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0 10 20 30 40 50 60 70

• a company with a stable economic position and financial potential

guaranteeing its dynamic development,

• a company implementing one of the largest investment programmes in Europe.

The structure of fuels and other primary energy carriers consumed in the generation of power sold by PGE Polska Grupa Energetyczna in 2009

PLN

21.623 bn

PGE Capital Group’s consolidated revenue in 2009

37 %

increase in PGE Capital Group’s consolidated EBITDA over that of 2008

62 %

increase in PGE Capital Group’s consolidated net profit over that of 2008

PLN

3.726 bn

PGE Capital Group’s total investment expenditures in 2009

PLN

7.983 bn

PGE Capital Group’s consolidated EBITDA in 2009

PLN

4.337 bn

PGE Capital Group’s consolidated net profit in 2009

PLN

5.968 bn

value of the Initial Public Offering of PGE Polska Grupa Energetyczna S.A.

PLN

2.5 bn

PGE Capital Group’s investments in mining and generation in 2009

PLN

1.0 bn

PGE Capital Group’s investment expenditures on distribution in 2009

Renewable energy sources,

including biomass 1.04% Hard coal 22.86% Lignite 72.43% Natural gas 3.40% 0.27% Others

PGE is:

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PGE in numbers

53.8 TWh

43.1 m tons

30.0 TWh

electricity sold by PGE retail

sales companies in 2009

5 million

the number of electricity

consumers served by the PGE

retail sales companies

12.4 GW

PGE Capital Group’s total installed capacity

268,000

km

the length of PGE Capital

Group’s power lines

electricity generated by PGE Capital Group in 2009

PGE Polska Grupa Energetyczna is Poland’s largest producer and provider of electricity

as well as one of the largest power companies in Central and Eastern Europe.

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We are developing

in a sustainable way

50 Strategic projects

38 PGE’s Areas of Activity

20 PGE’s Mission/Vision

4 4 | 5

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PGE’s Mission/Vision

PGE’s Mission

PGE’s Mission is to build shareholder value by satisfying

its clients’ energy needs.

PGE is operating in an increasingly competitive

environment, both domestically and internationally.

In order to meet the requirements of competition

while ensuring a high level of customer service,

it is the company’s priority to focus on customers

and their satisfaction.

PGE is a commercial law company and its shares are

publicly-traded. That is why building shareholder value

is one of the pillars of PGE’s strategy.

PGE’s Vision

PGE’s Vision is to become the leading utility company

in Central Europe.

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Calendar of events in 2009

17 August

PGE Kopalnia Węgla Brunatnego Bełchatów S.A. began lignite mining in the Szczerców Mining Pit – one of the three lignite min-ing pits in the Bełchatów bed. PGE Elektrownia Bełchatów S.A. – the largest producer of elec-tricity in Poland – gained another source of supply.

30 July

By an entry in the National Court Register, the ad-dress and registered office of PGE Polska Grupa Energetyczna S.A. were changed. Warsaw became the Company’s registered office.

2 July

The Management Board of PGE Polska Grupa Energetyczna S.A. en-trusted PGE Elektrownia Bełchatów S.A. with the role of being the integra-tor of its Conventional Energy business line under the PGE Capital Group’s Consolidation Program.

11 May

The Management Board of PGE Polska Grupa Energetyczna S.A. an-nounced its strategy until 2012, including plans for Group consolidation and integration and details concerning its investment program.

30 January

The European Commission proposed to award financial assistance to PGE Elektrownia Bełchatów S.A. to build a Carbon Capture and Storage (CCS) installation.

13 January

By a decision of the Polish government, PGE Polska Grupa Energetyczna S.A. was selected to partici-pate in drafting Nuclear Power Program for Poland and play the leading role in its implementation.

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28 December

Registration of PGE Energia Jądrowa S.A.

6 November

PGE Polska Grupa Energetyczna S.A.’s IPO on the Warsaw Stock Exchange. As a result of its successful IPO, PGE at-tracted nearly PLN 6 billion for further investments.

17 November

PGE Polska Grupa Energetyczna S.A. signed a memorandum with EDF S.A. to start coopera-tion in the field of nuclear power. The purpose of co-operation is to analyze the feasibility of developing nuclear reactors using EPR technology and the possi-bility of industrial partner-ship to build the first nucle-ar power plant in Poland.

1 December

Registration of PGE Obrót S.A. and PGE Dystrybucja S.A.

Calendar of events in 2009

12 October

17 September

PGE Elektrownia Opole S.A. announced a tender to build two energy unit. This procurement entails the design, construction, start-up, commissioning and provision of war-ranty services for new energy units no. 5 and 6 with a gross capacity of 800-900 MW each.

4 September

The Management Board of PGE Polska Grupa Energetyczna S.A. named the companies responsible for merging the PGE Capital Group entities within the following business lines: retail sales, distribution and renewable energy.

1 September

As part of its strategy to focus on the energy sec-tor, the Management Board of PGE Polska Grupa Energetyczna S.A. made the decision to begin prepara-tions to sell its shares in Polkomtel S.A., a mobile phone network operator.

PGE Polska Grupa Energetyczna S.A. published its prospectus to conduct its IPO.

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At the end of 2009, the PGE Capital Group recorded a 62% growth of consolidated net profit – from PLN 2.67 bil-lion in 2008 to PLN 4.337 bilbil-lion in 2009. Consolidated revenues were PLN 21.623 billion and increased by 11.4% as compared to 2008. EBITDA increased by 36.5% – to PLN 7.983 billion. EBITDA increased by 37% year-on-year excluding compensation for long-term contracts. The 2008 and 2009 financial data have been translated into EUR using the following principles:

individual line items of assets and liabilities – according

•

to the average FX rate published by the National Bank of Poland as at 31 December 2009 – 4.1082 PLN/EUR (as at 31 December 2008 – 4.1724 PLN/EUR), individual line items of the statement of total

•

income and the cash flow statement – using the rate equal to the arithmetic average of the aver-age rates published by the National Bank of Poland as at the last day of each month of the financial period from 1 January 2009 to 31 December 2009 – 4.3406 PLN/EUR (for the period from 1 January 2008 to 31 December 2008 – 3.5321 PLN/EUR).

Shareholder structure

PGE Polska Grupa Energetyczna S.A.’s IPO on the Warsaw Stock Exchange took place on 6 November 2009. After the issue of se-ries B shares offered under the Initial Public Offering, the company’s shareholder structure as at 31 December 2009 was as follows:

State Treasury 85%,

•

other shareholders 15%.

•

As at 31 December 2009, PGE Polska Grupa Energetyczna S.A.’s share capital was PLN 17,300,900,000 and was divided into 1,730,090,000 shares with a par value of PLN 10 each, including:

1,470,576,500 series “A” bearer shares,

•

259,513,500 series “B” bearer shares.

