Letter from the
Management Board President

Dear Stakeholders,

On behalf of the Management Board of TAURON Polska Energia S.A., I hereby convey the TAURON Group’s Annual Report depicting the most important events and financial results in 2015.

For the Polish capital market and the energy industry, the past year was a period of uncertainty and extensive change with numerous concepts presented on restructuring the hard coal mining sector. Equity market investment sentiment became significantly softer – the Warsaw Stock Exchange’s key indices plummeted and the energy sector saw approximately 30% of its capitalisation evaporate. However, it is worth mentioning that European energy companies also operated in a similar turbulent environment, with some of them recording long-term historical share price lows. It is undeniable that the power industry is facing huge challenges of a structural nature, arising, in particular, from the increasingly restrictive climate policy that, in turn, translates into equity market sentiment.

In 2015 in Poland, we observed higher electricity demand (up 1.7% over 2014) and electricity generation (up 3.3%). The growth in energy generated by wind farms was the highest, up approximately 40%. In August, as a result of persistently extremely high temperatures and problems with cooling power generation units, the national power system suffered deficits in available capacity curtailing clients’ energy offtake. This event confirmed the sector’s commonly-held opinion that new effective generation units and power grid modernisation are necessary.

The stable financial results we generated in this challenging regulatory and market environment merit attention. The TAURON Group’s sales revenues in 2015 totalled roughly PLN 18.4 billion with an EBITDA of PLN 3.5. billion. Nevertheless, the Company generated a net loss on impairments for its participations in generation segment companies.

The high volume of distributed energy, the generation segment’s effective trade strategy and savings gained from the efficiency improvement programme made a positive contribution. In turn, impairments, the costs of handling the deficit of CO2 emission allowances and the dire situation on the hard coal market strapped the financial results.

I would also like to emphasise that we spent nearly PLN 4.2 billion on capital expenditures in 2015, including our largest investment, namely the construction of a coal-fired unit with a capacity of 910 MW at Elektrownia Jaworzno III. We are also completing the construction of a high efficiency cogeneration unit at Zakład Wytwarzania in Tychy. Traditionally, our capital expenditures focused on distribution grid modernisation and connection of new clients. In December of last year we also acquired a part of KWK Brzeszcze to augment the Group’s fuel security and secure new high quality coal resources.

To underwrite the TAURON Group’s investment programme we acquired bank financing in the form of corporate bonds worth over PLN 6 billion. Importantly, the new programme raises the permissible net debt/EBITDA ratio to 3.5x, thereby enhancing the Group’s financial security during its capital expenditures peak lasting from 2016 to 2018.

In last year’s part of the efficient improvement programme spanning 2013 – 2015, we continued to improve efficiency and slash expenses. In the last three years, the TAURON Group has generated overall savings of PLN 1.2 billion. I would like to assure you that one of the priorities of the Management Board I have the pleasure of leading is to continue making efficiency gains by setting even more ambitious goals.

In 2016 we will mainly focus on updating our business strategy. This is extremely important, particularly, when the challenging environment is taken into consideration, inter alia, EU climate policy, the legal and regulatory environment and the low level of wholesale energy prices. We will review all our ongoing and planned investment projects in detail. Our goal is to define the optimum development path to reflect Poland’s energy policy while primarily generating benefits for the company and its shareholders. We will also focus on finalising the purchase of a part of the Brzeszcze mine, fully integrating it in the mining segment and implementing best practices there, just as TAURON has acted in its Janina and Sobieski coal mines.

On behalf of the Management Board, I would like to express our gratitude to our shareholders, the Supervisory Board and our Employees for their commitment and work to grow the TAURON Group’s value.

 

Respectfully,

Remigiusz Nowakowski

President of the Management Board

TAURON Polska Energia S.A.