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Current Report No.: 29/2016

Title: Approval of Enea Capital Group's Development Strategy until 2030
Date: 2016.29.09
Report no.:  Current Report No.: 29/2016

Current Report No.: 29/2016

Date of preparation: 29.09.2016

Short name of issuer: Enea S.A.

Subject: Approval of Enea Capital Group's Development Strategy until 2030

Legal basis: Article 17 item 1 of MAR - confidential information

Content of report:

The Management Board of Enea S.A. (Company, Enea) informs that pursuant to the resolution of Enea S.A.'s Supervisory Board of 29 September 2016 regarding the approval of the document titled: "Enea Capital Group's Development Strategy until 2030" (Strategy) the Company adopted Enea Capital Group's Development Strategy until 2030 for realisation on the same day.

Enea optimises and adjusts the raw materials and energy group's functioning model to the market environment. The Group will be an active participant of positive changes in the Polish economy and will strengthen the Polish energy security, becoming a part of the Responsible Development Plan for Poland and the national energy policy. Enea will significantly increase its shares in particular market segments and focus on the development of new, innovative business lines and technologies.

Pursuant to the new mission: "Enea delivers constantly improved products and services, exceeding Customers' expectations due to motivated teams working in a friendly, safe and innovative organisation". The vision indicates that: "Enea is a leading supplier of integrated raw materials and energy related products and services and other innovative services for the wide range of Customers, recognised for the quality, comprehensiveness and reliability".

In order to obtain a durable competitive advantage, Enea defined 15 strategic goals within four perspectives, i.e.:

1)Owner's perspective:

-Large, controlled share in selected market segments;

-Durable relations with Customers, regularly decreasing costs of obtaining and keeping Customers;

-Maintenance of Enea CG's financial security;

-High mark-ups on package services and products;

-Innovativeness in all the aspects of Enea CG's operations.

2)Customer's perspective:

-Ability to satisfy comprehensive needs;

-Delivery of what is needed (not only that which was ordered) in due time;

-Attractive price-quality relation of offered products and services;

-Low purchase cost, support in financing purchases from Enea CG's offer;

-Sense of being "well cared for" by an ethical, reliable and innovative supplier.

3)Process perspective:

-Generation of an optimum product and services mix for well-identified Customers in cooperation with business partners;

-Reaching Customers efficiently and providing promised values on time, at adequate price and quality;

-Efficient, integrated management of flexible, open competence groups in clearly identified business lines, in the preferred role of Business Operators on entrusted assets.

4)Development perspective:

-Designing and implementation of the process of shaping a modern organizational governance on all the levels in the whole Enea CG;

-Balanced investments in intangible and tangible assets.

The priority specified in the strategy is growth in Enea CG's value for shareholders. The Group will aim at the achievement of the return on equity ratio (ROE) on the level of 10 per cent and return on assets ratio ROA on the level of 5 per cent until 2025.

Enea's Strategy foresees increasing electricity sales to end Customers to the level of 20.1 TWh in 2025 (growth by 24.4 per cent in relation to 2015). The growth will relate to the extension of own, conventional generating capacities. Regardless of the start-up of 1,075 MW unit in Kozienice Power Plant, Enea plans its engagement in the construction of new sources or acquisitions of the already existing ones on the level of additional 1,500-2,000 MW until 2025. Some of these activities will be implemented via partnerships with other energy groups. At the same time, the Group anticipates the modernisation of the existing 200 MW and 500 MW units in Kozienice Power Plant within the scope necessary for guaranteeing the efficiency of their operation and fulfilment of environmental standards, and as a consequence, the possibility of assets functioning on the market until 2030. The implementation of this strategy will mean a significant growth in Enea's importance in generating electricity for the needs of the Polish Power System. The total installed capacity of conventional sources is to increase from the current level of 3.2 GW to 5.8 - 6.3 GW in 2025. It will allow the Group to generate 20.7 - 22.8 TWh electricity from own sources, which will mean electricity generation and sales balance.

A considerable element of the foreseen growth in electricity generation is to be the investment in the modern unit in the clean coal technology, the so-called IGCC (Integrated Gasification Combined Cycle) with the capacity totalling to 300 - 500 MW. The project's business model is being intensely analysed. The Company assumes that it will be located near fuel sources, which will allow for increasing the economic efficiency of the investment. From the beginning of 2016, Enea foresees also a future transformation of the market towards the development of distributed generation sources and island energy markets (local balance areas). In in relation to that the Group will focus on a strong development of distributed generation, investing in local poly-generation sources (electricity, heat, cold and other products). Enea also accents the further development of the segment of heat which guarantees a safe return on investment via development of cogeneration sources and combined production of electricity. Within the renewable energy sources the Group will focus mainly on a growth in the operating efficiency of already held assets perceiving its chance in the development of hybrid RES.