•

Selected Financial Data

60% 50 40 30 20 10

Growth of revenues Growth of EBITDA Growth of net profit

62%

37%

11%

EBITDA margin of 36.9% – PGE ranks third among major European concerns

Company’s shareholder structure as at 31 December 2009 State Treasury 85% other shareholders 15% 12 months ended 31 December 2009 12 months ended 31 December 2008 12 months ended 31 December 2009 12 months ended 31 December 2008 000s of PLN 000s of EUR

Total sales revenues 21,623,350 19,408,706 4,981,602 5,494,961

Operating profit/loss 5,344,729 3,262,295 1,231,322 923,616

Gross profit/loss (before taxation) 5,378,534 3,169,535 1,239,110 897,354

Net profit/loss 4,337,223 2,670,247 999,212 755,996

Total income 4,296,508 2,700,434 989,832 764,542

Net cash on operating activity 7,298,888 5,386,580 1,681,523 1,525,040

Net cash on investment activity (3,628,590) (5,444,485) (835,957) (1,541,434)

Net cash on financing activity 1,898,319 (528,285) 437,336 (149,567)

Movement in the net balance

of cash and cash equivalents 5,568,617 (586,190) 1,282,902 (165,961)

Net profit per share (in PLN/EUR per share) 2.23 1.31 0.51 0.37

Diluted profit per share (in PLN/EUR per share) 2.23 1.31 0.51 0.37

Balance as at 31 December 2009 Balance as at 31 December 2008 Balance as at 31 December 2009 Balance as at 31 December 2008 000s of PLN 000s of EUR Non-current assets 41,964,446 40,701,211 10,214,801 9,754,868 Current assets 12,477,640 6,487,592 3,037,252 1,554,883

Group’s assets classified as for sale 5,712 3,458 1,390 829

Total assets 54,447,798 47,192,261 13,253,444 11,310,579

Equity 38,849,752 30,175,578 9,456,636 7,232,187

Share capital 17,300,900 14,705,765 4,211,309 3,524,534

Long-term liabilities 9,762,322 9,519,888 2,376,302 2,281,634

Short-term liabilities 5,835,724 7,496,795 1,420,506 1,796,758

Weighted average number of shares 1,513,947,249 1,470,576,500 1,513,947,249 1,470,576,500

Number of shares at the end

of the reporting period 1,730,090,000 1,470,576,500 1,730,090,000 1,470,576,500

Book value per share (in PLN/EUR per share) 18.02 15.51 4.39 3.72

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Letter from

the Chairman of the Supervisory Board

PGE Polska Grupa Energetyczna S.A.

Dear Sir / Madam,

Another year of PGE Capital Group’s operations is now behind us. 2009 may be acknowledged to have been a very successful year. Despite the recession and decrease in electricity con sump-tion, the PGE Capital Group has proven that stable development is possible even in a time of crisis. Confirmation of these words is found above all in last year’s Initial Public Offering and 2009’s great financial performance, which has enabled the Group to continue implementation of crucial investment processes.

Last year the Supervisory Board of PGE Polska Grupa Energetyczna S.A., in which I have been privileged to serve as Chairman, observed and thoroughly analysed PGE’s situation. It cooper-ated with the Management Board concerning all material aspects of the Group’s activity. The Supervisory Board held 15 meetings during which decisions were made to enhance operational efficiency, implementation of the Group’s investment plans and the sale of PGE’s non-energy assets.

The execution of the Group’s comprehensive development strategy, the growth of energy prices and the proceeds earned on long-term contracts contributed to the Group recording 62% growth in consolidated net profit in 2009 even though the growth rate in demand for energy slumped. Very robust financial performance coupled with one of the highest EBITDA margins generated by any European power engineering holding reflect the well-thought-through investment policy.

One enormous achievement of the entire PGE Capital Group was the Company’s long-coming floatation on the Warsaw Stock Exchange preceded by its Initial Public Offering worth almost PLN 6 billion. I would like to take advantage of this opportunity to thank all the employees of the PGE Capital Group for their commitment and hard work on that project. It is with great satisfaction that I assert that this great achievement was made possible by their efforts. I would also like to express my gratitude for fruitful cooperation to the Management Board of PGE Polska Grupa Energetyczna S.A. and my colleagues in the Supervisory Board.

I believe that 2010 will be a year in which the Polish economy will enjoy stable economic growth. For PGE it will be a time to address new challenges and expend efforts to generate the best possible financial performance. I am convinced that the Supervisory Board,

the Management Board of PGE Polska Grupa Energetyczna S.A. and all the Group’s employees will do their utmost to make that happen.

Respectfully,

Marcin Zieliński

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Letter from

the President of Management Board of

PGE Polska Grupa Energetyczna S.A.

Dear Sir / Madam,

On behalf of the Management Board of PGE Polska Grupa Energetyczna S.A. I would like to present you with the Annual Report detailing the achievements of the PGE Capital Group and its consolidated 2009 financial performance. Undoubtedly, this past year was a turning point in the history of the PGE Capital Group. It was a year of hard work, new challenges and great success. It was a very good year for PGE despite economic slowdown and decline in industrial

production. At the end of 2009, the PGE Capital Group recorded 62% growth in con-solidated net earnings – rising from PLN 2.67 billion in 2008 to PLN 4.337 billion in 2009. Consolidated revenues totaled PLN 21.623 billion, showing 11.4% growth over 2008. Without a doubt, one exceptional event in 2009, not just for PGE but also for the entire energy sector, was November’s floatation of PGE Polska Grupa Energetyczna S.A. preceded by the largest Initial Public Offering in Europe in 2009 worth almost PLN 6 billion. This success belongs to the entire PGE Capital Group and its over 40 thousand employees. The extensive

interest in our company’s shares confirms the strength of the Polish energy industry, its potential for development and its attractiveness to investors. We are pleased that investors have placed their confidence in us and shown their appreciation for our strategy. One of this strategy’s pillars is rooted in the process that has been commenced of consolidating and tidying up its organizational structure. After its completion PGE Capital Group’s structure will be much simpler thereby contributing to the quality of management and operational efficiency. We have launched the largest investment program in the Polish energy industry and we are implementing it on a timely basis. In 2009, the PGE Capital Group’s investments totaled PLN 3.7 billion. The largest implemented projects included opening the Szczerców Mining Pit to deliver lignite to PGE Elektrownia Bełchatów S.A. in the upcoming decades and the considerable progress achieved in the construction of a 858 MW unit in that power plant. Another one of last year’s stellar event was the launch of the program to build Poland’s first nuclear power plant. In January 2009, the Polish government entrusted PGE with the construction of two nuclear power plants envisaging power of 3 thou-sand MW each. This is a tremendous challenge that will influence Poland’s energy security in the future. We have already taken strong action to ensure that electricity will flow from the first Polish nuclear power plant in 2020, in alignment with plans. Our successes and robust financial performance stem from the hard work of the Group’s employees, whom I would like to thank for their commitment and the sheer enor-mity of their work. They have enabled us to implement PGE’s ambitious strategy. PGE’s vision is to be the leader on the energy market capable of competing effectively with the largest European utilities in the future. I hope this publication will help you appreciate that vision while broadening your knowledge of the PGE Capital Group. Respectfully yours,

