Who we are. Where we are going

ANNUAL REPORT 2006

Who we are PSE-Operator S.A. is the transmission system operator (TSO) of the Polish Power System. It performs the aforementioned function within the scope and in the manner prescribed by the binding legal regulations, and in accordance with the conditions stipulated in the decision by the President of the Energy Regulatory Office. The PSE-Operator S.A. company was established with a notarial deed dated 17 February 2004 as a sole-stockholder subsidiary of Polskie Sieci Elektroenergetyczne SA (PSE SA). It obtained legal status on 3 March 2004 in the result of an entry into the National Court Register under No. KRS 0000197596, kept by the District Court for the capital city of Warsaw, 12th Commercial Division. On 15 April 2004 the PSE-Operator S.A. company received a license for running business activities consisting in transmission and distribution of electrical energy within the territory of the Republic of Poland. It commenced the licensed activities on 1 July 2004, taking into lease from PSE SA an organized part of the enterprise consisting of transmission assets. As of 31 December 2006 the initial capital of the Company amounted to PLN 1,000,000 divided into registered stocks of nominal value PLN 100 each. In accordance with the legal framework as of 31 December 2006, a change in the ownership occurred in the result of which PSE-Operator S.A. is now a sole shareholder company of the State Treasury. Where we are going PSE-Operator S.A. is responsible for guaranteeing continuity of electricity supply to its customers and makes every effort to supply energy of proper quality, following at the same time the principle of the lowest costs possible. At the end of 2006, due to the change in ownership, PSE-Operator S.A. immediately commenced works on preparation of a new strategy of individual activities of the transmission system operator on the domestic and European electricity markets. The main strategic goal of PSE-Operator S.A. is provision of electricity transmission services according to objective and transparent rules ensuring equal treatment of the parties, and with due respect for the natural environment. As it takes care of the country s energy safety, a priority task of PSE-Operator S.A. is to build new and to modernize the existing lines and substations with the use of state-of-the-art technologies and with the environmental protection regulations observed. PSE-Operator S.A. takes efforts to eliminate hazards to the company s activities as the national electricity transmission system operator, particularly by means of bringing about formal takeover of the transmission assets*, development of the transmission system and improvement of solutions in the area of the balancing market. * Under the Program for the Power Sector the Company will receive transmission assets till the end of 2007. 2 PSE-Operator S.A. Annual Report 2006

ANNUAL REPORT 2006

A landmark year Dear Ladies and Gentlemen, Once again I am very privileged to have the opportunity, on behalf of the Management Board of PSE-Operator S.A., to write these introductory words to the Annual Report. July 1, 2007 will be the third anniversary of the beginning of our operations as a transmission system operator. Ever since then the Management Board and staff have been working to build up an independent company operating in a transparent and nondiscriminatory manner, and our efforts have concentrated on fulfilling the tasks and obligations which are laid down for transmission system operators by law and by decisions of the President of the Energy Regulatory Office. Many events in 2006 had a significant impact on the operations of PSE-Operator S.A. I think that anyone who observed the company s activity over the course of the year will agree with me that it was a difficult time for us, but one which ended with many important successes. You will read all the details in this Report, so I will limit myself here to pointing out just a few of the most important events and statistics. We were working in conditions much influenced by the great pace of events linked to the implementation of the governmental Program for the Power Sector. As Polish transmission system operator since 1 July 2004, we are well recognized and a valued international partner. We have got an agreement from the President of the Energy Regulatory Office for a Development Plan for Meeting Current and Future Demand for Electricity in 2006 2020. On 1 June 2006 we put into effect our Instruction of the Transmission System Operation and Maintenance. We are also actively involved in the process of creating a regional electricity market for Central and Eastern Europe according to ERGEG Electricity Regional Initiative. PSE-Operator S.A. achieved good results last year. Our net profit amounted to PLN 208.5 million. Investment was also intense: expenditure on the investment tasks and projects contained in PSE SA s investment plan for 2006 totalled PLN 450.3 million. In turn, fixed and intangible assets worth a total of PLN 401.8 million were brought into use. In December 2006, ownership of all shares in PSE-Operator S.A. was transferred from PSE SA to the State Treasury. We became a state-owned company, thus satisfying the requirement laid down in Article 9k of the Energy Law Act: The operator of a transmission system shall operate in the Joint Stock Company form in which the sole shareholder shall be the State Treasury. This is the first step towards completing the process by which the transmission system operator will achieve full independence. A solution is still required regarding the transfer to PSE-Operator S.A. of the transmission assets and, five regional dispatching centres, today still separated companies. A large majority of European transmission system operators are the owners of their transmission grids. Experience relating to the development of electricity markets in EU countries shows that even those few countries whose transmission system operators did not own network assets are now abandoning that model. According to Directive 2003/54/EC, in order for real competition to exist in the electricity market, access to the network must be free from discrimination, transparent, and accurately valued. This means that transmission and distribution operators must be separated in both a legal and an organizational sense. They must have appropriate powers to take effective decisions in relation to network assets. PSE-Operator S.A. Annual Report 2006

A landmark year Their independence from the interests of producers and suppliers should be guaranteed. There still remains much to be done in this area. So what are our the most urgent actions for the future? The most important thing at the present time is to structure the transmission network operator as quickly as possible in an organizational and legal form which will enable it to function efficiently and independently. There is therefore a need for changes in the rules and statutes, for the transfer to PSE-Operator S.A. of essential assets, and for adaptation of the existing organizational structure to meet new needs. These are only some of our challenges for the future. As the national transmission system operator, we will be working closely with all business entities and national authorities in the following areas: assurance of efficient operation of the Polish Power System, and in particular assurance of its future development through changes in the law, particularly in relation to investment processes and increased decision-making powers for the transmission system operator in case of emergency situations; the need to change the law on the safe functioning of the electricity system, and particularly the safety of operation of the transmission and distribution networks. This is confirmed both by experience gained from cooperation between operators on transmission and distribution systems, and by the conclusions drawn from the large disturbances which occurred in 2006; a more precise definition in the Energy Law Act of the rights and obligations of the transmission system operator in relation to establishing technical requirements for equipment and systems operating in the transmission and distribution networks throughout the country. The transmission system operator s power to issue binding instructions should be made sufficiently clear, so as to avoid disputes concerning areas of competence and to guarantee the safe functioning of the entire electricity system; development of procedures to be followed in crisis situations which threaten security of supply over large parts of the country. The measures currently laid down in the Energy Law Act were found to be inadequate in the light of the disturbances of June 2006; strengthening of cooperation between the transmission system operator and the national authorities in case of emergency situations. We will continue to undertake active international cooperation regionally, bilaterally and within international TSO organizations. The main focuses of this work will be: action to build new cross-border connections; participation in coordinated regional planning of transmission system development in order to eliminate bottlenecks in the transmission of electricity; development of rules for coordinated auctions for transmission capacity in the regional market of Central and Eastern Europe; increased coordination of operational activity with transmission system operators belonging to UCTE (the Union for the Co-ordination of Transmission of Electricity), in accordance with UCTE s Security Package rules. We must not forget even for a moment that the greatest resource of PSE-Operator S.A. is its people. It is their knowledge and skills, their consistent good work and ability to take difficult decisions to assure security of supply in Poland. For this reason we employ highly qualified personnel who are dedicated to ensuring the continuity of electricity supplies. And we do all this in accordance with our motto: Electricity in good hands. On behalf of the Management Board I would like to convey heartfelt thanks to our customers and business partners for their fruitful cooperation, and to thank all our staff for their creativity and effectiveness in carrying out the tasks entrusted to them. Stefania Kasprzyk President of the Management Board PSE-Operator S.A. Annual Report 2006

Table of contents About us Company Bodies 9 Profile of activities 11 Organization and employees 12 The year 2006 in short Major events and achievements of the Company 15 Data concerning operation of the Polish Power System 16 Our activities Legal basis for activities 19 Responsibilities of the transmission system operator 20 Polish Power System 22 Network assets and related activities 26 Transmission services 31 Wholesale power market 33 Cooperation with transmission systems of other countries 34 Allocating cross-border transmission capacity 36 Activities of the Energy Accounting and Control Centre 36 Regional cooperation with transmission system operators 37 Participation in the works of international organizations of operators 39 Participation in the works of international industry organizations 41 New technologies 42 Major R & D achievements 43 Telecommunication and IT 43 Company safety issues 45 Environmental protection 46 Main goals to be achieved in 2007 49 Abbreviated financial statements for 2006 50 accompanied by chartered auditor s opinion

About us

Company Bodies General Meeting of Shareholders Within the period between 1 January and 30 December 2006 the only stockholder of the Company, holding 100 % of the stocks, was Polskie Sieci Elektroenergetyczne SA. On 27 December 2006 an Extraordinary General Meeting of Shareholders of Polskie Sieci Elektroenergetyczne SA adopted a resolution on payment of dividend for the year 2005 in a material form consisting in transferring by PSE SA to the State Treasury, not later than on 31 December 2006, all the stocks of PSE-Operator S.A. On 29 December 2006 Polskie Sieci Elektroenergetyczne SA handed over to the State Treasury the documents of all stocks of the PSE- Operator S.A. company, thus transferring their ownership to the State Treasury, with the execution date of 31 December 2006. From 31 December 2006 the only stockholder of the Company, holding 100 % of the stocks, has been the State Treasury. Supervisory Board As of 31 December 2006 the Supervisory Board during its first term of office consisted of: Henryk Baranowski Chairman Edward Słoma Vice Chairman Marta Busz Secretary Joanna Adamczyk Member Lech Małecki Member Piotr Nojszewski Member Marek Pastuszko Member In 2006 the following changes occurred in the composition of the Supervisory Board: on 14 July 2006 an Extraordinary General Meeting of Stockholders of PSE-Operator S.A. dismissed Józef Sieniuć from the post of Supervisory Board Chairman and recalled him from the composition of the Supervisory Board of PSE-Operator S.A. Moreover, it recalled Jadwiga Karwatka from the composition of the Company s Supervisory Board. At the same time it appointed Henryk Baranowski to the position of the Chairman of Supervisory Board of PSE-Operator S.A. and Lech Małecki to the position of a Member of the Company s Supervisory Board. on 4 September 2006 an Extraordinary General Meeting of Stockholders of PSE-Operator S.A. removed Jerzy Marczak from the composition of the Company s Supervisory Board and appointed Marek Pastuszko to the position of a Member of the Supervisory Board. Henryk Baranowski Chairman of the Supervisory Board PSE-Operator S.A. Annual Report 2006 9

Company Bodies Management Board As of 31 December 2006 the Management Board during its first term of office consisted of: Stefania Kasprzyk President Wojciech Kułagowski Vice President Till 10 November 2006 the Management Board during its first term of office consisted of: Stefania Kasprzyk President Wojciech Kułagowski Vice President Jerzy Loch Vice President Stefania Kasprzyk President Wojciech Kułagowski Vice President 10 PSE-Operator S.A. Annual Report 2006

