourable EU draft regulations • Compatibility with a megatrend of distributed power generation • Improvement of the country’s energy security • Support of regional social and economical development through inter alia utilisation of local fuels potential • Prospective improvement of the air quality (reduction of smog) • Supports achievement of climate targets – reduction of CO 2 emission • Necessary product with no substitute for customers The key to free the potential of the segment: stable regulations including long-term support for cogeneration
Opportunities on heat market in Poland 13 • Support for highly efficient cogeneration to be continued after 2018 • High level od decapitalisation of district heating assets and strict environmental standards – space for highly-efficient, innovative technologies • Expected gradual decommissioning of old, inefficient condensation assets due to inter alia BAT conclusions creates additional room for cogeneration sources on electricity market Share of cogeneration in heat production in 2015, Heating assets (net) and decapitalisation of by voivodships of fixed assets ratio in 2015, by voivodships PLN m Production of heat in cogeneration Decapitalisation of assets in 2015 Net assets Source: Energy Regulatory Office
Development of heat in PGE 14 Currently possessed 1 cogeneration and heating assets of PGE Acquisitions and organic Assets acquired 2 development of 4 district heating networks Decapitalised 3 district heating assets outside of Regulatory environment PGE’s area Development of technologies Local conditions
Strategic support for development of district heating 15 market Report by the Ministry of Energy „Directions for development of innovations in energy” (May 2017) indicates the legitimacy of: Increasing the share of cogeneration as an environmentally effective way of using fossil fuels Financial support for expansion of the district heating network We assume that support for highly efficient cogeneration will be continued in long-term perspective : The certificate system of support for highly efficient cogeneration will expire by the end of 2018. Declaration by the Ministry of Energy implies that after 2018 support for that technology will be continued Conceptual works on the auction system are ongoing in the Ministry of Energy, system shall be similar to auction-based RES support scheme, provided by the RES Law According to the Ministry of Energy, the proposed system shall be disclosed shortly
Electricity and heat – a perfect match 16 • Changes in regulatory, market and technological environment generate new challenges for the energy groups … and opportunities • Strengthened PGE = knowledge of specific local conditions and relations capital • Extending the value chain by district heating networks – PGE interested in development and acquisition of district heating networks , especially in locations where PGE operates its generating assets • Use of grants and preferential financing – environmental programs • Search for new technologies like multi-fuel installations, gasification, etc. improving efficiency of modernised heat sources • Possible expansion of products and services on offer PGE’s goal is to benefit from market opportunities and to create value through supplies of heat to customers at competitive price and in ecological way
Heat in PGE – one step further 17 • Not only big cities – potential of smaller localities • Identifying heat sources of 1-50 MW t requiring major modernisation • Approx. 200 most attractive installations with the highest co-operation potential have been identified • Access to local markets and customers database through acquisition of EDF assets supports implementation of the project No information No installations Out of segmentation Medium profile High profile Need for modernisation High profile • not competitive to PGE • capacity of 1-50 MW t • fuel hard coal, gas, fuel oil • Year of construction/ modernisation < 2000
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