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1 Annual Report 2009

2 Navigation on report s pages Click on the header "Annual Report 2009" to go to the table of contents lick on the header of the financial part to go to the financial part Click to move to the previous / next page Navigation in the table of contents Click a title or a thumbnail to move forward to the selected chapter

3 PGE is: a company with a stable economic position and financial potential guaranteeing its dynamic development, PLN bn PGE Capital Group s consolidated revenue in 2009 PLN bn PGE Capital Group s consolidated EBITDA in % increase in PGE Capital Group s consolidated EBITDA over that of 2008 PLN bn PGE Capital Group s consolidated net profit in % increase in PGE Capital Group s consolidated net profit over that of 2008 PLN bn value of the Initial Public Offering of PGE Polska Grupa Energetyczna S.A. a company implementing one of the largest investment programmes in Europe. PLN bn PGE Capital Group s total investment expenditures in 2009 PLN 1.0 bn PGE Capital Group s investment expenditures on distribution in 2009 PLN 2.5 bn PGE Capital Group s investments in mining and generation in 2009 The structure of fuels and other primary energy carriers consumed in the generation of power sold by PGE Polska Grupa Energetyczna in 2009 Renewable energy sources, including biomass 1.04% Hard coal 22.86% Lignite 72.43% Natural gas 3.40% Others 0.27%

4 PGE Polska Grupa Energetyczna is Poland s largest producer and provider of electricity as well as one of the largest power companies in Central and Eastern Europe. PGE in numbers 5 million the number of electricity consumers served by the PGE retail sales companies 268,000 km the length of PGE Capital Group s power lines 30.0 TWh electricity sold by PGE retail sales companies in 2009 PGE Capital Group s total installed capacity 12.4 GW 53.8 TWh 43.1 m tons electricity generated by PGE Capital Group in 2009 lignite mined by PGE Capital Group in 2009

5 Annual Report 2009

6 2009 Annual Report 2 3 Table of Contents PGE s Mission/Vision 4 PGE s Areas of Activity 20 Strategic projects 38 We are developing in a sustainable way PGE s Mission/Vision Calendar of events in Selected Financial Data Letter from the Chairman of the Supervisory Board Letter from the President of the Management Board Governing Bodies of PGE Polska Grupa Energetyczna S.A.: a) Supervisory Board...16 b) Management Board PGE s Areas of Activity Factors affecting financial performance Strategic projects: a) consolidation...40 b) investments...42 c) development of nuclear power Corporate Governance We are developing in a sustainable way IFRS compliant financial highlights of the PGE Capital Group A report on the activities of the Supervisory Board of pge Polska Grupa Energetyczna S.A. In the year

7 2009 Annual Report 4 5 PGE s Mission/Vision PGE s Mission PGE s Mission is to build shareholder value by satisfying its clients energy needs. PGE is operating in an increasingly competitive environment, both domestically and internationally. In order to meet the requirements of competition while ensuring a high level of customer service, it is the company s priority to focus on customers and their satisfaction. PGE is a commercial law company and its shares are publicly-traded. That is why building shareholder value is one of the pillars of PGE s strategy. PGE s Vision PGE s Vision is to become the leading utility company in Central Europe.

8 2009 Annual Report 6 7 Calendar of events in July 2009 in 13 January By a decision of the Polish government, PGE Polska Grupa Energetyczna S.A. was selected to participate in drafting Nuclear Power Program for Poland and play the leading role its implementation. 30 January The European Commission proposed to award financial assistance to PGE Elektrownia Bełchatów S.A. to build a Carbon Capture and Storage (CCS) installation. 11 May The Management Board of PGE Polska Grupa Energetyczna S.A. announced its strategy until 2012, including plans for Group consolidation and integration and details concerning its investment program. The Management Board of PGE Polska Grupa Energetyczna S.A. entrusted PGE Elektrownia Bełchatów S.A. with the role of being the integrator of its Conventional Energy business line under the PGE Capital Group s Consolidation Program. 30 July By an entry in the National Court Register, the address and registered office of PGE Polska Grupa Energetyczna S.A. were changed. Warsaw became the Company s registered office. 17 August PGE Kopalnia Węgla Brunatnego Bełchatów S.A. began lignite mining in the Szczerców Mining Pit one of the three lignite mining pits in the Bełchatów bed. PGE Elektrownia Bełchatów S.A. the largest producer of electricity in Poland gained another source of supply.

9 2009 Annual Report Calendar of events in September As part of its strategy to focus on the energy sector, the Management Board of PGE Polska Grupa Energetyczna S.A. made the decision to begin preparations to sell its shares in Polkomtel S.A., a mobile phone network operator. 4 September The Management Board of PGE Polska Grupa Energetyczna S.A. named the companies responsible for merging the PGE Capital Group entities within the following business lines: retail sales, distribution and renewable energy. 17 September PGE Elektrownia Opole S.A. announced a tender to build two energy unit. This procurement entails the design, construction, start-up, commissioning and provision of warranty services for new energy units no. 5 and 6 with a gross capacity of MW each. 12 October PGE Polska Grupa Energetyczna S.A. published its prospectus to conduct its IPO. 6 November PGE Polska Grupa Energetyczna S.A. s IPO on the Warsaw Stock Exchange. As a result of its successful IPO, PGE attracted nearly PLN 6 billion for further investments. 17 November PGE Polska Grupa Energetyczna S.A. signed a memorandum with EDF S.A. to start cooperation in the field of nuclear power. The purpose of cooperation is to analyze the feasibility of developing nuclear reactors using EPR technology and the possibility of industrial partnership to build the first nuclear power plant in Poland. 1 December Registration of PGE Obrót S.A. and PGE Dystrybucja S.A. 28 December Registration of PGE Energia Jądrowa S.A.

