Tauron Polska Energia S.A.

Annual Report • Dec 31, 2018

3 April 2019

TAURON.PL

Letter of the President of the Management Board of TAURON Polska Energia S.A.

Ladies and Gentlemen,

On behalf of the Management Board of TAURON Polska Energia S.A. I have the pleasure to introduce to you the Annual Report of TAURON Polska Energia S.A. for 2018 that presents the financial and operating results, as well as the highlights of last year.

To my satisfaction I may say that TAURON is taking advantage of the opportunities presented by the strong growth of the Polish economy, with Poland's GDP advancing at a 5 percent annual rate in 2018, in an optimum manner. This was reflected in good and stable financial results. Last year TAURON reported an increase of the volume of electricity distributed, while the number of customers connected to our distribution grid went up by 65 thousand. We also maintained our market share in a highly competitive electricity supply segment.

An extremely important event for the entire power sector in 2018 was the conducting of the first auctions as part of the so-called capacity market, whose goal is to ensure the security of electricity supply for the customers. As part of that mechanism electricity generators will be receiving remuneration for the readiness to deliver electricity to the grid starting from 2021. The auctions will be conducted until 2025. The funds from the capacity market will represent an impulse for making investment and modernization decisions, including the decisions related to the obligation to adapt the generating units to the stringent environmental requirements by 2021.

I would like to highlight that TAURON Group has successfully participated in three capacity market main auctions as a result of which we have concluded capacity market contracts with the delivery in 2021–2023. TAURON Group's total revenue from the auctions completed, calculated at the closing prices, will reach more than 4.8 billion PLN by 2037.

When discussing the financial results of TAURON Polska Energia the achievement of a more than 11 percent sales revenue growth should be noted. The level of the net profit was significantly impacted by the booking of the write-downs related to the loss of the carrying amount of the stocks and shares, primarily in the Generation segment.

The fact of implementing a number of initiatives that guarantee funds required for the continued sustainable growth of the Capital Group is worth noting. We are continuing our long term cooperation with Bank Gospodarstwa Krajowego. In December we signed a loan agreement with this institution worth 1 billion PLN. Furthermore, we signed agreements with another of our strategic partners – the European Investment Bank, as a result of which we obtained additional hybrid financing worth 750 million PLN. As a result of these actions, we had access to funds in the region of 5.8 billion PLN as of the end of 2018.

Similar as in the previous years, also in 2018 we incurred significant capital expenditures, primarily spent on upgrading the distribution and generation infrastructure, while at the same time making sure that we maintained the leverage ratio at a level that guaranteed stability and financial security.

Last year the Group spent 3.7 billion PLN on investments, with the largest portion of the funding stream allocated to the Distribution and Generation segments. In the Distribution segment the capital expenditures of more than 2 billion PLN were spent primarily on upgrading the distribution grid and installing new grid connections.

On the other hand, the capital expenditures in the Generation segment came in at 1.3 billion PLN, which was mainly related to the implementation of our largest project – the construction of the 910 MW power generation unit in Jaworzno. We are planning to commission this project, with its budget of more than 6 billion PLN, in the fourth quarter of this year. This is our flagship investment project that will cover the demand for electricity of 2.5 million households. The new unit will be adapted to comply with the stringent natural environment protection standards, while reducing the CO2 emission by one third, as compared to the currently operated generating units. It is noteworthy that last year we effectively diversified the project's financing sources – the Polish Development Fund (PFR) joined the Nowe Jaworzno Grupa TAURON company and is ultimately to invest up to 880 million PLN in this project.

TAURON Group sets ambitious goals for itself and is working on new solutions. We are aware of the dynamic changes occurring in the dispersed (distributed) electricity generation technologies, as well as in customer behaviors. This is why one of our priorities involves developing the so-called power industry of tomorrow, among others by investing in innovations. Jointly with PFR we will allocate 200 million PLN to develop our businesses of the future. We have launched scouting, as well as research and development programs, and we have established, in cooperation with PFR, a corporate venture capital fund EEC Magenta – the first project of this type in Poland. The fund's assets are managed by a professional team responsible for investing the capital in innovative enterprises operating in the power sector.

In 2018 we were developing initiatives aimed at expanding TAURON Group's innovations. As part of the operational program "Digital Poland" we are building a more than 6 thousand km long fiber optic network, and we installed twenty fast electric vehicles chargers as part of promoting electromobility.

It is worth mentioning that our activities in the innovations area are appreciated by the experts. We were awarded the Wprost Weekly Innovators 2018 prize in the power sector companies category and the Super Business Golden Laurel Wreath for supporting start-up companies.

TAURON is also regularly awarded prizes in The Best Annual Report competition for the best annual report. We maintain the high quality of reporting to meet the expectations of our customers, shareholders and the other stakeholders. In 2018 TAURON was awarded, for the second time in a row, The Best of The Best prize and the first special prize for the best integrated report. It also gives me great pleasure to mention that last year we were awarded – for the third time already – the first prize in the survey of investor relations among the WIG30 index companies organized by the Stock Market and Investors Paper "Parkiet" and the Polish Chamber of Brokerage Houses.

I am aware of many challenges facing TAURON Group, however I am looking at its growth prospects with optimism. I believe that as a result of the Group's comprehensive transformation, that has been successively implemented for a few years now, we are appropriately prepared to react flexibly to the changes taking place in its environment. We have also achieved appropriate organizational maturity. I believe that we will be able to skillfully use the competences and experience acquired so far to steadfastly expand the key segments of our operations.

I am also convinced that the business projects and the social dialogue initiatives underway will contribute to developing TAURON's long term relationships with all stakeholder groups.

On behalf of the Management Board of TAURON Polska Energia S.A. I would like to cordially thank our stakeholders, especially the Members of the Supervisory Board and the Personnel, for their commitment to the work aimed at developing and building TAURON Group's value.

Yours respectfully,

Filip Grzegorczyk President of the Management Board of TAURON Polska Energia S.A.

Katowice, March 29, 2019

in PLN thou.		in EUR thou.
SELECTED FINANCIAL DATA	2018 period from 01.01.2018 to 31.12.2018	2017 period from 01.01.2017 to 31.12.2017	2018 period from 01.01.2018 to 31.12.2018	2017 period from 01.01.2017 to 31.12.2017
Selected stand-alone financial data of TAURON Polska Energia S.A.
Revenues on sales	8 618 642	7 792 025	2 019 884	1 835 707
Operating profit (loss)	22 659	262 788	5 310	61 910
Profit (loss) before tax	(1 732 283)	919 565	(405 982)	216 638
Net profit (loss)	(1 709 853)	854 351	(400 725)	201 275
Other total income	(19 666)	(6 713)	(4 609)	(1 582)
Total aggregate income	(1 729 519)	847 638	(405 334)	199 693
Profit (loss) per share (in PLN/EUR) (basic and diluted)	(0.98)	0.49	(0.23)	0.12
Weighted average number of shares (in pcs) (basic and diluted)	1 752 549 394	1 752 549 394	1 752 549 394	1 752 549 394
Net cash flows from operating activity	(125 146)	246 027	(29 329)	57 961
Net cash flows from investment activity	(720 432)	(1 353 288)	(168 842)	(318 818)
Net cash flows from financial activity	844 776	593 470	197 984	139 814
Increase/(decrease) in net cash and equivalents	(802)	(513 791)	(188)	(121 043)
	Status as at 31.12.2018	Status as at 31.12.2017 (adjusted figures)	Status as at 31.12.2018	Status as at 31.12.2017 (adjusted figures)
Fixed assets	27 166 500	27 371 684	6 317 791	6 562 537
Current assets	2 346 490	2 949 690	545 695	707 207
Total Assets	29 512 990	30 321 374	6 863 486	7 269 744
Share capital	8 762 747	8 762 747	2 037 848	2 100 925
Equity	15 259 836	17 377 906	3 548 799	4 166 465
Long-term liabilities	8 533 790	9 530 787	1 984 602	2 285 067
Short-term liabilities	5 719 364	3 412 681	1 330 085	818 212
Total liabilities	14 253 154	12 943 468	3 314 687	3 103 279

The above financial data were converted into EUR, for the 2018 and 2017, according to the following principles:

–

• individual items of the statement of financial standing according to the average NBP exchange rate announced on 31 December 2018 – PLN/EUR 4.3 (as at 29 December 2017 – PLN/EUR 4.1709) –
• individual items of the statement of comprehensive income and the statement of cash flows according to the exchange rate representing the arithmetic means of average NBP exchange rates announced on the last day of each month of the financial period from 01 January 2018 to 31 December 2018 – PLN/EUR 4.2669 (for the period from 1 January 2017 to 31 December 2017 – PLN/EUR 4.2447).

INDEPENDENT AUDITOR'S

REPORT ON THE AUDIT

of the annual financial statements of TAURON Polska Energia S.A. for the year 2018

TAURON.PL

Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Rondo ONZ 1 00-124 Warszawa

+48 (0) 22 557 70 00 +48 (0) 22 557 70 01 warszawa@pl.ey.com www.ey.com/pl

SPRAWOZDANIE NIEZALEŻNEGO BIEGŁEGO REWIDENTA Z BADANIA

Dla Walnego Zgromadzenia oraz dla Rady Nadzorczej TAURON Polska Energia S.A.

Sprawozdanie z badania rocznego sprawozdania finansowego

Opinia

Przeprowadziliśmy badanie rocznego sprawozdania finansowego TAURON Polska Energia S.A ("Spółka") z siedzibą w z siedzibą w Katowicach, ul. Ks. Piotra Ściegiennego 3, na które składają się: sprawozdanie z całkowitych dochodów za okres od dnia 1 stycznia 2018 roku do dnia 31 grudnia 2018 roku, sprawozdanie z sytuacji finansowej na dzień 31 grudnia 2018 roku, sprawozdanie ze zmian w kapitale własnym, sprawozdanie z przepływów pieniężnych za okres od dnia 1 stycznia 2018 roku do dnia 31 grudnia 2018 roku oraz informacja dodatkowa zawierająca opis przyjętych zasad rachunkowości i noty objaśniające ("sprawozdanie finansowe").

Naszym zdaniem, sprawozdanie finansowe:

• przedstawia rzetelny i jasny obraz sytuacji majątkowej i finansowej Spółki na dzień 31 grudnia 2018 roku oraz jej wyniku finansowego i przepływów pieniężnych za okres od dnia 1 stycznia 2018 roku do dnia 31 grudnia 2018 roku zgodnie z mającymi zastosowanie Międzynarodowymi Standardami Sprawozdawczości Finansowej zatwierdzonymi przez Unię Europejską oraz przyjętymi zasadami (polityką) rachunkowości,
• jest zgodne co do formy i treści z obowiązującymi Spółkę przepisami prawa oraz jej statutem,
• zostało sporządzone na podstawie prawidłowo prowadzonych ksiąg rachunkowych zgodnie z przepisami rozdziału 2 ustawy z dnia 29 września 1994 roku o rachunkowości ("ustawa o rachunkowości").

Niniejsza opinia jest spójna ze sprawozdaniem dodatkowym dla Komitetu Audytu, które wydaliśmy dnia 2 kwietnia 2019 roku.

ERNST & YOUNG W POLSCE JEST CZŁONKIEM GLOBALNEJ PRAKTYKI ERNST & YOUNG

Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k.

Sąd Rejonowy dla m.st. Warszawy w Warszawie, XII Wydział Gospodarczy Krajowego Rejestru Sądowego, KRS: 0000481039, NIP: 526-020-79-76

Podstawa opinii

Nasze badanie przeprowadziliśmy zgodnie z Międzynarodowymi Standardami Badania w wersji przyjętej jako Krajowe Standardy Badania przez Krajową Radę Biegłych Rewidentów ("KSB") oraz stosownie do ustawy z dnia 11 maja 2017 roku o biegłych rewidentach, firmach audytorskich oraz nadzorze publicznym ("ustawa o biegłych rewidentach") oraz Rozporządzenia Parlamentu Europejskiego i Rady (UE) nr 537/2014 z dnia 16 kwietnia 2014 roku w sprawie szczegółowych wymogów dotyczących ustawowych badań sprawozdań finansowych jednostek interesu publicznego, uchylające decyzję Komisji 2005/909/WE ("rozporządzenie UE"). Nasza odpowiedzialność zgodnie z tymi standardami została dalej opisana w sekcji naszego sprawozdania "Odpowiedzialność biegłego rewidenta za badanie sprawozdania finansowego".

Jesteśmy niezależni od Spółki zgodnie z Kodeksem etyki zawodowych księgowych Międzynarodowej Federacji Księgowych ("Kodeks IFAC") przyjętym uchwałami Krajowej Rady Biegłych Rewidentów oraz z innymi wymogami etycznymi, które mają zastosowanie do badania sprawozdań finansowych w Polsce. Wypełniliśmy nasze inne obowiązki etyczne zgodnie z tymi wymogami i Kodeksem IFAC. W trakcie przeprowadzania badania kluczowy biegły rewident oraz firma audytorska pozostali niezależni od Spółki zgodnie z wymogami niezależności określonymi w ustawie o biegłych rewidentach oraz w rozporządzeniu UE.

Uważamy, że dowody badania, które uzyskaliśmy są wystarczające i odpowiednie, aby stanowić podstawę dla naszej opinii.

Kluczowe sprawy badania

Kluczowe sprawy badania są to sprawy, które według naszego zawodowego osądu były najbardziej znaczące podczas badania sprawozdania finansowego za bieżący okres sprawozdawczy. Obejmują one najbardziej znaczące ocenione rodzaje ryzyka istotnego zniekształcenia, w tym ocenione rodzaje ryzyka istotnego zniekształcenia spowodowanego oszustwem. Do spraw tych odnieśliśmy się w kontekście naszego badania sprawozdania finansowego jako całości i przy formułowaniu naszej opinii oraz podsumowaliśmy naszą reakcję na te rodzaje ryzyka, a w przypadkach, w których uznaliśmy za stosowne przedstawiliśmy najważniejsze spostrzeżenia związane z tymi rodzajami ryzyka. Nie wyrażamy osobnej opinii na temat tych spraw.

Kluczowa sprawa badania	Jak nasze badanie odniosło się do tej sprawy
Utrata wartości aktywów
Dlaczego zagadnienie jest kluczową sprawą badania	Podejście do badania
Na dzień 31 grudnia 2018 roku Spółka w ramach istotnych pozycji aktywów wykazywała: należności z tytułu pożyczek i objętych obligacji (o wartości bilansowej ok. 6 058 mln zł), jak również udziały i akcje (o wartości bilansowej ok. 21 076 mln zł) stanowiące ok. 92% sumy bilansowej Spółki. Zgodnie z Międzynarodowymi Standardami Sprawozdawczości Finansowej Zarząd Spółki jest zobligowany do określenia wartości oczekiwanych strat kredytowych, które mogą wystąpić w okresie 12 miesięcy lub pozostałym okresie życia należności z tytułu pożyczek i objętych obligacji w zależności od klasyfikacji aktywów do koszyków, a w odniesieniu do udziałów i akcji w wyniku zidentyfikowania przesłanek utraty wartości aktywów do przeprowadzenia testu na utratę przez nie wartości.	Nasze procedury, w odniesieniu do opisanej kluczowej sprawy badania obejmowały, między innymi: · omówienie procesu oraz identyfikację mechanizmów kontrolnych funkcjonujących w Spółce i związanych z testami na utratę wartości aktywów, jak również zrozumienie stosowanych polityk rachunkowości oraz procedur, w tym środowiska kontroli wewnętrznej, odnoszących się do procesu oceny przesłanek utraty wartości, identyfikacji obiektywnych zdarzeń wskazujących na utratę wartości oraz testów na utratę wartości aktywów; · ocenę przyjętych przez Spółkę osądów odnośnie grupowania składników aktywów w ośrodki wypracowujące środki pieniężne; · ocenę, przy wsparciu specjalistów z zakresu wyceny, przyjętych przez Spółkę założeń i szacunków służących określeniu wartości odzyskiwalnej aktywów, w tym: - przyjętych przez Spółkę kluczowych założeń makroekonomicznych na kolejne lata (w tym: stopy dyskonta, prognozowana stopa wzrostu) poprzez porównanie ich do danych rynkowych oraz dostępnych zewnętrznych danych; - poprawności arytmetycznej modelu zdyskontowanych przepływów pieniężnych, oraz - założeń przyjętych do ustalenia przepływów pieniężnych oraz wartości rezydualnych po okresie objętym szczegółową strategią;

Sprawa została określona jako kluczowa dla badania sprawozdania finansowego Spółki z uwagi na wartość wykazanych powyżej aktywów, która jest istotna dla sprawozdania finansowego, jak również z uwagi na złożony element profesjonalnego osądu Zarządu dotyczącego wyceny należności z tytułu pożyczek i objętych obligacji, a także akcji i udziałów w spółkach niebędących spółkami zależnymi lub wspólnymi przedsięwzięciami oraz złożony element profesjonalnego osądu Zarządu dotyczącego szacowania wartości odzyskiwalnej akcji i udziałów we wspólnych przedsięwzięciach i spółkach zależnych.

Wycena należności z tytułu pożyczek i objętych obligacji, a także akcji i udziałów w spółkach niebędących spółkami zależnymi lub wspólnymi przedsięwzięciami wymaga zastosowania odpowiedniego modelu wyceny, w zależności od klasyfikacji aktywów, zgodnie z Międzynarodowym Standardem Sprawozdawczości Finansowej 9 Instrumenty finansowe.

Szacunek wartości odzyskiwalnej akcji i udziałów w spółkach zależnych lub wspólnych przedsięwzięciach wymaga przyjęcia przez Zarząd Spółki szeregu założeń, co do przyszłych warunków rynkowych i gospodarczych, obejmujących między innymi, przyszłe zmiany w zakresie cen surowców, energii elektrycznej, praw majątkowych wynikających ze świadectw pochodzenia energii, praw do emisji CO2 oraz przyszłych przychodów, kosztów i przepływów pieniężnych, średnioważonego kosztu kapitału ("WACC"), jak również wpływu potencjalnych i już zatwierdzonych polskich i europejskich zmian regulacyjnych, w tym dotyczących ochrony środowiska oraz przewidywanej sytuacji makroekonomicznej.

• · kierowanie zapytań odnoszących się do statusu realizacji przyjętych założeń, w tym aktualności kluczowych szacunków, do pracowników działu finansowego oraz Zarządu Spółki;
• · analizę zewnętrznych źródeł informacji takich jak prasa branżowa oraz ocena przy wsparciu specjalistów z zakresu wycen potencjalnego ryzyka związanego z realizacją założeń;
• · ocenę przesłanek utraty wartości oraz uzgodnienie danych źródłowych będących podstawą modeli testów na utratę wartości do przyjętych przez Spółkę prognoz finansowych;
• · ocenę dokonanej przez Spółkę klasyfikacji wyceny należności z tytułu pożyczek i objętych obligacji;
• · ocenę osądu Zarządu Spółki w zakresie istnienia obiektywnych zdarzeń mających wpływ na utratę wartości należności z tytułu pożyczek i objętych obligacji;
• · ocenę przyjętego przez Spółkę modelu wyceny strat kredytowych, w tym uzgodnienie danych źródłowych będących podstawą wyceny strat kredytowych do umów pożyczek oraz warunków emisji obligacji;
• · ocenę kompletności ujawnień, zgodnie z Międzynarodowym Standardem Rachunkowości 36 Utrata wartości aktywów oraz Międzynarodowym Standardem Sprawozdawczości Finansowej 9 Instrumenty finansowe, w sprawozdaniu finansowym Spółki w zakresie utraty wartości.

Odniesienie do ujawnienia w sprawozdaniu finansowym
Spółka zawarła ujawnienie dotyczące analizy przesłanek utraty wartości, szacunków utraty wartości, jak również odpisów z tytułu utraty wartości udziałów i akcji w nocie nr 10 not objaśniających do sprawozdania finansowego za rok zakończony 31 grudnia 2018 roku. Ujawnienie dotyczące wyceny należności z tytułu udzielonych pożyczek i objętych obligacji zawarte zostały przez Spółkę odpowiednio w notach nr 22 oraz nr 19 not objaśniających do sprawozdania finansowego za rok zakończony 31 grudnia 2018 roku.
Roszczenia, sprawy sądowe i zobowiązania warunkowe
Dlaczego zagadnienie jest kluczową sprawą badania	Podejście do badania
Spółka występuje jako strona wielu roszczeń i spraw sądowych, które w zależności od oceny Spółki ujmowane są jako rezerwy lub zobowiązania warunkowe. Istotnymi wartościowo są zidentyfikowane przez Spółkę potencjalne i zgłoszone roszczenia dotyczące rozwiązania przez jednostkę zależną umów długoterminowych na zakup energii elektrycznej i praw majątkowych wynikających ze świadectw pochodzenia energii wytwarzanej w odnawialnych źródłach energii.	Nasze procedury, w odniesieniu do opisanej kluczowej sprawy badania obejmowały, między innymi: · monitorowanie zewnętrznych źródeł informacji w celu identyfikacji naruszenia lub potencjalnego naruszenia przez Spółkę przepisów prawa i regulacji; przegląd przedstawionej do badania • dokumentacji dotyczącej spraw sądowych oraz omówienie z Zespołem Prawnej Obsługi Projektów Spółki istotnych spraw sądowych; analizę kosztów usług prawnych • poniesionych w ciągu roku, w celu potwierdzenia kompletności podmiotów świadczących usługi prawne na rzecz Spółki; uzyskanie pisemnych wyjaśnień od • prawników obsługujących Spółkę w zakresie prowadzonych przez nich spraw sądowych i spornych oraz analizę przedstawionych wyjaśnień;

Osądy Zarządu dotyczące ujęcia i wyceny rezerw z tytułu postępowań sądowych są z natury obarczone ryzykiem i mogą zmieniać się w czasie, ponieważ wyniki trwających spraw sądowych są zależne od przyszłych rozstrzygnięć. Sprawa została określona jako kluczowa dla badania sprawozdania finansowego Spółki z uwagi na element profesjonalnego osądu kierownictwa Spółki co do konieczności utworzenia odpowiednich rezerw oraz oszacowania ich wysokości.	ocenę poziomu oraz kompletności rezerw z • tytułu spraw spornych rozpoznanych przez Spółkę w kontekście istniejącej dokumentacji prawnej; analizę i ocenę zobowiązań warunkowych • oraz zmian wartości rezerw na roszczenia i sprawy sądowe; omówienie wybranych spraw sądowych ze • specjalistami z zakresu prawa; przegląd protokołów posiedzeń organów • Spółki oraz protokołów z kontroli organów nadzoru oraz korespondencji z tymi organami;
Odniesienie do ujawnienia w sprawozdaniu finansowym	ocenę kompletności ujawnień w zakresie • toczących się istotnych postepowań sądowych i pozasądowych oraz związanych z nimi zobowiązań warunkowych w sprawozdaniu finansowym.
Spółka zawarła ujawnienia dotyczące roszczeń i spraw sądowych w nocie nr 40 not objaśniających do sprawozdania finansowego za rok zakończony 31 grudnia 2018 roku.

Odpowiedzialność Zarządu i Rady Nadzorczej za sprawozdanie finansowe

Zarząd Spółki jest odpowiedzialny za sporządzenie, na podstawie prawidłowo prowadzonych ksiąg rachunkowych, sprawozdania finansowego, które przedstawia rzetelny i jasny obraz sytuacji majątkowej i finansowej oraz wyniku finansowego Spółki zgodnie z Międzynarodowymi Standardami Sprawozdawczości Finansowej zatwierdzonymi przez Unię Europejską, przyjętymi zasadami (polityką) rachunkowości, obowiązującymi Spółkę przepisami prawa oraz statutem Spółki, a także za kontrolę wewnętrzną, którą Zarząd uznaje za niezbędną, aby umożliwić sporządzenie sprawozdania finansowego niezawierającego istotnego zniekształcenia spowodowanego oszustwem lub błędem.

Sporządzając sprawozdanie finansowe Zarząd Spółki jest odpowiedzialny za ocenę zdolności Spółki do kontynuowania działalności, ujawnienie, jeżeli ma to zastosowanie, spraw związanych z kontynuacją działalności oraz za przyjęcie zasady kontynuacji działalności jako podstawy rachunkowości, z wyjątkiem sytuacji kiedy Zarząd albo zamierza dokonać likwidacji Spółki, albo zaniechać prowadzenia działalności albo nie ma żadnej realnej alternatywy dla likwidacji lub zaniechania działalności.

Zarząd Spółki oraz członkowie Rady Nadzorczej są zobowiązani do zapewnienia, aby sprawozdanie finansowe spełniało wymagania przewidziane w ustawie o rachunkowości. Członkowie Rady Nadzorczej są odpowiedzialni za nadzorowanie procesu sprawozdawczości finansowej Spółki.