Tomasz Zadroga

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Marcin Zieliński

Chairman of the Supervisory Board

Graduated from the Law and Administration Department of Warsaw University and Postgraduate Studies in Finance at the Warsaw School of Economics. In 2003-2004 he completed legislative training. Since February 2008 he has been the director of the 3rd Corporate Governance and Privatization Department at the State Treasury Ministry (main place of employment). Since May 2009 he has been the Supervisory Board Deputy Chairman of PHZ Baltona S.A., with its registered office in Warsaw. Previously he also was a Supervisory Board member in Stocznia Gdynia S.A. and Elektrownia Wodna Żarnowiec S.A., with its registered office in Gniewino. According to his representation, Marcin Zieliński is affiliated with a shareholder holding no fewer than 5% of the total number of shares at the shareholder meeting i.e. the State Treasury by employ-ment with the State Treasury Ministry.

of the Government’s Entrepreneurship Support Program using the sureties and guarantees of Bank Gospodarstwa Krajowego. Previously, he served on the supervisory boards of, among oth-ers, Polski Monopol Loteryjny Sp. z o.o., PKP Cargo S.A. and Warszawski Rolno-Spożywczy Rynek Hurtowy S.A. Since 2003 he has been a Supervisory Board member of PKP S.A.

Małgorzata Dec

Member of the Supervisory Board

Has a Ph.D. in economics. Graduated from the Warsaw School of Economics. Since June 2009 she has been employed as head of the Privatization Processes Coordination Sub-Department of the Analyses Department at the State Treasury Ministry (main place of employ-ment). Since September 2009 she has been the Supervisory Board Chairwo-man of Nafta Polska S.A. Previously, she served on the Supervisory Board of Warszawski Rolno-Spożywczy Rynek Hurtowy S.A.

According to her representation, Małgorzata Dec is affiliated with a share-holder holding no fewer than 5% of the total number of shares at the shareholder meeting i.e. the State Treasury by employ-ment with the State Treasury Ministry.

Czesław Grzesiak

Graduated from the Law and Administration Department at the University in Poznań ma-joring in Law; completed a course for receiv-ers. He is a member of the Lewiatan Polish Confederation of Private Employers and a Management Board member of the Polish Commerce and Distribution Organization. Professional experience in management: since 1995 a Management Board member and later – since 2004 – Vice-president of the Management Board of TESCO /Polska/ Sp. z o.o. In addition, he was the President of the Management Board of 40 TESCO group companies. In 1991-1993 he was the rece iver for the Iglo tech State-Owned Enterprise in Świd nica and the Glass Mill in Pieńsk. He was a mem ber of the Supervisory Boards of PHU Podzamcze S.A., Minor S.A., Madex S.A. Czesław Grzesiak’s main place of em ploy ment is TESCO /Polska/ Sp. z o.o. in Kraków. He also is the President of the Management Board of SAVIA – Karpaty Sp. z o.o., Genesis Sp. z o.o., Promesa Sp. z o.o. and a Management Board member of Jasper Sp. z o.o.

Grzegorz Krystek

Graduated from the Electrical Engineering Department of the Warsaw University of Technology specializing in power plants. In 2005 he completed his MBA postgradu-ate studies at the Warsaw University of Technology. The program was conducted by the following schools of economics: London Business School, HEC School of Management from Paris and Norwegian School of Eco-no mics and Business Administration in Bergen. Co-authored the Domestic Emissions Reduction Plan, was an expert in the Council of European Energy Regulators (CEER). Professional experience in management: from 2004 Vice-president of the Management

Board of Hasbrouck Sp. z o.o., 2005-2006 Commercial Director in Vertis Environmental Finance Poland Sp. z o.o., 2001-2003 direc-tor on Energy and direcdirec-tor on Strategy and Development in Elektrim S.A., member of the Super vi so ry Boards of ZE PAK S.A., Elektrim Mega dex S.A., Elektrim-Volt S.A., EM Yachts Sp. z o.o.

Grzegorz Krystek’s main place of employ-ment is a company under the business name of Partner.

Katarzyna Prus

Legal Advisor graduated from the Law and Administration Department of Warsaw University and the European Integration Studies in the National School of Public Administration in Warsaw. From 1996 employed by the State Treasury Ministry (her main place of employment); currently, she is employed as Sub-Department Head of the Legal Representation Department. From 2001 member of examination committees for testing candidates to become supervisory board members in companies with a State Treasury shareholding.

She also was the Supervisory Board Chairwoman of, among others, Zespół Elektrociepłowni Poz nań skich S.A., Przedsiębiorstwo Spedycji Międzyna-rodowej C.Hartwig-Katowice S.A., and also a Supervisory Board member of Południowy Koncern Energetyczny S.A. with its registered office in Katowice. From October 2005, Supervisory Board member and then Chairwoman of Fa bry ka Elemen tów Złącznych S.A. with its registered office in Siemianowice Śląskie. According to her representation, Katarzyna Prus is affiliated with a shareholder hold-ing no fewer than 5% of the total number of shares at the shareholder meeting i.e.

The Supervisory Board is composed of seven to nine members appointed and dismissed by the Shareholder Meeting. The Supervisory Board oversees PGE Polska Grupa Energetyczna S.A.’s operations in all areas of its activity

on a continuous basis.

Supervisory Board of PGE Polska Grupa Energetyczna S.A.

Composition of the PGE Polska Grupa Energetyczna S.A. Supervisory Board

As at 14 June 2010

Maciej Bałtowski

Vice-Chairman of the Supervisory Board

Professor ordinary at the Economics Department at the Maria Curie-Skłodowska University in Lublin. Co-authored several draft amendments to the Act on Commercialization and Privatization. Currently, director of the Institute of Economics at the Maria Curie-Skłodowska University in Lublin (main place of employment). Previously, supervisory board chairman of, among others, Wschodni Bank Cukrownictwa S.A., Lubelska Fabryka Wag FAWAG S.A. and Miejskie Przedsiębiorstwo Wodociągów i Kanalizacji Sp. z o.o., with its regis-tered office in Lublin. In 1999-2007 he was a partner in Centrum Kształcenia Menedżerów Przemysłowych Sp. z o.o., with its registered office in Lublin.

Jacek Barylski

Legal Advisor Graduated from the Law and Administration Department of the University of Łódź and Postgraduate Studies in Finance at the Warsaw School of Economics. Currently, the director of the Guarantees and Sureties Department at the Finance Ministry (main place of employment). He also is the Chairman of the Steering Committee on Execution

the State Treasury by employment with the State Treasury Ministry.