Profile of activities The subject of activities of PSE-Operator S.A. is performing the tasks of a national electricity transmission system operator (TSO). The tasks and obligations of the TSO in the electricity sector in Poland are clearly defined. Legal regulations and decisions by the President of the Energy Regulatory Office (ERO) stipulate the rights and obligations, competences and tools necessary for the activities of the transmission system operator to be conducted properly. The main goals of the activities of PSE-Operator S.A. are: to ensure safe and economic operation of the Polish Power System (PPS) in the conditions of its synchronous work within the UCTE (Union for the Co-ordination of Transmission of Electricity) connected transmission system; allocating, on market principles, transmission capacity in cross-border exchange; ensuring the necessary development of the national transmission network; creation of technical and organizational infrastructure necessary for functioning of the domestic wholesale electricity market; preserving the financial stability of the enterprise and creating growth in the company value. PSE-Operator S.A. provides transmission services in domestic and cross-border trade to particular users of the transmission system. The transmission services provided in the domestic trade include in particular: transmission of electrical power understood as transport of electricity with the use of the transmission system; maintenance of continuity and reliability of electricity supply and reception within the electricity system, as well as maintenance of quality parameters thereof; conducting financial clearings resulting from imbalance of electrical power supplied to and received from the PPS. The transmission services provided in the crossborder trade include in particular: determining the volume of and offering cross-border transmission capacity; reserving cross-border transmission capacity; effecting cross-border exchange. PSE-Operator S.A. Annual Report 2006 11

Organization and employees Organization In 2006 PSE-Operator S.A. conducted its activities within the organizational structure specified in the Organizational Rules and Regulations of the Company. Management of PSE-Operator S.A. is decentralized by means of delegating tasks, responsibilities and rights to the lowest possible, justified level of organization. MANAGEMENT BOARD ZARZĄD DEPARTAMENT GRID INFRASTRUCTURE INFRASTRUKTURY DEPARTMENT SIECIOWEJ FINANCIAL DEPARTAMENT AND CONTROLLING FINANSÓW I DEPARTMENT KONTROLINGU POWER DEPARTAMENT SYSTEM OPERATIONS USŁUG OPERATORSKICH DEPARTMENT ORGANIZATION DEPARTAMENT DEPARTMENT ORGANIZACJI DEPARTAMENT SALES AND DEVELOPMENT SPRZEDAŻY DEPARTMENT I ROZWOJU COMMUNICATION BIURO KOMUNIKACJI OFFICE TELECOMMUNICATION DEPARTAMENT AND TELEINFORMATYKI IT DEPARTMENT WORK STANOWISKO HEALTH AND SAFETY DS. BHP SECTION DEPARTAMENT COMPANY BEZPIECZEŃSTWA SECURITY DEPARTMENT SPÓŁKI Organizational structure of PSE-Operator S.A. as on 31 December 2006 12 PSE-Operator S.A. Annual Report 2006

Organization and employees The Management From the left: Magdalena Wasiluk-Hassa, Bonifacy Gajewski, Małgorzata Klawe, Jacenty Węgliński, Wojciech Kułagowski, Andrzej Gajewski, Stefania Kasprzyk, Bogumił Rudnicki, Iwona Laskowska, Jerzy Dudzik, Piotr Rak, Kazimierz Żółtowski. Employees From the beginning of its activities PSE-Operator S.A. has been consistently building an organization responsible for good working and employment conditions for its employees. A special role is played by continuing education the aim of which is to provide the Company with employees having competences necessary for pursuance of the PSE-Operator S.A. development and value growth strategies. In 2006 the continuing education program for employees included conferences and seminars organized by professional educational companies, as well as organization of internal training tailored to the needs of PSE-Operator S.A. The most popular were training courses in the areas of power engineering, legal regulations, taxes, accounting and public procurement law. The knowledge of financial issues, labor law and management was improved as well. The command of foreign languages was also brushed up. Training courses were attended by 117 individuals, which accounts for 29 % of all employees. The largest group of employees took the advantage of English language courses. In 2006 employees of PSE-Operator S.A. upgraded their knowledge also on undergraduate, graduate and post-graduate college courses. 24 individuals did bachelor or master studies, mainly in finances and management. 36 persons used the opportunity to do post-graduate studies power engineering, finances and management were the most preferred subjects. In total 60 employees of PSE-Operator S.A. have studied, which accounts for 15 % of all employees. Seven people graduated in 2006. The training courses organized in 2006 allowed to improve the efficiency of employees and teams work, broaden specialized knowledge and upgrade qualifications, and ensured that the employees meet the requirements set by the company and the external environment. At the end of 2006 there were 400 individuals employed at PSE-Operator S.A. Men accounted for 64.5 % of all employees whereas women for 35.5 %. 368 employees are university graduates, which accounts for 92 % of all the employed persons. PSE-Operator S.A. Annual Report 2006 13

The year 2006 in short

Major events and achievements of the Company January The President of the Energy Regulatory Office (ERO) issued a decision appointing PSE-Operator S.A. as the electrical power transmission system operator for the period from 1 February 2006 till 31 December 2007 on the territory of the Republic of Poland. May The District Labor Inspectorate approved the PSE-Operator S.A. Corporate Collective Labor Agreement together with a salary incentives system. New standards for agreements on provision of transmission services were worked out, adjusted to the stipulations of the draft of new Instruction of the Transmission System Operation and Maintenance (ITSOM). A technical design of a data communications system was prepared regarding the equipment of new TSO headquarters in Bielawa and tenders were invited for an IT System for the Electricity Market. June Implementation of the Instruction of the Transmission System Operation and Maintenance (ITSOM), adjusted to the provisions of Art. 9g of the Energy Law Act (a separate part of the ITSOM concerning system balancing and system congestion management was approved by the President of the ERO). August The tender procedure for development of PCM data communications network to be used by PSE-Operator S.A. was finished and an agreement with a contractor was concluded. September A representative of PSE-Operator S.A. was appointed as Vice President of UCTE (Union for the Co-ordination of Transmission of Electricity). November A Memorandum formulating common goals of eight TSOs from the Central and Eastern Europe Region (Poland, Austria, the Czech Republic, two operators from Germany, Slovakia, Slovenia and Hungary) was negotiated and signed. On the basis of the aforementioned document and under the direction of the Company representative, a draft of a new flow-based capacity allocation concept of setting technical parameters under the coordinated mechanism was worked out. The 1 st stage of development and modernization of PCM devices, including telecommunication hubs in 44 transmission network facilities and conducted under an agreement concluded with a contractor for development of the PCM data communications network used by PSE-Operator S.A., was finished. December The President of the ERO issued a decision approving the PSE-Operator S.A. tariff for the period between 1 January 2007 and 31 December 2007. The Development plan for meeting the current and future demand for electricity in 2006 2020 was agreed upon with the President of the ERO. All stocks of PSE-Operator S.A. were transferred by PSE SA to the State Treasury the condition stipulated in Art. 9k of the Energy Law Act was thereby fulfilled. Technical designs of data communications systems were prepared regarding the equipment of new TSO headquarters in Bielawa and tenders were invited for an IT System for an Integrated Management System and a Local Area Network. At the end of 2006 PSE-Operator S.A. disclosed gross profit in the amount of PLN 264.3 million. After deduction of the mandatory charges to the financial result, the net profit amounted to PLN 208.5 million. PSE-Operator S.A. Annual Report 2006 15

Data concerning operation of the Polish Power System As of 31 December 2006 the total capacity available in the Polish Power System (PPS) amounted to 34,718 MW and was slightly, that is by 174 MW, higher than in the previous year. At the end of 2006 the total capacity available in public thermal plants was 30,150 MW, which accounts for 87 % of total capacity available in the PPS. The maximum domestic power demand occurred on 24 January 2006 during the evening peak and amounted to 24,640 MW. The minimum domestic power demand occurred on 21 May 2006 during the night off-peak period and amounted to 10,820 MW. The difference between the maximum and the minimum demand within the analyzed period amounted to 13,820 MW (56 % of the peak demand). [MW] Consecutive hour quarters in a day Maximum demand Minimum demand Power demand curves for days on which the maximum and minimum domestic power demand occurred 33,3% 2,5% 1,8% 5,1% 57,3% Hard coal power plants Lignite power plants Elektrownie gazowe Elektrownie wodne Gas (Public (Gas-Fired power Hydro Power plants power Stations) Hydro-electric power plants Industrial power plants Percentage share of particular power plant groups broken down by fuel type in domestic electricity generation in 2006 16 PSE-Operator S.A. Annual Report 2006

Data concerning operation of the Polish Power System The minimum domestic power demand during evening peaks on business days in 2006 occurred on 30 June and amounted to 17,173 MW. The average monthly domestic power demand during evening peaks on business days in 2006 was higher than in all months of 2005. In 2006 the total electricity generation amounted to 160,848 GWh and was higher by 3.1 % than in the previous year. The domestic power consumption in 2006 amounted to 149,847 GWh and was higher by 3.5 % than in 2005. The balance of electricity exchange effected between Poland and neighboring countries in 2006 amounted to 11,001 GWh and was lower by 1.7 % in comparison to the previous year. [MW] 24 000 23 000 22 000 21 000 20 000 19 000 18 000 17 000 16 000 15 000 14 000 January February March April May June July August September October November December Average monthly domestic power demand during evening peaks on business days in 2006 in comparison to historical data [GWh] 170 000 1996 1998 2000 2001 2002 2003 2004 2005 2006 160 000 150 000 140 000 130 000 120 000 110 000 100 000 90 000 80 000 198 1 198 8 198 9 199 0 199 1 199 2 199 3 199 4 199 5 Krajowa produkcja energii elektrycznej Domestic electricity generation 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 years l a t a Domestic electricity consumption Domestic electricity generation and consumption in the years 1981 2006 PSE-Operator S.A. Annual Report 2006 17

Our activities

Legal basis for activities PSE-Operator S.A., as a company governed by the commercial law, operates in accordance with all the general legal regulations, and particularly with: the provisions of the Code of Commercial Partnerships and Companies of 15 September 2000 (Journal of Laws No. 94 item 1037, as amended); the provisions of the Civil Code of 23 April 1964 (Journal of Laws No. 16 item 93, as amended); the provisions of the Accounting Act of 29 September 1994 (Journal of Laws No. 76 item 694, as amended). PSE-Operator S.A., as the national transmission system operator, acts on the basis of the following regulations: decision by the President of the Energy Regulatory Office No. PEE/272/4988/W/2/2004/MS of 15 April 2004 on granting to PSE-Operator S.A. a license to transmit and distribute power within the period from 1 July 2004 till 1 July 2014; decision by the President of the Energy Regulatory Office No. DPE-47-3(6)/4988/2005/2006/BT of 26 January 2006 appointing PSE-Operator S.A. as the operator of the electrical power transmission system within the territory of the Republic of Poland till 31 December 2007; the provisions of the Energy Law Act of 10 April 1997 (Journal of Laws of 2003, No. 153 item 1504, as amended), which takes into account the provisions of the Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity; subordinate legislation for the Energy Law Act of 10 April 1997 (Journal of Laws of 2003, No. 153 item 1504, as amended). PSE-Operator S.A., as a transmission system operator, acts on the European electricity market pursuant the following regulations: directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity; regulation EC No. 1228/2003 of 26 June 2003 on conditions for access to the network for crossborder exchanges in electricity together with the guidelines of 9 November 2006 on the management and allocation of available transfer capacity of interconnections between national systems; decision No. 1229/2003/EC of the European Parliament and of the Council of 26 June 2003 laying down a series of guidelines for trans-european energy networks; directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment (the SoS directive). PSE-Operator S.A. Annual Report 2006 19