Odpowiedzialność biegłego rewidenta za badanie sprawozdania finansowego

Naszymi celami są uzyskanie racjonalnej pewności, czy sprawozdanie finansowe jako całość nie zawiera istotnego zniekształcenia spowodowanego oszustwem lub błędem oraz wydanie sprawozdania z badania zawierającego naszą opinię. Racjonalna pewność jest wysokim poziomem pewności, ale nie gwarantuje, że badanie przeprowadzone zgodnie z KSB zawsze wykryje istniejące istotne zniekształcenie. Zniekształcenia mogą powstawać na skutek oszustwa lub błędu i są uważane za istotne, jeżeli można racjonalnie oczekiwać, że pojedynczo lub łącznie mogłyby wpłynąć na decyzje gospodarcze użytkowników podjęte na podstawie tego sprawozdania finansowego.

Zgodnie z § 5 Międzynarodowego Standardu Badania 320, koncepcja istotności stosowana jest przez biegłego rewidenta zarówno przy planowaniu i przeprowadzaniu badania, jak i przy ocenie wpływu rozpoznanych podczas badania zniekształceń oraz nieskorygowanych zniekształceń, jeśli występują, na sprawozdanie finansowe, a także przy formułowaniu opinii biegłego rewidenta. W związku z powyższym, wszystkie opinie i stwierdzenia zawarte w sprawozdaniu z badania są wyrażane z uwzględnieniem jakościowego i wartościowego poziomu istotności ustalonego zgodnie ze standardami badania i zawodowym osądem biegłego rewidenta.

Zakres badania nie obejmuje zapewnienia co do przyszłej rentowności Spółki ani efektywności lub skuteczności prowadzenia jej spraw przez Zarząd Spółki obecnie lub w przyszłości.

Podczas badania zgodnego z KSB stosujemy zawodowy osąd i zachowujemy zawodowy sceptycyzm, a także:

• identyfikujemy i oceniamy ryzyka istotnego zniekształcenia sprawozdania finansowego spowodowanego oszustwem lub błędem, projektujemy i przeprowadzamy procedury badania odpowiadające tym ryzykom i uzyskujemy dowody badania, które są wystarczające i odpowiednie, aby stanowić podstawę dla naszej opinii. Ryzyko niewykrycia istotnego zniekształcenia wynikającego z oszustwa jest większe niż tego wynikającego z błędu, ponieważ oszustwo może dotyczyć zmowy, fałszerstwa, celowych pominięć, wprowadzenia w błąd lub obejścia kontroli wewnętrznej,
• uzyskujemy zrozumienie kontroli wewnętrznej stosownej dla badania w celu zaprojektowania procedur badania, które są odpowiednie w danych okolicznościach, ale nie w celu wyrażenia opinii na temat skuteczności kontroli wewnętrznej Spółki,
• oceniamy odpowiedniość zastosowanych zasad (polityki) rachunkowości oraz zasadność szacunków księgowych oraz powiązanych ujawnień dokonanych przez Zarząd Spółki,
• wyciągamy wniosek na temat odpowiedniości zastosowania przez Zarząd Spółki zasady kontynuacji działalności jako podstawy rachunkowości oraz, na podstawie uzyskanych dowodów badania, czy istnieje istotna niepewność związana ze zdarzeniami lub warunkami, która może poddawać w znaczącą wątpliwość zdolność Spółki do kontynuacji działalności. Jeżeli dochodzimy do wniosku, że istnieje istotna niepewność, wymagane jest od nas zwrócenie uwagi w naszym sprawozdaniu biegłego rewidenta na powiązane ujawnienia w sprawozdaniu finansowym lub, jeżeli takie ujawnienia są nieadekwatne, modyfikujemy naszą opinię. Nasze wnioski są oparte na dowodach badania uzyskanych do dnia sporządzenia naszego sprawozdania biegłego rewidenta, jednakże przyszłe zdarzenia lub warunki mogą spowodować, że Spółka zaprzestanie kontynuacji działalności,
• oceniamy ogólną prezentację, strukturę i zawartość sprawozdania finansowego, w tym ujawnienia, oraz czy sprawozdanie finansowe przedstawia będące ich podstawą transakcje i zdarzenia w sposób zapewniający rzetelną prezentację.

Przekazujemy Komitetowi Audytu informacje o, między innymi, planowanym zakresie i czasie przeprowadzenia badania oraz znaczących ustaleniach badania, w tym wszelkich znaczących słabościach kontroli wewnętrznej, które zidentyfikujemy podczas badania.

Składamy Komitetowi Audytu oświadczenie, że przestrzegaliśmy stosownych wymogów etycznych dotyczących niezależności oraz że będziemy informować ich o wszystkich powiązaniach i innych sprawach, które mogłyby być racjonalnie uznane za stanowiące zagrożenie dla naszej niezależności, a tam gdzie ma to zastosowanie, informujemy o zastosowanych zabezpieczeniach.

Spośród spraw przekazywanych Komitetowi Audytu ustaliliśmy te sprawy, które były najbardziej znaczące podczas badania sprawozdania finansowego za bieżący okres sprawozdawczy i dlatego uznaliśmy je za kluczowe sprawy badania. Opisujemy te sprawy w naszym sprawozdaniu biegłego rewidenta, chyba że przepisy prawa lub regulacje zabraniają publicznego ich ujawnienia lub gdy, w wyjątkowych okolicznościach, ustalimy, że kwestia nie powinna być przedstawiona w naszym sprawozdaniu, ponieważ można byłoby racjonalnie oczekiwać, że negatywne konsekwencje przeważyłyby korzyści takiej informacji dla interesu publicznego.

Inne informacje, w tym sprawozdanie z działalności

Inne informacje obejmują sprawozdanie z działalności Spółki za okres od dnia 1 stycznia 2018 roku do dnia 31 grudnia 2018 roku ("Sprawozdanie z działalności") wraz z oświadczeniem o stosowaniu ładu korporacyjnego i oświadczeniem na temat informacji niefinansowych, o którym mowa w art. 49b ust. 1 ustawy o rachunkowości, które są wyodrębnionymi częściami tego sprawozdania (razem "Inne informacje").

Odpowiedzialność Zarządu i Rady Nadzorczej

Zarząd Spółki jest odpowiedzialny za sporządzenie Innych informacji zgodnie z przepisami prawa.

Zarząd Spółki oraz członkowie Rady Nadzorczej są zobowiązani do zapewnienia, aby Sprawozdanie z działalności Spółki wraz z wyodrębnionymi częściami spełniało wymagania przewidziane w ustawie o rachunkowości.

Odpowiedzialność biegłego rewidenta

Nasza opinia z badania sprawozdania finansowego nie obejmuje Innych informacji. W związku z badaniem sprawozdania finansowego naszym obowiązkiem jest zapoznanie się z Innymi informacjami, i czyniąc to, rozpatrzenie, czy Inne informacje nie są istotnie niespójne ze sprawozdaniem finansowym lub naszą wiedzą uzyskaną podczas badania, lub w inny sposób wydają się istotnie zniekształcone. Jeśli na podstawie wykonanej pracy, stwierdzimy istotne zniekształcenia w Innych informacjach, jesteśmy zobowiązani poinformować o tym w naszym sprawozdaniu z badania. Naszym obowiązkiem, zgodnie z wymogami ustawy o biegłych rewidentach, jest również wydanie opinii, czy Sprawozdanie z działalności zostało sporządzone zgodnie z przepisami oraz czy jest zgodne z informacjami zawartymi w sprawozdaniu finansowym.

Ponadto jesteśmy zobowiązani do poinformowania, czy Spółka sporządziła oświadczenie na temat informacji niefinansowych oraz wydania opinii, czy Spółka w oświadczeniu o stosowaniu ładu korporacyjnego zawarła wymagane informacje.

Opinia o Sprawozdaniu z działalności

Na podstawie wykonanej w trakcie badania pracy, naszym zdaniem, Sprawozdanie z działalności Spółki:

• zostało sporządzone zgodnie z art. 49 ustawy o rachunkowości oraz § 70 Rozporządzenia Ministra Finansów z dnia 29 marca 2018 roku w sprawie informacji bieżących i okresowych przekazywanych przez emitentów papierów wartościowych oraz warunków uznawania za równoważne informacji wymaganych przepisami prawa państwa niebędącego państwem członkowskim ("rozporządzenie o informacjach bieżących"),
• jest zgodne z informacjami zawartymi w sprawozdaniu finansowym.

Ponadto, w świetle wiedzy o Spółce i jej otoczeniu uzyskanej podczas naszego badania oświadczamy, że nie stwierdziliśmy w Sprawozdaniu z działalności Spółki istotnych zniekształceń.

Opinia o oświadczeniu o stosowaniu ładu korporacyjnego

Naszym zdaniem, w oświadczeniu o stosowaniu ładu korporacyjnego Spółka zawarła informacje określone w § 70 ust. 6 punkt 5 rozporządzenia o informacjach bieżących.

Ponadto, naszym zdaniem, informacje wskazane w § 70 ust. 6 punkt 5 lit. c-f, h oraz i tego rozporządzenia zawarte w oświadczeniu o stosowaniu ładu korporacyjnego są zgodne z mającymi zastosowanie przepisami oraz informacjami zawartymi w sprawozdaniu finansowym.

Informacja na temat informacji niefinansowych

Zgodnie z wymogami ustawy o biegłych rewidentach potwierdzamy, że Spółka sporządziła oświadczenie na temat informacji niefinansowych, o którym mowa w art. 49b ust. 1 ustawy o rachunkowości jako wyodrębnioną część Sprawozdania z działalności.

Nie wykonaliśmy żadnych prac atestacyjnych dotyczących oświadczenia na temat informacji niefinansowych i nie wyrażamy jakiegokolwiek zapewnienia na jego temat.

Oświadczenie na temat świadczonych usług niebędących badaniem sprawozdań finansowych

Zgodnie z naszą najlepszą wiedzą i przekonaniem oświadczamy, że usługi niebędące badaniem sprawozdań finansowych, które świadczyliśmy na rzecz Spółki i jej spółek zależnych są zgodne z prawem i przepisami obowiązującymi w Polsce oraz że nie świadczyliśmy usług niebędących badaniem, które są zakazane na mocy art. 5 ust. 1 rozporządzenia UE oraz art. 136 ustawy o biegłych rewidentach. Usługi niebędące badaniem sprawozdań finansowych, które świadczyliśmy na rzecz Spółki i jej spółek zależnych w badanym okresie sprawozdawczym zostały wymienione w sprawozdaniu z działalności Spółki.

Wybór firmy audytorskiej

Zostaliśmy wybrani do badania sprawozdania finansowego Spółki po raz pierwszy uchwałą Rady Nadzorczej z dnia 15 marca 2017 roku oraz ponownie uchwałą Rady Nadzorczej z dnia 26 lutego 2018 roku. Sprawozdania finansowe Spółki badamy nieprzerwanie począwszy od roku obrotowego zakończonego dnia 31 grudnia 2017 roku; to jest przez okres 2 kolejnych lat.

Warszawa, dnia 2 kwietnia 2019 roku

Kluczowy biegły rewident

(podpisano elektronicznym podpisem kwalifikowanym)

Leszek Lerch Biegły rewident nr w rejestrze: 9886

działający w imieniu: Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Rondo ONZ 1, 00-124 Warszawa nr na liście firm audytorskich: 130

The Polish original should be referred to in matters of interpretation. Translation of auditor's report originally issued in Polish.

Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Rondo ONZ 1 00-124 Warszawa

+48 (0) 22 557 70 00 +48 (0) 22 557 70 01 www.ey.com/pl

INDEPENDENT AUDITOR'S REPORT ON THE AUDIT

To the General Meeting and Supervisory Board of TAURON Polska Energia S.A.

Audit report on the annual financial statements

Opinion

We have audited the annual financial statements of TAURON Polska Energia S.A. (the 'Company') located in Katowice at Ks. Piotra Ściegiennego 3 street, containing: the statement of comprehensive income for the period from 1 January 2018 to 31 December 2018, the statement of financial position as at 31 December 2018, the statement of changes in equity, the statement of cash flows for the period from 1 January 2018 to 31 December 2018 and additional information to the financial statements, including a summary of significant accounting policies (the 'financial statements').

In our opinion, the financial statements:

• give a true and fair view of the financial position of the Company as at 31 December 2018 and its financial performance and its cash flows for the period from 1 January 2018 to 31 December 2018 in accordance with required applicable rules of International Accounting Standards, International Financial Reporting Standards approved by the European Union and the adopted accounting policies,
• are in respect of the form and content in accordance with legal regulations governing the Company and the Company's Statute,
• have been prepared based on properly maintained accounting records, in accordance with chapter 2 of the Accounting Act dated 29 September 1994 (the 'Accounting Act').

The opinion is consistent with the additional report to the Audit Committee issued on 2 April 2019.

Basis for opinion

We conducted our audit in accordance with the International Standards on Auditing in the version adopted as the National Auditing Standards by the National Council of Statutory Auditors ("NAS") and pursuant to the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Oversight (the 'Act on Statutory Auditors') and the Regulation (EU) No. 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (the 'Regulation 537/2014'). Our responsibilities under those standards are further described in the 'Auditor's responsibilities for the audit of the financial statements' section of our report.

We are independent of the Company in accordance with the Code of ethics for professional accountants, published by the International Federation of Accountants (the 'Code of ethics'), adopted by the National Council of Statutory Auditors and other ethical responsibilities in accordance with required applicable rules of the audit of financial statements in Poland. We have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of ethics. While conducting the audit, the key certified auditor and the audit firm remained independent of the Company in accordance with the independence requirements set out in the Act on Statutory Auditors and the Regulation 537/2014.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. They include the most significant assessed risks of material misstatement, including the assessed risks of material misstatement due to fraud. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we have summarized our reaction to these risks and in cases where we deemed it necessary, we presented the most important observations related to these types of risks. We do not provide a separate opinion on these matters.

Impairment of assets analysis
Why the issue is a key audit matter	Audit approach
As at December 31, 2018, the Company presented loans receivable and bought bonds (with a carrying amount of • approximately PLN 6 058 mln), as well as shares (with a carrying amount of approximately PLN 21 076 mln) constituting in total approximately 92% of the Company's balance sheet total. According to International Financial Reporting Standards the Management of the entity is obliged to estimate the expected credit loss, which may occur in the period of 12 months or remaining period of existence • of receivables from loans and bought bonds depending on classification of assets to the brackets and for equity instruments as a result of the identified assets impairment • premise for performing the impairment test. The issue was identified as key audit matter in the audit of the financial statements due to the value of the assets listed above, which is significant for the financial statements, as well as due to the complex element of the professional judgment of the management regarding the valuation of receivables from loans and bought bonds, as well as shares in companies that are not subsidiaries or joint ventures and a complex element of the professional judgment of the Management Board regarding the estimation of the recoverable amount of shares in joint	Our procedures, in relation to the key audit matter described, included, among others: Overview of the process and identification of the control mechanisms operating in the Company related to impairment tests of assets, as well as an understanding of the applied accounting policies and procedures, including internal control environment related to the assessment process of impairment indicators; identification of the objective events indication the impairment and tests for impairment of assets, Assessment of the assumptions adopted by the Company with regard to the grouping of assets into cash-generating units (CGU), Assessment (with the assistance of valuation specialists) of estimates and assumptions made by the Company in order to determine the assets recoverable amount, including: - the key macroeconomic assumptions adopted by the Company for the future years (including: discount rates, projected growth rate) by comparing them to market data and available external data; - arithmetical correctness of the discounted cash flows model, and - assumptions made to determine cash flows and residual values after the period covered by a detailed strategy;

Valuation of receivables from loans and bought bonds as well as shares in companies which are not subsidiaries or joint ventures requires the application of appropriate valuation model, depending on the classification of assets, in accordance with International Financial Reporting Standard 9 Financial Instruments.

Estimation of the recoverable amount of shares in subsidiaries or joint ventures requires the Management Board to adopt a number of assumptions regarding future market and economic conditions, such as, future changes in the prices of raw materials, electricity, property rights arising from certificates of origin of energy, CO2 emission rights and future revenues, costs and cash flows, weighted average cost of capital ("WACC"), as well as the impact of potential and already approved Polish and European regulatory changes, including environmental protection and the anticipated macroeconomic situation.

A reference to disclosure in the financial statements

The Company disclosed the information regarding impairment indicators analysis, estimates of the impairment test, as well as impairment losses on shares in note 10 of the explanatory notes to the financial statements for the year ended December 31, 2018. The disclosure regarding the valuation of receivables from loans granted and bought bonds was included by the Company in notes 18 and 19 of the explanatory notes to the financial statements for the year ended 31 December 2018, respectively.

• Inquiries to the employees of the financial department and the Management Board referring to the status of implementation of the adopted assumptions, including the validity of key estimates,
• Analysis of external sources of information such as industry press and evaluation of potential risk related to the implementation of the assumptions with the support of valuation specialists;
• Assessment of the impairments indicators and reconciliation of source data used in impairment test models and assessment of impairment triggers for financial forecasts adopted by the Company;
• Assessment of the classification of the receivables from loans granted and bought bonds;
• Assessment of the Management Board's judgment regarding the existence the of objective events having an impact on the impairment of loans and bought bonds;
• Assessment of the credit loss valuation model adopted by the Company, including reconciliation of the source data being the basis for the valuation of credit losses to loan agreements and terms of issue of bonds;
• Assessment of completeness of disclosures in the financial statements of the Company in terms of impairment in accordance with the International Accounting Standard 36 Impairment of assets and International Financial Reporting Standard 9 Financial Instruments.

Claims, lawsuits and contingent liabilities

Why the issue is a key audit matter

The Company is a party to many significant claims and court cases which, depending on the Company's assessment, are recognized as provisions or contingent liabilities. Significant in terms of value are potential and submitted claims identified by the Company related to the termination of longterm contracts for the purchase of electricity and property rights arising from certificates of origin of energy generated in renewable energy sources.

The Management's judgments regarding the recognition and measurement of provisions for court cases are inherently risky and may change over time, as the results of ongoing lawsuits depend on the future decisions. This issue was identified as key audit matter of the Company's financial statements due to the element of the professional judgment of the Company's Management regarding the obligation to create adequate provision and estimate its amount.

A reference to disclosure in the financial statements

The Company disclosed information regarding claims and court cases in note 40 of the explanatory notes to the financial statements for the year ended December 31, 2018.

Audit approach

Our procedures, in relation to the key audit matter described, included, among others:

• Monitoring of external sources of information to identify breaches or potential violations of law and regulations by the Company;
• Review of the documentation regarding court cases presented for the audit purposes and discussion of significant court cases with the Legal Project Management Team of the Company;
• Analysis of the costs of legal services incurred during the year in order to confirm the completeness of entities providing legal services to the Company;
• Obtaining written explanations from the lawyers serving the Company with regard to the court and disputable cases conducted by them, and the analysis of the provided explanations;
• Analysis and assessment of contingent liabilities and changes in the value of provisions for claims and court cases Discussion of the selected court cases with internal specialists in the field of law;
• Review of minutes of meetings of the legal bodies of the Company as well as control reports of supervisory authorities and correspondence with these authorities.
• Assessment of the completeness of disclosures regarding pending major court and out-of-court proceedings and related contingent liabilities in the financial statements.

Responsibilities of the Company's Management and members of the Supervisory Board for the financial statements

The Company's Management is responsible for the preparation, based on properly maintained accounting records, the financial statements that give a true and fair view of the financial position and the financial performance in accordance with required applicable rules of International Accounting Standards, International Financial Reporting Standards approved by the European Union, the adopted accounting policies, other applicable laws, as well as the Company's Statute, and is also responsible for such internal control as determined is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, The Company's Management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless The Company's Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Company's Management and the members of the Company's Supervisory Board are required to ensure that the financial statements meet the requirements of the Accounting Act. The members of the Company's Supervisory Board are responsible for overseeing the Company's financial reporting process.

Auditor's responsibility for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud or error, and to issue an independent auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not guarantee that an audit conducted in accordance with NAS will always detect material misstatement when it exists. Misstatements may arise as a result of fraud or error and are considered material if it can reasonably be expected that individually or in the aggregate, they could influence the economic decisions of the users taken on the basis of these financial statements.

In accordance with International Auditing Standard 320, section 5, the concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor's report. Hence all auditor's assertions and statements contained in the auditor's report are made with the contemplation of the qualitative and quantitative materiality levels established in accordance with auditing standards and auditor's professional judgment.

The scope of the audit does not include assurance on the future profitability of the Company nor effectiveness of conducting business matters now and in the future by the Company's Management.

Throughout the audit in accordance with NAS, we exercise professional judgment and maintain professional skepticism and we also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or override of internal control,
• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control,
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Company's Management,
• conclude on the appropriateness of the Company's Management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our independent auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our independent auditor's report, however, future events or conditions may cause the Company to cease to continue as a going concern,
• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate to them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated to the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other information, including the Directors' Report

The other information comprises the Directors' Report for the period from 1 January 2018 to 31 December 2018, the representation on the corporate governance and the representation on preparation of the statement on non-financial information, mentioned in article 49b, section 1 of the Accounting Act as a separate element of the Directors' Report (jointly 'Other Information').

Responsibilities of the Company's Management and members of the Supervisory Board

The Company's Management is responsible for the preparation the Other Information in accordance with the law.

The Company's Management and members of the Company's Supervisory Board are required to ensure that the Directors' Report (with separate elements) meets the requirements of the Accounting Act.

Auditor's responsibility

Our opinion on the financial statements does not include the Other Information. In connection with our audit of the financial statements, our responsibility is to read the Other Information and, in doing so, consider whether it is materially inconsistent with the financial statements or our knowledge obtained during the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this Other Information, we are required to report that fact in our independent auditor's report. Our responsibility in accordance with the Act on Statutory Auditors is also to issue an opinion on whether the Directors' Report was prepared in accordance with relevant laws and that it is consistent with the information contained in the financial statements.

In addition, we are required to inform whether the Company has prepared the representation on non-financial information and to issue an opinion on whether the Company has included the required information in the representation on application of corporate governance.

Opinion on the Directors' Report

Based on the work performed during our audit, in our opinion, the Directors' Report:

• has been prepared in accordance with the article 49 of the Accounting Act and paragraph 70 of the Decree of the Minister of Finance dated 29 March 2018 on current and periodic information published by issuers of securities and conditions for recognition as equivalent the information required by laws of non-EU member states (the 'Decree on current and periodic information'),
• is consistent with the information contained in the financial statements.

Moreover, based on our knowledge of the Company and its environment obtained during our audit, we have not identified material misstatements in the Directors' Report.

Opinion on the corporate governance application representation

In our opinion, in the representation on application of corporate governance, the Company has included information stipulated in paragraph 70, section 6, point 5 of the Decree on current and periodic information.

Moreover, in our opinion, the information stipulated in paragraph 70, section 6, point 5 letter c-f, h and i of the Decree included in the representation on application of corporate governance is in accordance with applicable laws and information included in the financial statements.

Information on non-financial information

In accordance with the Act on Statutory Auditors, we confirm, that the Company has prepared a statement on non-financial information mentioned in article 49b, section 1 of the Accounting Act as a separate element of the Directors' Report.

We have not performed any attestation procedures in respect to the statement on non-financial information and do not express any assurance in its respect.

Representation on the provision of non-audit services

To the best of our knowledge and belief, we represent that services other than audits of the financial statements, which we have provided to the Company and its subsidiaries, are compliant with the laws and regulations applicable in Poland, and that we have not provided non-audit services, which are prohibited based on article 5 item 1 of Regulation 537/2014 and article 136 of the Act on Statutory Auditors. The non-audit services, which we have provided to the Company and its subsidiaries in the audited period, have been disclosed in the Directors' Report.

Appointment of the audit firm

We were appointed for the audit of the Company's financial statements initially based on the resolution of Supervisory Board from 15 March 2017 and reappointed based on the resolution from 26 February 2018. The financial statements of the Company have been audited by us uninterruptedly starting from the financial year ended on 31 December 2017, i.e. for the past two consecutive years.

