CONSOLIDATED ANNUAL REPORT FOR THE YEAR 2010 TAURON POLSKA ENERGIA S.A. CAPITAL GROUP KATOWICE, 15 MARCH 2011 Ladies and Gentlemen, I have the pleasure of presenting to you the Annual Report of TAURON Polska Energia Capital Group for the year 2010. It is an exceptional report as it is the very first time it has been published by TAURON operating as a listed company. To our Company and the entire TAURON Group, last year was exceptional – it was a period of intense work and preparations to float on the Warsaw Stock Exchange. In June 2010, TAURON debuted on the Warsaw floor. Total value of the shares sold as part of the initial public offering amounted to over PLN 4.2 billion. It is worth emphasising that with respect to the value, TAURON’s offering was the second largest offering in the power industry in Europe and the seventh largest offering among all the companies debuting in Europe in 2010. The offering enjoyed enormous interest, which translated into a very high number of institutional investors, both Polish and foreign, and over 231 thousand individual investors, which puts our offering among the largest IPOs realised in Poland to date. In December 2010, Company shares became part of the flag WIG20 Index, which confirms that we belong to the most important companies listed on the Warsaw trading floor. In 2010, we continued realisation of the activities provided for in the TAURON Group’s corporate strategy. One of the strategic priorities of the Group is the development of new generation capacities and modernisation of the existing ones. As part of the investment programme, we are executing projects involving construction of power units fuelled with hard coal, natural gas and renewable sources of energy. At Jaworzno III Power Plant, there will be constructed a new 910 MW coal-fired unit. The planned commissioning date is the year 2016. Commenced have also been the works related to the execution of a 400 MW gas and steam unit at Stalowa Wola power plant. The completion of the project has been planned to take place in the second half of 2014. A new heating unit is being executed at Bielsko-Bia³a Combined Heat and Power Plant. In August, construction of a 50 MWe/182 MWt unit started there. The unit planned commissioning date is mid-2013. Moreover, the Group is executing investment projects involving construction and reconstruction of biomass-fuelled boilers (Tychy Combined Heat and Power Plant, Jaworzno III Power Plant) III) and numerous modernisation-related tasks which will make it possible to extend the life of the existing generation assets in light of the applicable EU regulations. We have also begun development of wind power capacities in Wicko (40 MW) and Marszewo (100 MW). The year 2010 also brought about numerous organisation- and capital-related changes within the TAURON Group. As part of reorganisation of the Group’s structure, in June TAURON Polska Energia merged with ENION Zarz¹dzanie Aktywami and Energomix Servis. In the fourth quarter of 2010, the Company repurchased from the State Treasury minority stakes in Polski Koncern Energetyczny, Enion, EnergiaPro and ESW. As a result of the transaction, the State Treasury acquired, in the course of private subscription, 163,110,632 shares of TAURON Polska Energia, while the share of the holding company in the capital of the aforementioned subsidiaries increased to nearly 100%. During the subject period, we also continued the project of acquisition of the Boles³aw Œmia³y mine and of the purchase of stock of Po³udniowy Koncern Wêglowy owned by Kompania Wêglowa. In 2010, we launched the process of consolidation of the generation assets of Po³udniowy Koncern Energetyczny, Stalowa Wola Power Plant and Tychy Combined Heat and Power Plant. Eventually, generation assets based on hard coal will be concentrated with one Group entity. Activities within the Distribution Area are going in the same direction – two currently operating distribution companies will merge into a single entity. In turn, the Supply Area has been reorganised – the activity related to the supply of electricity has been concentrated within TAURON Sprzeda¿ while the activity related to customer service has been concentrated within TAURON Obs³uga Klienta. In 2010, we recorded increased volumes with respect to operating activity within the key business areas of the Group. Last year, power plants as well as combined heat and power plants owned by the Group generated 21.3 TWh of electricity net, which means an increase by 14% as compared to 2009. Economic recovery as well as actions aimed at the acquisition of new customers facilitated the increase of the volumes of distribution and supply of electricity. In 2010, distribution of electricity was approx. 