10 2009 Annual Report Selected Financial Data 12 months ended 31 December s of PLN 12 months ended 31 December months ended 31 December s of EUR 12 months ended 31 December 2008 Total sales revenues 21,623,350 19,408,706 4,981,602 5,494,961 Operating profit/loss 5,344,729 3,262,295 1,231, ,616 Gross profit/loss (before taxation) 5,378,534 3,169,535 1,239, ,354 Net profit/loss 4,337,223 2,670, , ,996 Total income 4,296,508 2,700, , ,542 Net cash on operating activity 7,298,888 5,386,580 1,681,523 1,525,040 Net cash on investment activity (3,628,590) (5,444,485) (835,957) (1,541,434) Net cash on financing activity 1,898,319 (528,285) 437,336 (149,567) Movement in the net balance of cash and cash equivalents 5,568,617 (586,190) 1,282,902 (165,961) Net profit per share (in PLN/EUR per share) Diluted profit per share (in PLN/EUR per share) Balance as at 31 December s of PLN Balance as at 31 December 2008 Balance as at 31 December s of EUR Balance as at 31 December 2008 Non-current assets 41,964,446 40,701,211 10,214,801 9,754,868 Current assets 12,477,640 6,487,592 3,037,252 1,554,883 Group s assets classified as for sale 5,712 3,458 1, Total assets 54,447,798 47,192,261 13,253,444 11,310,579 Equity 38,849,752 30,175,578 9,456,636 7,232,187 Share capital 17,300,900 14,705,765 4,211,309 3,524,534 Long-term liabilities 9,762,322 9,519,888 2,376,302 2,281,634 Short-term liabilities 5,835,724 7,496,795 1,420,506 1,796,758 Weighted average number of shares 1,513,947,249 1,470,576,500 1,513,947,249 1,470,576,500 Number of shares at the end of the reporting period 1,730,090,000 1,470,576,500 1,730,090,000 1,470,576,500 Book value per share (in PLN/EUR per share) Diluted profit per share (in PLN/EUR per share) At the end of 2009, the PGE Capital Group recorded a 62% growth of consolidated net profit from PLN 2.67 billion in 2008 to PLN billion in Consolidated revenues were PLN billion and increased by 11.4% as compared to EBITDA increased by 36.5% to PLN billion. EBITDA increased by 37% year-on-year excluding compensation for long-term contracts. The 2008 and 2009 financial data have been translated into EUR using the following principles: individual line items of assets and liabilities according to the average FX rate published by the National Bank of Poland as at 31 December PLN/EUR (as at 31 December PLN/EUR), individual line items of the statement of total income and the cash flow statement using the rate equal to the arithmetic average of the average rates published by the National Bank of Poland as at the last day of each month of the financial period from 1 January 2009 to 31 December PLN/EUR (for the period from 1 January 2008 to 31 December PLN/EUR). EBITDA margin of 36.9% PGE ranks third among major European concerns 60% % 37% 62% Growth of revenues Growth of ebitda Growth of net profit Shareholder structure PGE Polska Grupa Energetyczna S.A. s IPO on the Warsaw Stock Exchange took place on 6 November After the issue of series B shares offered under the Initial Public Offering, the company s shareholder structure as at 31 December 2009 was as follows: State Treasury 85%, other shareholders 15%. As at 31 December 2009, PGE Polska Grupa Energetyczna S.A. s share capital was PLN 17,300,900,000 and was divided into 1,730,090,000 shares with a par value of PLN 10 each, including: 1,470,576,500 series A bearer shares, 259,513,500 series B bearer shares. Company s shareholder structure as at 31 December 2009 State Treasury 85% other shareholders 15%

11 2009 Annual Report Letter from the Chairman of the Supervisory Board PGE Polska Grupa Energetyczna S.A. The execution of the Group s comprehensive development strategy, the growth of energy prices and the proceeds earned on long-term contracts contributed to the Group recording 62% growth in consolidated net profit in 2009 even though the growth rate in demand for energy slumped. Very robust financial performance coupled with one of the highest EBITDA margins generated by any European power engineering holding reflect the well-thoughtthrough investment policy. Dear Sir / Madam, Another year of PGE Capital Group s operations is now behind us may be acknowledged to have been a very successful year. Despite the recession and decrease in electricity con sumption, the PGE Capital Group has proven that stable development is possible even in a time of crisis. Confirmation of these words is found above all in last year s Initial Public Offering and 2009 s great financial performance, which has enabled the Group to continue implementation of crucial investment processes. One enormous achievement of the entire PGE Capital Group was the Company s long-coming floatation on the Warsaw Stock Exchange preceded by its Initial Public Offering worth almost PLN 6 billion. I would like to take advantage of this opportunity to thank all the employees of the PGE Capital Group for their commitment and hard work on that project. It is with great satisfaction that I assert that this great achievement was made possible by their efforts. I would also like to express my gratitude for fruitful cooperation to the Management Board of PGE Polska Grupa Energetyczna S.A. and my colleagues in the Supervisory Board. I believe that 2010 will be a year in which the Polish economy will enjoy stable economic growth. For PGE it will be a time to address new challenges and expend efforts to generate the best possible financial performance. I am convinced that the Supervisory Board, the Management Board of PGE Polska Grupa Energetyczna S.A. and all the Group s employees will do their utmost to make that happen. Last year the Supervisory Board of PGE Polska Grupa Energetyczna S.A., in which I have been privileged to serve as Chairman, observed and thoroughly analysed PGE s situation. It cooperated with the Management Board concerning all material aspects of the Group s activity. The Supervisory Board held 15 meetings during which decisions were made to enhance operational efficiency, implementation of the Group s investment plans and the sale of PGE s non-energy assets. Respectfully, Marcin Zieliński Chairman of the Supervisory Board PGE Polska Grupa Energetyczna S.A.