Warsaw, 2 April 2019

Key Certified Auditor

(signed electronically with qualified signature)

Leszek Lerch Certified auditor no in the register: 9886

on behalf of: Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. Rondo ONZ 1, 00-124 Warsaw no on the audit firms list: 130

FINANCIAL STATEMENTS

in accordance with the International Financial Reporting Standards, as endorsed by the European Union for the year ended 31 December

2018

TAURON.PL

TABLE OF CONTENTS

		STATEMENT OF COMPREHENSIVE INCOME 4 STATEMENT OF FINANCIAL POSITION . 5 STATEMENT OF FINANCIAL POSITION – CONTINUED 6 STATEMENT OF CHANGES IN EQUITY . 7 STATEMENT OF CASH FLOWS 8
1. 2. 3. 4. 5. 6. 7. 8.	effective 7.1. 7.2.	INFORMATION ABOUT TAURON POLSKA ENERGIA S.A. AND BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS 9 General information about TAURON Polska Energia S.A. . 9 Shares in related parties 9 Statement of compliance . 11 Going Concern 11 Functional and Presentation Currency . 11 Standards, amendments to standards and interpretations which have been published but are not yet . 11 Changes in the accounting policies 13 Application of new standards and amendments to standards 13 Presentation change . 17 Accounting principles (policy) and material values based on professional judgment and estimates . 18
		BUSINESS SEGMENTS 19
9.	9.1. 9.2.	Information on operating segments 19 Operating segments 19 Geographic areas of operations . 21
		IMPAIRMENT OF SHARES IN SUBSIDIARIES 22
10.		Impairment of financial assets 22
		EXPLANATORY NOTES TO THE STATEMENT OF COMPREHENSIVE INCOME 26
11. 12. 13. 14. 15. 16.	Sales revenue Income tax 15.1. 15.2. 15.3. 15.4.	. 26 Expenses by type . 27 Employee benefits expenses . 28 Finance income and costs 28 . 29 Tax expense in the statement of comprehensive income . 30 Reconciliation of the effective tax rate . 30 Deferred income tax 30 Tax Capital Group 31 Earnings (loss) per share . 32
17. 18.	Shares	EXPLANATORY NOTES TO THE STATEMENT OF FINANCIAL POSITION 33 Investment property . 33 . 33
19. 20. 21. 22. 23.	Bonds Loans granted Inventories	. 36 Derivative instruments and hedge accounting . 37 Other financial assets . 39 . 40 . 42
24. 25. 26.		Receivables from buyers . 43 Other non-financial assets 44 Cash and cash equivalents . 45
27.	27.1. 27.2. 27.3. 27.4. 27.5.	Equity 45 Issued capital . 45 Major shareholders . 46 Reserve capital . 46 Revaluation reserve from valuation of hedging instruments 46 Retained earnings/ (Accumulated losses) and dividend limitation . 47
28. 29.	Debt 29.1. 29.2. 29.3. 29.4.	Dividends paid and proposed 47 . 47 Bonds issued . 48 Debt agreement covenants 51 Loans from the European Investment Bank . 52 Loans from a subsidiary 52
	29.5. 29.6. 29.7.	Cash pool service 52 Overdraft facilities 53 Concluding a loan agreement with Bank Gospodarstwa Krajowego . 53

30. 31.	29.8. Finance lease liabilities . 53 29.9. Operating lease liabilities . 53 Provisions for employee benefits . 54 Other provisions 55
32.	Accruals, deferred income and government grants . 56
33. 34.	Liabilities to suppliers . 56 Other financial liabilities . 57
35.	Other non-financial liabilities . 57
	EXPLANATORY NOTES TO THE STATEMENT OF CASH FLOWS 58
36.	Significant items of the statement of cash flows . 58
	36.1. Cash from/used in operating activities . 58
	36.2. Cash from/used in investing activities . 58
	36.3. Cash from/used in financing activities . 59
	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT 60
37.	Financial instruments . 60
	37.1. Carrying amount and fair value of financial instrument classes and categories . 60
	37.2. Revenue, expenses, gain and loss items included in the statement of comprehensive income
	by category of financial instruments . 62
38.	Principles and objectives of financial risk management . 63
	38.1. Credit risk . 64
	38.1.1. Credit risk related to receivables from buyers 64
	38.1.2. Credit risk related to bonds and loans granted . 65
	38.1.3. Credit risk related to other financial assets . 65
	38.2. Liquidity risk 66 38.3. Market risk 67
	38.3.1. Interest rate risk 68
	38.3.2. Currency risk . 70
	38.3.3. Raw material and commodity price risk related to commodity derivative instruments
	and price risk related to units 72
39.	Operational risk . 72
	OTHER INFORMATION 73
40. 41.	Contingent liabilities 73 Security for liabilities 78
42.	Capital commitments . 79
43.	Related-party disclosures . 79
	43.1. Transactions with related parties and State Treasury companies 79
	43.2. Compensation of the executives . 80
44.	Finance and capital management 80
45.	Employment structure 80
46.	Fee of the certified auditor or the entity authorized to audit financial statements 81
47. Structure of financial statements broken down by business activity type in line with Article 44 of
	the Energy Law . 81
48.	Other material information 83
49.	Events after the end of the reporting period . 85

STATEMENT OF COMPREHENSIVE INCOME

Sales revenue 11 8 618 642 7 792 025 Cost of sales 12 (8 472 648) (7 414 707) Profit on sale 145 994 377 318 12 Selling and distribution expenses (20 692) (23 309) Administrative expenses 12 (98 716) (88 751) Other operating income and expenses (3 927) (2 470) Operating profit 22 659 262 788 Dividend income 14 819 437 560 832 Interest income on bonds and loans 14 327 447 456 426 Interest expense on debt 14 (298 602) (334 638) Revaluation of shares 14 (2 469 069) (134 372) Revaluation of bonds and loans 14 15 493 – Other finance income and costs 14 (149 648) 108 529 Profit (loss) before tax (1 732 283) 919 565 Income tax expense 22 430 (65 214) 15.1 Net profit (loss) (1 709 853) 854 351 27.4 Measurement of hedging instruments (24 297) (8 159) Income tax expense 15.1 4 617 1 550 Other comprehensive income subject to reclassification to profit or loss (19 680) (6 609) Actuarial gains/(losses) 18 (128) 15.1 Income tax expense (4) 24 Other comprehensive income not subject to reclassification to profit or loss 14 (104) Other comprehensive income, net of tax (19 666) (6 713) Total comprehensive income (1 729 519) 847 638 Earnings (loss) per share (in PLN):		Note	Year ended 31 December 2018	Year ended 31 December 2017
	– basic and diluted, for net profit	16	(0.98)	0.49

STATEMENT OF FINANCIAL POSITION

	Note	As at 31 December 2018	As at 31 December 2017 (restated figures)
ASSETS
Non-current assets
Investment property	17	22 010	21 701
Shares	18	21 076 056	20 912 679
Bonds	19	5 043 981	6 009 920
Loans granted	22	808 760	382 989
Derivative instruments	20	43 844	26 704
Deferred tax assets	15.3	148 180	–
Other financial assets	21	2 804	2 724
Other non-financial assets	25	20 865	14 967
		27 166 500	27 371 684
Current assets
Inventories	23	409 587	198 428
Receivables from buyers	24	819 563	719 133
Income tax receivables	15.4	13 921	–
Bonds	19	192 311	562 776
Loans granted	22	13 117	520 191
Derivative instruments	20	176 499	54 994
Other financial assets	21	245 721	131 640
Other non-financial assets	25	9 846	40 951
Cash and cash equivalents	26	465 925	721 577
		2 346 490	2 949 690
TOTAL ASSETS		29 512 990	30 321 374

(in PLN '000)

STATEMENT OF FINANCIAL POSITION – CONTINUED

	Note	As at 31 December 2018	As at 31 December 2017 (restated figures)
EQUITY AND LIABILITIES
Equity
Issued capital	27.1	8 762 747	8 762 747
Reserve capital	27.3	8 511 437	7 657 086
Revaluation reserve from valuation of hedging instruments	27.4	3 371	23 051
Retained earnings / (Accumulated losses)	27.5	(2 017 719)	935 022
		15 259 836	17 377 906
Non-current liabilities
Debt	29	8 474 344	9 472 454
Other financial liabilities	34	17 626	20 126
Derivative instruments	20	37 930	5 217
Deferred income tax liabilities	15.3	–	29 843
Provisions for employee benefits	30	3 787	3 147
Accruals, deferred income and government grants	32	103	–
		8 533 790	9 530 787
Current liabilities
Debt	29	4 504 374	2 725 763
Liabilities to suppliers	33	525 986	413 265
Other financial liabilities	34	371 646	62 590
Derivative instruments	20	202 992	57 249
Income tax liabilities		–	37 629
Other non-financial liabilities	35	24 626	32 490
Provisions for employee benefits	30	245	330
Other provisions	31	72 894	68 771
Accruals, deferred income and government grants	32	16 601	14 594
		5 719 364	3 412 681
Total liabilities		14 253 154	12 943 468
TOTAL EQUITY AND LIABILITIES		29 512 990	30 321 374

STATEMENT OF CHANGES IN EQUITY

	Note	Issued capital	Reserve capital	Revaluation reserve from valuation of hedging instruments	Retained earnings/ (Accumulated losses)	Total equity
As at 1 January 2017		8 762 747	7 823 339	29 660	(85 478)	16 530 268
Distribution of prior years profit		–	(166 253)	–	166 253	–
Transactions with shareholders		–	(166 253)	–	166 253	–
Net profit		–	–	–	854 351	854 351
Other comprehensive income		–	–	(6 609)	(104)	(6 713)
Total comprehensive income		–	–	(6 609)	854 247	847 638
As at 31 December 2017		8 762 747	7 657 086	23 051	935 022	17 377 906
Impact of IFRS 9	7.1	–	–	–	(388 551)	(388 551)
As at 1 January 2018		8 762 747	7 657 086	23 051	546 471	16 989 355
Coverage of prior years loss	27.3	–	854 351	–	(854 351)	–
Transactions with shareholders		–	854 351	–	(854 351)	–
Net loss		–	–	–	(1 709 853)	(1 709 853)
Other comprehensive income		–	–	(19 680)	14	(19 666)
Total comprehensive income		–	–	(19 680)	(1 709 839)	(1 729 519)
As at 31 December 2018		8 762 747	8 511 437	3 371	(2 017 719)	15 259 836

STATEMENT OF CASH FLOWS

	Note	Year ended	Year ended
		31 December 2018	31 December 2017
Cash flows from operating activities
Profit (loss) before tax		(1 732 283)	919 565
Depreciation and amortization		4 759	5 532
Interest and dividends, net		(814 298)	(685 709)
Impairment losses on shares		2 469 069	134 372
Impairment losses on bonds and loans		(15 493)	–
Foreign exchange difference		113 540	(130 351)
Other adjustments of profit before tax		23 767	31 218
Change in working capital	36.1	(70 078)	(57 218)
Income tax paid		(104 129)	28 618
Net cash from (used in) operating activities		(125 146)	246 027
Cash flows from investing activities
Purchase of shares	36.2	(2 646 353)	(6 169 590)
Loans granted	36.2	(847 442)	(307 132)
Purchase of bonds	36.2	(160 000)	(350 000)
Purchase of investment fund units		–	(75 000)
Purchase of investment property		(3 926)	–
Other		(3 188)	(524)
Total payments		(3 660 909)	(6 902 246)
Redemption of bonds	36.2	1 334 920	3 547 110
Repayment of loans granted	36.2	421 225	1 000 000
Dividends received		819 437	359 787
Interest received	36.2	289 177	642 017
Redemption of investment fund units		75 346	–
Other proceeds		372	44
Total proceeds		2 940 477	5 548 958
Net cash from (used in) investing activities		(720 432)	(1 353 288)
Cash flows from financing activities
Payment of finance lease liabilities		(23 519)	(3 442)
Repayment of loans and borrowings	36.3	(162 318)	(175 695)
Redemption of debt securities		–	(1 650 000)
Interest paid	36.3	(301 978)	(265 223)
Commission paid		(17 409)	(19 632)
Total payments		(505 224)	(2 113 992)
Issue of debt securities	36.3	1 350 000	2 707 462
Total proceeds		1 350 000	2 707 462
Net foreign exchange difference		(526)	2 038
Net cash from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period, of which: restricted cash	26 26 26	844 776 (802) (1 559 232) (1 560 034) 58 374	593 470 (513 791) (1 045 441) (1 559 232) 49 631

INFORMATION ABOUT TAURON POLSKA ENERGIA S.A. AND BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

1. General information about TAURON Polska Energia S.A.

These financial statements have been prepared by TAURON Polska Energia Spó³ka Akcyjna (the "Company") with its registered office in ul. ks. Piotra Œciegiennego 3 in Katowice, Poland, whose shares are publicly traded.

The Company was established by a notarized deed on 6 December 2006 under the name of Energetyka Po³udnie S.A. On 8 January 2007, the Company was registered at the District Court for Kzatowice-Wschód, Business Division of the National Court Register, under number KRS 0000271562. The change of its name to TAURON Polska Energia S.A. was registered with the District Court on 16 November 2007.

The Company was assigned statistical number (REGON) 240524697 and tax identification number (NIP) 9542583988.

TAURON Polska Energia S.A. was established for an unlimited period. •

The core business of TAURON Polska Energia S.A. is: •

• head office and holding operations, except for financial holdings PKD 70.10 Z; •
• sales of electricity PKD 35.14 Z; •
• sales of coal PKD 46.71.Z;
• sales of gaseous fuels in a network system PKD 35.23.Z.

TAURON Polska Energia S.A. is the parent of the TAURON Polska Energia S.A. Capital Group (the "Group", the "TAURON Group").

The financial statements prepared by the Company cover the financial year ended 31 December 2018 and include comparative information for the year ended 31 December 2017. These financial statements were approved for publication by the Management Board on 29 March 2019.

The consolidated financial statements for the year ended 31 December 2018 prepared by the Company were approved for publication by the Management Board on 29 March 2019.

Composition of the Management Board •

Management Board as at 31 December 2018 and 31 December 2017: •

• Filip Grzegorczyk President of the Management Board; •
• Jaros³aw Broda Vice President of the Management Board; •
• Kamil Kamiñski Vice President of the Management Board;
• Marek Wadowski Vice President of the Management Board.

In the financial year ended 31 December 2018 the Management Board's composition did not change. As at the date of approval of these financial statements for publication the composition of the Management Board had not changed.

2. Shares in related parties

As at 31 December 2018, TAURON Polska Energia S.A. held direct and indirect interest in the following key subsidiaries:

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU (in PLN '000)

Item	Company name	Registered office	Core business	Share of TAURON Polska Energia S.A. in the entity's capital	Share of TAURON Polska Energia S.A. in the gover ning body
1	TAURON Wydobycie S.A.	Jaworzno	Hard coal mining	100.00%	100.00%
2	TAURON Wytwarzanie S.A.	Jaworzno	Generation, transmission and distribution of electricity and heat	100.00%	100.00%
3	Nowe Jaworzno Grupa TAURON Sp. z o.o.1	Jaworzno	Generation of electricity	97.89%	97.89%
4	TAURON Ekoenergia Sp. z o.o.	Jelenia Góra	Generation of electricity	100.00%	100.00%
5	Marselwind Sp. z o.o.	Katowice	Generation of electricity	100.00%	100.00%
6	TAURON Ciep³o Sp. z o.o.	Katowice	Production and distribution of heat	100.00%	100.00%
7	TAURON Serwis Sp. z o. o.	Katowice	Services	95.61%	95.61%
8	TAURON Dystrybucja S.A.	Kraków	Distribution of electricity	99.74%	99.75%
9	TAURON Dystrybucja Serwis S.A.	Wroc³aw	Services	100.00%	100.00%
10	TAURON Dystrybucja Pomiary Sp. z o.o.2	Tarnów	Services	99.74%	99.75%
11	TAURON Sprzeda¿ Sp. z o.o.	Kraków	Sale of electricity	100.00%	100.00%
12	TAURON Sprzeda¿ GZE Sp. z o.o.	Gliwice	Sale of electricity	100.00%	100.00%
13	TAURON Czech Energy s.r.o.	Ostrawa, Czech Republic	Sale of electricity	100.00%	100.00%
14	TAURON Obs³uga Klienta Sp. z o.o.	Wroc³aw	Services	100.00%	100.00%
15	Kopalnia Wapienia Czatkowice Sp. z o.o.	Krzeszowice	Limestone quarrying and stone quarrying	100.00%	100.00%
16	Polska Energia Pierwsza Kompania Handlowa Sp. z o.o.	Warszawa	Sale of electricity	100.00%	100.00%
17	TAURON Sweden Energy AB (publ)	Sztokholm, Sweden	Services	100.00%	100.00%
18	Bioeko Grupa TAURON Sp. z o.o.3	Stalowa Wola	Wholesale of fuel and derivative products	100.00%	100.00%
19	Wsparcie Grupa TAURON Sp. z o.o.2	Tarnów	Services	99.74%	99.75%

¹ On 20 December 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital. The new shares were assumed by Fundusz Inwestycji Infrastrukturalnych – Kapita³owy Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych. The aforesaid increase in the issued capital of was registered on 15 January 2019. The transaction resulted in a change in the interests held by TAURON Polska Energia S.A. in the issued capital and decision-making body of the subsidiary (a decrease from 100% to 97.89%).

² TAURON Polska Energia S.A. holds indirect interest in TAURON Dystrybucja Pomiary Sp. z o.o. and Wsparcie Grupa TAURON Sp. z o.o. through its subsidiary, TAURON Dystrybucja S.A. TAURON Polska Energia S.A. uses shares in TAURON Dystrybucja Pomiary Sp. z o.o.

³ On 8 October 2018 the name of the company was changed from Biomasa Grupa TAURON Sp. z o.o. to Bioeko Grupa TAURON Sp. z o.o.

As at 31 December 2018, TAURON Polska Energia S.A. held direct and indirect interest in the following key jointly-controlled entities:

Item	Company name	Registered office	Core business	Share of TAURON Polska Energia S.A. in the entity's capital and governing body
1	Elektrociep³ownia Stalowa Wola S.A.1	Stalowa Wola	Generation of electricity	50.00%
2	TAMEH HOLDING Sp. z o.o.2	D¹browa Górnicza	Head office and holding operations	50.00%
3	TAMEH POLSKA Sp. z o.o.2	D¹browa Górnicza	Generation, transmission, distribution and sale of electricity and heat	50.00%
4	TAMEH Czech s.r.o.2	Ostrawa, Czech Republic	Production, trade and services	50.00%

¹ TAURON Polska Energia S.A. holds indirect interest in Elektrociep³ownia Stalowa Wola S.A. through a subsidiary, TAURON Wytwarzanie S.A. ² TAURON Polska Energia S.A. holds direct interest in the issued capital and the governing body of TAMEH HOLDING Sp. z o.o., which holds 100% interest in the issued capital and the governing bodies of TAMEH POLSKA Sp. z o.o. and TAMEH Czech s.r.o.

As at 31 December 2018 the interest of TAURON Polska Energia S.A. in the issued capital and decision-making bodies of the above material subsidiaries and co-subsidiaries did not change vs. 31 December 2017, except for the share in Nowe Jaworzno Grupa TAURON Sp. z o.o., a subsidiary as described in detail in Note 48 hereto.

3. Statement of compliance

These financial statements have been prepared in compliance with the requirements of the International Financial Reporting Standards ("IFRS"), as endorsed by the European Union ("EU").

The IFRS consist of standards and interpretations approved by the International Accounting Standards Board ("IASB") and the International Financial Reporting Interpretations Committee.

4. Going Concern

These financial statements have been prepared on the assumption that the Company will continue as a going concern in the foreseeable future. As at the date of approval of these financial statements for publication, no circumstances had been identified which would indicate a risk to the Company's ability to continue as a going concern.

5. Functional and Presentation Currency

Polish zloty is the functional currency of the Company and the presentation currency of these financial statements. These financial statements have been presented in the Polish zloty ("PLN") and all figures are in PLN thousand, unless stated otherwise.

6. Standards, amendments to standards and interpretations which have been published but are not yet effective

The Company did not choose an early application of any standards, revised standards or interpretations, which were published, but are not yet mandatorily effective. •

Standards, amendments to standards and the interpretation issued by the International Accounting Standards Board ("IASB") which have been endorsed by the European Union, but are not yet effective

According to the Management Board, IFRS 16 Leases will materially impact the accounting policies applied thus far:

IFRS 16 Leases

Effective date in the EU: annual periods beginning on or after 1 January 2019.

Under IFRS 16 Leases, the lessee recognizes the right-of-use asset and the lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee uses the incremental borrowing rate.

Lessors continue to classify leases as operating or finance leases, i.e. in line with IAS 17 Leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise, a lease is classified as an operating lease. A lessor recognizes finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment. A lessor recognizes operating lease payments as income on a straight-line basis or another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished.

Impact on the financial statements

The Company has decided to apply the modified retrospective approach and the practical expedients allowed by IFRS 16 Leases, i.e. with the cumulative effect of initially applying this Standard recognized at the date of 1 January 2019.

As at 1 January 2019, the Company will recognize the right-of-use assets in the amount equal to the leasing liability in the current value of other lease payments discounted by applying the incremental borrowing rate adjusted by the amount of any prepayment or accumulated lease payments relating to that lease, recognized in the statement of financial position before the date of first adoption.

An analysis of the impact of IFRS 16 Leases on the accounting policies has shown a change material for the Company, i.e. the need to recognize right-of-use assets and liabilities for leases currently classified as operating leases in the financial statements. The Company analyzed all concluded contracts to identify those affected by IFRS 16 Leases. The analysis included in particular developing a methodology of determining the incremental interest rate, asset identification, verification of control of its use and determining the lease term.

The Company has decided to present right-of-use assets separately from other assets in the statement of financial position, except for right-of-use assets that meet the definition of investment property, which are presented as investment property as at 31 December 2018 in the amount of PLN 3 926 thousand and include only perpetual usufruct of land. The perpetual usufruct of land, presented as investment property, will increase by discounted lease payments of PLN 1 526 thousand.

Estimated impact of the application of IFRS 16 Leases as at 1 January 2019

	As at 31 December 2018	Recognition of right-of-use assets and lease liabilities	As at 1 January 2019
ASSETS
Non-current assets	27 166 500	41 496	27 207 996
Investment property	22 010	1 526	23 536
Right-of-use assets	–	39 970	39 970
TOTAL ASSETS	29 512 990	41 496	29 554 486
EQUITY AND LIABILITIES
Equity	15 259 836	–	15 259 836
Non-current liabilities	8 533 790	34 404	8 568 194
Debt	8 474 344	34 404	8 508 748
Current liabilities	5 719 364	7 092	5 726 456
Debt	4 504 374	7 092	4 511 466
TOTAL EQUITY AND LIABILITIES	29 512 990	41 496	29 554 486

Estimated distribution of right-of-use assets as at 1 January 2019

Right-of-use assets	As at 1 January 2019
Lease of office and warehouse space	35 345
Lease of parking spaces	3 123
Lease of cars	1 502
Total	39 970

Reconciliation of future minimum operating lease payments calculated in line with IAS 17 Leases as at 31 December 2018 to lease liabilities estimated in line with IFRS 16 Leases as at 1 January 2019:

Reconciliation IAS 17 Leases to IFRS 16 Leases
Future minimum operating lease payments as at 31 December 2018 in line with IAS 17 Leases	49 164
Discount using the incremental interest rate	(7 668)
Lease liabilities under IFRS 16 Leases as at 1 January 2019	41 496
•

The following practical expedients have been applied as at the date of first-time adoption of IFRS 16 Leases: •

• a single discount rate was adopted for the portfolio of similar leases;
• the requirements of IFRS 16 Leases were not applied to leases whose term expires within 12 months of the first-time adoption date; •
• the knowledge of effective leases, in particular regarding the use of the contractual extension/termination option, was applied; •
• if the non-lease component could not be separated for a base asset class, both the lease and non-lease components were recognized as a single lease.

The data presented above, which according to the Company, comply with the requirements of IFRS 16 Leases in all material respects, were estimated. Consequently, the final figures disclosed in the financial statements for 2019 may differ from those presented in these financial statements.

According to the Management Board, the following amendments and revised standards will not materially impact the accounting policies applied thus far:

Standard/ amendment	Effective in the EU as of (annual periods beginning on or after the date provided)
Revised IFRS 9 Financial Instruments	1 January 2019
Revised IAS 28 Investments in Associates and Joint Ventures	1 January 2019
IFRIC 23 Uncertainty over Income Tax Treatments	1 January 2019
Revised IAS 19 Employee Benefits	1 January 2019
Annual Improvements to IFRS (Cycle 2015–2017):
IAS 12 Income Taxes	1 January 2019
IAS 23 Borrowing Costs	1 January 2019
IFRS 3 Business Combinations	1 January 2019
• IFRS 11 Joint Arrangements	1 January 2019

Standards and revised standards issued by the International Accounting Standards Board which have not been endorsed by the European Union and are not yet effective

According to the Management Board, the following standards and revised standards will not materially impact the accounting policies applied thus far:

Standard	Effective date specified in the Standard, not endorsed by the EU (annual periods beginning on or after the date provided)
IFRS 14 Regulatory Deferral Accounts	1 January 2016*
IFRS 17 Insurance contracts	1 January 2021
Revised IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between Investor and its Associate or Joint Venture with subsequent amendments	the effective date has been postponed
Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Material	1 January 2020
Amendments to IFRS 3 Business Combinations	1 January 2020
Amendments to References to the Conceptual Framework in IFRS	1 January 2020

* The European Commission decided not to launch the process of endorsement of the interim standard for use in the EU until the publication of the final version of IFRS 14 Regulatory Deferral Accounts.

7. Changes in the accounting policies

The accounting principles (policy) adopted for the preparation of these financial statements are consistent with those used for the preparation of the annual financial statements of TAURON Polska Energia S.A. for the year ended 31 December 2017, except for the application of the new standards and amendments to standards and changes to the accounting principles (policy) applied by the Company, as discussed below.

7.1. Application of new standards and amendments to standards

According to the Management Board, the following new standards and amendments to standards have a material impact on the accounting policies applied thus far:

(in PLN '000)

IFRS 9 Financial Instruments

Effective date in the EU: annual periods beginning on or after 1 January 2018. •

Key changes introduced by IFRS 9 Financial Instruments:

Change in the classification and measurement of financial assets

Instead of the four classes of financial assets identified by IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments identifies three categories of financial assets: ––

• financial assets measured at amortized cost; –
• financial assets measured at fair value through other comprehensive income;
• financial assets measured at fair value through profit or loss. –

Pursuant to IFRS 9 Financial Instruments, financial assets are classified upon initial recognition based on: –

• cash flow characteristics (test SPPI, Solely Payments of Principal and Interest); •
• business model for managing the financial asset.