Responsibilities of the transmission system operator A transmission system operator, in accordance with the Energy Law Act, is an energy company dealing with transmission of electricity, responsible for network operations in the transmission system, current and long-term operational safety of that system, use, maintenance, overhauls and necessary development of the transmission network, including connections with other electrical power systems. The most important domestic legal conditions for the TSO operations, as specified above, are stipulated in Art. 9c item 2 of the Energy Law Act. TSO responsibilities: Taking care of the safety of electrical power supply by means of safeguarding the safety of transmission system operation and proper transmission system capacity. Dispatching of the Power System in an efficient manner, with the required reliability and quality of electricity supply ensured, and coordinating the operation of a part of the 110 kv network (the socalled coordinated 110 kv network) in cooperation with operators of distribution systems. Maintenance of the transmission network, systems and devices, including connections with other electrical power systems, in a manner safeguarding reliability of the electrical power system operation. Ensuring long-term capacity of the transmission system in order to satisfy justified needs in the area of electricity transmission in domestic and cross-border trade, including the area of transmission network development, and where applicable, development of connections with other electrical power systems. Cooperating with other transmission system operators or energy companies in order to ensure reliable and efficient operations of electrical power systems and to coordinate the development thereof. Dispatching the power of generating units connected to the transmission network and of generating units whose available capacity is 50 MW or higher, connected to the coordinated 110 kv network, taking into account agreements with the users of the transmission system and the technical limitations of that system. Managing transmission capacities connections with other electrical power systems. Purchasing system services necessary for proper operation of the electrical power system, reliability of the work of that system and for maintaining the quality parameters of electricity. Balancing the electrical power system, which means also balancing the current power demand with power supply in the Polish Power System, system congestion management and conducting financial clearings with the users of that system resulting from: imbalance of electrical power supplied to and received from the Polish Power System, system congestion management. 20 PSE-Operator S.A. Annual Report 2006

Responsibilities of the transmission system operator Managing flows of electrical power in the transmission system in a manner coordinated with other connected electrical power systems and, in cooperation with operators of distribution systems, in the coordinated 110 kv network, taking into account the technical limitations of that system. Purchasing electricity for covering losses in the transmission network in the course of electricity transmission through that network, as well as applying transparent and non-discriminating market procedures to purchases of that electricity. Providing the network users and other system operators with information about the conditions of rendering electricity transmission services, including: cross-border trade, network management and electricity balancing - necessary for gaining access and use of transmission grid. Preparing the configuration of the transmission network in reference model and, in cooperation with the operators of the electrical power distribution systems, the network configuration for the coordinated 110 kv network in normal state. PSE-Operator S.A. Annual Report 2006 21

Polish Power System Each electrical power system is characterized by variability of its operating conditions resulting from the variability of demand and possibilities of occurrence of random incidents. Moreover power system operations are influenced by the necessity of balancing the demand which is carried on in the framework of the electricity market and with removing transmission congestion. PSE-Operator S.A. manages the operation of the Polish Power System (PPS) which, due to the character of technical functions, can be divided into three subsystems: electricity generation (in power plants, combined heat and power stations and distributed generation); electricity transmission through extra-high voltage network on the territory of Poland and cross-border lines; distributing and supplying electricity through distribution networks of high, medium and low voltage (tasks fulfilled by the distribution system operators). Extra-high voltage network The Polish extra-high voltage network consists of network infrastructure consisting of following facilities: 235 lines with total length of 12,941 kilometers, of which: one 750 kv line with length of 114 km, sixty-seven 400 kv lines with total length of 4,919 km, one hundred and sixty-seven 220 kv lines with total length of 7,908 km, 95 extra-high voltage (EHV) substations. Cross-border connections Cross-border exchanges of electricity are carried out through EHV connections with the electric power systems of the neighboring countries. The Polish Power System includes the following crossborder connections with the neighboring countries: in the west: two 400 kv double-circuit transmission lines with the German system running from Mikułowa to Hagenwerder and from Krajnik to Vierraden (temporarily 220 kv voltage is used). in the south: two 400 kv lines with the Czech system, running from Dobrzeń to Albrechtice and from Wielopole to Nošovice; one 220 kv double-circuit line with the Czech system running from Kopanina/Bujaków to Lískovec; one 400 kv double-circuit line with the Slovak system running from Krosno to Lemešany. in the north: a direct current cable with the Swedish system. in the east: one 220 kv line with the Belarusian system and running from Białystok to Ross (presently shut down); one 220 kv line with the Ukrainian system and running from Zamość to Dobrotvinska; one 750 kv line with the Ukrainian system and running from Rzeszów to Khmelnitskaja (presently shut down). 22 PSE-Operator S.A. Annual Report 2006

Polish Power System Sweden Lithuania Ross Belarus Germany Dobrotvinska 400 kv (currently 220 kv) 400 kv (planned) DC cable 450 kv Power Substations Czech Republic Slovak Republic Khmelnitskaja Out of operation Dobrotwór The National Transmission Grid and cross-border connections Power balance At the end of 2006 the total power available in PPS amounted to 34,718 MW and was higher by 174 MW in comparison to the previous year. The total power available from public thermal power plants accounted for ca. 87 % of the total power available in PPS, whereas the share of public hard coal fired power plants was dominating 59 % in comparison to the 25 % share of public lignite fired power plants. The share of the other sources in the total power available in PPS did not exceed several per cent. The average annual available power of domestic power plants during evening peaks on business days in 2006 amounted to 27,131 MW and was lower by more than 2.5 %, whereas the average annual power available to the TSO was lower by 3.4 % in comparison to the year 2005. That decrease was caused mainly by extreme weather conditions in the summer season which resulted in increased capacity losses. The average annual power demand amounted to 20,578 MW and was higher by ca. 4 % than in the previous year. It was the highest average annual power demand in the history of Polish power industry. The maximum power demand in 2006 reached the level of 24,640 MW. It was higher by 5 % in comparison to the year 2005. The highest increase in power demand in 2006 was recorded in the months when extreme weather conditions occurred: in January and in July by ca. 8 % in comparison to January and July 2005. The average monthly power reserves from evening peaks on business days in 2006 available for the TSO amounted to 3,997 MW and were lower by ca. 30 % in comparison to the year 2005. PSE-Operator S.A. Annual Report 2006 23

Polish Power System Electricity generation and consumption Gross domestic electricity generation in 2006 amounted to 160,848 GWh and was higher by 3.1 % in comparison to 2005. The domestic electricity consumption in 2006 amounted to 149,847 GWh and was the highest in the history of Polish power industry, whereas in comparison to 2005 it was higher by 3.5 %. Export of electricity in 2006 amounted to 13,442.8 GWh, of which export within trade exchange amounted to 13,434.3 GWh. In comparison to the year 2005, the export was lower by 6 %. Total import of electricity in 2006 amounted to 2,441.7 GWh, of which commercial import amounted to 2,420.1 GWh. In comparison to the year 2005, the import was lower by 22.4 %. Structure of electricity generation in domestic power plants, volumes of cross-border electricity exchanges and domestic electricity consumption in the years 2004-2006 2004 2005 2005/2004 2006 2006/2005 GWh GWh % GWh % 1. Total electricity generation 153 361 156 023 101.7 160 848 103.1 1.1 Public power plants 144 821 147 616 101.9 152 498 103.3 of which: public hydro power plants public thermal power plants 3 524 3 587 101.8 2 822 78.7 141 296 144 029 101.9 149 676 103.9 of which: hard coal-fi red 85 370 84 614 99.1 92 111 108.9 lignite-fi red 52 136 54 888 105.3 53 518 97.5 gas-fi red 3 791 4 527 119.4 4 046 89.4 1.2 Power plants using the energy of wind and other renewable sources * - - - 70-1.3 Industrial power plants 8 540 8 407 98.4 8 280 98.5 2. 3. Cross-border exchanges Domestic electricity consumption -9 292-11 186 120.3-11 001 98.3 144 069 144 837 100.5 149 847 103.5 * Data was not recorded in the years 2004-2005 24 PSE-Operator S.A. Annual Report 2006

Polish Power System Voltage levels and frequency In the winter season of 2006 the voltage levels in the 400 and 220 kv network s nodes kept acceptable value ranges. However, in the summer season of 2006 were lower than in the previous years. The voltage instability incident of 26 June 2006 was caused, among others, by low voltages in extra high voltage networks. A detailed description of the course of the incident, its causes and conclusions therefrom has been presented in the Final report on analysis of voltage incident that occurred on 26 June 2006. In 2006 the average annual frequency remained at the level of 50.001 Hz. The instantaneous value of maximum frequency amounted to 50.623 Hz, and minimum frequency amounted to 49.840 Hz. The maximum value occurred on 4 November 2006 in the result of a failure in the German electrical power system which resulted in short division of the UCTE system into three parts. In the consequence Polish Power System was in the part in which generated power significantly exceeded demand what resulted in a short frequency increase. PSE-Operator S.A. Annual Report 2006 25

Network assets and related activities Network assets PSE-Operator S.A. fulfills activities of a transmission system operator and leases network assets from PSE SA. For that purpose on 1 July 2004 an Enterprise Lease Agreement was concluded for an initial term of six months and after it was extended for a period of three years. Pursuant to the said agreement PSE-Operator S.A. has been using both an organized group of material and intangible assets necessary for performing the TSO function. For the lease of the organized part of the enterprise PSE-Operator S.A. pays a lease fee calculated with the use of the net transaction profit method. As of 31 December 2006 the network assets leased by PSE-Operator S.A included, among other: 235 EHV lines of total length of 12,941 km. The assets leased from PSE SA do not include all the existing EHV substations. The year 2006 saw continuation of activities aimed at obtaining ownership rights to the Skawina and Ostrołęka 220 kv substations, which were conducted in cooperation with the Ministry of the Treasure. Within the term of lease the TSO is obliged to carry out maintenance works including necessary repairs of the leased network assets and property included therein. The functioning of PSE-Operator S.A. as a national TSO who does not own transmission assets is a temporary solution. The strategic goal of the TSO is to acquire rights to those assets. Maintenance and repairs In 2006 PSE-Operator S.A. carried out works which consisted in operating and maintaining and repairing the facilities included in the organized part of the transmission enterprise and which influenced reliable operation of the transmission network. The major maintenance works included: visual inspections, aerial surveys and diagnostics of extra-high voltage lines with the use of aviation technology; service surveys of transformers and circuit-breakers; 26 PSE-Operator S.A. Annual Report 2006

Network assets and related activities checking the correctness of functional operation of automated safety systems; obligatory activities resulting from regulations concerning pressure tanks, environmental protection and real estate management. In 2006 93 repair tasks worth PLN 30.4 million were performed. The main effects of pursuing the repairs plan include: 20 line-related tasks worth PLN 17.2 million and consisting in insulation replacements, foundation repairs, earthing system repairs, lightning arrester wire replacements and construction s painting. 69 substation-related tasks worth PLN 12.9 million and consisting in repairs of primary and secondary equipment, compressed air systems, steelworks and buildings, cable channels, installations and roads. The total costs of operation and repairs amounted in 2006 to PLN 154.9 million. Investments In accordance with the Agreement on investment projects management, PSE-Operator S.A. rendered the following services for the benefit of PSE SA: preparing investments for realization, carrying out investment tasks. As a part of activities preceding investment projects, documentation necessary for the decision-taking process was prepared in relation to fulfillment of, among other, the following tasks: modernization of the Klikowa 220/110 kv substation, modernization of the Radkowice 220/110 kv substation, modernization of the Poręba 220/110 kv substation, modernization of the Chełm 220/110 kv substation, modernization of the Katowice 220/110 kv substation, 400 and 220 kv networks interconnection at the Byczyna substation. Under the investment activities in 2006 the following tasks and stages of investment projects were completed: development of the Olsztyn Mątki 400/110 kv substation, PSE-Operator S.A. Annual Report 2006 27