12 2009 Annual Report Letter from the President of Management Board of PGE Polska Grupa Energetyczna S.A. interest in our company s shares confirms the strength of the Polish energy industry, its potential for development and its attractiveness to investors. We are pleased that investors have placed their confidence in us and shown their appreciation for our strategy. One of this strategy s pillars is rooted in the process that has been commenced of consolidating and tidying up its organizational structure. After its completion PGE Capital Group s structure will be much simpler thereby contributing to the quality of management and operational efficiency. We have launched the largest investment program in the Polish energy industry and we are implementing it on a timely basis. In 2009, the PGE Capital Group s investments totaled PLN 3.7 billion. The largest implemented projects included opening the Szczerców Mining Pit to deliver lignite to PGE Elektrownia Bełchatów S.A. in the upcoming decades and the considerable progress achieved in the construction of a 858 MW unit in that power plant. Another one of last year s stellar event was the launch of the program to build Poland s first nuclear power plant. In January 2009, the Polish government entrusted PGE with the construction of two nuclear power plants envisaging power of 3 thousand MW each. This is a tremendous challenge that will influence Poland s energy Dear Sir / Madam, security in the future. We have already taken strong action to ensure that electricity On behalf of the Management Board of PGE Polska Grupa Energetyczna S.A. I would like to Our successes and robust financial performance stem from the hard work of the Group s present you with the Annual Report detailing the achievements of the PGE Capital Group and its employees, whom I would like to thank for their commitment and the sheer enor- consolidated 2009 financial performance. Undoubtedly, this past year was a turning point in the mity of their work. They have enabled us to implement PGE s ambitious strategy. will flow from the first Polish nuclear power plant in 2020, in alignment with plans. history of the PGE Capital Group. It was a year of hard work, new challenges and great success. PGE s vision is to be the leader on the energy market capable of competing effectively It was a very good year for PGE despite economic slowdown and decline in industrial with the largest European utilities in the future. I hope this publication will help you production. At the end of 2009, the PGE Capital Group recorded 62% growth in con appreciate that vision while broadening your knowledge of the PGE Capital Group. solidated net earnings rising from PLN 2.67 billion in 2008 to PLN billion in Consolidated revenues totaled PLN billion, showing 11.4% growth over Respectfully yours, Without a doubt, one exceptional event in 2009, not just for PGE but also for the entire energy sector, was November s floatation of PGE Polska Grupa Energetyczna S.A. preceded by the largest Initial Public Offering in Europe in 2009 worth almost PLN 6 billion. This success Tomasz Zadroga belongs to the entire PGE Capital Group and its over 40 thousand employees. The extensive President of the Management Board of PGE Polska Grupa Energetyczna S.A.