Introduction of a new impairment testing model based on expected credit losses

IFRS 9 Financial Instruments replaces the incurred credit losses with the concept of expected credit losses, resulting in the recognition of a loss allowance upon initial recognition of an asset. The requirements regarding impairment of financial assets apply to financial assets measured at amortized cost and at fair value through other comprehensive income.

Impact on the financial statements as at 1 January 2018

The Company decided to apply IFRS 9 Financial Instruments with the effect as of 1 January 2018. The Company decided not to restate the comparative information, as permitted by the Standard. The data as at 31 December 2017 and for the year ended 31 December 2017 were presented in line with IAS 39 Financial Instruments: Recognition and Measurement.

Impact of the application of IFRS 9 Financial Instruments on retained earnings as at 1 January 2018:

	IAS 39		IFRS 9			Effect of change
Categories and classes of financial instruments in line with IAS 39				Fair value through:
	At amortised/ at historical cost	At fair value	At amortised cost	Profit/loss	Other comprehensive income	Increase/ (decrease)
1 Financial assets at fair value through profit
or loss, held for trading	–	154 574	–	154 574	–	–
Derivative instruments	–	53 216	–	53 216	–	–
Investment fund units	–	101 358	–	101 358	–	–
2 Financial assets available for sale	39 244	–	–	25 351	–	(13 893)
Long-term shares	39 244	–	–	25 351	–	(13 893)
3 Loans and receivables	8 228 015	–	7 551 955	177 275	–	(498 785)
Receivables from buyers	719 133	–	717 558	–	–	(1 575)
Gross value	720 057	–	720 057	–	–	–
Impairment loss	(924)	–	(2 499)	–	–	(1 575)
Bonds	6 572 696	–	6 176 103	–	–	(396 593)
Gross value	6 572 696	–	6 572 696	–	–	–
Impairment loss	–	–	(396 593)	–	–	(396 593)
Loans granted under cash pool agreement	190 526	–	190 526	–	–	–
Other loans granted	712 654	–	461 077	150 960	–	(100 617)
Gross value	712 654	–	471 887	150 960	–	(89 807)
Impairment loss	–	–	(10 810)	–	–	(10 810)
Other financial receivables	33 006	–	6 691	26 315	–	–
4 Hedging derivative instruments	–	28 482	–	28 482*	–	–
5 Cash and cash equivalents	–	721 577	–	721 577	–	–
Total effect of the application of IFRS 9 on financial assets (512 678)
1 Financial liabilities measured at amortised cost	470 239	–	437 184	–	–	33 055
Loan granted by European Investment Bank	470 239	–	437 184	–	–	33 055
Total effect of the application of IFRS 9 on financial liabilites						33 055
Effect on retained earnings						(479 623)
Deferred tax					91 072
Effect on retained earnings after deferred tax						(388 551)

* The Company has continued hedge accounting in line with IAS 39 Financial Instruments: Recognition and Measurement.

Change in the classification and measurement of financial assets

•

The categories of financial assets identified in IAS 39 Financial Instruments: Recognition and Measurement cannot be directly translated into those identified in IFRS 9 Financial instruments and therefore the Company has developed a method of classification of financial assets which sets the terms of the SPPI and the business model tests. On such basis the Company carried out the business model and SPPI tests for all financial assets material as at 1 January 2018.

The analysis revealed that a considerable portion of financial assets presented in the above table generates cash flows corresponding solely to the repayment of principal and interest and they are maintained under a business model based solely on the generation of cash flows, which translates into their classification as financial assets measured at amortized cost.

The subordinated loan and the loans used for the purposes of repayment of debt originated to the joint venture Elektrociep³ownia Stalowa Wola S.A., measured at amortized cost in line with IAS 39 Financial Instruments: Recognition and Measurement, with the carrying amount as at 1 January 2018 of PLN 240 767 thousand, have been classified to financial assets measured at fair value through profit or loss in the amount of PLN 150 960 thousand, since the cash flows they generate do not correspond solely to the repayment of principal and interest. The application of IFRS 9 Financial instruments reduced the Company's retained earnings as at 1 January 2018 by PLN 89 807 thousand.

IFRS 9 Financial Instruments requires that interests in other entities be measured at fair value, also with respect to those shares which – due to a limited availability of information – have so far been measured at cost less any impairment allowances. Therefore the Company, estimated the fair value of shares held in PGE EJ 1 Sp. z o.o. in line with the adjusted net assets method considering its share in the net assets and adjusting the value by relevant factors affecting the measurement such as the non-controlling interest discount and the discount for the lack of liquidity of the above instruments. As the key factors affecting the value of the assumed shares had not changed at a given end of the reporting period compared to the initial recognition, in the case of other instruments the Company assumes that the historical cost is an acceptable approximation of the fair value. The application of IFRS 9 Financial Instruments to measurement of equity investments reduced the Company's retained earnings as at 1 January 2018 by PLN 13 893 thousand. The above equity instruments are measured at fair value through profit or loss in line with IFRS 9 Financial Instruments.

Based on an analysis, transferred collateral, amounting to PLN 26 315 thousand as at 1 January 2018, was classified as other financial receivables measured at fair value through profit or loss, since the classification provides the best reflection of the nature of these financial assets. The remaining part of other financial receivables, with receivables of the Tax Capital Group as the key item, were classified as measured at amortized cost. •

Introduction of a new impairment testing model based on expected credit losses

The Company has identified the following categories of financial assets for which it has verified the impact of the calculation of expected credit losses in line with IFRS 9 Financial Instruments on the financial statements: ––

• receivables from buyers; and
• held bonds of subsidiaries and loans granted.

As far as the receivables from buyers are concerned, the Company has designated a portfolio of strategic counterparties in the case of which it is expected that the historical performance (lack of material delinquencies) does not provide full information on the expected credit losses that the Company may be exposed to. The risk of insolvency on the part of strategic counterparties has been assessed based on ratings assigned to the counterparties using an internal scoring model and appropriately restated to account for the probability of default. It is expected that the historical performance information concerning receivables from other counterparties may reflect the credit risk that will be faced in future periods. The expected credit losses for this group of counterparties have been estimated through an analysis of ageing of receivables and percentage ratios assigned to individual ranges and groups (such as receivables claimed at court, receivables from counterparties in bankruptcy) which help estimate the value of receivables from buyers which are not expected to be paid.

Based on the analyses, the total value of the loss allowance for expected credit losses due to receivables from buyers, following the application of IFRS 9 Financial Instruments increased compared to the value of the allowance calculated based on previous terms, which resulted in a decrease in retained earnings as at 1 January 2018 by PLN 1 575 thousand.

As far as granted loans and held bonds are concerned, the Company assesses the risk of insolvency on the part of the borrowers and issuers based on the ratings assigned to the counterparties using an internal scoring model, appropriately restated to account for the probability of default. The expected credit loss, in line with IFRS 9 Financial Instruments, is calculated based on the time value of money.

The application of IFRS 9 Financial Instruments to the expected credit losses under purchased bonds and granted loans measured at amortized cost resulted in a decrease of the Company's retained earnings as at 1 January 2018 by PLN 396 593 thousand and PLN 10 810 thousand, respectively. •

Change in the basis of measurement for liabilities in the event of modification of contractual cash flows

IFRS 9 Financial Instruments also introduces a change in the basis of measurement for liabilities if the contractual cash flows have been modified. The Company has liabilities under loans from the European Investment Bank and the liabilities are modified through a change in interest rates at an agreed date. The application of IFRS 9 Financial Instruments increased the Company's retained earnings as at 1 January 2018 by PLN 33 055 thousand. •

Hedge accounting

As at 1 January 2018 the Company held instruments hedging fluctuations in cash flows related to issued bonds and resulting from the interest rate risk. These interest rate swaps are subject to hedge accounting.

An analysis of risks and rewards related to the adoption of the hedge accounting solutions introduced by IFRS 9 Financial Instruments in light of the Company's portfolio of financial instruments revealed that the principles defined in IAS 39 Financial Instruments: Recognition and Measurement should still be applied. It is not expected that the application of the provisions of IFRS 9 Financial Instruments concerning hedge accounting will have a material impact on the Company's financial statements as regards its transactions. The Company has been monitoring the work carried out by the International Accounting Standards Board with respect to IFRS 9 Financial Instruments related to hedge accounting and the date of the obligatory application of the hedge accounting principles. •

Measurement of financial guarantee liabilities

The Company has analysed the impact of IFRS 9 Financial Instruments on the measurement of financial guarantee liabilities. The analysis did not reveal any significant impact of IFRS 9 Financial Instruments on the measurement of liabilities in the loss allowance for expected credit losses.

IFRS 15 Revenue from Contracts with Customers

Clarifications to IFRS 15 Revenue from Contracts with Customers

Effective date in the EU: annual periods beginning on or after 1 January 2018.

The standard specifies how and when an IFRS reporter will recognize revenue as well as requires more informative, relevant disclosures. The standard replaces IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 18 Transfer of Assets from Customers and a number of interpretations concerning revenue recognition. •

The key principles introduced by IFRS 15 Revenue from Contracts with Customers are:

• five steps of revenue recognition: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to each performance obligation; and recognize revenue when the entity satisfies a performance obligation; •
• revenue is recognized when (or as) the Company satisfies the obligation to transfer an asset. The asset has been transferred as control has passed; •
• the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

The new standard requires significantly extended disclosures regarding sales and revenue to enable users of financial statements to understand the nature, timing, amount as well as risk and uncertainty of revenue and cash flows arising from contracts with customers. An entity has to disclose quantitative and qualitative information about: its contracts with customers, its material judgments and estimates and capitalized costs of contract acquisition and performance.

Impact on the financial statements as at 1 January 2018

The Company has decided to apply the modified retrospective approach allowed by IFRS 15 Revenue from Contracts with Customers, i.e. with the cumulative effect of initially applying this Standard recognized at the date of initial application. The Company decided not to restate the comparative information, as permitted by the Standard. The data as at 31 December 2017 and for the year ended 31 December 2017 were prepared in line with IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 18 Transfer of Assets from Customers and interpretations related to revenue recognition issued before IFRS 15 Revenue from Contracts with Customers was endorsed.

There have been conducted a five-step analysis of its contracts with customers, which is necessary for proper measurement of its revenue in accordance with IFRS 15 Revenue from Contracts with Customers – from identification of contracts (or contract groups), through selection of liability items and determination of prices, their allocation to individual liability items to revenue recognition.

As part of the analysis, the Company reviewed concluded contracts, in terms of the amount of variable compensation, a guarantee for the sold goods, fulfilment of the conditions for recognizing combined contracts and the existence of elements of financing in the contracts.

Based on an analysis of contracts with customers the Company concludes that the implementation of IFRS 15 Revenue from Contracts with Customers does not have an impact on the Company's equity as at 1 January 2018.

According to the Management Board, the introduction of the following amendments to standards and interpretations has not materially impacted the accounting policies applied thus far.

Standard/amendment	Effective date in the EU (annual periods beginning on or after the date provided)
Revised IFRS 4 Insurance Contracts	1 January 2018
Revised IFRS 2 Share-based Payments: Classification and Measurement of Share-based Payment Transactions	1 January 2018
Revised IAS 40 Investment Property – Transfers of Investment Property	1 January 2018
IFRIC 22 Foreign Currency Transactions and Advance Consideration	1 January 2018
Annual Improvements to IFRS (cycle 2014–2016):
IFRS 1 First-time Adoption of International Financial Reporting Standards	1 January 2018
IAS 28 Investments in Associates and Joint Ventures	1 January 2018

7.2. Presentation change

As of 1 January 2018, the Company presents the measurement effects, i.e. assets or liabilities due to positive or negative valuation on forwards and futures (derivative financial instruments) separately, disclosing a gain or loss on a single contract. Previously, the Company applied a simplified approach involving the recognition of the effects of measurement taking into account the positions of contract.

The effect of the presentation change on the statement of financial position as at 31 December 2017 is presented in the table below. The change has not had any effect on the Company's profit/loss.

	As at 31 December 2017 (authorised figures)	Change in presentation of derivative instruments	As at 31 December 2017 (restated figures)
ASSETS
Non-current assets	27 371 425	259	27 371 684
Derivative instruments	26 445	259	26 704
Current assets	2 901 667	48 023	2 949 690
Derivative instruments	6 971	48 023	54 994
TOTAL ASSETS	30 273 092	48 282	30 321 374
EQUITY AND LIABILITIES
Non-current liabilities	9 530 528	259	9 530 787
Derivative instruments	4 958	259	5 217
Current liabilities	3 364 658	48 023	3 412 681
Derivative instruments	9 226	48 023	57 249
TOTAL EQUITY AND LIABILITIES	30 273 092	48 282	30 321 374

8. Accounting principles (policy) and material values based on professional judgment and estimates

Significant accounting principles are presented in notes to these financial statements.

When applying the accounting policy, professional judgment of the management, along with accounting estimates, have been of key importance; they have impacted the figures disclosed in these financial statements and in the explanatory notes. The assumptions underlying the estimates have been based on the Management Board's best knowledge of current and future actions and events in individual areas. In the period covered by these financial statements, there were no significant changes in estimates or estimation methods applied, which would affect the current or future periods, other than those described further in these financial statements.

The items of the financial statements which are exposed to the risk of material adjustment of the carrying amounts of assets and liabilities have been presented in notes to these financial statements. Key estimates include allowances for shares in subsidiaries, intercompany bonds and loans, as presented in details in Notes 10, 19 and 22 to these financial statements.

Additionally, the Company makes significant estimates as regards the contingent liabilities is discloses, and in particular as regards court cases it is a party to. Contingent liabilities have been presented in detail in Note 40 hereto.

BUSINESS SEGMENTS

9. Information on operating segments

9.1. Operating segments

The Company carries out its business in two operating segments, that is "Sales" and "Holding activity". •

The assets of the "Holding activity" segment are: •

• shares in subsidiaries and jointly-controlled entities; •
• bonds acquired from subsidiaries; •
• cash pool loan receivables, including a cash pool deposit; •
• receivables arising from other loans granted to related parties;
• assets arising from valuation of hedging instruments relating to issued bonds. •

The liabilities of the "Holding activity" segment are:

• bonds issued by the Company, including liabilities arising from valuation of hedging instruments relating to such bonds; ••
• loans from the European Investment Bank to carry out investment projects in subsidiaries;
• liabilities due to loans from related parties, including under the cash pool agreement.

The "Holding activity" segment includes intra-group receivables and liabilities arising from income tax settlements of the Tax Capital Group companies.

Finance income and finance costs include dividend income as well as net interest income and expense earned/incurred by the Company in relation to the central financing model adopted by the Group.

General and administrative expenses are presented under unallocated expenses, as they are incurred for the Group as a whole and are not directly attributable to a specific operating segment.

EBIT is the profit/loss on continuing operations before tax, finance income and finance costs, i.e. operating profit (loss).

EBITDA is the profit/loss on continuing operations before tax, finance income and finance costs, increased by amortization/depreciation and impairment of non-financial assets.

Year ended 31 December 2018

	Sales	Holding activity	Unallocated items	Total
Revenue
Sales outside the Group	1 006 805	–	–	1 006 805
Sales within the Group	7 603 640	8 197	–	7 611 837
Segment revenue	8 610 445	8 197	–	8 618 642
Profit/(loss) of the segment	113 178	8 197	–	121 375
Unallocated expenses	–	–	(98 716)	(98 716)
EBIT	113 178	8 197	(98 716)	22 659
Revaluation of shares		(2 469 069)	–	(2 469 069)
Net finance income/(costs)	–	729 570	(15 443)	714 127
Profit/(loss) before income tax	113 178	(1 731 302)	(114 159)	(1 732 283)
Income tax expense	–	–	22 430	22 430
Net profit/(loss) for the year	113 178	(1 731 302)	(91 729)	(1 709 853)
Assets and liabilities
Segment assets	2 131 713	27 193 114	–	29 324 827
Unallocated assets	–	–	188 163	188 163
Total assets	2 131 713	27 193 114	188 163	29 512 990
Segment liabilities	884 862	13 073 580	–	13 958 442
Unallocated liabilities	–	–	294 712	294 712
Total liabilities	884 862	13 073 580	294 712	14 253 154
EBIT	113 178	8 197	(98 716)	22 659
Depreciation/amortization	(4 759)	–	–	(4 759)
Impairment	131	–	–	131
EBITDA	117 806	8 197	(98 716)	27 287
Other segment information
Capital expenditure*	7 319	–	–	7 319

* Capital expenditure includes expenditures for property, plant and equipment and non-current intangible assets, except for energy certificates acquired by the Company.

For the year ended 31 December 2017 (restated data)

	Sales	Holding activity	Unallocated items	Total
Revenue
Sales outside the Group	995 252	–	–	995 252
Sales within the Group	6 762 587	34 186	–	6 796 773
Segment revenue	7 757 839	34 186	–	7 792 025
Profit/(loss) of the segment	317 353	34 186	–	351 539
Unallocated expenses	–	–	(88 751)	(88 751)
EBIT	317 353	34 186	(88 751)	262 788
Revaluation of shares	–	(134 372)	–	(134 372)
Net finance income (costs)	–	783 990	7 159	791 149
Profit/(loss) before income tax	317 353	683 804	(81 592)	919 565
Income tax expense	–	–	(65 214)	(65 214)
Net profit/(loss) for the year	317 353	683 804	(146 806)	854 351
Assets and liabilities
Segment assets	1 796 606	28 423 410	–	30 220 016
Unallocated assets	–	–	101 358	101 358
Total assets	1 796 606	28 423 410	101 358	30 321 374
Segment liabilities	591 436	12 124 905	–	12 716 341
Unallocated liabilities	–	–	227 127	227 127
Total liabilities	591 436	12 124 905	227 127	12 943 468
EBIT	317 353	34 186	(88 751)	262 788
Depreciation/amortization	(5 532)	–	–	(5 532)
Impairment	100	–	–	100
EBITDA	322 785	34 186	(88 751)	268 220
Other segment information
Capital expenditure*	160	–	–	160

* Capital expenditure includes expenditures for property, plant and equipment and non-current intangible assets, except for energy certificates acquired by the Company.

In the financial year ended 31 December 2018, revenue from sales to two major clients from the TAURON Group constituted 68% and 9% of the Company's total revenue in the "Sales" segment and amounted to PLN 5 873 610 thousand and PLN 789 451 thousand, respectively.

In the financial year ended 31 December 2017, revenue from sales to two major clients from the Capital Group accounted for 67% and 10% of the Company's total revenue in the "Sales" segment and amounted to PLN 5 208 284 thousand and PLN 799 943 thousand, respectively.

9.2. Geographic areas of operations

The majority of the Company's business operations are carried out in Poland. In the years ended 31 December 2018 and 31 December 2017, export sales amounted to PLN 97 502 thousand and PLN 147 938 thousand, respectively.

IMPAIRMENT OF SHARES IN SUBSIDIARIES

10. Impairment of financial assets

SELECTED ACCOUNTING PRINCIPLES

Under IAS 36 Impairment of Assets, as at each reporting period end, the Company assesses shares held in subsidiaries and joint ventures for objective impairment indication regarding financial assets or asset groups.

If there is any objective indication that the assets may be impaired, the assets are tested for impairment. The tests include shares in subsidiaries and intra-group loans and bonds that account for key financial assets of the Company. The amount of the impairment loss is the difference between the carrying amount of a financial asset or group of financial assets and the recoverable amount, which is the fair value less costs of disposal or the value in use, whichever is higher. The value in use is calculated as the present value of estimated future cash flows from the operations of subsidiaries and the estimated residual value discounted using the weighted average cost of capital.

As at 31 December 2018 and 30 June 2018, the Company carried out impairment tests focusing on shares and intra-group loans and bonds, taking into account the following factors: ••

• the Company's capitalization remaining below their carrying amount for a long period; •
• changes in global prices of commodities, energy and greenhouse gas emission allowances; •
• material fluctuations of energy prices on the future/forward market and continuing liquidity problems; •
• an increase in power price limits on the current wholesale market and on the balancing market; •
• regulatory activities aimed at the limiting of end user price increases; •
• the continuing high volatility in the mining and geological industries; •
• disadvantageous excavation front structure (short face runs), which generates additional costs of reinforcements; •
• limited competition in the market of mining materials and services, which results in price increases; •
• the outcome of auctions carried out on the power market in relation to 2021, 2022 and 2023;
• proceeding winter package provisions (including emission standards) that adversely impact the capability of coal-based units to participate in the power market after 1 July 2025; ••
• persisting unfavorable market conditions for the conventional power industry; •
• the Act on Promoting Power from Highly Effective Cogeneration of 14 December 2018 coming into force;
• an increase in the risk-free rate.

Shares and intra-group loans and bonds accounted for about 92% of the balance sheet total as at the end of the reporting period.

The recoverable amount is the value in use. The calculation method has been presented below.

Relevant tests were conducted based on the present value of projected cash flows from operations of the key entities, by reference to detailed projections by 2028 and the estimated residual value. The projections used for the power generating and mining units cover the entire period of their operation. Reliance on projections covering a period longer than 5 years results mainly from the fact that investment processes in the power industry are time-consuming. The macroeconomic and sector assumptions serving as the basis for projections are updated as frequently as any indications for their modification are observed on the market. Projections also take into account changes in the regulatory environment known as at the date of the test.

Key assumptions made for purposes of the tests performed as at 31 December 2018

The weighted average cost of capital (WACC) during the projection period, as used in the calculations, ranges from 6.46% to 11.58% in nominal terms before tax, taking into account the risk free rate determined by reference to the yield on 10-year treasury bonds (4.04%) and the risk premium for operations appropriate for the power industry (6%). The growth rate used for extrapolation of projected cash flows beyond the detailed planning period is 2.5% and it corresponds to the estimated long-term inflation rate. As at 31 December 2018, WACC did not change compared to 31 December 2017.

The key business assumptions affecting the estimated value in use of the tested entities are:

•

• Assumption in coal prices projected for the coming years are stable as global prices and cots of transport will remain high. According to international institutions, after 2023 and in the long run, coal price will insignificantly decrease as a result of the implementation of climate policy and the strategy to replace coal with energy from renewable sources followed by a growing number of countries. Prices forecast by international institutions by 2030 show a downward trend. It has been assumed that in the years 2021–2040 the prices of power coal will decrease by 12%; •
• The electricity wholesale price path for the years 2019–2027 with the perspective by 2040 has been adopted, taking into account such factors as the effect of the balance of the market supply and demand for electricity, costs of fuel as well as costs of acquiring greenhouse gas emission allowances. The price growth assumed for 2019 vs. the average SPOT price in the second half of 2018 is 17%. It has been assumed that power prices will decrease by 4.5% by 2021 vs. 2019, among others as a result of a capacity balance improvement resulting from the commissioning of new power units in Jaworzno and Opole and the power market startup. An increase of 3.7% is assumed after 2021 and by 2027 (vs. 2021) followed by a drop by 7.2% between 2028 and 2040 (fixed prices) vs. 2027; •
• The operating reserve capacity mechanism is to remain in place until the end of 2020, i.e. until the Capacity Market has been implemented; •
• The Capacity Market mechanism implementation has been taken into account (in line with the adopted and notified Act on the Capacity Market and the draft Capacity Market Regulations). With regard to the operating coal-based units that do not meet the EPS 550 criterion, commencement of payments for power in 2021 to be continued to 2025 has been assumed. For entities that won or will win long-term contracts by 31 December 2019 and do not meet the EPS 550 criterion, payments have been assumed to be continued until the contract expiration date; •
• Greenhouse gas emission limits for heat generation have been set in line with the regulation of the Council of Ministers and adjusted by the level of operations, i.e. generation of heat; •
• The greenhouse gas emission allowance price growth path for the years 2019–2027 with the perspective by 2040 has been adopted. It has been assumed that the market price will increase by ca. 23% by 2027, comparing to 2019 and by ca. 212% vs. the average price observed in 2018, with slight but serial greenhouse gas emission allowance price decreases in 2028–2040 vs. 2027 (fixed prices), totaling 10%. This results from the assumed increase in decarbonization of the economy and the resultant drop in demand for emission allowances in 2030–2040; •
• The price path assumed for emission certificates and the obligatory redemption in the subsequent years are based on the amended Act on Renewable Energy Sources; •
• Limited support periods for green energy have been assumed in accordance with the Act on Renewable Energy Sources, which provides for new support mechanisms for renewable energy. The support period has been limited to 15 years as from the date of the first supply of electricity qualifying for an energy certificate to the distribution network; •
• In line with the amended Energy Law and certain other acts, the applicable CHP support system settlements for 2018 will be carried out until 30 June 2019. No support for CHP has been assumed thereafter for the existing coal based units; •
• Regulated revenue generated by distribution companies, ensuring coverage of reasonable costs and a reasonable level of return on capital has been assumed. The return on capital is conditional on the Regulatory Asset Value. In 2019, the effect of losing profit on distribution, resulting from no tariffs introduced, has been recognized; •
• The electricity retail price path has been adopted based on the wholesale price of black energy, taking into account the costs of excise duty, the obligation to surrender energy certificates as well as an appropriate level of margin. In 2019 effects of changes in the Excise Duty Act and certain other acts of 28 December 2018, introducing regulations regarding electricity prices and fees included in tariffs, considering an excise duty reduction; ••
• End-user sales volumes taking into account GDP growth and increased market competition have been applied;
• Tariff revenue generated by heat companies, ensuring coverage of reasonable costs and a reasonable level of return on capital has been assumed; •
• Maintaining the production capacity of the existing non-current assets as a result of replacement and development investments was considered.