Network assets and related activities construction of the Olsztyn Mątki-Olsztyn I 220 kv line, modernization of the Olsztyn I 220/110 kv substation, modernization of the Łośnice 220/110 kv substation, modernization of a 220/110 kv transformers population, replacement of 220 kv circuit breakers at the Mikułowa substation, elimination of threats to provision of the transmission services at the Blachownia substation, replacement of a section of the Świebodzice Klecina 220 kv line with a double-circuit double voltage 220 + 110 kv line, improvement of the technical condition of the Krosno Lemešany 400 kv line, construction of the Tarnów Krosno 400 kv line, modernization of the Połaniec Radkowice 220 kv line, modernization of the Chmielów Boguchwała 220 kv line. In relation to carrying out the investment tasks and projects included in the investment plan of PSE SA for the year 2006, investment outlays were made in the amount of PLN 450.3 million. The results of completed investment projects In the result of the investment activities carried out for the benefit of PSE SA: the transmission network was extended with: 92.6 km of the 400 kv lines, 252.6 km of fiber optic channels, power transformation capacity was increased by 810 MVA, of which by: 330 MVA 400/220 kv at the Olsztyn Mątki substation, 160 MVA 220/110 kv at the Konin substation, 160 MVA 220/110 kv at the Wanda substation, 160 MVA 220/110 kv at the Bieruń substation, fixed and intangible assets of total value of PLN 401.8 million were handed over for use. The most important effects of completed tasks building of the Olsztyn system (development of the Olsztyn Mątki 400/110 kv substation, modernization of the Olsztyn I 220/110 kv substation (1 st stage) and start-up of the Olsztyn Mątki Olsztyn I 400 kv line) supplying power to the Olsztyn agglomeration allowed to interconnect the 400 kv network with the 220 kv network, which provide additional power supply to the Olsztyn substations and improve the availability of the Gdańsk Błonia Olsztyn Mątki 400 kv line; substations were modernized for the purpose of increasing their reliability, adjusting them to new working conditions, providing remote supervision, control and monitoring, as well as automatic operation of the substation; replacement of the autotransformers at EHV substation increased the availability of power supply points within the perspective of the coming thirty years; lines modernization eliminated network constraints by means of increasing the transmission capacity of the lines and will contribute to improvement of operation reliability and adjustment of the technical parameters of the lines to the binding standards and regulations. Planning activities The following plans were prepared for the year 2007: maintenance plan, plan of repairs, PSE SA investment plan, PSE-Operator S.A. investment plan. Works on preparation of the Investment Plan for the years 2007 2011 were continued. The most important plans for the year 2007 and the following years are development of the 400 kv network, replacement of the 220 kv network with the 400 kv network, replacement of the population of transformers, voltage transformers and surge arresters, continuation of the program for safety of electrical power network operation and commencement of modernization of a group of power lines and 28 PSE-Operator S.A. Annual Report 2006

Network assets and related activities substations. For the purposes of the aforementioned tasks a data communication network will be developed together with the required applications. An important element of the investment program will be tasks related to reactive power management including installation of shunt reactors at substations and installation of batteries of capacitors. All the activities will be coordinated with investment plans of entities dealing with power generation and of distribution system operators. Taking into account the tasks and the investment projects included in the binding medium-term plan for the years 2006-2010, as well as the prepared preliminary list of tasks to be included in the next issue of the plan for the years 2007-2011, the necessary expenditures to be made within a period of five years may be estimated as PLN 3 3.5 billion. PSE-Operator S.A. Annual Report 2006 29

Network assets and related activities Timely pursuance of the investment plans depends on the prevailing formal and legal conditions. Acquisition of the right of way is a complicated and time-consuming task. Within the recent period the duration of the process of preparing and carrying out projects concerning EHV lines has increased to between ten and twenty years. If new legal solutions concerning infrastructural projects and simplifying the process of making arrangements with local governments and land owners are not adopted, pursuance of the PSE-Operator S.A. investment plans will be significantly hindered. In 2006 PSE-Operator S.A. aimed at introducing amendments to legal regulations which render fulfillment of its statutory obligations difficult. The company proposed amendments to the following legal acts: the Act of 27 March 2003 on Land Planning and Development (Journal of Laws No. 80, item 717) amendment to the stipulations which would allow to introduce to local land development plans line facilities provided for in the Development Plans agreed upon with the President of the ERO; the Act of 17 June 1966 on Enforcement Proceedings in Administration (Journal of Laws of 2005, No. 229 item 1954, as amended) introduction of an administrative proceeding path facilitating entry into real estate in order to perform necessary operating activities or remove results of a failure (changes are necessary due to the rights of real estate owners hindering or sometimes even preventing quick and efficient removal of effects of line facilities failures); the Civil Code of 23 April 1964 (Journal of Laws No. 16 item 93, as amended) an amendment allowing legal persons created by line investors to acquire the real estate easement; the Criminal Code of 6 June 1997 (Journal of Laws No. 88 item 553) amendments to the Criminal Code provisions concerning offences resulting in a probable failure in utilities (electricity, gas, heat, fuels and water) supply to local community centers or to large areas of the country; the Act of 21 August 1997 on Real Estate Management (Journal of Laws of 2004, No. 261 item 2603 and No. 281 item 2782) amendments designed to facilitate obtaining administrative decisions on restricting the manner of use and on restricting the amount of financial claims from owners only to the damages paid. 30 PSE-Operator S.A. Annual Report 2006

Transmission services Sales of electricity transmission services constitute the main source of revenues of PSE-Operator S.A. from its activities.the company provides electricity transmission services on the basis of contracts for provision of the said services, on the conditions stipulated in the Instruction of the Transmission System Operation and Maintenance and on the basis of the TSO s tariff for electricity approved by the President of the ERO. In 2006, on the basis of concluded contracts, PSE-Operator S.A. provided transmission services to: 13 power plants, 6 combined heat and power plants, 15 distribution system operators, 3 end customers, 43 trading enterprises. The year 2006 saw conclusion of transmission contracts between PSE-Operator S.A. and 7 new customers trading enterprises. As the new Instruction of the Transmission System Operation and Maintenance came into force on 1 June 2006, draft contracts for provision of electricity transmission services were prepared and sent to the TSO customers. Connecting services Activities related to connecting entities to the Polish Power System concern two areas. The first one is connecting to the transmission network. In this area PSE-Operator S.A. established in 2006 connecting conditions: for generating entities for total power of 309 MW; for distribution companies for total power of 320 MW. PSE-Operator S.A. Annual Report 2006 31

Transmission services The second area concerns arrangement of the connecting conditions for entities to be connected to the 110 kv distribution network. In this area PSE-Operator S.A. arranged in 2006 connecting conditions: for generating entities for total power of 795.5 MW; of which wind farms accounted for 708 MW; for customers for total power of 174 MW. Tariff Settlements of the transmission services provided by PSE-Operator S.A. within the period from 1 January 2006 till 31 December 2006 were conducted in accordance with the tariff of PSE-Operator S.A. approved by the President of the Energy Regulatory Office (President of the ERO) on 14 December 2005. On 15 December 2006 the President of the ERO issued a decision approving the tariff of PSE-Operator S.A. for the following year. The tariff came into force and has been applied in settlements of the provided transmission services since 1 January 2007. Tariff activities PSE-Operator S.A. provides services to particular entities included in the PPS in the area of: electricity transmission through the transmission grid service provided for the benefit of entities connected to the transmission grid. In order to provide it, PSE-Operator S.A. handles the following: operations and network assets maintenance; power contracting for the needs of balance differences in the transmission network; contracting of transmission services in the networks belonging to other entities; ensuring reliability of electricity supply, proper quality parameters of supplies, meeting the UCTE requirements for cross-border exchanges, appropriate generating capacities at the PPS in a longterm perspective and stimulating activities aimed at decreasing the negative impact of electricity generation on the environment; 32 PSE-Operator S.A. Annual Report 2006

Transmission services conducting settlements arising from imbalance of electricity supplied to and received from the system for entities using the balancing market. In order to provide services, PSE-Operator S.A. carries out, amongst others, the following activities: contracting and monitoring of power reserves (control system services) and additional services from the administrator of long-term contracts; contracting the reliability must-run generation; balancing power generation with demand reported by market participants on the day-ahead hourly balancing market and conducting settlements of deviations from the reported schedules (for that purpose PSE-Operator S.A. creates and conducts maintenance of balancing and settling systems); clearing compensation charges within the system of cross-border transmission services, that consist in mutual coverage of power transit costs by transmission network operators within a uniform European system, together with simultaneous transfer of the financial results of those settlements in the operators tariffs in particular countries; connecting entities to the EHV network (for the purposes of providing those services PSE-Operator S.A. established conditions and constructed connections). Wholesale power market PSE-Operator S.A. as the entity responsible for managing the Polish Power System, ensures its safe and reliable operation by means of providing balancing services to the electricity market participants, and administers the balancing and the technical markets. The balancing market (BM) As of the end of 2006, 78 entities participated in the balancing market processes, of which: 19 generating entities, 17 customers, 40 trading enterprises, Towarowa Giełda Energii SA and PSE-Operator S.A. as the TSO. Technical and commercial data were submitted by 39 market operators and concerned 317 BM units. In 2006 the market participants supplied 11.4 TWh of the balancing power to the balancing market. procurement contract. Control system services were purchased from thermal power plants for PLN 573 million. As regards hydro-electric power plants, system services worth PLN 203.7 million were purchased. Moreover, availability services were purchased from thermal power plants operating in the conditions of reliability must-run generation for an amount of PLN 124.3 million. Technical market In 2006 the purchases of control system services and generating units availability services were effected on the basis of bilateral agreements with suppliers concluded after prior proceeding for granting a public Coordination services Within provision of coordination services supporting the commercial activities on the electricity market, annual, monthly and daily coordination planning was done. PSE-Operator S.A. Annual Report 2006 33

Wholesale power market Development of balancing mechanisms On 1 June 2006 changes were introduced in the rules of balancing market operations. Their aim was to eliminate the observed irregularities concerning settlements for planned balancing power and to allow the customers entitled to use the TPA to participate more freely in the wholesale electricity market. The changes concerned mainly: introduction of joint settlement of generating BM units within the area of planned balancing power, modification of the rules for setting the adjustment settlement price CRK (including the maximum price of reliability must-run generation CWmax), modification of the settlement rules concerning purchases of energy in emergency situations, introduction of settlements for power arising from power plant constraints, modification of the rules for setting spread prices, abandonment of the application of imbalance insensibility area, introduction of group commercial balancing, improvement in the precision of offers. Cooperation with transmission systems of other countries The Polish transmission system managed by PSE-Operator S.A. is a part of the UCTE system Union for the Co-ordination of Transmission of Electricity the largest European group of electrical power systems operating synchronously. Safe and reliable operation of the UCTE system ensures supply of electricity to more than 450 million citizens of the European countries. UCTE, as the only association of transmission system operators in Europe, worked out and implemented the so-called Security Package. It consists of three elements: the UCTE Operation Handbook concerning coordination of activities, uniform rules of operation and information exchange; the Multilateral Agreement between all the TSOs belonging to UCTE, valid from 1 July 2005; procedures of monitoring the degree of fulfilling the requirements stipulated in the UCTE Operation Handbook. Synchronous operation within UCTE increases safety of system management, whereas in emergency situations it allows to obtain assistance from other UCTE members and creates more favorable conditions for cross-border exchanges, provided that transmission congestions arising from the physical nature of the electrical power system are eliminated. The European electrical power system operates in conditions which are substantially different from those for which it was designed. This results mainly from the continuing development of electricity market, which causes intensification of cross-border transmission and occurrence of long-distance transmissions, and from development of energy generation sources of variable characteristics, which are, for example, wind power plants. Those factors make ensure safe operation of the transmission system an increasing challenge for the transmission system operators. Means which facilitate actions taken by operator in emergency situations are contracts stipulating the rules of mutual assistance. PSE-Operator S.A. signed the first bilateral general contract with the operator of the Czech transmission system ČEPS, a.s. in the year 2005. In 2006 the PSE-Operator S.A. company 34 PSE-Operator S.A. Annual Report 2006