13 2009 Annual Report Governing Bodies of PGE Polska Grupa Energetyczna S.A. Supervisory Board of PGE Polska Grupa Energetyczna S.A. The Supervisory Board is composed of seven to nine members appointed and dismissed by the Shareholder Meeting. The Supervisory Board oversees PGE Polska Grupa Energetyczna S.A. s operations in all areas of its activity on a continuous basis. Composition of the PGE Polska Grupa Energetyczna S.A. Supervisory Board As at 14 June 2010 Marcin Zieliński Chairman of the Supervisory Board Graduated from the Law and Administration Department of Warsaw University and Postgraduate Studies in Finance at the Warsaw School of Economics. In he completed legislative training. Since February 2008 he has been the director of the 3rd Corporate Governance and Privatization Department at the State Treasury Ministry (main place of employment). Since May 2009 he has been the Supervisory Board Deputy Chairman of PHZ Baltona S.A., with its registered office in Warsaw. Previously he also was a Supervisory Board member in Stocznia Gdynia S.A. and Elektrownia Wodna Żarnowiec S.A., with its registered office in Gniewino. According to his representation, Marcin Zieliński is affiliated with a shareholder holding no fewer than 5% of the total number of shares at the shareholder meeting i.e. the State Treasury by employment with the State Treasury Ministry. Maciej Bałtowski Vice-Chairman of the Supervisory Board Professor ordinary at the Economics Department at the Maria Curie- Skłodowska University in Lublin. Coauthored several draft amendments to the Act on Commercialization and Privatization. Currently, director of the Institute of Economics at the Maria Curie-Skłodowska University in Lublin (main place of employment). Previously, supervisory board chairman of, among others, Wschodni Bank Cukrownictwa S.A., Lubelska Fabryka Wag FAWAG S.A. and Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji Sp. z o.o., with its registered office in Lublin. In he was a partner in Centrum Kształcenia Menedżerów Przemysłowych Sp. z o.o., with its registered office in Lublin. Jacek Barylski Member of the Supervisory Board Legal Advisor Graduated from the Law and Administration Department of the University of Łódź and Postgraduate Studies in Finance at the Warsaw School of Economics. Currently, the director of the Guarantees and Sureties Department at the Finance Ministry (main place of employment). He also is the Chairman of the Steering Committee on Execution of the Government s Entrepreneurship Support Program using the sureties and guarantees of Bank Gospodarstwa Krajowego. Previously, he served on the supervisory boards of, among others, Polski Monopol Loteryjny Sp. z o.o., PKP Cargo S.A. and Warszawski Rolno- Spożywczy Rynek Hurtowy S.A. Since 2003 he has been a Supervisory Board member of PKP S.A. Małgorzata Dec Member of the Supervisory Board Has a Ph.D. in economics. Graduated from the Warsaw School of Economics. Since June 2009 she has been employed as head of the Privatization Processes Coordination Sub-Department of the Analyses Department at the State Treasury Ministry (main place of employment). Since September 2009 she has been the Supervisory Board Chairwoman of Nafta Polska S.A. Previously, she served on the Supervisory Board of Warszawski Rolno-Spożywczy Rynek Hurtowy S.A. According to her representation, Małgorzata Dec is affiliated with a shareholder holding no fewer than 5% of the total number of shares at the shareholder meeting i.e. the State Treasury by employment with the State Treasury Ministry. Czesław Grzesiak Member of the Supervisory Board Graduated from the Law and Administration Department at the University in Poznań majoring in Law; completed a course for receivers. He is a member of the Lewiatan Polish Confederation of Private Employers and a Management Board member of the Polish Commerce and Distribution Organization. Professional experience in management: since 1995 a Management Board member and later since 2004 Vice-president of the Management Board of TESCO /Polska/ Sp. z o.o. In addition, he was the President of the Management Board of 40 TESCO group companies. In he was the rece iver for the Iglo tech State-Owned Enterprise in Świd nica and the Glass Mill in Pieńsk. He was a mem ber of the Supervisory Boards of PHU Podzamcze S.A., Minor S.A., Madex S.A. Czesław Grzesiak s main place of em ploy ment is TESCO /Polska/ Sp. z o.o. in Kraków. He also is the President of the Management Board of SAVIA Karpaty Sp. z o.o., Genesis Sp. z o.o., Promesa Sp. z o.o. and a Management Board member of Jasper Sp. z o.o. Grzegorz Krystek Member of the Supervisory Board Graduated from the Electrical Engineering Department of the Warsaw University of Technology specializing in power plants. In 2005 he completed his MBA postgraduate studies at the Warsaw University of Technology. The program was conducted by the following schools of economics: London Business School, HEC School of Management from Paris and Norwegian School of Econo mics and Business Administration in Bergen. Co-authored the Domestic Emissions Reduction Plan, was an expert in the Council of European Energy Regulators (CEER). Professional experience in management: from 2004 Vice-president of the Management Board of Hasbrouck Sp. z o.o., Commercial Director in Vertis Environmental Finance Poland Sp. z o.o., director on Energy and director on Strategy and Development in Elektrim S.A., member of the Super vi so ry Boards of ZE PAK S.A., Elektrim Mega dex S.A., Elektrim-Volt S.A., EM Yachts Sp. z o.o. Grzegorz Krystek s main place of employment is a company under the business name of Partner. Katarzyna Prus Member of the Supervisory Board Legal Advisor graduated from the Law and Administration Department of Warsaw University and the European Integration Studies in the National School of Public Administration in Warsaw. From 1996 employed by the State Treasury Ministry (her main place of employment); currently, she is employed as Sub-Department Head of the Legal Representation Department. From 2001 member of examination committees for testing candidates to become supervisory board members in companies with a State Treasury shareholding. She also was the Supervisory Board Chairwoman of, among others, Zespół Elektrociepłowni Poz nań skich S.A., Przedsiębiorstwo Spedycji Międzynarodowej C.Hartwig-Katowice S.A., and also a Supervisory Board member of Południowy Koncern Energetyczny S.A. with its registered office in Katowice. From October 2005, Supervisory Board member and then Chairwoman of Fa bry ka Elemen tów Złącznych S.A. with its registered office in Siemianowice Śląskie. According to her representation, Katarzyna Prus is affiliated with a shareholder holding no fewer than 5% of the total number of shares at the shareholder meeting i.e. the State Treasury by employment with the State Treasury Ministry. Zbigniew Szmuniewski Member of the Supervisory Board Graduated from the Law and Admini stra tion Department of the Maria Curie-Skłodowska University in Lublin. He holds a Diploma from the International School of Commerce and a Diploma as a Ukrainian Stock Exchange Broker. For 13 years he was director in the Voivodship Office. For two years he was the President of the Management Board of Bank BDK Ukraina Ltd. in Ukraine and the chief specialist at PKO S.A. in Warsaw. Commercial Advisor for the Polish Embassy in Kiev in and In he was the Supervisory Board Chairman of UNIMOR S.A. with its registered office in Gdańsk. Main place of employment: Ministry of Economy. Krzysztof Żuk Member of the Supervisory Board Ph.D in Economics, graduated from the Economics Department at the Maria Curie- Skłodowska University in Lublin. Authored and co-authored more than 70 academic publications, including 8 monographs. Professional experience in management: undersecretary of state at the State Treasury Ministry, Deputy Mayor of the City of Lublin, director of the Representative Office of the State Treasury Ministry in Lublin, director of the Representative Office of the Ministry of Ownership Transformations in Lublin. He was a supervisory board member of companies with a State Treasury shareholding. Currently, he is a Supervisory Board member of Polskie LNG S.A. Krzysztof Żuk s main place of employment is the Lublin City Hall.