Fixed assets were also tested for impairment. To this end, the Company applied the relevant assumptions used for impairment testing of shares.

Sensitivity analyses conducted by the Company reveal that the projected prices of electricity, those of greenhouse gas emission allowances and the adopted discount rates, as well as coal prices are the key factors exerting an effect on the estimated cash flows of the key entities.

Test results

The impairment tests carried out in line with IAS 36 Impairment of Assets as at 31 December 2018 indicated impairment of the carrying amount of shares in subsidiaries of PLN 1 868 386 thousand and reversal of an impairment loss on shares in a subsidiary of PLN 402 377 thousand.

The impairment tests carried out in line with IAS 36 Impairment of Assets as at 30 June 2018 indicated impairment of the carrying amount of shares in subsidiaries of PLN 1 514 271 thousand and reversal of an impairment loss on shares in a subsidiary of PLN 538 144 thousand.

The aforesaid impairment allowances were recognized in the Company's finance costs and concerned the following entities:

Company	WACC* assumed in tests as at			Recoverable amount of shares, intra-group	Impairment (loss)/reversal of loss recognized in the year ended 31 December 2018
	31 December 2018	30 June 2018 (unaudited)	31 December 2017	loans and bonds as at 31 December 2018	Shares
TAURON Wytwarzanie S.A.	8.59%	8.36%	8.39%	426 915	(2 287 830)
TAURON Ekoenergia Sp. z o.o.	9.60%	9.51%	8.78%	1 914 172	940 521
TAURON Wydobycie S.A.	11.58%	10.95%	10.20%	548 316	(1 094 827)

* The level of the weighted average cost of capital (WACC) in nominal terms before tax.

The impairment loss on shares in a subsidiary TAURON Wydobycie S.A. was recognized in 2018 for the following reasons: ••

• high volatility of mining and geological conditions in mines owned by the TAURON Group; •
• disadvantageous excavation front structure (short face runs), which generates additional costs of reinforcements;
• limited competition in the market of mining materials and services, which results in the price growth.

The impairment loss on shares in a subsidiary TAURON Wytwarzanie S.A. was recognized in 2018 for the following reasons: ••

• finalizing the first three Power Market auctions regarding deliveries for 2021–2023;
• including provisions of the projected Energy Regulation, which (on the EU level) shall eliminate units that emit more than 550kgCO2/MWh or, on average, more than 350kgCO2/kW of the installed power per year from the use of power mechanisms after 1 July 2025; •
• an increase on greenhouse gas emission allowance costs.

The reversal of the impairment loss on shares in a subsidiary TAURON Ekoenergia Sp. z o.o. recognized in 2018 was possible for the following reasons: •

• changes regarding renewable energy sources (the manner of calculating a substitution fee and taxes on wind farms) that positively affect financial performance of assets based on renewable energy sources; •
• a fundamental change in market factors related to energy generation from renewable sources, meaning a competitive advantage over conventional generation.

The loans extended to Elektrociep³ownia Stalowa Wola S.A. were tested for impairment. The results of the test showed that there is no need for an impairment loss provided that the assumption are compliant with the impairment tests on shares.

(in PLN '000)

The table below presents change in impairment allowances on shares in the year ended 31 December 2018:

Company	Impairment as at 1 January 2018	Impairment loss recognized in the year ended 31 December 2018	Impairment loss reversed in the year ended 31 December 2018	Impairment as at 31 December 2018	Carrying amount of shares including impairment losses as at 31 December 2018
TAURON Wytwarzanie S.A.	(5 347 296)	(2 287 830)	–	(7 635 126)	230 575
TAURON Ekoenergia Sp. z o.o.	(1 125 693)	–	940 521	(185 172)	1 754 593
TAURON Wydobycie S.A.	(147 870)	(1 094 827)	–	(1 242 697)	99 058

Apart from allowances for shares in subsidiaries, included in the result of the above impairment tests, in the financial year ended 31 December 2018 an impairment allowance was recognized for shares in Polska Energia Pierwsza Kompania Handlowa Sp. z o.o., a subsidiary, of PLN 6 000 thousand and in TAURON Sweden Energy AB (publ) of PLN 20 933 thousand.

EXPLANATORY NOTES TO THE STATEMENT OF COMPREHENSIVE INCOME

11. Sales revenue

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2018

Revenue is recognized when (or as) the performance obligation is fulfilled in the form of transferring the promised goods, products, materials (i.e. assets) or perform a service to a client. The asset transfer takes place when a client obtains control over an asset. For sales of electricity and gaseous fuels, the energy is deemed sold when delivered to a consumer.

Revenue should be recognized at the amount expected by the Company, following reduction by VAT, excise duty, other sales taxes, charges and discounts.

The Company has introduced five steps of revenue recognition: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to each performance obligation; and recognize revenue when (or as) the entity satisfies a performance obligation.

For goods and materials, revenue is recognized when the Company ceases to be involved in permanent management of the goods sold to the extent the function is usually performed in relation to owned goods, and when it ceases to effectively control these items.

Revenue includes amounts the Company expects to receive from sales of electricity, gaseous fuels, greenhouse emission allowances and other products, amended by granted rebates, discounts, excise duty.

Revenue from sales of goods includes the total positive result on transactions on greenhouse gas emission allowances, concluded within the trading portfolio, i.e. intended for sale and to realize short-term profit arising from market price fluctuations, including trading in emission allowances, fair value measurement of inventories, as well as measurement and settlement of derivative commodity instruments related to sales of greenhouse gas emission allowances.

Revenue from sales of goods includes gains on change in measurement and on exercising derivative commodity instruments falling within the scope of IFRS 9 Financial Instruments and related to purchases and sales of other commodities.

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2017

Revenue is recognized in the amount it is probable that future economic benefits relating to a transaction will flow to the Company and the amount of the revenue can be measured reliably. Revenue is recognized at the fair value of the payment, received or due, following reduction by VAT, excise duty, other sales taxes, charges and discounts. Revenue recognition criteria.

Revenue from sales of goods and materials is recognized if significant ownership-related risks and benefits from goods and materials have been transferred to the buyer and if the revenue amount can be reliably measured and incurred costs can be reliably estimated.

Revenue from sales of goods includes the total positive result on transactions on greenhouse gas emission allowances, concluded within the trading portfolio, i.e. intended for sale and to realize short-term profit arising from market price fluctuations, including trading in emission allowances, fair value measurement of inventories, as well as measurement and settlement of derivative commodity instruments related to sales of greenhouse gas emission allowances.

Gains on change in measurement and on exercising derivative commodity instruments falling within the scope of IAS 39 Financial Instruments: Recognition and Measurement and related to purchases and sales of other commodities are recognized in revenue from sales of goods.

	Year ended 31 December 2018	Year ended 31 December 2017
Sale of goods for resale, finished goods and materials without elimination of excise	8 506 398	7 667 345
Excise	–	(2 630)
Revenue from sales of goods for resale and materials	8 506 398	7 664 715
Electricity	7 555 021	7 117 988
Gas	277 887	190 507
Emission allowances	666 306	336 566
Property rights arising from energy certificates	1 586	14 939
Other	5 598	4 715
Rendering of services	112 244	127 310
Trading income	67 014	52 711
Management of shares	8 197	34 186
Other	37 033	40 413
Total	8 618 642	7 792 025

TAURON Polska Energia S.A. acts as an agent coordinating and supervising purchases, supplies and transportation of fuels. The Company purchases coal from third parties (and from the TAURON Group companies in the first half of 2017), which is subsequently sold to related parties. It recognizes revenue from agency services (supply management).

In the year ended 31 December 2018, the value of raw materials purchased and subsequently resold in the aforementioned transactions was PLN 1 097 640 thousand. The Company recognized revenue from agency services of PLN 33 271 thousand.

12. Expenses by type

SELECTED ACCOUNTING PRINCIPLES

The Company presents costs by function.

They include:

• cost of goods, materials and services sold (cost of sales), incurred during a given reporting period, including any impairment allowances on property, plant and equipment, intangible assets, receivables and inventories;
• total sales, general and administrative expenses incurred in the reporting period (disclosed separately in the statement of comprehensive income).

Costs of goods sold include the total negative result on transactions on greenhouse gas emission allowances, concluded within the trading portfolio, i.e. intended for sale and to realize short-term profit arising from market price fluctuations, including trading in emission allowances, fair value measurement of inventories, as well as measurement and settlement of derivative commodity instruments related to sales of greenhouse gas emission allowances.

Costs of goods sold include losses on change in measurement and on exercising derivative commodity instruments falling within the scope of IFRS 9 Financial Instruments and related to purchases and sales of other commodities.

Costs that can be assigned directly to revenue generated by the Company impact profit or loss for the period which the revenue pertains to.

Costs that can only be indirectly assigned to revenue or other benefits obtained by the Company impact the profit or loss in the portion pertaining to the given reporting period, and match the revenue or other economic benefits.

	Year ended 31 December 2018	Year ended 31 December 2017
Depreciation of property, plant and equipment and amortization of intangible assets	(4 759)	(5 532)
Materials and energy	(1 481)	(1 311)
External services	(51 201)	(49 277)
Taxes and charges	(4 586)	(4 375)
Employee benefits expense	(92 935)	(87 068)
Advertising expenses	(28 910)	(22 207)
Other	(1 896)	(1 849)
Total costs by type	(185 768)	(171 619)
Costs of performances intended for internal purposes	55	–
Selling and distribution expenses	20 692	23 309
Administrative expenses	98 716	88 751
Cost of goods for resale and materials sold	(8 406 343)	(7 355 148)
Cost of sales	(8 472 648)	(7 414 707)

An increase in the value of goods and materials sold during the year ended 31 December 2018 versus the comparative period arises mostly from an increase in electricity prices in the current reporting period and the effects of derecognition of provisions for onerous contracts with a joint venture in the net amount of PLN 201 174 thousand recognized in the comparative period, as described in Note 31 hereto.

(in PLN '000)

13. Employee benefits expenses

	Year ended 31 December 2018	Year ended 31 December 2017
Wages and salaries	(74 004)	(70 026)
Social security costs	(10 481)	(9 662)
Jubilee bonuses	–	(247)
Appropriations to the Social Fund	(545)	(520)
Costs of employee retirement plans	(2 712)	(2 475)
Post-employment benefits expenses – actuarial provisions	(635)	(606)
Other employee benefits expenses	(4 558)	(3 532)
Total	(92 935)	(87 068)
Items included in cost of sales	(27 580)	(22 741)
Items included in costs of performances intended for internal purposes	(55)	–
Items included in selling and distribution expenses	(6 890)	(7 640)
Items included in administrative expenses	(58 410)	(56 687)

14. Finance income and costs

SELECTED ACCOUNTING PRINCIPLES

Finance income and costs include in particular items relating to:

• revenue from profit sharing in other entities, including dividends;
• interest;
• disposal/liquidation of financial assets;
• revaluation of financial instruments, except financial assets measured at fair value where the effects are recognized in other comprehensive income and charged to revaluation reserve and derivative commodity instruments falling within the scope of IFRS 9 Financial Instruments in the case of which gains/losses on change in measurement and on exercising are presented within operating activities where gains/losses on the related trading in goods are also recognized;
• interest expense related to measurement of employee benefits, in line with IAS 19 Employee Benefits;
• changes in the balance of a provision resulting from the nearing deadline to incur the expense (discount unwinding effect);
• foreign exchange differences resulting from transactions performed during the reporting period and balance sheet measurement of assets and liabilities at the end of the reporting period, except for differences recognized in the initial value of a fixed asset;
• other items related to financing activities.

Translation of items denominated in foreign currencies

Foreign currency transactions are translated into PLN at initial recognition at the exchange rate applicable as at the transaction date. As at the end of the reporting period:

• monetary items denominated in foreign currencies are translated at the closing rate (the average exchange rate published by the National Bank of Poland as at the date);
• non-monetary items measured at historical cost and denominated in foreign currencies are translated at the exchange rate as at the original transaction date; and
• non-monetary items measured at fair value and denominated in foreign currencies are translated at the exchange rate as at the fair value measurement date.

Exchange differences from translation are recognized within finance income (costs), or, in the cases specified in the accounting principles (policy), capitalized in the value of assets.

Exchange rates applied for the purpose of balance sheet measurement:

EUR 4.3000 4.1709 USD 3.7597 3.4813	Currency	31 December 2018	31 December 2017
	CZK	0.1673	0.1632

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)

	Year ended 31 December 2018	Year ended 31 December 2017
Income and costs from financial instruments	(1 755 041)	659 477
Dividend income	819 437	560 832
Interest income on bonds and loans	327 447	456 426
Other interest income	5 774	19 539
Surplus of impairment losses (recognised)/reversed on shares	(2 469 069)	(134 372)
Interest expense	(298 602)	(334 638)
Commissions due to external financing	(22 993)	(19 068)
Exchange gains/(losses)	(118 143)	127 476
Gain/(loss) on derivative instruments	(4 052)	(18 042)
Revaluation of bonds and loans	15 493	–
Other	(10 333)	1 324
Other finance income and costs	99	(2 700)
Interest on discount (other provisions)	–	(2 330)
Other	99	(370)
Total, incl. recognized in the statement of comprehensive income:	(1 754 942)	656 777
Dividend income	819 437	560 832
Interest income on bonds and loans	327 447	456 426
Interest expense on debt	(298 602)	(334 638)
Revaluation of shares	(2 469 069)	(134 372)
Revaluation of bonds and loans	15 493	–
Other finance income and costs	(149 648)	108 529

In the year ended 31 December 2018, exchange losses exceeded exchange gains by PLN 118 143 thousand. Exchange losses are mainly exchange differences related to the Company's debt in the Euro, i.e. a loan obtained from a subsidiary, subordinated bonds and eurobonds. On that basis, exchange losses exceeded exchange gains by PLN 113 013 thousand. In the comparative period, exchange gains exceeded exchange losses.

In the year ended 31 December 2018 a surplus of impairment allowances on shares occurred in the amount of PLN 2 469 069 thousand, mainly as a result of recognizing impairment of shares in: TAURON Wydobycie S.A. of PLN 1 094 827 thousand and TAURON Wytwarzanie S.A. of PLN 2 287 830 thousand and reversal of impairment allowances on shares in TAURON Ekoenergia Sp. z o.o. of PLN 940 521 thousand, following impairment tests carried out as at 30 June 2018 and 31 December 2018, as described in detail in Note 10 hereto.

15. Income tax

SELECTED ACCOUNTING PRINCIPLES

Current tax

Income tax recognized in profit or loss for the period includes actual tax charge for the given reporting period determined by the Company in line with provisions of the CIT Act and including the settlement of the Tax Capital Group the Company belongs to, as well as any previous year tax adjustments.

Deferred tax

The Company recognizes a deferred tax asset and a deferred tax liability arising from temporary differences between the book value of assets and liabilities and their tax value, and a tax loss deductible in the future.

The carrying amount of the deferred tax asset is reviewed at the end of each reporting period. The Company reduces the carrying amount of the deferred tax asset to the extent the generation of taxable income sufficient to use the deferred tax asset in part or in whole is not probable. Unrecognized deferred tax asset is reviewed at the end of each reporting period and recognized to the extent its use is probable following generation of taxable income in the future. Deferred tax asset related to deductible differences concerning investments in subsidiaries is recognized insofar as their reversal is probable in the foreseeable future and where taxable income will be available to enable realization of deductible differences.

The deferred tax asset and liability are measured with the application of tax rates expected to be applicable in the period of realization of the asset or derecognition of the liability, with the consideration of tax rates (and tax regulations) that had been enacted or substantively enacted at the end of the reporting period.

Income tax related to items which are not recognized in profit or loss, i.e. items recognized in other comprehensive income or directly in equity, is recognized in other comprehensive income or in equity, respectively.

The Company offsets its deferred tax asset and deferred tax liability only if it has an enforceable legal title to offset its current tax receivables with liabilities and the deferred tax asset and liability concern the same tax authority.

PROFESSIONAL JUDGMENT AND ESTIMATES

As at each balance sheet date, the Company analyzes realizability of deferred tax asset and assesses its unrecognized items.

15.1. Tax expense in the statement of comprehensive income

Key items of the tax expense in the statement of comprehensive income:

	Year ended 31 December 2018	Year ended 31 December 2017
Current income tax	(59 908)	(66 160)
Current income tax expense	(53 127)	(66 429)
Adjustments of current income tax from prior years	(6 781)	269
Deferred tax	82 338	946
Income tax expense in profit or loss	22 430	(65 214)
Income tax expense in other comprehensive income	4 613	1 574

15.2. Reconciliation of the effective tax rate

	Year ended 31 December 2018	Year ended 31 December 2017
Profit/(loss) before tax	(1 732 283)	919 565
Tax at Poland's statutory tax rate of 19%	329 134	(174 717)
Adjustments to income tax from previous years	(6 781)	269
Tax resulting from tax non-deductible costs	(647 305)	(66 366)
Impairment loss on shares and loans in subsidiaries	(647 822)	(62 136)
Recognition of non-deductible provisions	(798)	(798)
Other	1 315	(3 432)
Tax resulting from income not included in taxable base	342 152	154 377
Reversal of impairment loss on shares in subsidiaries	178 699	36 605
Dividends	155 693	106 558
Reversal of non-deductible provisions	–	10 419
Other	7 760	795
Settlement of the TCG	4 851	21 223
Other	379	–
Tax at the effective tax rate of 1.3% (2017: -7.1%)	22 430	(65 214)
Income tax expense in profit/(loss)	22 430	(65 214)

15.3. Deferred income tax

Deferred income tax results from the following items:

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)

	As at 31 December 2018	As at 31 December 2017 (restated figures)
difference between tax base and carrying amount of financial assets	41 547	38 969
valuation of hedging instruments	794	5 412
other	5 849	4 812
Deferred tax liabilities	48 190	49 193
difference between tax base and carrying amount of financial assets	76 519	258
difference between tax base and carrying amount of financial liabilities	60 110	13 299
different timing of recognition of revenue and cost of sales for tax purposes	53 580	1 970
provisions and accruals	3 199	2 930
difference between tax base and carrying amount of fixed and intangible assets	2 666	821
other	296	72
Deferred tax assets	196 370	19 350
Deferred tax assets/(liabilities), net, of which:	148 180	(29 843)
Deferred tax assets/(liabilities), net – recognized in profit or loss	57 935	(24 403)
Deferred tax assets/(liabilities), net – recognized in other comprehensive income	(827)	(5 440)
Deferred tax assets/(liabilities), net – recognized with retained profits	91 072	–

Deferred tax assets on deductible temporary differences arising from investments in subsidiaries is recognized insofar as their reversal is probable in the foreseeable future and where taxable income will be available to enable realization of deductible differences. According to the Company, deductible temporary differences related to recognition of impairment allowances on shares in subsidiaries of PLN 9 144 984 thousand will not be reversed in the foreseeable future, as the investments are not intended for sale. Consequently, no related deferred tax asset has been recognized.

As taxable profit is forecast for subsequent years for the Tax Capital Group ("TCG") of which the Company is a member, the deferred tax asset related to all deductible differences, except those described above, has been recognized in these financial statements in the full amount.

The increase in the deferred tax asset arising from the difference between the tax values and carrying amounts of financial assets is mainly the effect of the recognition of an impairment loss on bonds, loans granted and receivables under a cash-pooling agreement, recognized as at 31 December 2018 in accordance with IFRS 9 Financial Instruments in the total amount of PLN 72 263 thousand.

15.4. Tax Capital Group

On 30 October 2017 the articles of association of the Tax Capital Group for the years 2018–2020 were registered. Pursuant to the previous agreement, TCG was registered for the period of three fiscal years from 2015 to 2017.

The major companies constituting the Tax Capital Group as from 1 January 2018 are TAURON Polska Energia S.A., TAURON Wytwarzanie S.A., TAURON Dystrybucja S.A., TAURON Ciep³o Sp. z o.o., TAURON Sprzeda¿ Sp. z o.o., TAURON Sprzeda¿ GZE Sp. z o.o., TAURON Obs³uga Klienta Sp. z o.o., TAURON Ekoenergia Sp. z o.o., TAURON Wydobycie S.A. and Kopalnia Wapienia Czatkowice Sp. z o.o.

As at 31 December 2018, the Tax Capital Group had an income tax receivables of PLN 13 921 thousand. The entire amount pertains to 2018 and constitutes a surplus of the tax withholdings paid of PLN 342 734 thousand over the Tax Group's tax charge of PLN 328 813 thousand.

At the same time, due to the Company's settlements, as the Representative Company, with the Tax Capital Group companies, it has reported a liability to these subsidiaries arising from tax overpayment of PLN 90 490 thousand, which has been presented in the statement of financial position as "Other financial liabilities", as well as receivables from the Tax Capital Group companies arising from tax underpayment of PLN 54 458 thousand, which have been presented in the statement of financial position as "Other financial assets".

16. Earnings (loss) per share

SELECTED ACCOUNTING PRINCIPLES

Earnings (loss) per share for each period is calculated by dividing the net profit (loss) for a given reporting period by the weighted average number of shares existing in that period.

Earnings (loss) per share (in PLN)	Year ended 31 December 2018	Year ended 31 December 2017
Basic and diluted, for profit (loss) for the financial year	(0.98)	0.49

Presented below is information about the (negative) earnings and number of shares which served as the basis for calculation of the basic and diluted (negative) earnings per share presented in the statement of comprehensive income.

	Year ended 31 December 2018	Year ended 31 December 2017
Net profit (loss) attributable to ordinary shareholders	(1 709 853)	854 351
Number of ordinary shares	1 752 549 394	1 752 549 394

EXPLANATORY NOTES TO THE STATEMENT OF FINANCIAL POSITION

17. Investment property

SELECTED ACCOUNTING PRINCIPLES

The Company holds an investment property generating revenue from rental fees. The property is rented to a subsidiary. At initial recognition investment property is measured at cost including transaction costs. After initial recognition all investment properties held are measured in line with IAS 16 Property, Plant and Equipment, i.e. at cost less impairment allowances or acquisition costs. This means that the Company gradually depreciates the real property throughout its useful life.

	Year ended 31 December 2018	Year ended 31 December 2017
COST
Opening balance	36 169	36 169
Purchase	3 926	–
Closing balance	40 095	36 169
ACCUMULATED DEPRECIATION
Opening balance	(14 468)	(10 851)
Depreciation for the period	(3 617)	(3 617)
Closing balance	(18 085)	(14 468)
NET CARRYING AMOUNT AT THE BEGINNING OF THE PERIOD	21 701	25 318
NET CARRYING AMOUNT AT THE END OF THE PERIOD, of which:	22 010	21 701
Buildings	18 084	21 701
Perpetual usufruct of land	3 926	–

The investment property is composed of a perpetual usufruct right to land and buildings located in Katowice Szopienice, at Lwowska 23. On 17 April 2018, the Management Board decided to acquire a perpetual usufruct right to land located in Katowice-Szopienice, at Lwowska 23 with the right to buildings located in the land from PKO Leasing S.A. The objective of the decision was to fulfil the Company's obligations under a preliminary sales agreement concluded in 2008. Having obtained an approval of the Supervisory Board, on 30 May 2018 the Company and PKO Leasing S.A. entered into a sales agreement under which the Company acquired the investment property in question.

The Company estimates that as at the end of the reporting period the fair value of the property in amount of PLN 28 626 thousand.

18. Shares

SELECTED ACCOUNTING PRINCIPLES

Shares in subsidiaries

Shares in subsidiaries are measured at cost less impairment allowances. impairment allowances are recognized in line with IAS 36 Impairment of Assets, where the carrying amount is compared to the higher of the fair value less costs to sell and the value in use.

Shares in jointly-controlled entities

Shares in co-subsidiaries are recognized at cost less impairment allowances, if any.

PROFESSIONAL JUDGMENT AND ESTIMATES

As at every balance sheet date the Company assesses if there is any objective indication that the shares may be impaired. Should material impairment indications occur, the Company is obliged to carry out impairment tests of shares and recognize an impairment loss or reverse an existing one.

Pursuant to IFRS 9 Financial Instruments, the Company classifies and measures at fair value shares in entities other than subsidiaries and co-subsidiaries as described in details in Note 7 hereto.