Zbigniew Szmuniewski

Graduated from the Law and Admini stra tion Department of the Maria Curie-Skłodowska University in Lublin. He holds a Diploma from the International School of Commerce and a Diploma as a Ukrainian Stock Ex-change Broker. For 13 years he was director in the Voivodship Office. For two years he was the President of the Management Board of Bank BDK Ukraina Ltd. in Ukraine and the chief specialist at PKO S.A. in Warsaw. Commercial Advisor for the Polish Embassy in Kiev in 1995-1998 and 2004-2007. In 2003-2004 he was the Supervisory Board Chairman of UNIMOR S.A. with its registered office in Gdańsk. Main place of employment: Ministry of Economy.

Krzysztof Żuk

Ph.D in Economics, graduated from the Economics Department at the Maria Curie-Skłodowska University in Lublin. Authored and co-authored more than 70 academic publications, including 8 monographs. Professional experience in management: 2007-2009 undersecretary of state at the State Treasury Ministry, 2006-2007 Deputy Mayor of the City of Lublin, 1996-2006 director of the Representative Office of the State Treasury Ministry in Lublin, 1992-1996 director of the Representative Office of the Ministry of Ownership Trans-formations in Lublin. He was a supervisory board member of companies with a State Treasury shareholding. Currently, he is a Supervisory Board member of Polskie LNG S.A.

Krzysztof Żuk’s main place of employment is the Lublin City Hall.

Governing Bodies of

PGE Polska Grupa Energetyczna S.A.

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18 | 19

Tomasz Zadroga

President of the Management Board

Appointed as President of the Management Board on 1 August 2008. Coordinated the tasks performed by the Nuclear Energy Department (until the date of establishing the company called PGE Energia Jądrowa S.A.), the Risk Audit and Analyses Department, the Mergers and Acquisitions Department, the Press Spokesman, the Position on Occupational Safety and Health, the Management Board Proxy on Protection of Restricted Information and the Management Board Office. Graduated from the International Economic and Political Relations Program at the Economic and Social Department of the University of Łódź and The Association of Chartered Certified Accountants (ACCA). Has broad professional experience in corporate restructuring, strategic planning and finance management. His career to-date included serving on the management boards of commer-cial companies in a variety of indus-tries e.g. Inter Cars, IC Development & Finance and Adidas Polska. He also was the financial director at Papyrus-Stora Enso Polska and ABB Polska.

Marek Szostek

Vice-president of the Management Board for Organisation

Appointed to be Vice-president of the Management Board on 3 August 2009. Coordinated tasks performed by the Human Resources Department, the Management and Administration Department and the Marketing and PR Department. Graduated from the Economics and Organization of Transportation Program at the Domestic

Commerce Department of the Planning and Statistics University in Warsaw (currently the Warsaw School of Economics).

In the course of his professional career he was responsible for man-aging the key operational areas of commercial and production companies such as ASICS Polska Sp. z o.o., Adidas Poland Sp. z o.o., Nike Poland Sp. z o.o., Makton Sp. z o.o., Eurosmak Sp. z o.o., Fedrus S.A. He also worked in the Tax Chamber in Warsaw. In these companies he held mana gement functions as Vice-president of the Management Board, general direc-tor, sales and market development director and commercial director.

On 20 November 2009 the Supervisory Board of PGE Polska Grupa Energetyczna S.A. approved the Company’s

Organizational Bylaws and the Company’s Management Board Bylaws. The Management Board is composed of 5 members. The split of areas of activity, duties and responsibilities between the Management Board members is as follows:

Management Board of PGE Polska Grupa Energetyczna S.A.

Governing Bodies of

PGE Polska Grupa Energetyczna S.A.

Piotr Szymanek

Vice-president of the Management Board for Corporate Affairs

Appointed as Vice-president of the Management Board on 21 July 2008. Responsible for coordinating the activities of the Legal Department, the Security Department and the Procurement Department. Graduated from the Law and Administration Department of Warsaw University and the Program entitled Enterprise Management on the European Union Market at the Warsaw School of Economics. Legal advisor. He also ran his own Legal Advisor’s Office which catered to important entities in the insurance and financial sector.

He acquired professional experience in legal affairs in energy utilities by providing legal assistance and in legislation by working for Stołeczne Przedsiębiorstwo Energetyki Cie-plnej S.A. and Polskie Sieci Elektro-energetyczne S.A. Previously, a ma na ger in various financial institu-tions such as Powszechny Zakład Ubezpieczeń S.A., Bank Współpracy Europejskiej S.A., Bank Pekao S.A. and Polski Bank Inwestycyjny.

Wojciech Topolnicki

Vice-president of the Management Board for Development and Finance

Appointed as Vice-president of the Management Board on 1 July 2008. Coordinated tasks performed by the Treasury Department, the Controlling Department, the Stra-tegy and Investment Department and the Accounting Department. Graduated from the Management and Economics Department of the Gdańsk University of Technology and Ecole Superieure de Commerce in Rouen (MBA studies).

Has extensive professional experience in finance management. He worked as, among others, deputy financial director and financial controller in EADS PZL “Warszawa-Okęcie” S.A. and as Senior Manager in the Audit and Economic Consulting Depart-ment at Arthur Andersen Sp. z o.o. He also conducted his own business activity in corporate finance. The companies for which he wor ked included, among others, MicroStra-tegy Poland Sp. z o.o. (as financial director), GreenVenture S.A. and Polish Energy Partners S.A.

Marek Trawiński

Vice-president of the Management Board for Operations

Appointed as Vice-president of the Management Board on 28 July 2008. Coordinated the Group’s core business tasks related to energy per for med by the Commerce Depart ment, the Distribution Department, the Mining and Generation Department and the Marketing Department (from November 2009). Graduated with honors from the Electric Engineering Department of the Wrocław University of Technology and MBA studies at European University in Montreux. Also completed several post-graduate studies including a course for English translators in science and technology at the University of Wrocław, a course on management fi-nance and accounting at Wrocław College of Management and Finance, and a course on business communication and PR at the Warsaw School of Economics.

Has extensive professional experience in enterprise management. Former Pre sident of the Management Board of international and domestic companies such as ABB Instal Sp. z o.o., Alstom T&D Protection & Control S.A., Energetyka Sp. z o.o., MPWiK Sp. z o.o. Was a super visory board member and supervisory board chairman of several commercial law companies, private companies and companies with a State Treasury shareholding.

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20 | 21

The PGE Capital Group is one of the

largest producers and providers of

electricity in Poland.

In that it holds its own resources of fuel (lignite)

and produces and distributes energy through its own lines,

PGE guarantees secure and stable deliveries of electricity

to approx. 5 million households, companies and institutions.

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PGE’s Areas of Activity

Conventional Power Plants of the PGE Capital Group:

PGE Elektrownia Bełchatów S.A.

•

PGE Elektrownia Turów S.A.

•

PGE Elektrownia Opole S.A.

•

PGE Zespół Elektrowni Dolna Odra S.A.

•

Combined Heat and Power Plants of the PGE Capital Group:

PGE Elektrociepłownia Gorzów S.A.

•

PGE Elektrociepłownia Kielce S.A.