In the new strategy Enea foresees a balanced extension of assets in all the links of the chain of values, aiming at securing fuels for the needs of its own generating activity. The Group estimates that increasing its own conventional capacities to the level of 5.8 GW will increase the demand for bituminous coal from the current level of ca. 5.5 million tonnes annually to ca. 10.9 million tonnes annually.

In the area of mining Enea also plans to retain the role of the efficiency leader e.g. via the "Smart solutions mine" programme aiming at the implementation of technological and IT innovations leading to the further growth in the efficiency of mining and automation of underground works. Enea intends also to apply the best practices in mine management to develop a new business line - mining plants operator's services in the whole region of the Central and Eastern Europe.

Enea assumes maintenance of a stable market position and financial standing in the strategy due to further strengthening of the area of distribution which already today constitutes ca. 47 per cent of the Group's EBITDA. Enea will maximise the grid reliability improving SAIDI index to the level of 144 min. and SAIFI to the level of 1.69 until 2025, including via the application of modern IT tools allowing for a quick detection of grid failures and separation of damaged sections (FDIR) and modernisation of overhead lines. Additionally, Enea will pursue the achievement of grid loss index in 2025 on the level of 5.9 per cent. Enea will also invest in a smart distribution network initiating the transformation from the electricity supplier towards a multi-service enterprise.

The Group declares a considerable growth in the innovativeness of its actions and concentration on the Customer in its strategy. From the total number of 60 strategic initiatives described in the document as many as 31 are innovative in nature and relate to the development of new business lines. Thanks to them the Group plans to diversify the revenue structure in the future, including via offering package products with added value for Customers. Enea Innovation will become one of the significant centres of implementing innovative solutions in the Group which follow from the strategy. In this entity and in the structures established for that purpose Enea will create professional mechanisms of implementation project management and build a team capable of transforming initiatives into real products offered by the Group.

Enea will be active in such segments as the development of energy micro- and macro-clusters, electromobility, prosumer installations or solutions from the field of the Internet of Things, such as a smart house or smart company. In the future, the Group will also earn on a professional provision of widely understood services, including on the operation of the energy infrastructure of industrial plants, local balancing areas and even mines.

In the strategy the Group foresees a strong support for local development and maintenance of local social relations, as an element of the responsible business policy. The Group will take care for the development of particular regions of Poland, including as an attractive employer, the entity stimulating the social development and supporting local vocational education.

The Group foresees operating efficiency management within which it estimates fixed cost optimisation by PLN 700 million until 2025 in relation to 2016 base year. It means the continuation of the current efficiency improvement programme conducted in the Group for over 3 years.

Enea estimates that the basic capital expenditures on maintaining the continuity of the Group's operation in 2016 - 2030 will total to ca. PLN 26.4 billion. Enea also plans to implement the growth in efficiency of capital expenditures. As a result of conducted analyses, the Group optimised the capital expenditures on RES, cogeneration sources and heating networks planned in the previous strategy until 2020. CAPEX potential generated this way and the Group's financial situation will enable Enea to designate additional PLN 6.2 billion until 2025 and PLN 5.3 billion in 2026 - 2030 on development investments. The expenditures constitute the maximum investment budget the Group may allocate to economically attractive investments, including acquisitions.

Additionally, Enea's goal is generating additional EBITDA from the development of new, innovative business lines. The Group assumes that until 2025 5 - 10 per cent of EBITDA will be new segments of operations. Thus, Enea plans to obtain additional financial capabilities enabling investments in the development of innovative products on the level of PLN 3.2 billion until 2025 and PLN 2.5 billion in 2026 - 2030. Financing the development will be assumedly performed via strategic partnerships with external entities, including State-owned companies and small and medium enterprises, and also acquisitions of specialised entities, which will allow for the Group's business growth without any material increase of capital expenditures.

Having in mind the diverse and international nature of Enea SA's shareholding, and also the provisions of the Best Practices of WSE Listed Companies, Enea SA guarantees the availability of its website also in English. In case of any interpretation doubts and discrepancies between the Polish and English versions, the Polish version shall prevail.