(in PLN '000)

Change in shares for the year ended 31 December 2018

			Gross value			Impairment losses		Net value
No.	Company	Restated opening balance	(Decreases) Increases	Closing balance	Opening balance	Decreases (Increases)	Closing balance	Restated opening balance	Closing balance
1	TAURON Wydobycie S.A.	1 001 755	340 000	1 341 755	(147 870)	(1 094 827)	(1 242 697)	853 885	99 058
2	TAURON Wytwarzanie S.A.	7 085 701	780 000	7 865 701	(5 347 296)	(2 287 830)	(7 635 126)	1 738 405	230 575
3	TAURON Ciep³o Sp. z o.o.	1 928 043	–	1 928 043	–	–	–	1 928 043	1 928 043
4	TAURON Ekoenergia Sp. z o.o.	1 939 765	–	1 939 765	(1 125 693)	940 521	(185 172)	814 072	1 754 593
5	Marselwind Sp. z o.o.	307	–	307	–	–	–	307	307
6	TAURON Serwis Sp. z o.o.	1 268	–	1 268	–	–	–	1 268	1 268
7	Nowe Jaworzno Grupa TAURON Sp. z o.o.	3 551 026	1 060 000	4 611 026	–	–	–	3 551 026	4 611 026
8	TAURON Dystrybucja S.A.	10 511 628	–	10 511 628	–	–	–	10 511 628	10 511 628
9	TAURON Dystrybucja Serwis S.A.	201 045	439 317	640 362	–	–	–	201 045	640 362
10	TAURON Sprzeda¿ Sp. z o.o.	613 505	–	613 505	–	–	–	613 505	613 505
11	TAURON Sprzeda¿ GZE Sp. z o.o.	129 823	–	129 823	–	–	–	129 823	129 823
12	TAURON Czech Energy s.r.o.	4 223	–	4 223	–	–	–	4 223	4 223
13	Kopalnia Wapienia Czatkowice Sp. z o.o.	41 178	–	41 178	–	–	–	41 178	41 178
14	Polska Energia Pierwsza Kompania
	Handlowa Sp. z o.o.	55 056	6 000	61 056	(55 056)	(6 000)	(61 056)	–	–
15	TAURON Sweden Energy AB (publ)	28 382	–	28 382	–	(20 933)	(20 933)	28 382	7 449
16	Bioeko Grupa TAURON Sp. z o.o.1	1 269	–	1 269	–	–	–	1 269	1 269
17	TAURON Obs³uga Klienta Sp. z o.o.	39 831	–	39 831	–	–	–	39 831	39 831
18	TAMEH HOLDING Sp. z o.o.	415 852	–	415 852	–	–	–	415 852	415 852
19	PGE EJ 1 Sp. z o.o.	12 651	6 000	18 651	–	–	–	12 651	18 651
20	Magenta Grupa TAURON Sp. z o.o.	9 500	–	9 500	–	–	–	9 500	9 500
21	ElectroMobility Poland S.A.	2 500	15 000	17 500	–	–	–	2 500	17 500
22	Other	391	24	415	–	–	–	391	415
	Total	27 574 699	2 646 341	30 221 040	(6 675 915)	(2 469 069)	(9 144 984)	20 898 784	21 076 056

¹ On 8 October 2018 the name of the company was changed from Biomasa Grupa TAURON Sp. z o.o. to Bioeko Grupa TAURON Sp. z o.o.

The restated opening balance includes an adjustment to the value of shares in PGE EJ 1 Sp. z o.o. related to the adoption of IFRS 9 Financial Instruments, as described in detail in Note 7.1 hereto.

Changes in the balance of long-term investments in the year ended 31 December 2018 resulted mainly from the following transactions: •

Increase in the issued capital of ElectroMobility Poland S.A.

On 3 January 2018, the Extraordinary General Shareholders' Meeting of ElectroMobility Poland S.A. adopted a resolution to increase the issued capital of the entity by PLN 20 000 thousand by way of increasing the par value of the shares from PLN 2 500 thousand up to PLN 7 500 thousand in exchange for a cash contribution of PLN 5 000 thousand. The aforesaid increase in the issued capital of ElectroMobility Poland S.A. was registered on 23 April 2018.

On 4 October 2018 Extraordinary General Shareholders' Meeting of ElectroMobility Poland S.A. decided to increase its issued capital by PLN 40 000 through an increase in the par value of shares. The par value of shares held by the Company was increased from PLN 7 500 thousand to PLN 17 500 thousand in exchange for cash contribution of PLN 10 000 thousand. On 24 October 2018 the Company advanced monies to increase the capital. The aforesaid increase in the issued capital of ElectroMobility Poland S.A. was registered on 7 January 2019. •

Contributions to the capital of Polska Energia Pierwsza Kompania Handlowa Sp. z o.o.

On 1 March 2018, the Extraordinary General Shareholders' Meeting of Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. adopted a resolution concerning capital contributions to the company in the amount of PLN 6 000 thousand. The contributions are aimed to enable the company to finance its operations. The cash was contributed by the Company on 7 March 2018. •

Increase in the issued capital of Nowe Jaworzno Grupa TAURON Sp. z o.o.

On 29 March 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 3 500 thousand, through the issue of 70 000 new shares with the par value of PLN 50 each. The new shares were taken by the Company at the price of PLN 5 000 per share, i.e. for the total amount of PLN 350 000 thousand. The increase in the issued capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. was registered on 27 April 2018.

On 11 October 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 3 500 thousand, through the issue of 70 000 new shares with the par value of PLN 50 each. All new shares were taken by the Company at the price of PLN 5 000 per share, i.e. the total acquisition price of PLN 350 000 thousand. The increase in the issued capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. was registered on 23 October 2018.

On 18 December 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 3 600 thousand, through the issue of 72 000 new shares with the par value of PLN 50 each, i.e. with the total par value of PLN 3 600 thousand. All new shares were taken by the Company at the price of PLN 5 000 per share, i.e. the total acquisition price of PLN 360 000 thousand. The increase in the issued capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. was registered on 31 December 2018.

On 20 December 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital. The new shares were assumed by Fundusz Inwestycji Infrastrukturalnych – Kapita³owy Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych. The aforesaid increase in the issued capital of was registered on 15 January 2019, as described in details in Note 48 hereto. •

Increase in the issued capital of TAURON Wydobycie S.A.

On 26 April 2018, the Extraordinary General Shareholders' Meeting of TAURON Wydobycie S.A. adopted a resolution to increase the company's issued capital by PLN 3 400 thousand, through the issue of 340 000 new shares with the par value of PLN 10 each. The par value of shares held by the Company was increased from PLN 357 111 thousand to PLN 360 511 thousand. The new shares were taken by the Company at the price of PLN 1 thousand per share, i.e. for the total amount of PLN 340 000 thousand. The aforesaid increase in the issued capital of TAURON Wydobycie S.A. was registered on 25 May 2018. •

Increase in the issued capital of TAURON Dystrybucja Serwis S.A.

On 18 June 2018, the Extraordinary General Shareholders' Meeting of TAURON Dystrybucja Serwis S.A. adopted a resolution to increase the company's issued capital by PLN 4 393 thousand, through the issue of 4 393 170 new shares with the par value of PLN 1 each. The par value of shares held by the Company was increased from PLN 5 101 thousand to PLN 9 494 thousand. The new shares were taken by the Company at the price of PLN 100 per share, i.e. for the total amount of PLN 439 317 thousand. The aforesaid increase in the issued capital of TAURON Dystrybucja Serwis S.A. was registered on 22 August 2018. •

Increase in the capital of PGE EJ 1 Sp. z o.o.

On 9 August 2018, the Extraordinary General Shareholders' Meeting of PGE EJ 1 Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 60 000 thousand, through the issue of 425 530 new shares with the par value of PLN 141 each. All new shares were taken up and paid for by company's shareholders in proportion to their shares. The par value of shares held by the Company was increased from PLN 31 086 thousand to PLN 37 086 thousand in exchange for cash contribution of PLN 6 000 thousand. The aforesaid increase in the issued capital of PGE EJ 1 sp. z o.o. was registered on 11 September 2018. •

Increase in the issued capital of TAURON Wytwarzanie S.A.

On 9 August 2018, the Extraordinary General Shareholders' Meeting of TAURON Wytwarzanie S.A. adopted a resolution to increase the company's issued capital by PLN 7 800 thousand, through the issue of 780 000 new shares with the par value of PLN 10 each. The par value of shares held by the Company was increased from PLN 1 494 459 thousand to PLN 1 502 259 thousand. The new shares were taken by the Company at the price of PLN 1 thousand per share, i.e. for the total amount of PLN 780 000 thousand. The increase in the issued capital of TAURON Wytwarzanie S.A. was registered on 19 October 2018.

The Company's interest in the share capital and in the authorities of each entity did not change as a result of the above transactions, except interest in the share of subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. (decrease for 100% to 97.89%).

Impairment allowances on shares

In the year ended 31 December 2018 the Company recognized and reversed impairment allowances on shares in subsidiaries in the total amount of PLN 2 469 069 thousand as described in details in Note 10 hereto.

Change in shares for the year ended 31 December 2017

			Gross value			Impairment losses		Net value
No.	Company	Opening balance	(Decreases) Increases	Closing balance	Opening balance	Decreases (Increases)	Closing balance	Opening balance	Closing balance
1	TAURON Wydobycie S.A.	841 755	160 000	1 001 755	–	(147 870)	(147 870)	841 755	853 885
2	TAURON Wytwarzanie S.A.	7 236 727	(151 026)	7 085 701	(5 403 825)	56 529	(5 347 296)	1 832 902	1 738 405
3	TAURON Ciep³o Sp. z o.o.	1 328 043	600 000	1 928 043	–	–	–	1 328 043	1 928 043
4	TAURON Ekoenergia Sp. z o.o.	939 765	1 000 000	1 939 765	(939 765)	(185 928)	(1 125 693)	–	814 072
5	Marselwind Sp. z o.o.	107	200	307	–	–	–	107	307
6	TAURON Serwis Sp. z o.o.	1 268	–	1 268	–	–	–	1 268	1 268
7	Nowe Jaworzno Grupa TAURON Sp. z o.o.	–	3 551 026	3 551 026	–	–	–	–	3 551 026
8	TAURON Dystrybucja S.A.	9 511 628	1 000 000	10 511 628	–	–	–	9 511 628	10 511 628
9	TAURON Dystrybucja Serwis S.A.	–	201 045	201 045	–	–	–	–	201 045
10	TAURON Sprzeda¿ Sp. z o.o.	613 505	–	613 505	–	–	–	613 505	613 505
11	TAURON Sprzeda¿ GZE Sp. z o.o.	129 823	–	129 823	–	–	–	129 823	129 823
12	TAURON Czech Energy s.r.o.	4 223	–	4 223	–	–	–	4 223	4 223
13	Kopalnia Wapienia Czatkowice Sp. z o.o.	41 178	–	41 178	–	–	–	41 178	41 178
14	Polska Energia Pierwsza Kompania
	Handlowa Sp. z o.o.	55 056	–	55 056	–	(55 056)	(55 056)	55 056	–
15	TAURON Sweden Energy AB (publ)	28 382	–	28 382	–	–	–	28 382	28 382
16	Bioeko Grupa TAURON Sp. z o.o.1	1 269	–	1 269	–	–	–	1 269	1 269
17	TAURON Obs³uga Klienta Sp. z o.o.	39 831	–	39 831	–	–	–	39 831	39 831
18	TAMEH HOLDING Sp. z o.o.	415 852	–	415 852	–	–	–	415 852	415 852
19	PGE EJ 1 Sp. z o.o.	26 546	–	26 546	–	–	–	26 546	26 546
20	Magenta Grupa TAURON Sp. z o.o.	500	9 000	9 500	–	–	–	500	9 500
21	ElectroMobility Poland S.A.	2 500	–	2 500	–	–	–	2 500	2 500
22	Other	50	341	391	–	–	–	50	391
	Total	21 218 008	6 370 586	27 588 594	(6 343 590)	(332 325)	(6 675 915)	14 874 418	20 912 679

¹ On 8 October 2018 the name of the company was changed from Biomasa Grupa TAURON Sp. z o.o. to Bioeko Grupa TAURON Sp. z o.o.

19. Bonds

SELECTED ACCOUNTING PRINCIPLES

Under the central funding model, the Company acquires bonds issued by the TAURON Group companies. For the purpose of the financial statements for the year ended 31 December 2017 the bonds are classified to loans and receivables, i.e. financial assets with fixed or determinable payments. Following the first-time application of IFRS 9 Financial Instruments, since 1 January 2018 the bonds have been classified as financial assets measured at amortized cost.

Bonds with maturity of up to 12 months as of the end of the reporting period are classified to current assets and those with maturity of over 12 months as of the end of the reporting period – to non-current assets, however, it is not only the maturity, but also the Company's plans with respect to the rollover that matter.

PROFESSIONAL JUDGMENT AND ESTIMATES

Intra-group bonds maturing within one year, intended for rollover, are classified as long-term instruments. Such classification reflects the nature of funding under the intra-group bond issue scheme, which enables cash management in the medium and long term.

In accordance with IFRS 9 Financial Instruments the Company estimates impairment allowances for intra-group bonds, as discussed in more detail in Note 7 to these financial statements.

Under the central financing model, TAURON Polska Energia S.A. acquires bonds issued by the TAURON Group companies.

The table below presents the balances of bonds as at the end of the reporting period, i.e. 31 December 2018 and as at 31 December 2017, broken down by individual companies issuing the bonds.

	As at 31 December 2018				As at 31 December 2017
Company	Par value of purchased bonds	Accrued interest	Impairment loss	Total	Par value of purchased bonds	Accrued interest	Total
TAURON Wytwarzanie S.A.	200 000	262	(3 829)	196 433	1 064 920	10 689	1 075 609
TAURON Dystrybucja S.A.	3 300 000	60 026	(10 241)	3 349 785	3 770 000	62 326	3 832 326
TAURON Ciep³o Sp. z o.o.	1 075 000	15 169	(8 931)	1 081 238	1 075 000	15 169	1 090 169
TAURON Wydobycie S.A.	570 000	22 836	(143 578)	449 258	570 000	4 592	574 592
TAURON Ekoenergia Sp. z o.o.	160 000	416	(838)	159 578	–	–	–
Total	5 305 000	98 709	(167 417)	5 236 292	6 479 920	92 776	6 572 696
Non-current	5 205 000	–	(161 019)	5 043 981	6 009 920	–	6 009 920
Current	100 000	98 709	(6 398)	192 311	470 000	92 776	562 776

As at 31 December 2018, the par value of bonds maturing within one year, which were classified as long-term bonds, was PLN 370 000 thousand.

The change in bonds and the impairment loss

	Level 1: allowance equal to 12 monthly expected credit losses (no impairment)	Level 2: allowance for expected credit losses over the life period (no impairment)	Total
Gross value
As at 1 January 2018	4 499 215	2 073 481	6 572 696
Buy-back of bonds of TAURON Wytwarzanie S.A.	–	(864 920)	(864 920)
Buy-back of bonds of TAURON Dystrybucja S.A.	(470 000)	–	(470 000)
Reclassification between the levels: TAURON Wytwarzanie S.A.	200 262	(200 262)	–
Issue of bonds of TAURON Ekoenergia Sp. z o.o.	160 000	–	160 000
Interest accrued	190 304	84 658	274 962
Interest received	(192 187)	(76 842)	(269 029)
As at 31 December 2018	4 387 594	1 016 115	5 403 709
Impairment loss
As at 1 January 2018	(11 524)	(385 069)	(396 593)
Recognition	(4 804)	–	(4 804)
Reversal	992	141 009	142 001
Reclassification of allowances to cash pool receivables	–	50 050	50 050
Reclassification between levels	(3 828)	45 757	41 929
As at 31 December 2018	(19 164)	(148 253)	(167 417)
Net value	4 368 430	867 862	5 236 292

A change in the Company's estimates of the credit risk related to bonds issued by the subsidiary TAURON Wytwarzanie S.A. and repayment of a portion of bonds by the subsidiary TAURON Wytwarzanie S.A. in the amount of PLN 864 920 thousand were the key factors determining a reduction in the impairment allowances on bonds.

Bonds divided by Company's rating

	Level 1: allowance equal to 12 monthly expected credit losses (no impairment)	Level 2: allowance for expected credit losses over the economic life period (no impairment)	Total
AAA do A	–	–	–
A- do BBB-	3 520 443	–	3 520 443
BB+ do BB	666 889	423 278	1 090 167
BB- do B	200 262	–	200 262
B- do D	–	592 837	592 837
Gross value as at 31 December 2018	4 387 594	1 016 115	5 403 709
impairment loss	(19 164)	(148 253)	(167 417)
Net value as at 31 December 2018	4 368 430	867 862	5 236 292

The Company does not hold bonds for which impairment losses are calculated over the entire life cycle of a financial instrument and which as at 31 December 2018 were impaired due to credit risk.

20. Derivative instruments and hedge accounting

SELECTED ACCOUNTING PRINCIPLES

Derivative financial instruments falling within the scope of IFRS 9 Financial Instruments are classified as financial assets/financial liabilities measured at fair value through profit or loss, except derivatives which are designated as hedging instruments and subject to hedge accounting. Derivative instruments acquired and held for internal purposes as excluded from the scope of IFRS 9 Financial Instruments are not measured at the end of the reporting period. Accounting principles applied in the year ended 31 December 2017 based on IAS 39 Financial Instruments: Recognition and Measurement are consistent with those resulting from IFRS 9 Financial Instruments.

Derivatives classified as "financial assets/financial liabilities measured at fair value through profit or loss" are measured at fair value, taking into account their market value as at the end of the reporting period. Changes in the fair value of these instruments are recognized in profit or loss for the period. Derivatives are disclosed as assets if their value is positive or as liabilities if their value if negative.

As at the end of the reporting period, Interest Rate Swaps (IRS) acquired and held to hedge the interest rate risk relating to bonds issued are subject to hedge accounting. Other derivative instruments held by the Company as at the end of the reporting period are not subject to hedge accounting.

Hedge accounting

In order to hedge the interest rate risk, the Company uses IRS (Interest Rate Swap) contracts. These instruments hedge cash flows related to bonds issued. Such transactions are subject to hedge accounting.

At the inception of the hedge the hedging relationship and the risk management objective and strategy for undertaking the hedge are documented formally.

A cash flow hedge is accounted for in the following manner:

• the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in other comprehensive income; and
• the ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss for the period.

Gain or loss from revaluation of the hedging instrument disclosed in other comprehensive income is recognized directly in profit or loss in the same period during which the hedged item affects profit or loss for the period. For IRS, interest costs arising from debt are adjusted accordingly.

PROFESSIONAL JUDGMENT AND ESTIMATES

The Company measure fair value at each balance sheet date. Methodology is presented as below.

Derivative instrument	Methodology of determining fair value hierarchy
IRS	The difference between discounted floating-rate interest cash flows and those based on fixed interest rates. Reuters interest rate curve is the input data.
CCIRS	The difference between discounted interest cash flows relating to payments and receipts, in two different currencies, expressed in the valuation currency. Interest rate curves, basis spreads and NBP fixing for the relevant currencies from Reuters are the input data.
Forward currency contracts	The difference between discounted future cash flows: the forward price at the valuation date and the transaction price, multiplied by the nominal value of the contract in a foreign currency. NBP fixing and the implied interest rate curve from FX swap transactions for the relevant currency from Reuters are the input data.
Commodity forwards, futures	The fair value of forwards for the purchase and sale of emission allowances, electricity and other commodities is based on prices quoted on an active market or based on cash flows being the difference between the price reference index (forward curve) and the contract price.

As at each reporting period end, the Group checks the hedge effectiveness. In the year ended 31 December 2018 and 31 December 2017 the hedge was effective in its entirety.

	As at 31 December 2018				As at 31 December 2017 (restated figures)
	Charged to profit or loss	Charged to other com prehensive income	Total		Charged to	Charged to	Total
			Assets	Liabilities	profit or loss	other com prehensive income	Assets	Liabilities
IRS	16	4 162	4 178	–	23	28 459	28 482	–
CCIRS	(5 140)	–	–	(5 140)	(9 299)	–	–	(9 299)
Commodity future/forward	(17 138)	–	216 165	(233 303)	395	–	53 216	(52 821)
Currency forward	(2 479)	–	–	(2 479)	(346)	–	–	(346)
Total			220 343	(240 922)			81 698	(62 466)
Non-current			43 844	(37 930)			26 704	(5 217)
Current			176 499	(202 992)			54 994	(57 249)

The fair value hierarchy for derivative financial instruments is as follows:

	As at 31 December 2018		As at 31 December 2017 (restated figures)
	1 level	2 level	1 level	2 level
Assets
Derivative instruments – commodity	216 165	–	53 216	–
Derivative instruments – IRS	–	4 178	–	28 482
Total	216 165 4 178		53 216	28 482
Liabilities
Derivative instruments – commodity	233 303	–	52 821	–
Derivative instruments – currency	–	2 479	–	346
Derivative instruments – CCIRS	–	5 140		9 299
Total	233 303 7 619		52 821	9 645

Derivative instruments (subject to hedge accounting)

In 2016 the Company hedged a portion of its interest rate risk for cash flows relating to the exposure to WIBOR 6M, designated under the dynamic risk management strategy, i.e. interest on debt securities with the par value of PLN 2 100 000 thousand, through the entry into interest rate swap (IRS) transactions for a term of 4 to 5 years. The aforementioned transactions are subject to hedge accounting.

Effects of hedge accounting on revaluation reserve regarding hedging instruments are presented in Note 27.4 hereto.

Derivative instruments measured at fair value through profit or loss (FVTPL)

As at 31 December 2018, derivative instruments which did not fall within the scope of hedge accounting and were classified as financial assets or financial liabilities measured at fair value through profit or loss comprised: ••

• CCIRSs that hedge foreign currency cash flows resulting from the payment of interest on the issued eurobonds;
• commodity derivatives (futures, forward) including emission allowance and other commodity purchase and sale transactions; and •
• FX forward transactions hedging foreign currency cash flows resulting from the Company's operations.

The CCIRSs have been used with respect to the Company's Coupon Only Cross Currency Swap fixed-fixed transactions concluded in 2017 and in January 2018 and involve an exchange of interest payments on the total par value of EUR 500 000 thousand. They mature in July 2027. In accordance with the terms and conditions, the Company pays interest at a fixed rate in PLN and receives fixed interest-rate payments in EUR. Hedge accounting principles do not apply to the transaction in question.

21. Other financial assets

SELECTED ACCOUNTING PRINCIPLES

Other financial assets include investment fund units, Tax Capital Group receivables, deposits, performance bonds, collateral transferred and receivables arising from sales of property, plant and equipment and intangible assets.

	As at 31 December 2018	As at 31 December 2017
Receivables arising from income tax settlements of the TCG companies	54 458	6 133
Units in investment funds	26 063	101 358
Bid bonds, deposits, collateral transferred	4 213	15 343
Initial margin deposits	163 495	11 140
Other	296	390
Total	248 525	134 364
Non-current	2 804	2 724
Current	245 721	131 640

Initial margins are related mostly to futures transactions on the greenhouse emissions allowances concluded on foreign regulated markets.

22. Loans granted

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2018

Loans given by the Company are mainly loans to subsidiaries under a cash pooling arrangement and loans to joint ventures. Loans are classified as financial assets measured at amortized cost or at fair value through profit or loss.

Loans maturing within 12 months as of the end of the reporting period are classified to current assets and loans maturing in more than 12 months as of the end of the reporting period – to non-current assets considering the expectations as regards the loan repayment as at the end of the reporting period.

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2017

Loans given by the Company are mainly loans to subsidiaries and include cash pooling loans and loans to joint ventures. Loans are classified to loans and receivables and measured at amortized cost. Loans maturing within 12 months as of the end of the reporting period are classified to current assets and loans maturing in more than 12 months as of the end of the reporting period – to non-current assets considering the expectations as regards the loan repayment as at the end of the reporting period.

PROFESSIONAL JUDGMENT AND ESTIMATES

In line with IFRS 9 Financial Instruments the Company adequately classifies and measures granted loans and estimates impairment allowances, as discussed in detail below and in Note 38.1.2 to these financial statements.