3% higher than in 2009 and amounted to 37.5 TWh, including 32.9 TWh supplied to end customers, i.e. 6.5% more than in 2009. During the subject period, the Group supplied 34.3 TWh of electricity to retail customers, which means an increase by 12.8% as compared to 2009. Increased operating indicators were reflected by the improved financial results of the Group as compared to 2009. In 2010, TAURON Group reported total income from sales at the level of PLN 15,428.9 million, which means an increase by approximately 12.7% as compared to 2009. The main factors which affected the increase of revenues include an increased volume of supply of electricity and increased revenues from distribution and supply of heat. The result of the operating activity amounted to PLN 1,399.3 million (an increase by 5.9%), whereas the net income amounted to PLN 991.4 million (an increase by 4.6%). The Group’s operating profit margin reached the level of 9.1% while the net profit margin was 6.4%. In 2010, we implemented a model of central funding of the TAURON Group which results in, among other things, reduction of the costs of external funding and increased possibilities of fund acquisition, and thus a better opinion on the financial condition of the Company from rating agencies. In December 2010, the Company issued bonds of the total value of approx. PLN 850 million which was allocated to the reorganisation of a part of the debt of subsidiaries. At the same time, as part of a central model of management of the TAURON Group finances, we launched a programme of issue of internal bonds. At the beginning of the year, we implemented a programme of operating costs reduction which provides for a reduction of the costs by PLN 1 billion within three years. On behalf of the Management Board of TAURON Polska Energia, I wish to thank our shareholders, customers and all the employees for their involvement in the development of the Group’s market position. I believe that owing to the realisation of the strategy TAURON Group will systematically increase its value and will soon join the leading power companies in Central and Eastern Europe. Dariusz Lubera President of the Management Board Selected consolidated financial information of TAURON Polska Energia S.A. Capital Group in thousands PLN in thousands EUR 2010 2009 2010 2009 SELECTED FINANCIAL INFORMATION period period period period from 01.01.2010 from 01.01.2009 from 01.01.2010 from 01.01.2009 to 31.12.2010 to 31.12.2009 to 31.12.2010 to 31.12.2009 Selected consolidated financial information of TAURON Polska Energia S.A. Capital Group Income on sales 15 428 879 13 694 622 3 852 981 3 155 007 Operating profit 1 399 259 1 320 783 349 430 304 286 Profit before taxation 1 257 314 1 226 069 313 983 282 465 Net profit 991 383 948 163 247 573 218 441 Net profit for shareholders of the parent company 858 656 774 426 214 428 178 415 Net profit for non-controlling interest 132 727 173 737 33 145 40 026 Other comprehensive income 630 19 906 157 4 586 Total comprehensive income 992 013 968 069 247 731 223 027 Total comprehensive income for shareholders of the parent company 859 151 791 425 214 552 182 331 Total comprehensive income for non-controlling interest 132 862 176 644 33 179 40 696 Earnings per share (in PLN/EUR) (basic and diluted) 0,54 0,50 0,13 0,11 Weighted average number of shares (in items) (basic and diluted) 1 600 730 480 1 554 042 544 1 600 730 480 1 554 042 544 Net cash flows from operations 2 520 345 1 963 199 629 394 452 287 Net cash flows from investments (1 508 476) (1 354 024) (376 705) (311 944) Net cash flows from financial activity (512 864) (543 464) (128 075) (125 205) Net change of cash and cash equivalents 499 005 65 711 124 614 15 138 As of As of As of As of 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Fixed assets 18 959 101 18 475 838 4 787 289 4 497 307 Current assets 4 466 786 3 673 704 1 127 891 894 237 Fixed assets qualified for sale 4 397 5 951 1 110 1 449 Total assets 23 430 284 22 155 493 5 916 290 5 392 993 Primary capital 15 772 945 13 986 284 3 982 765 3 404 480 Equity for shareholders of the parent company 14 704 825 11 858 566 3 713 058 2 886 560 Equity for non-controlling interest 507 246 2 375 100 128 083 578 137 Total equity 15 212 071 14 233 666 3 841 141 3 464 697 Long-term liabilities 4 070 063 4 027 449 1 027 716 980 344 Short-term liabilities 4 148 150 3 894 378 1 047 433 947 952 Total liabilities 8 218 213 7 921 827 2 075 149 1 928 296 The aforementioned financial information for 2010 and 2009 has been calculated into EUR in accordance with the following rules: – particular items of the statement of financial situation – in accordance with the average NBP exchange rate announced as of 31 December 2010 – 3.9603 PLN/EUR (as of 31 December 2009 – 4.1082 PLN/EUR), – particular items of the statement of comprehensive income and statement of cash flows – in accordance with the exchange rate which constitutes an arithmetic mean of average NBP exchange rates announced on the last day of each month of the financial period from 1 January 2010 to 31 December 2010 – 4.0044 PLN/EUR (for the period from 1 January 2009 to 31 December 2009 – 4.3406 PLN/EUR).