Cooperation with transmission systems of other countries concluded further two General Contracts for Emergency Deliveries: with the operator of the system in eastern Germany Vattenfall Europe Transmission GmbH and with the operator of the Slovakian system Slovenská elektrizačná prenosová sústava, a.s. In total, as of the end of 2006 there were three general contracts concluded between PSE-Operator S.A. and all the neighboring systems operating synchronously. In 2006 several serious system disturbances occurred in the European electrical power systems. The most serious one was the failure that occurred in the UCTE system on 4 November 2006. In the result of that event the UCTE system was divided into three areas working asynchronously and 15 million customers lost power. The Polish system was included in the surplus area where the frequency remained for ca. 40 minutes on a level much higher than the nominal value. The drastic change in power flows caused by the failure led to overload of network elements near the border between Poland, the Czech Republic and Germany. The operating conditions of the UCTE systems were restored to normal status after ca. two hours. On 25 July 2006 a serious failure occurred in the Czech system, which resulted in isolation of internal islands, and system imbalance reached 2,500 MW causing a deviation of the system frequency by ca. 140 mhz. Thanks to emergency deliveries from the Polish system 300 MW, the Slovakian system 150 MW, the German systems 500 MW and assistance from the French system, control over the situation was regained and the frequency returned to a value close to the nominal one. On 26 June 2006 a voltage incident of local character occurred in Poland. In its aftermath extremely low voltage occurred at customers side in the central and north parts of the country, and for the purposes of incident removal power supply limitations of ca. 100 MW had to be introduced. PSE-Operator S.A. Annual Report 2006 35

Allocating cross-border transmission capacity The year 2006 saw continuation of coordinated auctions of cross-border transmission capacities held by five transmission system operators from Poland (PSE- Operator S.A.), the Czech Republic (ČEPS), Germany (VE-T and E.ON) and Slovakia (ŠEPS). Coordinated auctions between operators were the only project of that type in Europe as regards the number of operators involved. At the same time works were continued on changes in the rules of auctions for 2007. In September 2006 the transmission system operators submitted to the regulatory bodies a draft of an Agreement concerning the organization of a participation in co-ordinated auctions of transmission capacity at the common borders in 2007 accompanied by Rules of coordinated auctions of cross-border transmission capacity in 2007 constituting an attachment to the Agreement. It is an update to the agreement binding in 2006. The most significant changes provided for in that agreement include: introduction of an electronic system of bidding in monthly auctions, introduction of an electronic transfer of transmission capacity, changes in fees for holding auctions in relation to outlays on modernization of the e-trace system. In the result of the solutions worked out and of arrangements made, on 21 November 2006 an auction for annual cross-border exchange transmission capacity for the year 2007 was ended. It s results were published on 22 November 2006. Cross-Border Trade (CBT) In 2005 PSE-Operator S.A. signed a multilateral CBT Clearing and Settlement Contract between the operators on the basis of which it participated in 2006 in settlements of costs of electricity transits between the European TSOs. The aim of the aforementioned mechanism is to make sure that there are no additional, special border fees in the European Union Member States for export, import and transit of energy paid directly by market participants, and that settlements are only made directly between the TSOs and the costs are transferred within national tariffs. The contract referred to above was signed by operators from 20 countries for a year. PSE-Operator S.A. included the costs incurred in relation thereto in its tariff binding for the year 2006. Activities of the Energy Accounting and Control Centre The work of the Energy Accounting and Control Centre (EACC) was performed in 2006 in the correct manner, with all the time limits and procedures binding in cooperation with the Coordination Center for the northern part of the UCTE systems in Brauweiler (Germany) being observed. The basic tasks of the EACC include control of the international exchange between the common block and neighboring systems within UCTE, planning operation of systems, as well as registering and settling unplanned power exchanges. At the EACC current and periodical analyses of the work of partner systems belonging to the common control block, including the Bursztyn Island, are prepared. The analyses are based on UCTE recommendations and on methodology prepared at the EACC and taking into account the said recommendations. The common control block operated in 2006 within the range of ± 80 MWh/h for 97.5 % of all the time. The control deviation of the block with the frequency adjustment taken into account fell within the range of ± 80 MWh/h for 99.69 % of all the time. 36 PSE-Operator S.A. Annual Report 2006

Regional cooperation with transmission system operators Development of regional electricity markets was a top priority for the European Commission in 2006. The Commission recognized a need to build a uniform electricity market by means of creating and then merging regional markets. Having made a critical assessment of the works advancement achieved in 2005 in the result of activities conducted by regional minifora, the European Regulators Group for Electricity and Gas (ERGEG) commenced public consultations in order to determine the effective working structure for further works on creation of regional markets. In February 2006 the ERGEG launched the so-called Electricity Regional Initiative (ERI) aimed at: establishing regional electricity markets, identifying and publishing priority areas, working out and publishing action schedules, indicating the bodies that should take action, monitoring the advancement of works. Under the ERI seven projects concerning regional electricity markets were launched. In accordance with that concept the Polish electricity market constitutes a part of the Central and Eastern Europe Market consisting of the markets of the Czech Republic, Hungary, Slovakia, Austria, Slovenia and a part of the German market. Eight operators from those countries started cooperation already in 2004. Those are: Verbund-APG, ČEPS a.s., MAVIR, ELES, E. ON Netz GmbH, Vattenfall Europe - Transmission GmbH and SEPS a.s. In 2006 a Memorandum formulating common goals of the TSOs was signed. The goals include: working out a coordinated mechanism of transmission congestion management in cross-border exchange and allocating transmission capacity to entities participating in electricity trade, as well as establishing an independent Auction Office. PSE-Operator S.A. Annual Report 2006 37

Regional cooperation with transmission system operators The aim of the common works is to implement the new concept of allocating transmission capacity based on physical flows. New solutions are discussed with regulators within the ERI structures. Their implementation by the TSOs will depend on final acceptance by the Regional Coordination Committee within the ERI structure. Installed Capacity: Peak Demand: Energy Consumption: Population: Installed Capacity: Peak Demand: Energy Consumption: Population: Installed Capacity: Peak Demand: Energy Consumption: Population: Installed Capacity: Peak Demand: Energy Consumption: Population: DC cable AC cable Synchronous areas in Europe 38 PSE-Operator S.A. Annual Report 2006

Participation in the works of international organizations of operators UCTE From 15 September 2006 a representative of PSE- Operator S.A. has been acting as the Vice-President of the Union for the Co-ordination of Transmission of Electricity (UCTE). Election of our representative for such a post of eminence at UCTE is a sign of appreciation for the Polish transmission system operator. In 2006 PSE-Operator S.A. had at its disposal the fifth voting power (29 votes from the total number of 637 votes) at the General Meeting of UCTE after Germany, France, Italy and Spain. In the first half of 2006 the structure of working groups that had been used within the several previous years functioned at UCTE. In the second half of 2006 a new working structure was introduced based on competence centers and including supporting working groups and project groups. PSE-Operator S.A. has its representatives in all cells of the new structures, including chairmanship of an important group that monitors compliance with the standards specified in the UCTE Operation Handbook. Experts from PSE-Operator S.A. participated also in the works of dedicated task forces appointed for resolving current technical problems. Due to the serious disturbances in the UCTE system that occurred on 4 November 2006, the management body of UCTE established an Investigation Committee which task was to analyze the causes of the failure and to prepare recommendations for the future. The head of one of the three working groups (in accordance with the separated areas) was a representative of Power System Operations Department from PSE-Operator S.A. PSE-Operator S.A. Annual Report 2006 39

Participation in the works of international organizations of operators ETSO A representative of PSE-Operator S.A. represents Poland in the Steering Committee of the European Transmission System Operators (ETSO). ETSO is an association of transmission system operators from all the five, significantly different as regards size, groups of interconnected transmission systems in the territory of Europe, that is: UCTE, Nordel, UKTSOA, ATSOI, the Baltic countries. The goal of ETSO is to support the development of European internal electricity market. In 2006 PSE-Operator S.A. had at the General Meeting of ETSO 27 votes from a total number of 354 votes. Representatives of PSE-Operator S.A. actively participated in the activities of majority of the ETSO structures and in the works of numerous task forces. Their aim is to create common economic and market principles applying to cross-border exchanges of electricity, as well as the rules of establishing tariffs for such exchanges, and congestion management. CENTREL On 18 October 2006 members of the CENTREL regional group took an unanimous decision on ending the activities of the association on 31 December 2006. The reasons for that decision were new challenges related to the need of conducting regional activities at a larger scale than within a group of four TSOs. Cooperation in the area of power industry between the countries belonging to the Visegrad Group will be continued. The principles of that cooperation in the area of operators activities were established parallel with dissolution of the CENTREL group in a Letter of Intent signed on 18 October 2006. Irrespective of the decision on dissolution of the CENTREL group, the common Control Block continues its technical and organizational activities, which means that the duties of the block coordinator are still fulfilled by the EACC operating within the structures of PSE-Operator S.A. 40 PSE-Operator S.A. Annual Report 2006

Participation in the works of international industry organizations EURELECTRIC In 2006 PSE-Operator S.A. cooperated, through the agency of the Polish Electricity Association, with the Union of the Electricity Industry EURELECTRIC. The Union of the Electricity Industry EURELECTRIC represents common interests of the whole European power industry sector, and its goal is to support development and competitiveness of that sector, to promote the interests of its members on the political level and to convince others to pursue the strategy of action worked out jointly. In 2006 representatives of PSE-Operator S.A. cooperated within the following groups of the EURELECTRIC structure of expertise: the Networks Committee, the Environment & Sustainable Development Committee, the System Integration Working Group, the Climate Change Working Group, the SYSTINT Working Group, the EURPROG Network of Experts. CIGRE In 2006 representatives of PSE-Operator S.A. actively participated in the works of the International Council on Large Electric Systems CIGRE (French abbreviation for Conseil International des Grands Réseaux Électriques), which unites more than 80 countries (from Europe, America, Asia, Africa and Middle East). The main goal of CIGRE activities are development of technical knowledge and exchange of information between all the countries in the areas of electricity generation and transmission. CIGRE serves as a place for exchange of opinions between researchers and people who put the results of their work into practice. Representatives of PSE-Operator S.A. took part in the works of CIGRE through the Polish Committee of Large Electric Systems in the following Study Committes: System Maintenance and Control, High Voltage Equipment, Overhead Lines, Distribution Systems & Dispersed Generation. PSE-Operator S.A. Annual Report 2006 41