	As at 31 December 2018				As at 31 December 2017
	Principal/ Measurement	Interest	Impairment loss	Total	Principal	Interest	Total
Loans measured at amortized cost
Loan granted to TAURON Ekoenergia Sp. z o.o.	–	–	–	–	120 000	19 268	139 268
Loans granted to EC Stalowa Wola S.A.	18 185	426	(460)	18 151	529 007	41 425	570 432
Loans granted to PGE EJ 1 Sp. z o.o.	7 740	249	(52)	7 937	2 940	14	2 954
Granted cash pool loans including accrued interest	803 677	5 256	(212 400)	596 533	189 928	598	190 526
Loans measured at fair value
Loans granted to EC Stalowa Wola S.A.	199 256			199 256
Total	1 028 858	5 931	(212 912)	821 877	841 875	61 305	903 180
Non-current	1 020 513	670	(212 423)	808 760	326 790	56 199	382 989
Current	8 345	5 261	(489)	13 117	515 085	5 106	520 191

Change in loans granted and impairment loss, measured at amortized cost

	Level 1: allowance equal to 12 monthly expected credit losses (no impairment)		Total
Gross value
As at 1 January 2018	662 413	–	662 413
Accruing interest on the debt of EC Stalowa Wola S.A. as at the consolidation arrangement date	2 312	–	2 312
Discontinuing the recognition of the loan to EC Stalowa Wola S.A. at amortized cost	(358 977)	–	(358 977)
Other loans granted to/paid by EC Stalowa Wola S.A.	45 185	–	45 185
Loan granted to PGE EJ 1 Sp. z o.o.	4 800	–	4 800
Repayment of the loan granted to TAURON Ekoenergia Sp. z o.o. with interest, used to buy back intercompany bonds for redemption	(140 113)	–	(140 113)
Interest accrued	1 793	4 371	6 164
Change in the balance of loans originated under the cash pool arrangement	224 403	389 346	613 749
As at 31 December 2018	441 816	393 717	835 533
Impairment loss
As at 1 January 2018	(10 810)	–	(10 810)
Recognition – loans granted under the cash pool arrangement	(8 054)	(204 346)	(212 400)
Recognition – other loans	(496)	–	(496)
Derecognition following the consolidation arrangement with EC Stalowa Wola S.A.	8 191	–	8 191
Derecognition – partial repayment of a loan to subsidiary TAURON Ekoenergia Sp. z o.o.	2 603	–	2 603
As at 31 December 2018	(8 566)	(204 346)	(212 912)
Net value as at 31 December 2018	433 250	189 371	622 621

Loans measured at amortized cost as rated by the Company

Company's internal rating	Level 1: allowance equal to 12 monthly expected credit losses (no impairment)	Level 2: allowance for expected credit losses over the life period (no impairment)	Total
AAA do A	–	–	–
A- do BBB-	1 996	–	1 996
BB+ do BB	8 327	–	8 327
BB- do B	431 493	–	431 493
B- do D	–	393 717	393 717
Gross value as at 31 December 2018	441 816	393 717	835 533
impairment loss	(8 566)	(204 346)	(212 912)
Net value as at 31 December 2018	433 250	189 371	622 621

The Company did not originate loans for which impairment losses are calculated over the entire life cycle of a financial instrument and which as at 31 December 2018 were impaired due to credit risk.

Loan to a subsidiary

On 27 February 2018, a subsidiary – TAURON Ekoenergia Sp. z o.o. – repaid the total loan amounting to PLN 120 000 thousand with interest accrued of PLN 20 113 thousand, granted under a loan agreement concluded in 2015 for the amount of PLN 1 120 000 thousand.

Loans to joint ventures

On 28 February 2018, the Company and Elektrociep³ownia Stalowa Wola S.A. concluded an agreement to consolidate the debt of the borrower totalling PLN 609 951 thousand by renewing all the existing liabilities of the borrower arising from loans extended and outstanding by 28 February 2018. Under the agreement the consolidated amounts comprised the principal amounts of originated loans with the carrying amount as at 31 December 2017 of PLN 529 007 thousand; the principal amount of a loan of 12 January 2018 totalling PLN 27 000 thousand and related interest accrued as at 28 February 2018 totalling PLN 53 944 thousand.

In accordance with the consolidation agreement in question, on 30 April 2018 a portion of the principal amount of the loan of PLN 299 100 thousand was repaid, while the remaining portion of the debt of PLN 310 851 thousand with interest accrued since 1 March 2018 will be repaid by 30 June 2033. The loan bears a fixed interest rate and is secured with a blank promissory note and a promissory note agreement.

As the debt consolidation agreement changed significant contractual terms, the Company no longer discloses funds from loans under the agreement. It derecognized their carrying amount of PLN 511 952 thousand and disclosed a new asset measured at fair value at initial recognition of PLN 481 582 thousand, which has increased the financial expenses by PLN 30 370 thousand.

On 8 March 2018 Elektrociep³ownia Stalowa Wola S.A. entered into a loan agreement with Bank Gospodarstwa Krajowego and Polskie Górnictwo Naftowe i Gazownictwo S.A., whereby Bank Gospodarstwa Krajowego and PGNiG S.A. provided a loan of up to PLN 450 000 thousand each to Elektrociep³ownia Stalowa Wola S.A. The loan matures on 14 June 2030. The exposure of Bank Gospodarstwa Krajowego is secured with a bank guarantee issued upon request of the Company on 11 April 2018, as discussed in detail in Note 40 to these financial statements.

In view of the aforementioned agreement, on 8 March 2018 Elektrociep³ownia Stalowa Wola S.A. as a borrower, Polskie Górnictwo Naftowe i Gazownictwo SA, PGNiG Termika S.A., TAURON Polska Energia S.A., TAURON Wytwarzanie S.A. as subordinated creditors and Bank Gospodarstwa Krajowego as the Agent, entered into a debt subordination agreement. Pursuant to the agreement, the debt of Elektrociep³ownia Stalowa Wola S.A. owed to the Company under the debt consolidation agreement of 28 February 2018 for a total amount of PLN 609 951 thousand constitutes "subordinated debt". As at the date of approval of these financial statements for publication, the par value of the loan, constituting subordinated debt owed to the Company, was PLN 310 851 thousand. As at the end of the reporting period, the loan was measured at fair value was PLN 199 256 thousand.

Apart from the debt consolidating loan described above, in the year ended 31 December 2018, the Company originated the following loans to Elektrociep³ownia Stalowa Wola S.A.: •

On 30 March 2018, the Company and Elektrociep³ownia Stalowa Wola S.A. signed a loan agreement of up to PLN 7 290 thousand to be used for the operations of the borrower.

• On 11 April 2018 Polskie Górnictwo Naftowe i Gazownictwo S.A., TAURON Polska Energia S.A. and the borrower – Elektrociep³ownia Stalowa Wola S.A. concluded a VAT loan agreement up to the total amount of PLN 13 000 thousand, to finance the borrower's VAT obligations related to completion of the construction of the gas and steam unit in Stalowa Wola. Under the agreement, the Company will grant a loan of up to PLN 6 500 thousand to Elektrociep³ownia Stalowa Wola S.A. •
• On 19 December 2018, the Company and Elektrociep³ownia Stalowa Wola S.A. concluded a loan agreement for the amount up to PLN 9 500 thousand, to be used for payments arising from mutual construction contracts in order to continue the investment including the gas and steam unit in Stalowa Wola.

All of the above loans are collateralized with borrower's promissory note with a promissory note agreement.

Loans granted under cash pool agreement

Detailed information on the cash pool service has been presented in Note 29.5 to these financial statements.

23. Inventories

•

SELECTED ACCOUNTING PRINCIPLES

The Company's inventories include acquired pollutant emission allowances and certificates of energy generated using renewable sources and in CHP units, intended for trading purposes.

At initial recognition inventories are measured at cost. At the end of the reporting period inventories are measured at cost or net realizable value, whichever is lower. If the cost is higher than the net realizable value, the Company recognizes an appropriate impairment loss.

Greenhouse gas emission allowances purchased for resale and generation of profit in the short term due to volatility of market prices are recognized within inventories. They are measured at fair value at initial recognition and at the end of each reporting period.

Releases of pollutant emission allowances and of the purchased certificates of energy generated using renewable sources and in CHP units are measured with the FIFO method.

	As at 31 December 2018	As at 31 December 2017
Gross Value
Energy certificates	250	250
Greenhouse gas emission allowances	409 489	198 459
Materials	–	40
Total	409 739	198 749
Measurement to net realisable value
Energy certificates	(52)	(184)
Greenhouse gas emission allowances	(146)	(145)
Measurement to fair value
Greenhouse gas emission allowances	46	8
Total	(152)	(321)
Net value
Energy certificates	198	66
Greenhouse gas emission allowances	409 389	198 322
Materials	–	40
Total	409 587	198 428

24. Receivables from buyers

SELECTED ACCOUNTING PRINCIPLES

Receivables from buyers are recognized at originally invoiced amounts, except situations where the effect of the time value of money is material, less allowances/write-downs.

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2018

Impairment allowances are recognized for both overdue and current receivables based on probability-weighted credit loss to be incurred should any of the following events occur:

• material payment delay;
• a debtor is put in liquidation, declared bankrupt or undergoes restructuring procedures;
• receivables are claimed at administrative or common court, or undergo enforcement.

Amounts receivable from buyers are divided into the portfolios of strategic and other counterparties.

For the portfolio of strategic counterparties, it is expected that the historical performance does not provide full information on the expected credit losses that the Company may be exposed to. The risk of insolvency on the part of strategic counterparties is assessed based on ratings assigned to the counterparties using an internal scoring model and appropriately restated to account for the probability of default. The expected credit loss, in line with IFRS 9 Financial Instruments, is calculated based on the estimated potential recoveries from security interests.

It is expected that the historical performance information concerning receivables from other counterparties may reflect the credit risk that will be faced in future periods. The expected credit losses for this group of counterparties have been estimated through an analysis of ageing of receivables and percentage ratios assigned to individual ranges and groups (such as receivables claimed at court, receivables from counterparties in bankruptcy) which help estimate the value of receivables from buyers which are not expected to be paid.

In order to consider future factors, the Company adjusts the historical probability of default using the probability level implied by quotings of annual Credit Default Swap (CDS) instruments for each rating.

Impairment of receivables is recognized in classes of expenses corresponding to each asset's function, i.e. as operating or financial expenses, depending on the related type of amount receivable.

SELECTED ACCOUNTING PRINCIPLES REGARDING THE YEAR ENDED 31 DECEMBER 2017

If the recoverable amount of an asset is lower than its carrying amount, the entity recognizes an allowance/write-down reducing it to the present value of projected cash flows. An allowance/write-down corresponding to the whole amount due is recognized for receivables from debtors placed into liquidation or bankruptcy, those for which court proceedings have been instituted as well as those subject to administrative or court enforcement proceedings. Otherwise, the allowance/write-down is recognized collectively based on the criterion of delinquency – for amounts past due by 6 to 9 months: 50% and for those which have not been paid for more than 9 months: 100%.

Allowances/write-downs on receivables are charged to operating expenses or finance costs, according to the type of receivables.

	As at 31 December 2018	As at 31 December 2017
Gross Value
Receivables from buyers	820 463	719 144
Receivables claimed at court	961	913
Total	821 424	720 057
Allowance/write-down
Receivables from buyers	(900)	(11)
Receivables claimed at court	(961)	(913)
Total	(1 861)	(924)
Net Value
Receivables from buyers	819 563	719 133
Receivables claimed at court	–	–
Total	819 563	719 133

As at 31 December 2018 and 31 December 2017, the largest item of receivables from buyers was receivables from TAURON Sprzeda¿ Sp. z o.o., a subsidiary, amounting to PLN 521 286 thousand and PLN 481 526 thousand, respectively.

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU (in PLN '000)

Aging of receivables from buyers as at 31 December 2018

		Past due
	Not past due	<30 days	30–360 days	>360 days	Total
Value of item before allowance/write-down	820 329	79	47	969	821 424
Percentage of allowance/write-down	0%	–	79%	100%	–
Allowance/write-down	(855)	–	(37)	(969)	(1 861)
Net Value	819 474	79	10	–	819 563

Aging of receivables from buyers as at 31 December 2017

		Past due
	Not past due	<30 days	30–360 days	>360 days	Total
Value of item before allowance/write-down	719 112	39	37	869	720 057
Percentage of allowance/write-down	0%	–	59%	100%	–
Allowance/write-down	(33)	–	(22)	(869)	(924)
Net Value	719 079	39	15	–	719 133

Impairment allowances on receivables from buyers

	Year ended 31 December 2018	Year ended 31 December 2017
Opening balance	(924)	(899)
Effects of implementing IFRS 9	(1 575)	–
Restated opening balance	(2 499)	(899)
Recognised	(48)	(74)
Reversed	686	49
Closing balance	(1 861)	(924)

Related-party transactions as well as related party receivables and liabilities have been presented in Note 43.1 hereto.

25. Other non-financial assets

SELECTED ACCOUNTING PRINCIPLES

Other non-financial assets include mostly settlement of taxes and charges, except for income tax presented in the statement of financial position under a separate line item, prepaid expenses and advance payments for deliveries.

Settlements due to taxes and charges comprise:

• VAT and excise duty settlements;
• PIT and social insurance;
• Environmental fees and other regulatory settlements.

Prepayments are measured at the amount of reliably estimated expenses incurred by the entity, related to future reporting periods and resulting in an inflow of economic benefits to the entity in the future. Prepaid expenses may be settled based on the elapsed time or amounts paid.

	As at 31 December 2018	As at 31 December 2017
Prepaid expenses, including:	19 168	16 799
Prepaid fee on borrowings	17 721	16 169
VAT receivables	4 736	36 094
Advance payments for deliveries	2 845	1 313
Other	3 962	1 712
Total	30 711	55 918
Non-current	20 865	14 967
Current	9 846	40 951

26. Cash and cash equivalents

SELECTED ACCOUNTING PRINCIPLES

Cash and short-term deposits recognized in the statement of financial position include in particular cash at bank and in hand and short-term deposits with original maturity of up to three months.

The balance of cash and cash equivalents recognized in the statement of cash flows consists of the aforesaid cash and cash equivalent items. If the entity uses overdraft facilities as a cash management solution, in line with IAS 7 Statement of Cash Flows, the balance of cash is presented in the statement of cash flows less the outstanding balance of such facilities. Additionally, cash is adjusted by the balances of short-term loans granted and taken out in a cash pool transaction as their main objective is to manage liquidity on a day-to-day basis.

	As at 31 December 2018	As at 31 December 2017
Cash at bank and in hand	252 834	521 343
Short-term deposits (up to 3 months)	170 091	200 234
Other	43 000	–
Total cash and cash equivalents presented in the statement of financial position, including:	465 925	721 577
restricted cash	58 374	49 631
Cash pool	(2 024 919)	(2 186 508)
Overdraft	(767)	(93 502)
Foreign exchange	(273)	(799)
Total cash and cash equivalents presented in the statement of cash flows	(1 560 034)	(1 559 232)

The balances of short-term loans granted and taken out in a cash pool transaction are not cash flows from investing or financing activities, but a cash adjustment, as their main objective is to manage the Group's liquidity on a day-to-day basis.

The balance of restricted cash includes mostly the amount securing the settlement with Izba Rozliczeniowa Gie³d Towarowych S.A. totaling PLN 56 698 thousand.

Detailed information on cash pool balances has been presented in Note 29.5 to these financial statements.

27. Equity

27.1. Issued capital

SELECTED ACCOUNTING PRINCIPLES

Issued capital

In the financial statements, issued capital is presented at the amount specified in the articles of association and entered in the Company's court register.

Reserve capital

Supplementary capital is created, to which at least 8% of profit for each financial year is appropriated in order to offset the loss of the joint stock company, until its amount equals at least one-third of the share capital.

Revaluation reserve from valuation of hedging instruments

Revaluation reserve arising from hedging instruments is related to the measurement of Interest Rate Swaps hedging interest rate risk of issued bonds. Its amount is determined as the fair value of the effective portion of cash flow hedging instruments, including deferred tax.

Issued capital as at 31 December 2018

Class/ issue	Type of shares	Number of shares	Nominal value of one share (in PLN)	Value of class/issue at nominal value	Method of payment
AA	bearer shares	1 589 438 762	5	7 947 194	cash/in-kind contribution
BB	registered shares	163 110 632	5	815 553	in-kind contribution
		1 752 549 394		8 762 747

As at 31 December 2018, the value of issued capital, the number of shares and the par value of shares had not changed as compared to 31 December 2017.

27.2. Major shareholders

Shareholding structure as at 31 December 2018 (to the best of the Company's knowledge)

Shareholder	Number of shares	Nominal value of shares	% of issued capital	% of total vote*
State Treasury	526 848 384	2 634 242	30.06%	30.06%
KGHM Polska MiedŸ S.A.	182 110 566	910 553	10.39%	10.39%
Nationale - Nederlanden Otwarty Fundusz Emerytalny	88 742 929	443 715	5.06%	5.06%
Other shareholders	954 847 515	4 774 237	54.49%	54.49%
Total	1 752 549 394	8 762 747	100%	100%

* The voting rights of the shareholders holding more than 10% of the total votes in the Company have been limited in such a manner that none of them is entitled to exercise the right to more than 10% of votes at the General Shareholders' Meeting of the Company. The limitation does not apply to the State Treasury and State Treasury owned companies in the period when the State Treasury and State Treasury owned companies hold shares in the Company entitling to not less then 25% of the total votes in the Company.

To the best of the Company's knowledge, the shareholding structure as at 31 December 2018 had not changed since 31 December 2017.

27.3. Reserve capital

On 16 April 2018, the General Shareholders' Meeting of the Company adopted a resolution to use the net profit for 2017 of PLN 854 351 thousand to increase the supplementary capital.

27.4. Revaluation reserve from valuation of hedging instruments

	Year ended 31 December 2018	Year ended 31 December 2017
Opening balance	23 051	29 660
Remeasurement of hedging instruments	(24 290)	(8 159)
Remeasurement of hedging instruments charged to profit or loss	(7)	–
Deferred income tax	4 617	1 550
Closing balance	3 371	23 051

The revaluation reserve from valuation of hedging instruments results from valuation of Interest Rate Swaps (IRS) hedging the interest rate risk arising from bonds issued, which has been discussed in more detail in Note 20 to these financial statements.

As at 31 December 2018 the Company recognized PLN 3 371 thousand of revaluation reserve from valuation of hedging instruments. It represents an asset arising from valuation of interest rate swaps as at the end of the reporting period, totalling PLN 4 178 thousand, adjusted by a portion of valuation relating to interest accrued on bonds as at the end of the reporting period, including deferred tax.

The profit/loss for the period includes PLN 1 202 thousand, with PLN 1 209 thousand of the amount received in respect of hedges used in relation to closed interest periods and PLN (7) thousand resulting from remeasurement of instruments related to interest on bonds accrued as at the end of the reporting period. The aforementioned costs of IRS hedging transactions adjusted finance costs arising from interest on bonds issued in the statement of comprehensive income.

27.5. Retained earnings/ (Accumulated losses) and dividend limitation

Reserve capital – dividend limitation

	As at 31 December 2018	As at 31 December 2017
Amounts subject to distribution	4 886 520	4 032 169
amounts from distribution of prior years profits	4 886 520	4 032 169
Non-distributable amounts	3 624 917	3 624 917
decrease in the value of issued capital	3 390 037	3 390 037
settlement of mergers with subsidiaries	234 880	234 880
Total reserve capital	8 511 437	7 657 086

The part of reserve capital in the amount of one third of the issued capital amounting to PLN 2 920 916 thousand can only be used to cover the loss disclosed in the financial statements.

Retained earnings/ (Accumulated losses) – dividend limitation

	As at 31 December 2018	As at 31 December 2017
Distributable amounts or losses to be covered	(1 709 840)	854 364
profit (loss) for the year ended 31 December 2018	(1 709 853)	–
profit (loss) for the year ended 31 December 2017	–	854 351
adjustment of prior years profit	13	13
Non-distributable amounts or losses to be covered	(307 879)	80 658
actuarial gains and losses on provisions for post-employment benefits	154	140
effects of implementing IFRS 9	(388 551)	–
settlement of mergers with subsidiaries	80 518	80 518
Total retained earnings/ (accumulated losses)	(2 017 719)	935 022

The Management Board recommends to offset the net loss for 2018 of PLN 1 709 853 thousand with reserve capital of Company.

28. Dividends paid and proposed

In the years ended 31 December 2018 and 31 December 2017 the Company did not pay dividend.

29. Debt

SELECTED ACCOUNTING PRINCIPLES

Loans, borrowings, bonds issued and finance lease liabilities are presented as debt in the statement of financial position of the Company.

At initial recognition, all loans, borrowings and bonds issued are measured at fair value less the cost incurred to obtain a loan or borrowing. After initial recognition interest-bearing loans and debt securities are measured at amortized cost using the effective interest method.

Amortized cost includes the cost incurred to obtain a loan, borrowing or debt securities and discounts or premiums relating to the liability.

Finance leases transferring substantially all the risks and rewards of ownership of a lease object to the Company are recognized in the statement of financial position as at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments.

Leases whereby the lessor retains substantially all the risks and rewards of ownership of the leased asset are classified as operating leases. Operating lease payments and subsequent lease rents are charged to expenses using the straight-line method over the lease term.

PROFESSIONAL JUDGMENT AND ESTIMATES

When measuring liabilities at amortized cost using the effective interest rate method, the Company estimates future cash flows considering all contractual terms of a given financial instrument, including the early repayment option. As at the reporting period end, early buy-back of bonds was included in the measurement of liabilities arising from issue of hybrid bonds under agreements concluded with the European Investment Bank, in relation to the intention to buy back the bonds after the end of the first financing period.

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)

	As at 31 December 2018	As at 31 December 2017
Long-term portion of debt
Subordinated hybrid bonds	1 537 848	791 355
Other issued bonds	5 530 671	7 113 161
Loans received from the European Investment Bank	690 129	873 770
Loans from the subsidiary	715 696	694 168
Total	8 474 344	9 472 454
Short-term portion of debt
Subordinated hybrid bonds	3 811	1 597
Other issued bonds	2 285 678	34 233
Cash pool loans received, including accrued interest	2 038 520	2 377 034
Loans from the European Investment Bank	160 547	168 340
Loans from the subsidiary	15 051	27 112
Overdraft	767	93 502
Finance lease	–	23 945
Total	4 504 374	2 725 763

29.1. Bonds issued

Bonds issued as at 31 December 2018

			Bonds at nominal	Maturity	As at balance sheet date		of which maturing within (after the balance sheet date)
Investor	Interest rate	Currency	value in currency	date	Accrued interest	Principal at amortized cost	up to 1 year	1–2 years	2–5 years	over 5 years
			100 000	20.12.2019	107	99 935	99 935	–	–	–
			100 000	20.12.2020	107	99 891	–	99 891	–	–
			100 000	20.12.2021	107	99 861	–	–	99 861	–
			100 000	20.12.2022	107	99 838	–	–	99 838	–
			100 000	20.12.2023	107	99 820	–	–	99 820	–
			100 000	20.12.2024	107	99 807	–	–	–	99 807
			100 000	20.12.2025	107	99 796	–	–	–	99 796
			100 000	20.12.2026	107	99 785	–	–	–	99 785
			100 000	20.12.2027	107	99 777	–	–	–	99 777
Bank	floating, based		100 000	20.12.2028	107	99 771	–	–	–	99 771
Gospodarstwa	on WIBOR 6M	PLN	70 000	20.12.2020	73	69 975	–	69 975	–	–
Krajowego			70 000	20.12.2021	73	69 970	–	–	69 970	–
			70 000	20.12.2022	73	69 967	–	–	69 967	–
			70 000	20.12.2023	73	69 964	–	–	69 964	–
			70 000	20.12.2024	73	69 963	–	–	–	69 963
			70 000	20.12.2025	73	69 961	–	–	–	69 961
			70 000	20.12.2026	73	69 960	–	–	–	69 960
			70 000	20.12.2027	73	69 959	–	–	–	69 959
			70 000	20.12.2028	73	69 958	–	–	–	69 958
			70 000	20.12.2029	73	69 958	–	–	–	69 958
Banks			400 000	14.03.2019	566	400 000	400 000	–	–	–
(issue scheme	floating, based	PLN	200 000	9.11.2020	854	199 764	–	199 764	–	–
underwriters)1	on WIBOR 6M		1 600 000	29.12.2020	387	1 598 100		– 1 598 100	–	–
Domestic investors TPEA1119	floating, based on WIBOR 6M	PLN	1 750 000	4.11.2019	7 555		1 749 400 1 749 400	–	–	–
European Investment Bank		EUR	190 000	16.12.2034	1 646	790 136	–	–	–	790 136
	fixed2	PLN	400 000	17.12.2030	1 243	398 781	–	–	–	398 781
		PLN	350 000	19.12.2030	922	348 931	–	–	–	348 931
Eurobonds	fixed	EUR	500 000	5.07.2027	25 181	2 134 826	–	–		– 2 134 826
Total					40 154		9 317 854 2 249 335 1 967 730			509 420 4 591 369

¹ Bond Issue Scheme of 24 November 2015.

² In relation to hybrid (subordinate) financing two periods occur. The Company cannot early buy back the bonds in the first (non-call) period, nor can EIB early sell them to third parties (in both cases except for cases indicated in the subscription agreement). In this period, the interest is fixed, while after the non-call period, it is floating and refers to the base rate (EURIBOR/WIBOR) increased by a determined margin.