•

PGE Elektrociepłownia Lublin-Wrotków Sp. z o.o.

•

PGE Elektrociepłownia Rzeszów S.A.

•

PGE Zespół Elektrociepłowni Bydgoszcz S.A.

•

(3 heat and power plants)

Szczecin Power Plant (as part of PGE Zespół

•

Elektrowni Dolna Odra S.A.)

Pomorzany Power Plant (as part of PGE Zespół

•

Elektrowni Dolna Odra S.A.) Energetyka Boruta Sp. z o.o.

•

Conventional Energy

The PGE Capital Group is the leader among the domestic producers of electricity – it has more than a 40% market share. In Conventional Energy, the mining and produc-ing companies operatproduc-ing within the PGE Capital Group include 2 lignite mines, 4 power plants and 10 combined heat and power plants.

In 2009, the mines of the PGE Capital Group mined a total of 43.1 million tons of lignite.

In 2009, the total electricity production of the PGE Capital Group was 53.8 TWh (net), of which 52.7 TWh came from companies in the conventional energy segment. In addi-tion to electricity, the combined heat and power plants and the power plants of the PGE Capital Group produced 22.8 million GJ of heat in this period.

Conventional Energy is PGE’s strategic business line from the standpoint of stability of energy deliveries to distribu-tion group companies. At the same time, Convendistribu-tional Energy is PGE Capital Group’s most profitable business line. In 2009, total sales revenues from that segment were PLN 13,388.9 million, representing growth of approx. 29% compared to 2008.

The operating result plus depreciation (EBITDA) was PLN 5,550.2 million and the operating result (EBIT) was PLN 4,026.3 million. In the corresponding period of 2008, EBITDA was PLN 4,150.7 million while EBIT was PLN 2,650.1 million.

Improvement in financial performance was primarily attributable to growth of wholesale energy prices in Poland.

The mining and generating companies operating within the group include the following:

Lignite Mines of the PGE Capital Group:

PGE KWB Bełchatów S.A.

•

PGE KWB Turów S.A.

•

In 2009, the core business of the PGE Capital Group was organized in five segments:

Conventional Energy, which

•

includes lignite mining and the generation of electricity and heat in conventional sources, Renewable Energy, which

•

includes the production of elec-tricity from renewable sources, Wholesale of electricity

•

and related products, Distribution of electricity,

•

Retail sale of electricity.

• Wholesale trade PLN 465 million Distribution PLN 1,093 million Retail sales PLN 405 million Renewable energy PLN 203 million Total: PLN 7,983 million Other PLN 267 million Conventional energy PLN 5,550 million

Influence exerted by individual lines of business on EBITDA

Source: PGE Polska Grupa Energetyczna S.A. * in-house consumption includes, among other things, energy purchases to offset the balancing difference and consumption of energy by mines and pumped storage plants

PGE Polska Grupa Energetyczna S.A.

and PGE Electra S.A.

Energy balance

64.7 TWh

Energy producers from

the PGE Capital Group

53.8 TWh

Purchases from companies from outside PGE Capital

Sales of the group companies to end users

30.0 TWh

Purchases on foreign markets

2.2 TWh

Purchases on the balancing market

8.0 TWh

Other purchases

0.7 TWh

Sales on the domestic wholesale market

23.2 TWh

Sales on the balancing market

3.8 TWh

Sales on foreign markets

1.8 TWh

Sales to PSE Operator S.A. (to offset

losses)

1.5 TWh

In-house consumption*

4.4 TWh

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Distribution

The distribution companies of the PGE Capital Group deliver electricity via distribution lines to more than five million users. The total length of PGE CG’s lines is 268 thousand kilometers.

The basic task of the PGE Capital Group in distribution is to guarantee high quality deliveries to millions of clients in central, north-eastern, eastern and south-eastern Poland. In addition, the purpose of the distribution companies’ operations is to provide access to the grid for new users and curtail grid losses. In 2009, PGE CG’s capital expenditures on distribution activity totaled PLN 1.0 billion. In 2009, total sales revenues in the Distribution segment were PLN 4,668.7 million compared to PLN 4,756.3 million in 2008. In 2009, the segment’s EBITDA was PLN 1,093.2 million while EBIT was PLN 263.2 million. In the corresponding period of the previous year, EBITDA was PLN 1,044.1 million while EBIT was PLN 229.9 million.

Growth of profits stemmed primarily from higher return on equity resulting from the price list for electricity distribution approved for 2009.

The following eight PGE CG companies are respon-sible for the distribution of electricity to end us-ers. They act as Distribution System Operators on a 120 km2_{area in the eastern part of the country:}

PGE Dystrybucja Białystok Sp. z o.o.

•

PGE Dystrybucja LUBZEL Sp. z o.o.

•

PGE Dystrybucja Łódź Sp. z o.o.

•

PGE Dystrybucja Łódź-Teren S.A.

•

PGE Dystrybucja Rzeszów Sp. z o.o.

•

PGE Dystrybucja Warszawa-Teren Sp. z o.o.

•

PGE Dystrybucja Zamość Sp. z o.o.

•

PGE Zakłady Energetyczne Okręgu

Radomsko-•

-Kieleckiego Dystrybucja Sp. z o.o.

Wholesale Trade

The PGE Capital Group is the only utility in Poland whose energy output exceeds the group’s end users’ demand. Therefore PGE Electra S.A. sells energy to entities from the PGE Capital Group as well to other utilities operating on the Polish market. Selected transactions in the domestic wholesale trade seg-ment are also carried out through PGE Polska Grupa Energetyczna S.A. On foreign markets, PGE Electra S.A. holds shares in ELECTRA Deutschland GmbH.

PGE is the leader in the wholesale electric-ity trade in Poland. Within the PGE Capital Group, the Wholesale Trade area is managed and coordinated by PGE Electra S.A. In 2009, total electricity sales on the wholesale market for the PGE Capital Group were 23.2 TWh.

In 2009, total sales revenues from the Wholesale Trade segment were PLN 12,723.0 million, repre-senting growth of approx. 18% compared to 2008. In 2009, the segment’s EBITDA was PLN 465.0 mil-lion while EBIT was PLN 439.4 milmil-lion. In the cor-responding period of the previous year, EBITDA was PLN 122.6 million while EBIT was PLN 74.5 million. Higher EBIT value in 2009 in the Wholesale Trade segment resulted mostly from the higher result on electricity trading recorded by PGE and the higher result recorded by PGE Electra S.A. stemming above all from increased sales of CO₂ emissions rights in 2009.

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26 | 27

Retail Sales

The Retail Sales companies of the PGE Capital Group provide top quality services to more than five million electricity users. In 2009, they sold a total of 30.0 TWh of electricity to end users. In 2009, total sales revenues from the Retail Sales segment were PLN 12,342.7 million, representing growth of approx. 15% compared to 2008. In 2009, the segment’s EBITDA was PLN 404.7 million while EBIT was PLN 397.7 million. In the corresponding period of the previous year, EBITDA was PLN 83.1 million while EBIT was PLN 76.7 million.

