We discuss the optimal operation of a combined heat and power (CHP) plant with heat storage. The dynamics of the district heating (DH) network are also considered. The decision variables include production of heat and power, supply temperature and operation of heat storage. Heat demand for the DH system and shadow prices for the electrical power system are inputs to the production system. The optimization criterion is minimization of total costs over the planning period. A non-linear optimization model based on real data is formulated and representative case studies are performed.