14 2009 Annual Report Governing Bodies of PGE Polska Grupa Energetyczna S.A Management Board of PGE Polska Grupa Energetyczna S.A. On 20 November 2009 the Supervisory Board of PGE Polska Grupa Energetyczna S.A. approved the Company s Organizational Bylaws and the Company s Management Board Bylaws. The Management Board is composed of 5 members. The split of areas of activity, duties and responsibilities between the Management Board members is as follows: Tomasz Zadroga President of the Management Board Marek Szostek Vice-president of the Management Board for Organisation Piotr Szymanek Vice-president of the Management Board for Corporate Affairs Wojciech Topolnicki Vice-president of the Management Board for Development and Finance Marek Trawiński Vice-president of the Management Board for Operations Appointed as President of the Management Board on 1 August Coordinated the tasks performed by the Nuclear Energy Department (until the date of establishing the company called PGE Energia Jądrowa S.A.), the Risk Audit and Analyses Department, the Mergers and Acquisitions Department, the Press Spokesman, the Position on Occupational Safety and Health, the Management Board Proxy on Protection of Restricted Information and the Management Board Office. Graduated from the International Economic and Political Relations Program at the Economic and Social Department of the University of Łódź and The Association of Chartered Certified Accountants (ACCA). Has broad professional experience in corporate restructuring, strategic planning and finance management. His career to-date included serving on the management boards of commercial companies in a variety of industries e.g. Inter Cars, IC Development & Finance and Adidas Polska. He also was the financial director at Papyrus- Stora Enso Polska and ABB Polska. Appointed to be Vice-president of the Management Board on 3 August Coordinated tasks performed by the Human Resources Department, the Management and Administration Department and the Marketing and PR Department. Graduated from the Economics and Organization of Transportation Program at the Domestic Commerce Department of the Planning and Statistics University in Warsaw (currently the Warsaw School of Economics). In the course of his professional career he was responsible for managing the key operational areas of commercial and production companies such as ASICS Polska Sp. z o.o., Adidas Poland Sp. z o.o., Nike Poland Sp. z o.o., Makton Sp. z o.o., Eurosmak Sp. z o.o., Fedrus S.A. He also worked in the Tax Chamber in Warsaw. In these companies he held mana gement functions as Vice-president of the Management Board, general director, sales and market development director and commercial director. Appointed as Vice-president of the Management Board on 21 July Responsible for coordinating the activities of the Legal Department, the Security Department and the Procurement Department. Graduated from the Law and Administration Department of Warsaw University and the Program entitled Enterprise Management on the European Union Market at the Warsaw School of Economics. Legal advisor. He also ran his own Legal Advisor s Office which catered to important entities in the insurance and financial sector. He acquired professional experience in legal affairs in energy utilities by providing legal assistance and in legislation by working for Stołeczne Przedsiębiorstwo Energetyki Cieplnej S.A. and Polskie Sieci Elektroenergetyczne S.A. Previously, a ma na ger in various financial institutions such as Powszechny Zakład Ubezpieczeń S.A., Bank Współpracy Europejskiej S.A., Bank Pekao S.A. and Polski Bank Inwestycyjny. Appointed as Vice-president of the Management Board on 1 July Coordinated tasks performed by the Treasury Department, the Controlling Department, the Strategy and Investment Department and the Accounting Department. Graduated from the Management and Economics Department of the Gdańsk University of Technology and Ecole Superieure de Commerce in Rouen (MBA studies). Has extensive professional experience in finance management. He worked as, among others, deputy financial director and financial controller in EADS PZL Warszawa-Okęcie S.A. and as Senior Manager in the Audit and Economic Consulting Department at Arthur Andersen Sp. z o.o. He also conducted his own business activity in corporate finance. The companies for which he wor ked included, among others, MicroStrategy Poland Sp. z o.o. (as financial director), GreenVenture S.A. and Polish Energy Partners S.A. Appointed as Vice-president of the Management Board on 28 July Coordinated the Group s core business tasks related to energy per for med by the Commerce Depart ment, the Distribution Department, the Mining and Generation Department and the Marketing Department (from November 2009). Graduated with honors from the Electric Engineering Department of the Wrocław University of Technology and MBA studies at European University in Montreux. Also completed several post-graduate studies including a course for English translators in science and technology at the University of Wrocław, a course on management finance and accounting at Wrocław College of Management and Finance, and a course on business communication and PR at the Warsaw School of Economics. Has extensive professional experience in enterprise management. Former Pre sident of the Management Board of international and domestic companies such as ABB Instal Sp. z o.o., Alstom T&D Protection & Control S.A., Energetyka Sp. z o.o., MPWiK Sp. z o.o. Was a super visory board member and supervisory board chairman of several commercial law companies, private companies and companies with a State Treasury shareholding.

15 2009 Annual Report PGE s Areas of Activity The PGE Capital Group is one of the largest producers and providers of electricity in Poland. In that it holds its own resources of fuel (lignite) and produces and distributes energy through its own lines, PGE guarantees secure and stable deliveries of electricity to approx. 5 million households, companies and institutions.