Growth of EBIT in the Retail Sales segment by approx. 419% in 2009 as compared to 2008 resulted mostly

from increased revenues on electricity sales to busi-ness clients and average electricity rate increases. Within the PGE Capital Group, the following eight com-panies are responsible for the retail sales of electricity:

PGE Lubelskie Zakłady Energetyczne S.A.

•

PGE Łódzki Zakład Energetyczny S.A.

•

PGE Obrót S.A.

•

PGE Zakład Energetyczny Białystok S.A.

•

PGE Zakład Energetyczny Łódź-Teren Obrót Sp. z o.o.

•

PGE Zakład Energetyczny Warszawa-Teren S.A.

•

PGE Zakłady Energetyczne Okręgu

•

Radomsko-Kieleckiego S.A.

PGE Zamojska Korporacja Energetyczna S.A.

•

Renewable Energy

In 2009, the electricity produced from renewable energy sources by the PGE Capital Group repre-sented a little more than 1% of the total energy produced by the PGE companies during that period. Despite that, the PGE Capital Group is one of the leading “green energy” producers in Poland. Within the Capital Group, investments in renew-able energy development are conducted by PGE Energia Odnawialna S.A. The company is also responsible for developing 29 hydro power plants (of the 36 functioning within the group) as well as the wind power plant in Kamieńsk. The Company’s mission is to produce and deliver electricity us-ing environmentally-friendly technologies utilizus-ing renewable sources of primary energy and biogas. In 2009, total sales revenues from the Renewable Energy segment were PLN 547.2 million compared to

PLN 557.8 million in 2008. In 2009, the segment’s EBITDA was PLN 203.0 million while EBIT was PLN 77.6 million. In the corresponding period of 2008, EBITDA was PLN 231.9 million while EBIT was PLN 135.7 million. Deterioration of the segment’s finan-cial results in 2009 as compared to 2008 resulted most-ly from the fact that PGE Energia Odnawialna S.A. wrote off the revaluation charges of receivables with business partners in the amount of PLN 22.5 million under other operating expenses, as well as the lower volume of sales of proprietary rights (green certificates). The Renewable Energy segment is very important in PGE’s investment plans. In 2009, the capital ex-penditures in the Renewable Energy segment were PLN 91.6 million compared to PLN 138.7 million in 2008. In the periods in question, the largest amounts of capital were invested in modernization and restoration of assets.

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28 | 29

_{Factors affecting}

financial performance

The PGE Capital Group is the leader

in the Polish electricity sector

and one of the largest utilities in

Central and Eastern Europe.

In 2009, the share of the PGE Capital Group in the Polish electricity

generation market measured by net electricity generation surpassed

40%. The Group is also the leader in electricity distribution, retail sales

and wholesale trade markets.

In addition, PGE is the only utility in Poland with an output surplus

over retail electricity sales.

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30 | 31

Factors affecting financial performance

During the twelve months of 2009, PGE recorded a decline in demand for the first time in 4 years. However, it was offset by higher prices and proceeds on compensation for the termination of long-term contracts. As a result of this situation, PGE’s rev-enues increased year-to-year by more than 11%.

Termination of Long-Term

Contracts (LTC)

In connection with the termination of LTC pursuant to the Act on the Principles for Covering the Costs Incurred by Generators in Connection with the Early Termination of Long-term Agreements for the Sale of Electric Power and Energy (the “LTC Act”), the generators who had previously been parties to these contracts acquired the right to receive compensation to cover sunk costs (producer’s expenditures resulting from outlays incurred by that producer up to 1 May 2004 for electricity

gen-eration assets, which were not covered by revenues received from the sale of electricity generation, power reserves and system services on the competi-tive market after early termination of a long-term contract). LTC limits the total amount of funds that may be paid out to all producers to cover sunk costs discounted as at 1 January 2007, to PLN 11.6 billion.

Prices of Electricity

In 2009, the Retail Sales Companies of the PGE Group continued to submit for approval price lists used for price list group G users (households). With respect to other users, in November 2007 the President of the Energy Regulatory Office decided that the retail sales market is a competitive market and he relieved utilities of the obligation to submit such price lists for approval. In 2009, the average rate of electricity fees for households was PLN 235.94/MWh, which

2004 2005 2006 2007 2008 8 6 4 2 0 GDP Growth

(%) for electricity (indexed)Growth of demand 115 110 105 100 95 90

The decline of demand for electricity was lower in Poland than in other EU member states, and the faster rate of GDP growth will contribute to restoration of demand

Poland EU 27 Poland EU 27 Source: Global Insight

5.3% 2.4% 3.6% 2.1% 6.3% 3.3% 6.8% 2.9% 5.0% 0.7%

Macroeconomic Situation

The PGE Capital Group focuses its activities primarily on Poland, therefore it is dependent on domestic macroeconomic trends.

There is a positive correlation between the growth of demand for electricity and economic growth, therefore the country’s macroeconomic situation is directly reflected in the financial performance of the PGE Capital Group. In 2009, the global recession and lower demand for products of energy-consuming branches of the Polish economy resulted in lower demand for electricity in the National Power System during that period by approx. 4.0% compared to 2008.

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32 | 33

represents growth of approx. 23% compared to the average rates prevailing from May 2008.

The prices of electricity on the domestic and international market exert a considerable influence on the results of PGE Polska Grupa Energetyczna S.A. and the overall PGE Group.

Domestic Market

In 2009, trade in electricity on the wholesale market, as in previous years, primarily entailed bilateral con tracts and futures on the TFS and GFS broke rage platforms. Despite limited demand for electricity in Poland in 2009 as compared to the previous year, the trading volume on the Polish Power Exchange (“TGE”) and the Electricity Trade Platform (“POEE”) in short-term contracts increased over previous years. Total trading volume in SPOT transactions in 2009 was 3.07 TWh for TGE and 4.36 TWh for POEE, which represents growth of trading volume by approx. 45% on TGE and 24% on POEE.

Compared to 2008, SPOT prices in 2009 were lower, which was partly attributable to transfer of the obliga-tion to pay excise tax from producers to entities selling electricity to end users.

As of 1 January 2009, only one settlement price has been in effect on the balancing market. Unification of the settlement price and establish-ment of balancing groups contributed to changing the nature and volumes recorded on the balanc-ing market in comparison with 2008. In 2009 the trading volume on the balancing market consider-ably decreased falling to 3.6 TWh compared to 4.8 TWh in the previous year. In contrast to the previous year, in 2009 energy sales by participants began to dominate the balancing market.

Just as in 2008, the average weekly settlement prices of deviations did not differ consider-ably from market prices (i.e. SPOT prices).

International Market

Compared with 2008, SPOT prices in Poland in 2009 (on the Power Exchange) and on neighboring markets – EEX (Germany), OTE (Czech Republic) and NordPool (Scandinavian countries) – fell considerably. Despite fundamental differences between the markets, the price trends were similar. In 2009, daily price volatil-ity was also considerably smaller than in the past.