New technologies Technology Platform On the initiative of the European Commission and on the basis of guidelines therefrom, since May 2005 PSE-Operator S.A. has been participated in the works of the Technology Platform for the Electricity Networks of the Future. The main goal of the Platform is to increase efficiency, safety and reliability of the European electricity transmission and distribution systems by means of transforming the existing electricity systems into an interactive service network and to remove obstacles to the large-scale integration of distributed and renewable energy sources. Transmission Fast Simulation and Modeling Under the plan of R&D works, the Transmission Fast Simulation and Modeling (T-FSM) project has been carried out since March 2005. Its objective is to work out tools for describing the states of the electrical power system and identifying threats. It will allow to take actions leading to improvement of network operation and safety. It has been assumed that realization of the project will encompass, using state-of-the-art solutions, such as the IEC 61850 communication standard, modern methods of power quality measurement and new possibilities resulting from phasor measurement. The work is performed with the use of knowledge stemming from the Intelligrid program carried out under the leadership of the Electric Power Research Institute (EPRI). Apart from EPRI, the partners of PSE-Operator S.A. in that project are solely Polish research institutes and power industry companies. The project is to result in technical and economic analysis determining the requirements, scope and manner of using the T-FSM in the Polish Power System. The analysis will be prepared based on observation of a pilot installation. The project is planned to be ended in December 2007. 42 PSE-Operator S.A. Annual Report 2006

Major R & D achievements As regards R&D works, the following papers were prepared in 2006 upon commission from PSE-Operator S.A.: Principles of anti-oscillation blocades protections setting with respect to system reconstruction (the work is implemented at EHV substations and will be used for changing the settings of out-of-step blockade attachments); Principles and criteria for analyzing settings of devices protecting generators against pole slips in respect of requirements concerning PPS stability conditions (the result of the work is a database containing information on used protections against pole slips and a software verifying protection settings used to update the settings); Methodology of optimizing power flows in the PPS with the use of phase shifters in the context of effecting cross-border exchanges (the result of the work is an analysis of the PPS development options allowing to avoid unnecessary investment expenses by means of taking decision on localization of phase shifters); Using reliability criteria for determining the indispensable PPS operation safety level for the needs of longterm planning of transmission activities development (new guidelines were worked out for determining the target value of power margin, which are used in the new cycle of analyses of electricity supply development in the long-term perspective); System of monitoring network transformers in operation, system software, pilot installation (the effect of the work is on-line and off-line collection of information on the work and behavior of a transformer, which allows to make economic assessments taking into account also the strategic aspect); Methodology of works conducted on live installations at substations and on live EHV lines (selected technologies are introduced in the operating practice). Telecommunication and IT As regards the development of telecommunication systems, the most important works conducted in 2006 included: installation of operating conversation recorders on several dozens of 220 kv and 400 kv substations with the possibility to remotely replay the recorded conversations and supervise them with the use of WAN; installation and launch of a pilot system of TSAT satellite links transmitting technological data between the national dispatching center and terminals situated at selected power substations; extension of the existing PCM data communication network used by PSE-Operator S.A. with several dozens of new nodes. The most important works conducted in 2006 in the area of IT systems development were: replacement of elements of the server and network platforms of the DYSTER dispatching control system accompanied by system and tool software update and implementation of the new communication protocol ICCP/TASE2 for exchange of information between national dispatching center and particular regional dispatching centers and distribution system operators (DSO). implementation of a new PowerCC CFE (Communication Front End) communication subsystem responsible for acquisition and distribution of data from local remote control systems to national dispatching center and regional dispatching centers and enabling operation of new network facilities to be included in the systems of remote substation control and supervision. PSE-Operator S.A. Annual Report 2006 43

Telecommunication and IT update of the SINAUT Spectrum system and implementation of the Multisite functionality enabling simultaneous work of two dispatching centers controlling the operation of the PPS and real-time switching of the control center from the main center to the backup center. in the area of the LFC (Load frequency control) central regulator: finished modernization of the data acquisition subsystem of the ARFAP Central Regulator System and construction of the PPS Control and Regulation Systems (CRS) for the new localization of the Transmission System Operator in Bielawa. in the area of the network assets management system (NAMS): modification of the Technical Maintenance Plan reports; launching in the NAMS a database containing information on digital protecting terminals and introducing changes in the areas of events registration process, the analysis module and documentation management together with preparation of codification and new reports to be used by maintenance companies. in the area of Geografical Information System (GIS): equipping the system with a base platform, satellite orthophotomaps and a topographic map of Poland with the Nature 2000 areas marked thereon; a technical design of the Geografical Information System implementation; supplementing with data concerning plot owners in the 200 m line belt (+/- 100 m to and from the line axis) resulting from measurements taken with a laser scanner in a EHV line belt. in the area of IT systems protection: updating the tools of a comprehensive system of anti-virus and anti-spam protection of stations and servers; construction of redundant hardware infrastructure together with sealing of the protection system against, amongst others, viruses and malicious code; installation of the Intrusion Prevention System allowing to improve the safety of the Internet node and domain nodes, and to efficiently detect and block hackers attacks in the network; installation of the digital signature and mail encrypting systems. in the area of construction of telecommunication systems for the TSO headquarters in Bielawa: planning and coordination of equipment and supplies of SDH and DWDM transmission devices, the LAN, radio communication equipment, aerial mast infrastructure; technical and formal arrangements concerning the conditions of supplying power to the new TSO headquarters and connecting it to the telecommunication network of the region and of Poland in a manner ensuring safety of the TSO operations. 44 PSE-Operator S.A. Annual Report 2006

Company safety issues In the area of PSE-Operator S.A. and Polish Power System safety, the following major projects and works were carried out in 2006: a planning documentation was prepared concerning the execution of defensive tasks of PSE-Operator S.A. in 2006, in accordance with guidelines provided by the Defense Affairs Department of the Ministry of Economy (DAD ME); projects stipulated in the Guidelines for preparing and implementing particular protection of category II facilities deemed to be particularly important for state safety and defense and located at enterprises and in the organizational units under jurisdiction of the Minister of Economy issued in May 2006 by the Minister of Economy were carried out; plans of particular protection of 24 category II facilities found by the Council of Ministers particularly important for state safety and defense were worked out and agreed upon with relevant bodies of the Police, the State Fire Service, Provincial Military Headquarters and Military Conscription Offices; a Plan of PSE-Operator S.A. operations in case of an external threat to state safety and in the time of war was prepared in accordance with the instruction and guidelines from DAD ME from April 2006; a conception plan of protecting the new PSE- Operator S.A. and national dispatching center headquarters in Bielawa was worked out, which meets the requirements specified for facilities of special importance for state defense and safety; the safety condition of PPS electrical power facilities subject to mandatory protection and protected at a request from the owner was monitored; a tender proceeding was prepared, announced and conducted in order to find contractors for supply, assembly and launch of a Technical Protection System (TPS) at 8 substations; investment projects were carried out in the area of TPS installations at 6 substations. PSE-Operator S.A. Annual Report 2006 45

Environmental protection From the commencement of its operations PSE- Operator S.A. has been making every effort to ensure that the substations and lines in operation meet the environmental protection requirements. In particular in 2006: as a part of each investment project carried out at an electrical power facility, works were conducted in order to ensure that all emission and legal standards are met; under the program of carrying out tasks in the area of environmental protection, Terms of Reference were prepared for 13 substations regarding modernization or construction of transformer stands together with water removal systems and sewage treatment devices. The project was planned to be carried out in the years 2007-2008. The aforementioned project covers the following substations: Aniołów, Bieruń, Dobrzeń, Katowice, Tarnów, Wrzosowa, Janów, Mościska, Piaseczno, Płock, Kielce, Ostrowiec and Rzeszów; in relation to establishment of the Nature 2000 areas within the territory of the Republic of Poland, works were carried out at PSE-Operator S.A. aimed at determining the rules of operating and localizing network facilities in the vicinity or in the said areas. In order to protect the environment, PSE-Operator S.A. continuously implemented and used stateof-the-art technologies utilized in the EU Member States, for example: modern coalescence separators included in the systems for water removal from transformer stands and used for treatment of rain waters polluted with oil derivatives; bioremediation of oil derivatives a modern method of removing oil contaminants from the ground without the need to move it, based on utilizing the ability of some microorganisms to degrade hydrocarbons. Current activities related to environmental protection were conducted as well. They consisted in: keeping quality and quantity registers of produced sewage and wastes; applying for new permits for sewage removal, construction of underground water intakes and production of wastes in situations where previous decisions had expired. In order to unify and regulate proceedings concerning environmental protection, the following documents were prepared: Methodology of handling products and wastes containing asbestos ; EMW emission catalogue for EHV lines ; Guidelines for handling hazardous and other wastes in the areas of EHV substations and lines. Works were also commenced on preparation of the Instruction for SF6 gas management in electrical power equipment aimed, amongst others, at limiting and recording emission of sulfur hexafluoride into the atmosphere. Under environmental protection, PSE-Operator S.A. cooperated with state administration and power industry associations. The company has its representatives in the Polish Electricity Association in the Generation Study Committee. In 2006 representatives of PSE-Operator S.A. participated in work forces appointed by the Economic Association of Polish Power Plants for the purposes of: cooperating with the Ministry of Environment on distribution of rights to emit carbon dioxide (CO 2 ) under the National Plan for Distribution of Rights for the public power plants sector for the years 2008-2012, and particularly issuing opinions on the presented distribution proposals; analyzing the possibilities to limit emission of sulfur dioxide (SO 2 ) and nitrogen oxides (NO x ) to the levels stipulated in the Treaty of Accession and issuing opinions on further proposals to fulfill the obligations. 46 PSE-Operator S.A. Annual Report 2006

Environmental protection The situation in the public power industry sector was analyzed in the light of the binding and expected legal requirements and in respect of impact on PPS safety. The following materials were prepared, amongst others, in 2006: Estimated balance of CO 2 emission and authorisations in the public power plants sector in 2005 ; Information about the status of environmental issues significant for the reliability must-run generation (CO 2, SO 2 and NO X ) ; Analysis of CO 2 emission distribution for power plants with centrally dispatched generating units (CDGU) for the year 2005 and forecast for the years 2006-2007 ; suggestions and comments concerning the Program for the Power Sector document issued by the Ministry of Economy (particularly regarding the presentation of environmental protection issues); proposals and comments concerning the Amendments to the Act on Trade in Rights to Emit Greenhouse Gases and Other Substances into the Atmoshpere draft prepared by the Ministry of Environment. PSE-Operator S.A. Annual Report 2006 47

Main goals to be achieved in 2007

Main goals to be achieved in 2007 In 2007 activities aimed at ensuring fulfillment of the statutory obligations of PSE-Operator S.A. will be continued. The main goals to be achieved include: obtaining a decision on equipping the Company with assets necessary for fulfilling the functions of the TSO. The assets will include: tangible assets, investments under construction, financial assets (shares and stocks of selected companies of the PSE Capital Group) and other assets of administrative and legal character (successions of rights arising from administrative decisions and contracts); conducting division of PSE SA by means of excluding from the company assets and transferring to PSE-Operator S.A. tangible and intangible assets necessary for performing the tasks of an electricity transmission system operator; obtaining a decision by the President of the ERO appointing PSE-Operator S.A. as the electricity transmission system operator for term of license; obtaining a PSE-Operator S.A. tariff approved by the President of the ERO for the consecutive tariff period starting on 1 January 2008; preparing a draft and obtaining a decision from the President of the ERO approving the new ITSOM in the part related to system balancing and system congestion management, with the date of entry into force being 1 June 2007; participating in preparation of planned legal regulations influencing the activities of PSE-Operator S.A., and particularly of further revisions of the Energy Law Act (particularly the one related to implementation of Directive No. 2005/89/EC), subordinate legislation for the Act in question (first of all the so-called System and Tariff decrees), guidelines drafted by the European Commission; preparing and adopting the Plan of investments for the year 2007; preparing standard contracts for provision of transmission services in relation to the obligation to separate, as regards legal form, the activities of electricity distribution system operators, as stipulated in the Directive No. 2003/54/EC and in the Energy Law Act; adjusting the organizational structure of the Company to new needs resulting from transfer to PSE-Operator S.A. of tangible and intangible assets necessary for performing the tasks of an electricity transmission system operator. PSE-Operator S.A. Annual Report 2006 49