16 2009 Annual Report PGE s Areas of Activity The transaction flows in the wholesale segment in 2009 Energy producers from the PGE Capital Group Purchases from companies from outside PGE Capital 53.8 TWh Purchases on foreign markets Purchases on the balancing market Other purchases TWh TWh TWh Conventional Energy The PGE Capital Group is the leader among the domestic producers of electricity it has more than a 40% market share. In Conventional Energy, the mining and producing companies operating within the PGE Capital Group include 2 lignite mines, 4 power plants and 10 combined heat and power plants. PGE Polska Grupa Energetyczna S.A. and PGE Electra S.A. Energy balance 64.7 TWh In 2009, the mines of the PGE Capital Group mined a total of 43.1 million tons of lignite Sales of the group companies to end users Sales on the domestic wholesale market Sales on the balancing market Sales on foreign markets Sales to PSE Operator S.A. (to offset losses) In-house consumption* TWh TWh TWh TWh TWh TWh * in-house consumption includes, among other things, energy purchases to offset the balancing difference and consumption of energy by mines and pumped storage plants Source: PGE Polska Grupa Energetyczna S.A. In 2009, the core business of the PGE Capital Group was organized in five segments: Conventional Energy, which includes lignite mining and the generation of electricity and heat in conventional sources, Renewable Energy, which includes the production of electricity from renewable sources, Wholesale of electricity and related products, Distribution of electricity, Retail sale of electricity. Influence exerted by individual lines of business on EBITDA Wholesale trade PLN 465 million Other PLN 267 million Distribution PLN 1,093 million Conventional Energy is PGE s strategic business line from the standpoint of stability of energy deliveries to distribution group companies. At the same time, Conventional Energy is PGE Capital Group s most profitable business line. In 2009, total sales revenues from that segment were PLN 13,388.9 million, representing growth of approx. 29% compared to The operating result plus depreciation (EBITDA) was PLN 5,550.2 million and the operating result (EBIT) was PLN 4,026.3 million. In the corresponding period of 2008, EBITDA was PLN 4,150.7 million while EBIT was PLN 2,650.1 million. Improvement in financial performance was primarily attributable to growth of wholesale energy prices in Poland. Total: PLN 7,983 million Retail sales PLN 405 million Renewable energy PLN 203 million In 2009, the total electricity production of the PGE Capital Group was 53.8 TWh (net), of which 52.7 TWh came from companies in the conventional energy segment. In addition to electricity, the combined heat and power plants and the power plants of the PGE Capital Group produced 22.8 million GJ of heat in this period. The mining and generating companies operating within the group include the following: Conventional energy PLN 5,550 million Lignite Mines of the PGE Capital Group: PGE KWB Bełchatów S.A. PGE KWB Turów S.A. Conventional Power Plants of the PGE Capital Group: PGE Elektrownia Bełchatów S.A. PGE Elektrownia Turów S.A. PGE Elektrownia Opole S.A. PGE Zespół Elektrowni Dolna Odra S.A. Combined Heat and Power Plants of the PGE Capital Group: PGE Elektrociepłownia Gorzów S.A. PGE Elektrociepłownia Kielce S.A. PGE Elektrociepłownia Lublin-Wrotków Sp. z o.o. PGE Elektrociepłownia Rzeszów S.A. PGE Zespół Elektrociepłowni Bydgoszcz S.A. (3 heat and power plants) Szczecin Power Plant (as part of PGE Zespół Elektrowni Dolna Odra S.A.) Pomorzany Power Plant (as part of PGE Zespół Elektrowni Dolna Odra S.A.) Energetyka Boruta Sp. z o.o.

17 2009 Annual Report PGE s Areas of Activity Distribution The distribution companies of the PGE Capital Group deliver electricity via distribution lines to more than five million users. The total length of PGE CG s lines is 268 thousand kilometers. The basic task of the PGE Capital Group in distribution is to guarantee high quality deliveries to millions of clients in central, north-eastern, eastern and south-eastern Poland. In addition, the purpose of the distribution companies operations is to provide access to the grid for new users and curtail grid losses. In 2009, PGE CG s capital expenditures on distribution activity totaled PLN 1.0 billion. In 2009, total sales revenues in the Distribution segment were PLN 4,668.7 million compared to PLN 4,756.3 million in In 2009, the segment s EBITDA was PLN 1,093.2 million while EBIT was PLN million. In the corresponding period of the previous year, EBITDA was PLN 1,044.1 million while EBIT was PLN million. Growth of profits stemmed primarily from higher return on equity resulting from the price list for electricity distribution approved for The following eight PGE CG companies are responsible for the distribution of electricity to end users. They act as Distribution System Operators on a 120 km2 area in the eastern part of the country: PGE Dystrybucja Białystok Sp. z o.o. PGE Dystrybucja LUBZEL Sp. z o.o. PGE Dystrybucja Łódź Sp. z o.o. PGE Dystrybucja Łódź-Teren S.A. PGE Dystrybucja Rzeszów Sp. z o.o. PGE Dystrybucja Warszawa-Teren Sp. z o.o. PGE Dystrybucja Zamość Sp. z o.o. PGE Zakłady Energetyczne Okręgu Radomsko-Kieleckiego Dystrybucja Sp. z o.o. Wholesale Trade The PGE Capital Group is the only utility in Poland whose energy output exceeds the group s end users demand. Therefore PGE Electra S.A. sells energy to entities from the PGE Capital Group as well to other utilities operating on the Polish market. Selected transactions in the domestic wholesale trade segment are also carried out through PGE Polska Grupa Energetyczna S.A. On foreign markets, PGE Electra S.A. holds shares in ELECTRA Deutschland GmbH. PGE is the leader in the wholesale electricity trade in Poland. Within the PGE Capital Group, the Wholesale Trade area is managed and coordinated by PGE Electra S.A. In 2009, total electricity sales on the wholesale market for the PGE Capital Group were 23.2 TWh. In 2009, total sales revenues from the Wholesale Trade segment were PLN 12,723.0 million, representing growth of approx. 18% compared to In 2009, the segment s EBITDA was PLN million while EBIT was PLN million. In the corresponding period of the previous year, EBITDA was PLN million while EBIT was PLN 74.5 million. Higher EBIT value in 2009 in the Wholesale Trade segment resulted mostly from the higher result on electricity trading recorded by PGE and the higher result recorded by PGE Electra S.A. stemming above all from increased sales of CO2 emissions rights in 2009.