Tariffs

PGE Group companies earn part of their revenues on the basis of tariffs approved by the President of the Energy Regulatory Office: tariffs for selling electricity to households (group G), tariffs of distribu-tion companies and tariffs for heat. The prevailing tariffs for electricity, distribution services and heat subject to the Energy Regulatory Office President’s approval do not fully cover the costs incurred by the group companies. Currently, the level of costs considered by the President of the Energy Regulatory Office to be justified for calculation of tariffs for the PGE Capital Group companies is lower than the costs actually incurred by those companies.

Prices of Fuel

In the twelve months of 2009, the costs to purchase the primary fuels from suppliers from outside the group were PLN 2,536 million and were approx. 28% higher than in 2008. In 2009, approx. 67% of electricity was produced from lignite coming from mines in the group, whose cost is less susceptible to price volatility than fuel from external sources. However, certain factors such as total quantity of mined lignite, costs of removing the overburden above the lignite layer, payroll expenses and environmental fees have an influence on the costs of mining incurred by the group and hence the costs of producing electricity by the PGE Capital Group.

Allocation of CO2 emissions rights

CO₂ emissions in 2009 Average annual allocation according to NAP II

PGE Elektrownia Bełchatów S.A. 29,473,070 26,937,155

PGE Elektrownia Turów S.A. 11,624,371 11,158,636

PGE Elektrownia Opole S.A. 7,413,193 6,475,340

PGE Zespół Elektrowni Dolna Odra S.A. 6,078,793 5,680,137 PGE Zespół Elektrociepłowni Bydgoszcz S.A. 1,070,373 1,155,252

PGE Elektrociepłownia Gorzów S.A. 475,753 476,690

PGE Elektrociepłownia Lublin-Wrotków Sp. z o.o. 493,484 570,840

PGE Elektrociepłownia Rzeszów S.A. 303,257 303,155

PGE Elektrociepłownia Kielce S.A. 172,482 189,357

Energetyka Boruta Sp. z o.o. 84,832 104,988

PEC Gorzów Sp. z o.o. 0 2,615

TOTAL 57,189,608 53,054,165

National Allocation Plan (NAP II)

In consideration of the Community trading scheme of greenhouse gas emission rights, the National Allocation Plan should be submitted to the European Commission. Since in both of the previous settlement periods the European Commission limited the quantity of CO₂ emissions rights granted to Poland compared to the quantities requested in NAP, the granted limits constitute a serious limitation for the energy sector. For the settlement period encompassing years 2008-2012, Poland requested a limit of 284 million tons of CO₂. Pursuant to the European Commission’s decision, Poland was granted an average annual limit of 208.5 million tons. According to the current NAP II, professional power plants have emissions rights for only 110.8 million tons of CO₂, while its emissions under normal conditions are estimated at approx. 120 million tons.

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34 | 35

10 20 30 40 50 TWh

Production of electricity in the PGE Capital Group (TWh)

35.9 38.2 13.1 13.2 1.5 1.6 2.0 2.0 0.6 0.5 0.6 0.5 0.1 0.1 Lignite-fired power plants Coal-fired power plants Coal-fired heat and power plants

Gas-fired heat and power plants Pumped storage plants Hydro power plants Wind power plants

Lignite-fired power plants Coal-fired power plants Coal-fired heat and power plants

Gas-fired heat and power plants Pumped storage plants Hydro power plants Wind power plants

53.8 56.1 Total production of electricity 2009 2008 -10 % 10 20

Change in electricity production in the PGE CG in 2009 as compared to the previous year (%)

0% 0% 20% 20% -1% -6% -4% -6% Total electricity

Production of electricity in the

PGE Capital Group

In 2009, the electricity production of the PGE Capital Group was 53.8 TWh (net) as compared to 56.1 TWh in 2008. Decrease in electricity production occurred in lignite-fired power plants, coal-fired power plants and coal-fired heat and power plants. The situation was attributed mostly to the increase in the number of reductions demanded by PSE Operator S.A. associa ted with lower demand for electricity in the National Power System, renovation of unit no. 4 of PGE Elektrownia Bełchatów S.A., which involved modernization and restoration, and failure of unit no. 4 of PGE Elektro wnia Turów S.A.

Production and sale of heat in the

PGE Capital Group

In 2009, the net heat production of the PGE Capital Group was 22.8 million GJ and it was higher by ap-prox. 1% as compared to 2008. On the other hand, the total sale of heat, after excluding sales to the PGE Capital Group companies, was 22.8 million GJ and it was higher by approx. 1% as compared to 2008. In 2009 and 2008, PEC Gorzów Sp. z o.o. and PEC Gryfino Sp. z o.o. purchased heat for the purpose of further sale from PGE Elektrociepłownia Gorzów S.A. and PGE Zespół Elektrowni Dolna Odra S.A. In 2009, the total volume of heat purchased by those com-panies within the PGE Capital Group was 1.4 mil-lion GJ as compared to 1.3 milmil-lion GJ in 2008.

Electricity purchases from outside

the PGE Capital Group

In 2009, the group companies purchased 10.9 TWh of en er gy from outside the PGE Capital Group (3.4 TWh less than in 2008). The decrease in the volume of the purchased electricity as compared to 2008 resulted mostly from discontinuation of energy purchases from producers from outside the PGE Capital Group in connection with the termina-tion of Long-Term Contracts (LTC) as of the end of March 2008. In 2009, foreign purchases decreased by approx. 46% as compared to 2008 mostly due to lower purchases from Sweden and Ukraine through the Zamość-Dobrotwór line and also smaller elec-tricity purchases on the Ger man market by Electra Deutschland GmbH. On the other hand, in 2009 electricity purchases on the balancing market in-creased mostly as a result of higher energy purchases by Bełchatów, Turów and Opole power plants.

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36 | 37

10 20 30 40 50 60 70 TWh

Electricity sales outside of the PGE Capital Group (TWh)

30.0 30.6 60.3 66.5 23.2 28.1 1.8 2.0 3.8 5.8 1.5 0.0 4.4 3.9 64.7 70.4

Sales to the end users

Total electricity sales

Sales on the wholesale market Sales to the foreign clients Sales on the balancing market Sales to PSE Operator (to offset losses) In-house consumption

Total electricity distribution

Sales to the end users

Total electricity sales

Sales on the wholesale market Sales to the foreign clients Sales on the balancing market Sales to PSE Operator (to offset losses) In-house consumption

Total electricity distribution

2009 2008

-30 -20 -10 % 10 20%

Change in electricity sales outside of the PGE Capital Group in 2009 as compared to the previous year (%)

-10% -34% 0% 13% -8% -17% -2% -9%

Electricity sales

in the PGE Capital Group

During the twelve months of 2009, the group sold 60.3 TWh of electricity. This represents a 9% decrease as compared to the sales achieved in the same period of 2008 (66.5 TWh). Changes in the sales structure re-sulted mostly from discontinuation of energy purchases from producers from outside of the PGE Capital Group, mostly in connection with termination of Long-Term Contracts as of the end of March 2008, and the impact of the deteriorating economic situation resulting in, among other things, decrease in demand for electric-ity. The decrease in energy sales to end users from 30.6 TWh in 2008 to 30.0 TWh in 2009 resulted above all from the decline in the demand for electricity.