Abbreviated financial statements for 2006 accompanied by chartered auditor s opinion

AUDITOR S OPINION To the Shareholder and Supervisory Board of PSE-Operator S.A. We have audited the attached fi nancial statements of PSE-Operator S.A. with registered offi ce in Warsaw, 2 Mysia Str., including: introduction to the fi nancial statements, balance sheet prepared as of 31 December 2006, with total assets and liabilities plus equity of PLN 1 559 637,82 thousand, profi t and loss account for the fi nancial year from 1 January 2006 to 31 December 2006, disclosing a net profi t of PLN 208 523,58 thousand, statement of changes in equity for the fi nancial year from 1 January 2006 to 31 December 2006, disclosing an increase in equity of PLN 143 023,58 thousand, cash fl ow statement for the fi nancial year from 1 January 2006 to 31 December 2006, showing a net cash infl ow of PLN 377 863,96 thousand during the fi nancial year, additional information and explanations; prepared in accordance with the Accounting Act of 29 September 1994 (Dz.U. of 2002, No. 76 item 694) and on 29 March 2007 we issued an unqualifi ed opinion on the fi nancial statement with a supplementary explanation. Without qualifying the accuracy and fairness of the audited fi - nancial statements, we draw attention to the information presented in Note 19 of the additional information, in which the Management Board disclosed the limitations on the use of revenues from organizing and managing cross border transmission.preparation of these summary fi nancial statements is the responsibility of the Management Board of the Company. Our responsibility was to express an opinion on compliance of the summary fi nancial statements with the full fi nancial statements. In our opinion the attached summary fi nancial statements were prepared in all material aspects in line with the full version of the fi nancial statements. The full version of the fi nancial statements, which was the subject of our audit, contains additional information that was not fully presented in the attached summary fi nancial statements. The issue we pointed out in our opinion is described in Note 19 of the full version of the audited fi nancial statements, which together with our opinion is accessible in the registered offi ce of PSE-Operator S.A. and in the registry court..... Wacław Nitka Member of the Board... Maria Rzepnikowska Chairman of the Board... Deloitte Audit Ltd. 18 Piękna Str. Warsaw 00-549... Anita Ait Karaś-Kulickaś Klik Certifi ed auditor No. 10145/7510 WARSAW, 29 MARCH 2007 51

BALANCE SHEET ASSETS NO. ITEM BALANCE AS OF 31.12.2006 (in PLN) BALANCE AS OF 31.12.2005 A NON-CURRENT ASSETS 29 738 057.55 6 623 606.24 I Intangible assets 0.00 0.00 II Tangible fi xed assets 2 090 815.50 1 242 560.00 1 Fixed assets 2 090 815.50 1 242 560.00 a land (including perpetual usufruct right) 1 041 133.83 298 214.00 b buildings, premises, civil and water engineering structures 1 049 681.67 944 346.00 2 Fixed assets under construction 0.00 0.00 3 Advances for fi xed assets under construction 0.00 0.00 III Long-term receivables 3 588 843.77 3 024 329.78 1 From related parties 0.00 0.00 2 From other entities 3 588 843.77 3 024 329.78 IV Long-term investments 0.00 0.00 1 Real property 0.00 0.00 2 Intangible assets 0.00 0.00 3 Long-term fi nancial assets 0.00 0.00 4 Other long-term investments 0.00 0.00 V Long-term prepayments and accruals 24 058 398.28 2 356 716.46 1 Deferred tax assets 24 058 398.28 2 356 716.46 2 Other prepayments and accruals 0.00 0.00 52

BALANCE SHEET ASSETS NO. ITEM BALANCE AS OF 31.12.2006 (in PLN) BALANCE AS OF 31.12.2005 B CURRENT ASSETS 1 529 899 766.30 1 134 215 101.65 I INVENTORY 5 447.80 237 113.18 II SHORT-TERM RECEIVABLES 886 564 995.05 872 924 343.09 1 Receivables from related parties 24 054 692.53 25 779 199.16 a trade receivables, maturing: 24 049 957.40 25 774 464.03 - up to 12 months 24 049 957.40 25 774 464.03 - over 12 months 0.00 0.00 b other 4 735.13 4 735.13 2 Receivables from other entities 862 510 302.52 847 145 143.93 a trade receivables, maturing: 829 374 555.49 836 490 434.77 - up to 12 months 829 374 555.49 836 490 434.77 - over 12 months 0.00 0.00 b receivables from tax, subsidies, customs duty, social security, health and other benefi ts 32 884 759.27 9 879 524.09 c other 250 987.76 775 185.07 d claimed at court 0.00 0.00 III SHORT-TERM INVESTMENTS 636 260 346.70 258 567 551.07 1 Short-term fi nancial assets 636 260 346.70 258 567 551.07 c cash and cash equivalents 636 260 346.70 258 567 551.07 - cash in hand and at bank 636 260 346.70 258 567 551.07 - other cash equivalents 0.00 0.00 - other pecuniary assets 0.00 0.00 2 Other short-term investments 0.00 0.00 IV SHORT-TERM PREPAYMENTS AND ACCRUALS 7 068 976.75 2 486 094.31 TOTAL ASSETS 1 559 637 823.85 1 140 838 707.89 53

BALANCE SHEET LIABILITIES NO. ITEM BALANCE AS OF 31.12.2006 (in PLN) BALANCE AS OF 31.12.2005 A EQUITY 342 159 988.93 199 136 413.83 I SHARE CAPITAL 1 000 000.00 1 000 000.00 II CALLED UP SHARE CAPITAL (NEGATIVE VALUE) 0.00 0.00 III OWN SHARES (NEGATIVE VALUE) 0.00 0.00 IV SUPPLEMENTARY CAPITAL 16 895 149.00 16 895 149.00 V REVALUATION RESERVE 0.00 0.00 VI OTHER RESERVE CAPITALS 115 741 264.83 0.00 VII PREVIOUS YEAR PROFIT (LOSS) 0.00 0.00 VIII NET PROFIT (LOSS) 208 523 575.10 181 241 264.83 IX WRITE-OFF ON NET PROFIT DURING THE FINANCIAL YEAR (NEGATIVE VALUE) 0.00 0.00 B LIABILITIES AND PROVISIONS FOR LIABILITIES 1 217 477 834.92 941 702 294.06 I PROVISIONS FOR LIABILITIES 66 053 018.34 8 873 280.51 1 Provision for deferred income tax 102 191.44 4 621.14 2 Provision for retirement and similar benefi ts 5 684 192.66 5 320 117.14 - long-term 4 135 697.52 3 878 131.76 - short-term 1 548 495.14 1 441 985.38 3 Other provisions 60 266 634.24 3 548 542.23 - long-term 0.00 0.00 - short-term 60 266 634.24 3 548 542.23 II LONG-TERM LIABILITIES 0.00 0.00 1 To related parties 0.00 0.00 2 To other entities 0.00 0.00 54

BALANCE SHEET LIABILITIES NO. ITEM BALANCE AS OF 31.12.2006 (in PLN) BALANCE AS OF 31.12.2005 III SHORT-TERM LIABILITIES 1 117 278 567.81 870 166 382.71 1 To related parties 847 768 890.33 581 544 888.36 a trade liabilities, maturing: 847 291 674.49 581 225 980.36 - up to 12 months 847 291 674.49 581 225 980.36 - over 12 months 0.00 0.00 b other 477 215.84 318 908.00 2 To other entities 263 737 075.61 283 360 644.54 a credits and loans 0.00 0.00 b arising from issuance of debt securities 0.00 0.00 c other fi nancial liabilities 0.00 0.00 d trade liabilities, maturing: 226 994 445.92 272 578 513.79 - up to 12 months 226 994 445.92 272 578 513.79 - over 12 months 0.00 0.00 e advances received for deliveries 0.00 0.00 f bill-of-exchange liabilities 0.00 0.00 g tax, customs duty, insurance and other liabilities 23 773 184.56 6 349 131.76 h payroll liabilities 1 406 627.60 829 931.59 i other 11 562 817.53 3 603 067.40 3 Special funds 5 772 601.87 5 260 849.81 IV PREPAYMENTS AND ACCRUALS 34 146 248.77 62 662 630.84 1 Negative goodwill 0.00 0.00 2 Other prepayments and accruals 34 146 248.77 62 662 630.84 - long-term 0.00 0.00 - short-term 34 146 248.77 62 662 630.84 TOTAL LIABILITIES AND EQUITY 1 559 637 823.85 1 140 838 707.89 55

FORECASTED PROFIT AND LOSS ACCOUNT NO. ITEM REALISATION FOR THE PERIOD (in PLN) 01.01.-31.12.2006 01.01.-31.12.2005 A NET REVENUES FROM SALES OF PRODUCTS, GOODS AND MATERIALS, INCLUDING: 7 887 691 260.24 7 577 784 406.17 - from related parties 172 075 023.88 186 021 755.16 I NET REVENUES FROM SALES OF PRODUCTS 6 809 471 517.87 6 265 037 994.98 II NET REVENUES FROM SALES OF GOODS AND MATERIALS 1 078 219 742.37 1 312 746 411.19 B COST OF PRODUCTS, GOODS AND MATERIALS SOLD, INCLUDING: 7 536 980 439.49 7 332 476 608.26 I MANUFACTURING COST OF PRODUCTS SOLD 6 436 225 284.91 6 019 400 869.74 II VALUE OF GOODS AND MATERIALS SOLD 1 100 755 154.58 1 313 075 738.52 C GROSS PROFIT (LOSS) ON SALES (A-B) 350 710 820.75 245 307 797.91 D SELLING EXPENSES 0.00 0.00 E GENERAL AND ADMINISTRATIVE COSTS 34 813 477.08 34 987 744.76 F PROFIT (LOSS) ON SALES (C-D-E) 315 897 343.67 210 320 053.15 G OTHER OPERATING REVENUES 2 519 599.86 12 906 923.01 I REVENUES FROM DISPOSAL OF NON-FINANCIAL NON-CURRENT ASSETS 0.00 0.00 II SUBSIDIES 0.00 0.00 III OTHER OPERATING REVENUES 2 519 599.86 12 906 923.01 H OTHER OPERATING EXPENSES 72 446 734.03 3 242 129.62 I LOSS ON DISPOSAL OF NON-FINANCIAL NON-CURRENT ASSETS 0.00 0.00 II REVALUATION OF NON-FINANCIAL ASSETS 0.00 0.00 III OTHER OPERATING EXPENSES 72 446 734.03 3 242 129.62 I PROFIT (LOSS) ON OPERATING ACTIVITIES (F+G-H) 245 970 209.50 219 984 846.54 56