18 2009 Annual Report PGE s Areas of Activity Retail Sales The Retail Sales companies of the PGE Capital Group provide top quality services to more than five million electricity users. In 2009, they sold a total of 30.0 TWh of electricity to end users. In 2009, total sales revenues from the Retail Sales segment were PLN 12,342.7 million, representing growth of approx. 15% compared to In 2009, the segment s EBITDA was PLN million while EBIT was PLN million. In the corresponding period of the previous year, EBITDA was PLN 83.1 million while EBIT was PLN 76.7 million. Growth of EBIT in the Retail Sales segment by approx. 419% in 2009 as compared to 2008 resulted mostly from increased revenues on electricity sales to business clients and average electricity rate increases. Within the PGE Capital Group, the following eight companies are responsible for the retail sales of electricity: PGE Lubelskie Zakłady Energetyczne S.A. PGE Łódzki Zakład Energetyczny S.A. PGE Obrót S.A. PGE Zakład Energetyczny Białystok S.A. PGE Zakład Energetyczny Łódź-Teren Obrót Sp. z o.o. PGE Zakład Energetyczny Warszawa-Teren S.A. PGE Zakłady Energetyczne Okręgu Radomsko-Kieleckiego S.A. PGE Zamojska Korporacja Energetyczna S.A. Renewable Energy In 2009, the electricity produced from renewable energy sources by the PGE Capital Group represented a little more than 1% of the total energy produced by the PGE companies during that period. Despite that, the PGE Capital Group is one of the leading green energy producers in Poland. Within the Capital Group, investments in renewable energy development are conducted by PGE Energia Odnawialna S.A. The company is also responsible for developing 29 hydro power plants (of the 36 functioning within the group) as well as the wind power plant in Kamieńsk. The Company s mission is to produce and deliver electricity using environmentally-friendly technologies utilizing renewable sources of primary energy and biogas. In 2009, total sales revenues from the Renewable Energy segment were PLN million compared to PLN million in In 2009, the segment s EBITDA was PLN million while EBIT was PLN 77.6 million. In the corresponding period of 2008, EBITDA was PLN million while EBIT was PLN million. Deterioration of the segment s financial results in 2009 as compared to 2008 resulted mostly from the fact that PGE Energia Odnawialna S.A. wrote off the revaluation charges of receivables with business partners in the amount of PLN 22.5 million under other operating expenses, as well as the lower volume of sales of proprietary rights (green certificates). The Renewable Energy segment is very important in PGE s investment plans. In 2009, the capital expenditures in the Renewable Energy segment were PLN 91.6 million compared to PLN million in In the periods in question, the largest amounts of capital were invested in modernization and restoration of assets.

19 2009 Annual Report Factors affecting financial performance The PGE Capital Group is the leader in the Polish electricity sector and one of the largest utilities in Central and Eastern Europe. In 2009, the share of the PGE Capital Group in the Polish electricity generation market measured by net electricity generation surpassed 40%. The Group is also the leader in electricity distribution, retail sales and wholesale trade markets. In addition, PGE is the only utility in Poland with an output surplus over retail electricity sales.

20 2009 Annual Report Factors affecting financial performance Macroeconomic Situation The PGE Capital Group focuses its activities primarily on Poland, therefore it is dependent on domestic macroeconomic trends. There is a positive correlation between the growth of demand for electricity and economic growth, therefore the country s macroeconomic situation is directly reflected in the financial performance of the PGE Capital Group. In 2009, the global recession and lower demand for products of energy-consuming branches of the Polish economy resulted in lower demand for electricity in the National Power System during that period by approx. 4.0% compared to The decline of demand for electricity was lower in Poland than in other EU member states, and the faster rate of GDP growth will contribute to restoration of demand GDP Growth (%) % 2.4% 3.6% 2.1% 6.3% % Growth of demand for electricity (indexed) Poland EU 27 Poland EU 27 Source: Global Insight 6.8% 2.9% 5.0% 0.7% During the twelve months of 2009, PGE recorded a decline in demand for the first time in 4 years. However, it was offset by higher prices and proceeds on compensation for the termination of long-term contracts. As a result of this situation, PGE s revenues increased year-to-year by more than 11%. Termination of Long-Term Contracts (LTC) In connection with the termination of LTC pursuant to the Act on the Principles for Covering the Costs Incurred by Generators in Connection with the Early Termination of Long-term Agreements for the Sale of Electric Power and Energy (the LTC Act ), the generators who had previously been parties to these contracts acquired the right to receive compensation to cover sunk costs (producer s expenditures resulting from outlays incurred by that producer up to 1 May 2004 for electricity generation assets, which were not covered by revenues received from the sale of electricity generation, power reserves and system services on the competitive market after early termination of a long-term contract). LTC limits the total amount of funds that may be paid out to all producers to cover sunk costs discounted as at 1 January 2007, to PLN 11.6 billion. Prices of Electricity In 2009, the Retail Sales Companies of the PGE Group continued to submit for approval price lists used for price list group G users (households). With respect to other users, in November 2007 the President of the Energy Regulatory Office decided that the retail sales market is a competitive market and he relieved utilities of the obligation to submit such price lists for approval. In 2009, the average rate of electricity fees for households was PLN /MWh, which