Distribution of electricity

The price list prevailing in 2009 was the second independent price list compiled by the distribu-tion companies since the spin-off of distribudistribu-tion activity from the structures of utilities. The rates for distribution services approved by the President of the Energy Regulatory Office for 2009 resulted in changes of average payments made by clients under individual price list groups as compared to 2008:

price list group A – decrease by 0.3%,

•

price list group B – increase by 3.5%,

•

price list group C+R – increase by 1.3%,

•

price list group G – decrease by 2.4%.

•

The average price of energy distribution services compared to those in effect in 2008 i.e. before the price list change, increased by approx. 2.4%.

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38 | 39

Strategic projects

In order to strengthen its position in

Poland as well as on the European market,

PGE is carrying out a comprehensive

development strategy.

The most important projects currently carried out

by PGE include the following:

• PGE Capital Group Consolidation Program to enhance

the group’s operational and management efficiency,

• investment program which is presently the largest

one in the Polish energy industry,

• construction of two nuclear power plants with

an envisaged power of 3 thousand MW each.

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40 | 41

Strategic projects

zational consolidation of the companies in the following areas of activity: Conventional Energy, Renewable Energy, Distribution, Retail Sales. Thus individual activity areas will take advantage of the many years of work and experi-ence of the companies comprising them. In addition, consolidation activities will make it possible to introduce consolidated management standards in companies and limit unnecessary costs thus enhancing the operational efficiency of the entire PGE Capital Group.

Due to the current profile of PGE’s business activity, con-solidation changes will be made mostly in conventional energy (power plants, combined heat and power plants and mines), distribution and retail sales, and to smaller extent in renewable energy.

Thanks to the Consolidation Program, the group’s current scattered organizational structure will be leveled. This will occur as a result of the merger through acquisition of the companies with the same lines of business, which right now are separate entities. As part of the individual busi-ness lines, the specified acquiring company will conduct consolidation and after merger the acquired companies will become branches. Pursuant to Art. 3 of the Labor Code, the established branches will retain their employer status to ensure that employees retain their current entitlements. In 2009, the following companies were designated as consolidating companies in the individual areas of activity:

Conventional Energy: PGE Elektrownia Bełchatów S.A.,

•

Retail Sales: PGE Obrót S.A. with its registered office

•

in Rzeszów (formerly PGE Rzeszowski Zakład Ener ge-tyczny S.A.),

Distribution: PGE Dystrybucja S.A. with its registered

•

office in Lublin.

Why should mergers be performed?

The Consolidation Program is a complex process consisting of many stages. Therefore in addition to economic issues, the decision to commence group integration was influenced by The PGE Capital Group has been operating in its current

shape since May 2007. The group’s greatest competitive advantage is its vertical integration and presence in al most the entire added value chain of energy production. At the same time, the current structure, which is com-prised of a few dozen largely autonomous companies, makes it difficult to manage the group and prolongs decision-making processes. Therefore, in order to fully take advantage of the chances afforded by the absence of competition issues among its companies and ensure the possibility of cooperation within the precisely specialized activity areas of PGE, in 2009 the Management Board of PGE Polska Grupa Energetyczna S.A. decided to consolidate the PGE Capital Group. As a result of consolidation, 4 sub-sidiaries of PGE Polska Grupa Ener getyczna S.A. (in addition to PGE Electra S.A. and PGE Energia Jądrowa S.A.) will be established in the following areas:

conventional energy, • renewable energy, • distribution, • retail sales. •

The Consolidation Program is, in addition to the in-vestment program and the development of Poland’s nuclear energy, one of the most important strategic activities of PGE Polska Grupa Energetyczna S.A. After consolidating the aforementioned areas, the merger of PGE Polska Grupa Energetyczna S.A. and PGE Electra S.A., whose business line includes wholesale trade, is planned.

Assumptions for the Consolidation

Program

The Consolidation Program’s objective is to attain a strong market and financial position, which will ensure, among other things, the necessary further development of the PGE Capital Group resulting from the legal and

organi-Consolidation Program for building

competitive advantage

The PGE Capital Group Consolidation Program is one of the most important elements of the strategy, announced by the Management Board, for building an integrated company which will cover the complete chain of energy processes. As a result of consolidation activities, the PGE Capital Group’s organizational structure will be simplified and tidied up, to achieve measurable benefits in the future.

several additional benefits resulting from its performance. These benefits may be divided into a few groups:

Technical and operational

Improvement of the group’s management efficiency,

•

Streamlining and accelerating decision-making

•

processes,

Increasing the freedom of operation within specialized

•

lines of business,

Better utilization of central functions (integration of IT

•

systems, single brand),

Utilization of complementariness of resources and skills

•

(knowledge exchange),

Streamlining individual production processes (technical

•

integration).

Market and marketing

Increase of PGE’s value in the context of planned

•

privatization,

Improvement of competitive position,

•

Strengthening of the negotiation position in acquisition

•

projects,

Building the position of a strong partner in development

•

projects (e.g. nuclear energy).

Financial

Optimization of financial flows in the PGE Capital Group,

•

Increase of cost and investment efficiency using

econo-•

mies of scale,

Reduction of operating expenses (cost synergies,

econo-•

mies of scale),

Reduction of cost of capital.

•

According to plans, the Consolidation Program will not result in any changes to current employee entitlements. To this end, social consultations are being carried out in all the companies involved in the process. Pursuant to the Act on Informing and Consulting Employees of 7 April 2006, consultations are being carried out with Employee Coun-cils. Their basic objective is to conclude detailed agree-ments (guarantee agreeagree-ments) related to consolidation.

Concept for managing non-energy

assets in the PGE Capital Group

The following programs are simultaneously being carried out in the PGE Capital Group:

Consolidation Program i.e. consolidation of

•

companies in the group’s key operational areas, Non-Core Divestment Program i.e. a project

•

to sell off non-energy assets.

These programs are being implemented independently and they aim at simplifying the structure of capital links in the PGE Capital Group, optimizing management stan-dards and generating added value for the PGE Capital Group.

The project related to divestment and optimization of management of non-energy assets pertains to companies in which the group holds shares but which are not related directly to its core business. Some of the assets involving a minority stake without any social and business limitations were designated to be sold directly e.g. shares in banks and telecommunication and ICT companies.

A different group includes assets with business and social relations will be integrated in the first phase to grow their value, including enhancement of efficient management structures and unification of standards of services provided to employees and entities in the PGE CG and aiming at providing specialized services outside the group on market conditions. In the second phase, the detailed methods of selling them will be approved.

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