FORECASTED PROFIT AND LOSS ACCOUNT NO. ITEM REALISATION FOR THE PERIOD (in PLN) 01.01.-31.12.2006 01.01.-31.12.2005 J FINANCIAL REVENUES 18 681 706.71 7 079 570.37 I DIVIDEND AND PROFIT SHARING, INCLUDING: 0.00 0.00 - from related parties 0.00 0.00 II INTEREST, INCLUDING: 16 393 747.35 7 020 220.37 - from related parties 34 644.00 0.00 III GAIN ON DISPOSAL OF INVESTMENTS 0.00 59 350.00 IV REVALUATION OF INVESTMENTS 0.00 0.00 V OTHER 2 287 959.36 0.00 K FINANCIAL EXPENSES 366 771.63 1 818 463.57 I INTEREST, INCLUDING: 366 771.63 511 428.37 - from related parties 32 081.32 0.00 II LOSS ON DISPOSAL OF INVESTMENT 0.00 0.00 III REVALUATION OF INVESTMENTS 0.00 0.00 IV OTHER 0.00 1 307 035.20 L PROFIT (LOSS) ON BUSINESS ACTIVITIES (I+J-K) 264 285 144.58 225 245 953.34 M RESULT ON EXTRAORDINARY EVENTS (M.I. M.II.) 0.00 0.00 I EXTRAORDINARY GAINS 0.00 0.00 II EXTRAORDINARY LOSSES 0.00 0.00 N GROSS PROFIT (LOSS) (L±M) 264 285 144.58 225 245 953.34 O INCOME TAX 55 761 569.48 44 004 688.51 P OTHER STATUTORY REDUCTIONS IN PROFIT (INCREASES IN LOSS) 0.00 0.00 R NET PROFIT (LOSS) (N-O-P) 208 523 575.10 181 241 264.83 57

STATEMENT OF CHANGES IN EQUITY (in PLN) NO. ITEM 01.01.-31.12.2006r. 01.01.-31.12.2005r. I. OPENING BALANCE OF EQUITY 199 136 413.83 34 790 297.53 - Adjustments of fundamental errors and changes in accounting principles 0.00 0.00 I.A. OPENING BALANCE OF EQUITY AFTER ADJUSTMENTS 199 136 413.83 34 790 297.53 1 OPENING BALANCE OF SHARE CAPITAL 1 000 000.00 1 000 000.00 1.1. CHANGES IN SHARE CAPITAL 0.00 0.00 1.2. CLOSING BALANCE OF SHARE CAPITAL 1 000 000.00 1 000 000.00 2 OPENING BALANCE OF CALLED UP SHARE CAPITAL 0.00 0.00 2.1. CLOSING BALANCE OF CALLED UP SHARE CAPITAL 0.00 0.00 3 OPENING BALANCE OF OWN SHARES 0.00 0.00 a Increase 0.00 0.00 b Decrease 0.00 0.00 3.1. CLOSING BALANCE OF OWN SHARES 0.00 0.00 4 OPENING BALANCE OF SUPPLEMENTARY CAPITAL 16 895 149.00 0.00 4.1. CHANGES IN SUPPLEMENTARY CAPITAL 0.00 16 895 149.00 a Increase from profi t distribution 0.00 16 895 149.00 b Decrease 0.00 0.00 4.2. CLOSING BALANCE OF SUPPLEMENTARY CAPITAL 16 895 149.00 16 895 149.00 5 OPENING BALANCE OF REVALUATION RESERVE 0.00 0.00 5.1. CHANGES IN REVALUATION RESERVE 0.00 0.00 5.2. CLOSING BALANCE OF REVALUATION RESERVE 0.00 0.00 6 OPENING BALANCE OF OTHER RESERVE CAPITALS 0.00 0.00 6.1. CHANGES IN OTHER RESERVE CAPITALS 115 741 264.83 0.00 a Increase 115 741 264.83 0.00 b Decrease 0.00 0.00 6.2. CLOSING BALANCE OF OTHER RESERVE CAPITALS 115 741 264.83 0.00 58

STATEMENT OF CHANGES IN EQUITY (in PLN) NO. ITEM 01.01.-31.12.2006r. 01.01.-31.12.2005r. 7 OPENING BALANCE OF PREVIOUS YEAR PROFIT (LOSS) 181 241 264.83 33 790 297.53 7.1. OPENING BALANCE OF PREVIOUS YEAR PROFIT 181 241 264.83 33 790 297.53 - Adjustments of fundamental errors and changes in accounting principles 0.00 0.00 7.2. OPENING BALANCE OF PREVIOUS YEAR PROFIT, AFTER ADJUSTMENTS 181 241 264.83 33 790 297.53 a Increase 0.00 0.00 b Decrease 181 241 264.83 33 790 297.53 - Reclassifi cation to supplementary capital 0.00 16 895 149.00 - Profi t distribution (to reserve capital) 115 741 264.83 0.00 - Payment of dividend to the shareholder 65 000 000.00 14 870 534.98 - Write off to incentive fund 0.00 1 647 863.55 - Write-off to the Company s Social Benefi ts Fund 500 000.00 376 750.00 7.3. OPENING BALANCE OF PREVIOUS YEAR LOSS 0.00 0.00 - Adjustments of fundamental errors and changes in accounting principles 0.00 0.00 7.4. OPENING BALANCE OF PREVIOUS YEAR LOSS, AFTER ADJUSTMENTS 0.00 0.00 a Increase 0.00 0.00 b Decrease 0.00 0.00 7.5. CLOSING BALANCE OF PREVIOUS YEAR LOSS 0.00 0.00 7.6. CLOSING BALANCE OF PREVIOUS YEAR PROFIT (LOSS) 0.00 0.00 8 NET RESULT 208 523 575.10 181 241 264.83 a Net profi t 208 523 575.10 181 241 264.83 b Net loss (negative value) 0.00 0.00 c Write-offs on profi t (negative value) 0.00 0.00 II CLOSING BALANCE OF EQUITY 342 159 988.93 199 136 413.83 III EQUITY INCLUDING PROPOSED PROFIT DISTRIBUTION (LOSS COVERAGE) 341 659 988.93 X 59

CASH FLOW STATEMENT (in PLN) NO. ITEM 01.01.-31.12.2006 01.01.-31.12.2005 A CASH FLOWS FROM OPERATING ACTIVITIES I NET PROFIT (LOSS) 208 523 575.10 181 241 264.83 II TOTAL ADJUSTMENTS 235 231 040.81 21 076 882.42 1 Amortization/Depreciation 33 157.80 0.00 2 Exchange gains / losses 171 164.90 (1 437 499.26) 3 Interest and profi t sharing (dividend) 9 242.08 270 390.46 4 Profi t (loss) on investment activities 0.00 (59 350.00) 5 Change in provisions 57 179 737.83 (653 637.95) 6 Change in inventory 231 665.38 25 977.57 7 Change in receivables (14 205 165.95) 8 349 550.41 8 Changes in short-term liabilities, except for loans and credits 246 612 185.10 (25 169 149.73) 9 Change in the balance of prepayments and accruals (54 800 946.33) 39 750 600.92 10 Other adjustments 0.00 0.00 III NET CASH FLOWS FROM OPERATING ACTIVITIES (I ± II) 443 754 615.91 202 318 147.25 B CASH FLOWS FROM INVESTMENT ACTIVITIES I INFLOWS 0.00 50 000 000.00 1 Disposal of intangible and tangible fi xed assets 0.00 0.00 2 Disposal of investments in real property and in intangible assets 0.00 0.00 3 From fi nancial assets, including: 0.00 50 000 000.00 a) in related parties 0.00 50 000 000.00 b) in other entities 0.00 0.00 - disposal of fi nancial assets 0.00 0.00 4 Other infl ows from investment activities 0.00 0.00 II OUTFLOWS 881 413.30 51 183 210.00 1 Acquisition of intangible assets and tangible fi xed assets 881 413.30 1 242 560.00 2 Investments in real property and intangible assets 0.00 0.00 3 For fi nancial assets, including: 0.00 49 940 650.00 a) in related parties 0.00 49 940 650.00 b) in other entities 0.00 0.00 - acquisition of fi nancial assets 0.00 0.00 - granted long-term loans 0.00 0.00 4 Other outfl ows from investment activities 0.00 0.00 III NET CASH FLOWS FROM INVESTMENT ACTIVITIES (I-II) (881 413.30) (1 183 210.00) 60

CASH FLOW STATEMENT (in PLN) NO. ITEM 01.01.-31.12.2006 01.01.-31.12.2005 C CASH FLOWS FROM FINANCIAL ACTIVITIES I INFLOWS 0.00 0.00 1 Net revenues from issuance of shares and other capital instruments as well as capital contributions 0.00 0.00 2 Credits and loans 0.00 0.00 3 Issuance of debt securities 0.00 0.00 4 Other infl ows from fi nancial activities 0.00 0.00 II OUTFLOWS 65 009 242.08 15 140 925.44 1 Acquisition of own shares 0.00 0.00 2 Dividend and other payments to shareholders 65 000 000.00 14 870 534.98 3 Profi t distribution liabilities other than profi t distribution payments to shareholders 0.00 0.00 4 Repayment of credits and loans 0.00 0.00 5 Redemption of debt securities 0.00 0.00 6 Due to other fi nancial liabilities 0.00 0.00 7 Payment of liabilities arising from fi nancial leasing 0.00 0.00 8 Interest 9 242.08 270 390.46 9 Other outfl ows from fi nancial activities 0.00 0.00 III NET CASH FLOWS FROM FINANCIAL ACTIVITIES (I-II) (65 009 242.08) (15 140 925.44) D TOTAL NET CASH FLOWS (A.III ± B.III ± C.III) 377 863 960.53 185 994 011.81 E BALANCE SHEET CHANGE IN CASH, INCLUDING: 377 692 795.63 187 431 511.07 - change in cash due to exchange differences (171 164.90) 1 437 499.26 F CASH OPENING BALANCE 257 130 181.22 71 136 169.41 G CLOSING BALANCE OF CASH (F±D), INCLUDING: 634 994 141.75 257 130 181.22 - of limited disposability 15 173.99 15 870.77 61

Contact with PSE-Operator S.A. UNIT PHONE FAX E-MAIL ADDRESS Secretary of the Management Board (+48 22) 340 26 00 (+48 22) 340 11 34 (+48 22) 340 22 33 izabela.bryzek@pse-operator.pl Communication Office (+48 22) 340 26 49 (+48 22) 340 26 50 joanna.drapinska@pse-operator.pl Power System Operations Department Sales and Development Department Grid Infrastructure Department (+48 22) 340 10 92 (+48 22) 340 25 38 marianna.kurzyk@pse-operator.pl (+48 22) 340 19 33 (+48 22) 340 21 92 edyta.czarnecka@pse-operator.pl (+48 22) 340 10 46 (+48 22) 340 23 55 marta.moszynska@pse-operator.pl Organization Department (+48 22) 340 25 58 (+48 22) 340 10 51 edyta.zych@pse-operator.pl Financial and Controlling Department Telecommunication and IT Department Work Health and Safety Section (+48 22) 340 19 37 (+48 22) 340 20 75 agnieszka.adamczyk@pse-operator.pl (+48 22) 340 26 52 (+48 22) 340 26 53 anna.malczyk@pse-operator.pl (+48 22) 340 20 36 (+48 22) 340 23 23 aneta.bujnowska@pse-operator.pl 62 PSE-Operator S.A. Annual Report 2006

graphics design: Studio Deforma, www.deforma.com.pl print: ODDI Poland Sp. z o.o.

PSE-Operator S.A. 2 Mysia str., Warsaw 00-496, Poland phone: (+48 22) 340 26 00, (+48 22) 340 11 34 fax: (+48 22) 340 22 33 www.pse-operator.pl