21 2009 Annual Report Factors affecting financial performance represents growth of approx. 23% compared to the average rates prevailing from May The prices of electricity on the domestic and international market exert a considerable influence on the results of PGE Polska Grupa Energetyczna S.A. and the overall PGE Group. Domestic Market In 2009, trade in electricity on the wholesale market, as in previous years, primarily entailed bilateral con tracts and futures on the TFS and GFS broke rage platforms. Despite limited demand for electricity in Poland in 2009 as compared to the previous year, the trading volume on the Polish Power Exchange ( TGE ) and the Electricity Trade Platform ( POEE ) in short-term contracts increased over previous years. Total trading volume in SPOT transactions in 2009 was 3.07 TWh for TGE and 4.36 TWh for POEE, which represents growth of trading volume by approx. 45% on TGE and 24% on POEE. Compared to 2008, SPOT prices in 2009 were lower, which was partly attributable to transfer of the obligation to pay excise tax from producers to entities selling electricity to end users. As of 1 January 2009, only one settlement price has been in effect on the balancing market. Unification of the settlement price and establishment of balancing groups contributed to changing the nature and volumes recorded on the balancing market in comparison with In 2009 the trading volume on the balancing market considerably decreased falling to 3.6 TWh compared to 4.8 TWh in the previous year. In contrast to the previous year, in 2009 energy sales by participants began to dominate the balancing market. Just as in 2008, the average weekly settlement prices of deviations did not differ considerably from market prices (i.e. SPOT prices). International Market Compared with 2008, SPOT prices in Poland in 2009 (on the Power Exchange) and on neighboring markets EEX (Germany), OTE (Czech Republic) and NordPool (Scandinavian countries) fell considerably. Despite fundamental differences between the markets, the price trends were similar. In 2009, daily price volatility was also considerably smaller than in the past. Tariffs PGE Group companies earn part of their revenues on the basis of tariffs approved by the President of the Energy Regulatory Office: tariffs for selling electricity to households (group G), tariffs of distribution companies and tariffs for heat. The prevailing tariffs for electricity, distribution services and heat subject to the Energy Regulatory Office President s approval do not fully cover the costs incurred by the group companies. Currently, the level of costs considered by the President of the Energy Regulatory Office to be justified for calculation of tariffs for the PGE Capital Group companies is lower than the costs actually incurred by those companies. Prices of Fuel In the twelve months of 2009, the costs to purchase the primary fuels from suppliers from outside the group were PLN 2,536 million and were approx. 28% higher than in In 2009, approx. 67% of electricity was produced from lignite coming from mines in the group, whose cost is less susceptible to price volatility than fuel from external sources. However, certain factors such as total quantity of mined lignite, costs of removing the overburden above the lignite layer, payroll expenses and environmental fees have an influence on the costs of mining incurred by the group and hence the costs of producing electricity by the PGE Capital Group. Allocation of CO 2 emissions rights National Allocation Plan (NAP II) In consideration of the Community trading scheme of greenhouse gas emission rights, the National Allocation Plan should be submitted to the European Commission. Since in both of the previous settlement periods the European Commission limited the quantity of CO 2 emissions rights granted to Poland compared to the quantities requested in NAP, the granted limits constitute a serious limitation for the energy sector. For the settlement period encompassing years , Poland requested a limit of 284 million tons of CO 2. Pursuant to the European Commission s decision, Poland was granted an average annual limit of million tons. According to the current NAP II, professional power plants have emissions rights for only million tons of CO 2, while its emissions under normal conditions are estimated at approx. 120 million tons. CO 2 emissions in 2009 Average annual allocation according to NAP II PGE Elektrownia Bełchatów S.A. 29,473,070 26,937,155 PGE Elektrownia Turów S.A. 11,624,371 11,158,636 PGE Elektrownia Opole S.A. 7,413,193 6,475,340 PGE Zespół Elektrowni Dolna Odra S.A. 6,078,793 5,680,137 PGE Zespół Elektrociepłowni Bydgoszcz S.A. 1,070,373 1,155,252 PGE Elektrociepłownia Gorzów S.A. 475, ,690 PGE Elektrociepłownia Lublin-Wrotków Sp. z o.o. 493, ,840 PGE Elektrociepłownia Rzeszów S.A. 303, ,155 PGE Elektrociepłownia Kielce S.A. 172, ,357 Energetyka Boruta Sp. z o.o. 84, ,988 PEC Gorzów Sp. z o.o. 0 2,615 TOTAL 57,189,608 53,054,165

22 2009 Annual Report Factors affecting financial performance Production of electricity in the PGE Capital Group (TWh) Total production of electricity Lignite-fired power plants Coal-fired power plants Coal-fired heat and power plants Gas-fired heat and power plants Pumped storage plants Hydro power plants Wind power plants TWh Change in electricity production in the PGE CG in 2009 as compared to the previous year (%) Total electricity -4% Production of electricity in the PGE Capital Group Production and sale of heat in the PGE Capital Group Electricity purchases from outside the PGE Capital Group Lignite-fired power plants Coal-fired power plants Coal-fired heat and power plants Gas-fired heat and power plants Pumped storage plants Hydro power plants Wind power plants -6% -6% -1% 0% 0% -10 % % 20% In 2009, the electricity production of the PGE Capital Group was 53.8 TWh (net) as compared to 56.1 TWh in Decrease in electricity production occurred in lignite-fired power plants, coal-fired power plants and coal-fired heat and power plants. The situation was attributed mostly to the increase in the number of reductions demanded by PSE Operator S.A. associa ted with lower demand for electricity in the National Power System, renovation of unit no. 4 of PGE Elektrownia Bełchatów S.A., which involved modernization and restoration, and failure of unit no. 4 of PGE Elektro wnia Turów S.A. In 2009, the net heat production of the PGE Capital Group was 22.8 million GJ and it was higher by approx. 1% as compared to On the other hand, the total sale of heat, after excluding sales to the PGE Capital Group companies, was 22.8 million GJ and it was higher by approx. 1% as compared to In 2009 and 2008, PEC Gorzów Sp. z o.o. and PEC Gryfino Sp. z o.o. purchased heat for the purpose of further sale from PGE Elektrociepłownia Gorzów S.A. and PGE Zespół Elektrowni Dolna Odra S.A. In 2009, the total volume of heat purchased by those companies within the PGE Capital Group was 1.4 million GJ as compared to 1.3 million GJ in In 2009, the group companies purchased 10.9 TWh of en er gy from outside the PGE Capital Group (3.4 TWh less than in 2008). The decrease in the volume of the purchased electricity as compared to 2008 resulted mostly from discontinuation of energy purchases from producers from outside the PGE Capital Group in connection with the termination of Long-Term Contracts (LTC) as of the end of March In 2009, foreign purchases decreased by approx. 46% as compared to 2008 mostly due to lower purchases from Sweden and Ukraine through the Zamość-Dobrotwór line and also smaller electricity purchases on the Ger man market by Electra Deutschland GmbH. On the other hand, in 2009 electricity purchases on the balancing market increased mostly as a result of higher energy purchases by Bełchatów, Turów and Opole power plants.