Bonds issued as at 31 December 2017

			Bonds at nominal	Maturity	As at balance sheet date		of which maturing within (after the balance sheet date)
Investor	Interest rate	Currency	value in currency	date	Accrued interest	Principal at amortized cost	up to 2 years	2–5 years	over 5 years
			100 000	20.12.2019	107	99 869	99 869	–	–
			100 000	20.12.2020	107	99 838	–	99 838	–
			100 000	20.12.2021	107	99 817	–	99 817	–
			100 000	20.12.2022	107	99 800	–	99 800	–
			100 000	20.12.2023	107	99 787	–	–	99 787
			100 000	20.12.2024	107	99 778	–	–	99 778
			100 000	20.12.2025	107	99 770	–	–	99 770
			100 000	20.12.2026	107	99 761	–	–	99 761
			100 000	20.12.2027	107	99 756	–	–	99 756
Bank	floating, based		100 000	20.12.2028	107	99 752	–	–	99 752
Gospodarstwa Krajowego	on WIBOR 6M	PLN	70 000	20.12.2020	74	69 963	–	69 963	–
			70 000	20.12.2021	74	69 961	–	69 961	–
			70 000	20.12.2022	74	69 959	–	69 959	–
			70 000	20.12.2023	74	69 958	–	–	69 958
			70 000	20.12.2024	74	69 957	–	–	69 957
			70 000	20.12.2025	74	69 956	–	–	69 956
			70 000	20.12.2026	74	69 956	–	–	69 956
			70 000	20.12.2027	74	69 955	–	–	69 955
			70 000	20.12.2028	74	69 955	–	–	69 955
			70 000	20.12.2029	74	69 955	–	–	69 955
Banks (issue scheme underwriters)1	floating, based on WIBOR 6M	PLN	1 600 000	29.12.2020	389	1 597 188	–	1 597 188	–
Domestic investors TPEA1119	floating, based on WIBOR 6M	PLN	1 750 000	4.11.2019	7 609	1 749 277	1 749 277	–	–
European Investment Bank	fixed2	EUR	190 000	16.12.2034	1 597	791 355	–	–	791 355
Eurobonds	fixed	EUR	500 000	5.07.2027	24 425	2 069 193	–	–	2 069 193
Total					35 830	7 904 516	1 849 146	2 106 526	3 948 844

¹ Bond Issue Scheme of 24 November 2015.

² In relation to hybrid (subordinate) financing two periods occur. The Company cannot early buy back the bonds in the first (non-call) period, nor can EIB early sell them to third parties (in both cases except for cases indicated in the subscription agreement). In this period, the interest is fixed, while after the non-call period, it is floating and refers to the base rate (EURIBOR) increased by a determined margin.

The Company has issued unsecured coupon bonds at a nominal price, except for eurobonds, which were issued at the issue price equal to 99.438% of their par value.

The eurobonds have been admitted to trading on the London Stock Exchange. They were rated "BBB" by the Fitch rating agency.

Bonds acquired by the European Investment Bank are subordinated, which means that they have priority of satisfaction only before the amounts due to the Company's shareholders in the event of its bankruptcy or liquidation. This in turn positively affects Company's financial stability, since the bonds are excluded from the net debt/EBITDA ratio calculation, a covenant underlying domestic bond issue schemes concluded by the Company (except for TPEA1119 series bonds quoted in the Catalyst Multilateral Trading Facility). Additionally, 50% of the subordinated bond amount has been classified by the rating agency as equity in the rating model, which has had a beneficial effect on the rating of the TAURON Group.

A change in the balance of bonds, excluding interest which increased the carrying amount in the year ended 31 December 2018 and in the comparable period, has been presented below.

	Year ended 31 December 2018	Year ended 31 December 2017
Opening balance	7 904 516	6 929 151
Issue*	1 347 943	2 703 643
Redemption	–	(1 650 000)
Measurement change	65 395	(78 278)
Closing balance	9 317 854	7 904 516

* Costs of discount and issue have been included.

In the year ended 31 December 2018, the Company issued (par value) the following bonds:

Date of issue	Agreement/ Scheme	Description	Year ended 31 December 2018
9.11.2018	Bond Issue Scheme dated	Issue of bonds maturing on 9 November 2020	200 000
14.12.2018	24 November 2015	Issue of bonds maturing on 14 March 2019	400 000
17.12.2018	Agreement with the European	Issue of bonds maturing on 17 December 2030	400 000
19.12.2018	Investment Bank	Issue of bonds maturing on 19 December 2030	350 000
•		Total	1 350 000

After the reporting period end, as part of the Bond Issue Scheme dated 24 November 2015:

• on 14 March 2019, the Company redeemed bonds with a nominal value of PLN 400 000 thousand according to the maturity date; •
• on 25 March 2019, the Company issued bonds with a nominal value of PLN 100 000 thousand, with maturity date of 25 March 2020.

In addition, as part of the subordinated bond program of BGK concluded on 6 September 2017, the Company submitted a proposal to purchase on 29 March 2019 subordinated bonds with a nominal value of PLN 400 000 thousand with a maturity of 29 March 2031, and BGK confirmed the acceptance of this proposal.

Concluding hybrid financing agreements with the European Investment Bank

On 11 December 2018 the Company and the European Investment Bank (EIB) concluded a subscription and project agreement regarding the issue of hybrid bonds with the total par value of PLN 400 000 thousand. Funds raised from the issue shall be used to cover expenses of TAURON Dystrybucja S.A., a subsidiary, related to development and improvement of the power grid infrastructure in 2018–2020.

On 17 December 2018 the Company issued bonds under the above agreement. These are unsecured subordinated coupon bearer securities. They were acquired by EIB as part of the operations of the European Fund for Strategic Investments, launched by EIB and the European Commission to implement the Juncker Plan.

The bonds will mature 12 years of the issue date, with the proviso that in line with the description of hybrid funding the first funding period was defined to last 7 years ("1st Funding Period") during which the Company will not be allowed to repurchase the bonds early and the bonds may not be sold early by EIB to third parties (in both cases, subject to the exceptions set out in the subscription agreement). The bonds bear fixed interest during the 1st Funding Period and during the next 5-year funding period ("2nd Funding Period") interest will be floating and determined by reference to WIBOR 6M increased by an agreed margin. Under the agreement, interest payment deadlines may be postponed until the buyback date or until the fifth day following the date of deciding on dividend payment at the latest.

As the bonds are subordinated, any claims arising therefrom will have priority of satisfaction only before the amounts due to the issuer's shareholders in the event of its bankruptcy or liquidation.

The bond issue has had a positive effect on the financial stability of the TAURON Group as the bonds are not taken into account for purposes of calculation of the debt ratio, which is a covenant in some funding schemes. Additionally, 50% of the bond amount has been classified by the rating agency as equity in the rating model, which has had a beneficial effect on the rating of the Capital Group. The rating assigned to the bonds by Fitch is BB+.

Additionally, on 13 December 2018, the Company and EIB signed another subscription and project agreement, that underlay the issue of hybrid bonds with the total par value of PLN 350 000 thousand ("B" Issue). The B Issue complements the A Issue. Therefore, in December 2018, the Company and EIB concluded agreements on the issue of subordinated bonds totalling PLN 750 000 thousand.

On 19 December 2018 the Company issued bonds under the above agreements. The remaining terms and parameters of the bonds comply with those of the A Issue.

Extension of the Bond Issue Scheme of 24 November 2015

The bond issue scheme of 24 November 2015 was extended on 9 March 2018. Under annexes to the agency and depositary agreement and to the guarantee agreement some banks extended the period of availability of the scheme's funds. Therefore, the maximum bond issue scheme value: •

• until 31 December 2021 is PLN 6 070 000 thousand (before the annexes were signed it had been PLN 5 320 000 thousand); •
• until 31 December 2022 is PLN 5 820 000 thousand (before the annexes were signed it had been PLN 2 450 000 thousand).

By 31 December 2020 the scheme's value will not change and will not exceed PLN 6 270 000 thousand.

The annexes were concluded with the following banks participating in the Scheme: Bank Handlowy w Warszawie S.A., Bank BG¯ BNP Paribas S.A., Santander Bank Polska S.A., CaixaBank S.A. (Joint Stock Company)) Branch in Poland, Industrial and Commercial Bank of China (Europe) S.A. Branch in Poland, ING Bank Œl¹ski S.A., mBank S.A., MUFG Bank (Europe) N.V., MUFG Bank (Europe) N.V. S.A. Branch in Poland and Powszechna Kasa Oszczêdnoœci Bank Polski S.A. Due to the extension, the financing margin in the Scheme has not changed.

The Company hedges a portion of interest cash flows related to issued bonds using IRS contracts. The instruments are subject to hedge accounting, which has been discussed in more detail in Note 20 to these financial statements.

29.2. Debt agreement covenants

The agreements signed by the Company with the banks include legal and financial covenants which are commonly used in such transactions. The key covenant is the net debt to EBITDA ratio (for the domestic bond issue schemes) which sets the debt less cash in relation to generated EBITDA. The maximum permissible value of the net debt/EBITDA ratio is 3.5, except for TPEA1119 series bonds, for which it is 3.0.

As at 31 December 2018, the net debt/EBITDA ratio calculated in line with the definition included in the issue terms regarding TPEA1119 series bearer bonds issued on 4 November 2014 for the total amount of PLN 1 750 000 thousand reached the level of 3.04, thus exceeding the maximum permissible level of 3.0 as determined in the issue terms regarding TPEA1119 series. This event may provide the basis to demand early buyback of the bonds, provided the bondholders' meeting approves such an action. The approval may take the form of a resolution passed by a majority of 66 and 2/3 percent of votes cast by bondholders present at the meeting. In March 2016 the Company signed an agreement with a group of bondholders that as at 31 December 2018 was entitled to exercise 41.93 percent of votes at the bondholders' meeting. Pursuant to the agreement, the bondholders being parties thereto are obliged to maintain the number of bonds held, to participate in each bondholders' meeting and to vote against a resolution approving the early buyback demand related to the net debt/EBITDA ratio having exceeded the 3.0 level. The contractual obligations remain valid provided that the net debt/EBITDA ratio does not exceed 3.5 (the ratio definition included in the agreement does not consider subordinated bond liabilities, i.e. it complies with the definitions included in other financing agreements concluded by the Issuer).

The fact that the net debt/EBITDA ratio (calculated in line with the definition included in the TPEA1119 series issue terms) exceeded 3.0 does not result in a breach of other financing agreements concluded by the Company, nor does it bring any other adverse effects related to these agreements.

The net debt/EBITDA ratio, being a covenant in other domestic bond issue schemes, has not been exceeded since the defined maximum permissible value was higher (3.5) and the debt definition differed, i.e. for the purpose of the net debt/EBITDA ratio calculation it did not include the amount of subordinated bonds issued.

29.3. Loans from the European Investment Bank

As at 31 December 2018, the balance of loans obtained from the European Investment Bank was PLN 850 676 thousand, including interest accrued of PLN 4 692 thousand. As at 31 December 2017, the balance of loans from the European Investment Bank was PLN 1 042 110 thousand, including interest accrued of PLN 6 100 thousand.

In the year ended 31 December 2018, the Company repaid PLN 162 318 thousand of the principal amount and PLN 28 995 thousand of interest.

A change in the balance of loans from the European Investment Bank, excluding contractual interest increasing their carrying amount, is presented below.

	Year ended 31 December 2018	Year ended 31 December 2017
Opening balance	1 036 010	1 183 415
Impact of IFRS 9	(33 055)	–
Opening balance after adjustement	1 002 955	1 183 415
Repaid	(162 318)	(147 568)
Measurement change	5 347	163
Closing balance	845 984	1 036 010

Following the effective date of IFRS 9 Financial Instruments, the carrying amount of liability due to loans granted by the European Investment Bank decreased by PLN 33 055 thousand, thus increasing retained earnings as at 1 January 2018 as described in detail in Note 7 hereto.

29.4. Loans from a subsidiary

As at 31 December 2018, the carrying amount of loans from a subsidiary, TAURON Sweden Energy AB (publ), was PLN 730 747 thousand (EUR 169 941 thousand), including interest of PLN 15 051 thousand (EUR 3 500 thousand) accrued as at the end of the reporting period. As at 31 December 2017, the carrying amount of loans from a subsidiary, TAURON Sweden Energy AB (publ), was PLN 721 280 thousand (EUR 172 932 thousand), including interest of PLN 27 112 thousand (EUR 6 500 thousand) accrued as at the end of the reporting period.

A change in the balance of the loan from the subsidiary, excluding contractual interest increasing its carrying amount, is presented below.

	Year ended 31 December 2018	Year ended 31 December 2017
Opening balance	694 168	765 450
Repaid	–	(28 127)
Measurement change	21 528	(43 155)
Closing balance	715 696	694 168

The Company's liability is a long-term loan granted under an agreement entered into in December 2014 by TAURON Polska Energia S.A. and TAURON Sweden Energy AB (publ). The loan bears interest at a fixed rate and interest is paid annually, in December, until the loan has been fully repaid i.e. until 29 November 2029.

Pursuant to an annex of 28 November 2018, in December 2018 a part of interest installment was repaid in the amount of EUR 3 296 thousand, while the remaining part of EUR 3 000 thousand was repaid on 31 January 2019.

29.5. Cash pool service

In order to optimize cash management, financial liquidity and finance income and costs, the TAURON Group has implemented a cash pool structure. On 18 December 2017, the Company concluded a new cash pooling agreement with PKO Bank Polski S.A. with the expiration date of 17 December 2020, with TAURON Polska Energia S.A. acting as an agent. The interest rate is set at arm's length.

The balances of receivables and liabilities arising from cash pool transactions have been presented in the table below.

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)
---------------	--

	As at 31 December 2018	As at 31 December 2017
Receivables from cash pool loans granted	803 677	189 928
Interest receivable on loans granted under cash pool agreement	5 256	598
Impairment loss	(212 400)	–
Total Receivables	596 533	190 526
Loans received under cash pool agreement	2 036 679	2 374 430
Interest payable on loans received under cash pool agreement	1 841	2 604
Total Liabilities	2 038 520	2 377 034

Surplus cash obtained by the Company under the cash pool agreement is deposited in bank accounts.

Under the cash pool agreement, the Company may use external financing in the form of an overdraft of up to PLN 300 000 thousand and an intraday limit of up to PLN 500 000 thousand. As at 31 December 2018, the Company did not have any related liabilities.

The Company recognized an impairment allowance for credit losses mainly due to a loan granted to a subsidiary from the Mining segment under a cash pooling agreement as at the balance sheet date, because it intends to continue providing financial support to the entity.

29.6. Overdraft facilities

As at 31 December 2018 the balance of overdraft facilities related to an agreement for an overdraft in USD with mBank S.A., concluded by the Company for the purpose of financing margin deposits and commodity transactions – USD 204 thousand (PLN 767 thousand).

As at 31 December 2017, the balance of overdraft facilities was PLN 93 502 thousand.

29.7. Concluding a loan agreement with Bank Gospodarstwa Krajowego

On 19 December 2018 the Company and Bank Gospodarstwa Krajowego ("BGK") concluded a loan agreement for PLN 1 000 000 thousand, to be used for: ••

• financing of Company's bonds repaid assumed by BGK maturing in 2019–2020 (totaling PLN 270 000 thousand);
• financing capital expenditure of the TAURON Group.

Under the agreement, the funds shall be provided by 31 December 2020, and repaid in equal installments from 2024 to 2033. The interest shall be based on a floating rate (WIBOR 6M) increased by BGK's margin.

As at the balance sheet date, the Company did not contract any liability related to the agreement mentioned above, concluded with BGK. After the balance sheet date, on January and February 2019 tranches of loan have been issued in total amount of PLN 730 000 thousand.

29.8. Finance lease liabilities

As at 31 December 2018, the Company did not have any finance lease liabilities.

As at 31 December 2017, the finance lease liability amounted to PLN 23 945 thousand and resulted from a lease of investment property. In the year ended 31 December 2018 the liability expired in line with contractual terms, and the Company purchased the leased property, as described in details in Note 17 hereto.

29.9. Operating lease liabilities

As at 31 December 2018, the Company used a real property located in Katowice at ul. ks. Piotra Œciegiennego 3, based on a lease agreement.

The Company's registered office is located in the leased premises with the usable area of 10 001.14 square meters. In 2018, the average monthly rental fee with the service charges was PLN 779 thousand.

The Company holds perpetual usufruct of land and pays other contractual fees, classified as operating lease liabilities.

The total amount of minimum lease liabilities arising from non-cancellable operating leases was PLN 49 164 thousand as at 31 December 2018.

30. Provisions for employee benefits

SELECTED ACCOUNTING PRINCIPLES

In accordance with the Compensation Policy the employees of the Company are entitled to the following post-employment benefits:

• retirement and disability benefits paid on a one-off basis, when an employee retires or is vested with the right to receive disability benefits;
• death benefits;
• cash equivalent resulting from special tariff for energy sector employees;
• benefits from the Company's Social Benefit Fund.

The present value of such liabilities is calculated by an independent actuary at the end of each reporting period. The accrued liabilities are equal to discounted future payments, including employee turnover, and pertain to the time remaining until the end of the reporting period. Demographic and employee turnover data are based on historical information.

Actuarial gains and losses on post-employment benefits are fully charged to other comprehensive income.

PROFESSIONAL JUDGMENT AND ESTIMATES

Provisions for post-employment benefits and jubilee bonuses have been estimated using actuarial methods. Key actuarial assumptions made as at the end of the reporting period for provision calculation purposes:

3.00%
2.50%
7.93%
2.50%
3.50%
3.50%
17.11

Change in provisions for employee benefits for the year ended 31 December 2018

	Provision for retirement, disability and similar benefits	Employee electricity rates	Social Fund	Provisions, total
Opening balance	2 037	1 316	124	3 477
Current service costs	359	254	22	635
Actuarial gains and losses, of which:	86	(98)	(6)	(18)
arising from changes in financial assumptions	6	–	–	6
arising from other changes	80	(98)	(6)	(24)
Benefits paid	(145)	(10)	(1)	(156)
Interest expense	52	40	2	94
Closing balance	2 389	1 502	141	4 032
Non-current	2 155	1 492	140	3 787
Current	234	10	1	245

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU (in PLN '000)

Change in provisions for employee benefits for the year ended 31 December 2017

	Provision for retirement, disability and similar benefits	Employee electricity rates	Social Fund	Provisions, total
Opening balance	1 653	1 083	97	2 833
Current service costs	348	240	18	606
Actuarial gains and losses, of which:	153	(32)	7	128
arising from changes in financial assumptions	(19)	–	–	(19)
arising from other changes	172	(32)	7	147
Benefits paid	(158)	(7)	(1)	(166)
Interest expense	41	32	3	76
Closing balance	2 037	1 316	124	3 477
Non-current	1 719	1 307	121	3 147
Current	318	9	3	330

Sensitivity analysis

A sensitivity analysis of measurement results as at 31 December 2018 to changes in key actuarial assumptions by 0.5 percentage point has been presented below:

Provision	Measurement as at 31 December 2018	Financial discount rate		Planned increases in base amount
		-0.5 p.p.	+0.5 p.p.	-0.5 p.p.	+0.5 p.p.
Provision for retirement, disability and similar benefits	2 389	2 507	2 280	2 279	2 507
Employee electricity rates	1 502	1 687	1 344	1 344	1 685
Social Fund	141	157	127	127	157
Total	4 032	4 351	3 751	3 750	4 349

A discount rate reduction by 0.5 percentage point would result in an increase in the provision for employee benefits from PLN 4 032 thousand to PLN 4 351 thousand. Discount rate increase by 0.5 percentage point, i.e. application of a 3.50% discount rate would result in a decrease in provision to PLN 3 751 thousand.

The benefits were calculated based on the assumptions set out in the Compensation Policy. Reducing the planned increases of compensation bases by 0.5 percentage point would result in a decrease in the provision for employee benefits down to PLN 3 750 thousand, while their increase by 0.5 percentage point would cause an increase in the provision up to PLN 4 349 thousand.

31. Other provisions

SELECTED ACCOUNTING PRINCIPLES

Provisions are recognized if the Company has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be reliably estimated.

As at the end of the reporting period, the Company recognized a provision against the risk of an adverse decision arising from the pending inspection procedure.

In the reporting period, the Company recognized also a provision for the obligation to surrender energy certificates.

As at 31 December 2018 other provisions included the provisions for tax risks due to the pending control proceedings. As at 31 December 2017 the Company recognized a related provision of PLN 68 694 thousand. As at 31 December 2018, the relevant provision amounted to PLN 72 894 thousand. An increase in the provision by PLN 4 200 thousand is attributable to interest accrued for the year ended 31 December 2018. The Company is a party to VAT inspection proceedings instigated by the Director of the Tax Inspection Office in Warsaw ("Director of the TIO"). The duration of these proceedings was several times extended by the TIO Director and by the Head of Mazowiecki Customs and Tax Office. The newest proceedings closing dates fall on 22 and 28 April 2019 and 23 May 2019.

Changes in other provisions in the comparable period, i.e. the year ended 31 December 2017 have been presented in the table below.

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)
---------------	--

	Provisions for onerous contracts with a jointly-controlled entity and provision for costs	Other provisions	Provisions, total
Opening balance	198 844	64 505	263 349
Unwinding of discount and change in discount rate	2 330	–	2 330
Recognision	2 250	4 277	6 527
Reversal	(203 424)	–	(203 424)
Utilisation	–	(11)	(11)
Closing balance	–	68 771	68 771
Non-current	–	–	–
Current	–	68 771	68 771

Provision for onerous contracts with a joint venture and for costs

In the financial year ended 31 December 2017, following the entry into force of the agreement to set out they key boundary conditions for the restructuring of "Construction of a gas and steam unit in Stalowa Wola" project concluded by TAURON Polska Energia S.A., Polskie Górnictwo Naftowe i Gazownictwo S.A. and Elektrociep³ownia Stalowa Wola S.A., an annex to the agreement to sell electricity of 11 March 2011 between the Company, Polskie Górnictwo Naftowe i Gazownictwo S.A. and Elektrociep³ownia Stalowa Wola S.A. and an annex to the agreement to supply gaseous fuel of 11 March 2011 between Polskie Górnictwo Naftowe i Gazownictwo S.A. and Elektrociep³ownia Stalowa Wola S.A., the Company released in full the following provisions: •

• a provision resulting from the fact that under a long-term contract to sell electricity, concluded among Elektrociep³ownia Stalowa Wola S.A., the Company and PGNiG Energia S.A., the Company was obliged to purchase half of the volume of electricity generated by Elektrociep³ownia Stalowa Wola S.A. at a price calculated in line with the "cost plus" formula, which covers the production costs and the financing costs; •
• a provision resulting from the fact that the Company was obliged to cover losses which may have been incurred under the take-or-pay clause of the comprehensive gaseous fuel supply contract entered into by PGNiG S.A. and Elektrociep³ownia Stalowa Wola S.A. Pursuant to the said clause, Elektrociep³ownia Stalowa Wola S.A. was obliged to pay PGNiG S.A. for uncollected gas; •
• a provision for necessary additional costs which the Company may have been required to incur for the operation of Elektrociep³ownia Stalowa Wola S.A. due to delays in project completion.

32. Accruals, deferred income and government grants

	As at 31 December 2018	As at 31 December 2017
Unused holidays	2 447	2 587
Bonuses	7 859	6 499
Accruals relating to post-service benefits for members of the Management Board/key management personnel	825	1 764
Other	5 573	3 744
Total	16 704	14 594
Non-current	103	–
Current	16 601	14 594

33. Liabilities to suppliers

SELECTED ACCOUNTING PRINCIPLES

Current liabilities to suppliers are recognized at amount due.

As at 31 December 2018 the highest liabilities to suppliers were the liabilities towards subsidiary TAURON Wytwarzanie S.A. and towards the state-owned Wêglokoks S.A. totalling PLN 113 292 thousand and PLN 100 711 thousand, respectively. As at 31 December 2017, the biggest liabilities to suppliers were the liabilities towards subsidiary TAURON Wytwarzanie S.A. and TAURON Sprzeda¿ Sp. z o.o. totalling PLN 163 952 thousand and PLN 87 255 thousand, respectively.

34. Other financial liabilities

SELECTED ACCOUNTING PRINCIPLES

Other financial liabilities include Tax Capital Group settlements, payroll liabilities, deposits, performance bonds, collateral received and liabilities arising from purchases of property, plant and equipment and intangible assets, measured at amount due since the discount effects are immaterial.

	As at 31 December 2018	As at 31 December 2017
Margin deposits arising from stock exchange transactions	248 480	7 163
Liabilities arising from income tax settlements of the TCG companies	90 490	34 836
Commissions related to securities	9 758	5 889
Wages and salaries, deductions on wages and salaries as well as other employee related liabilities	7 325	6 424
Bid bonds, deposits and collateral received	464	5 400
Other	32 755	23 004
Total	389 272	82 716
Non-current	17 626	20 126
Current	371 646	62 590

Additional deposits are related mostly to forward transactions on the greenhouse emissions allowances concluded on foreign regulated markets. Margin deposits states as cash received by the Company arising from current stock exchange transitions, due to change in valuation of futures contracts, open as at the end of reported period. An increase in deposits results from a growth in the prices of emission allowances, accompanied with a growing number of open futures as at the end of the reported period.

35. Other non-financial liabilities

SELECTED ACCOUNTING PRINCIPLES

As other non-financial liabilities in the statement of financial position are presented mainly liabilities arising from taxes and charges, which include:

• VAT and excise duty settlements;
• PIT and social insurance;
• Environmental fees and other regulatory settlements.

	As at 31 December 2018	As at 31 December 2017
VAT	17 756	25 385
Personal Income Tax	1 860	1 878
Social security	4 973	4 311
Excise	–	880
Other	37	36
Total	24 626	32 490

Regulations concerning VAT, corporate income tax and social insurance charges are frequently amended. The applicable regulations may also contain ambiguous issues, which lead to differences in opinions concerning the legal interpretation of tax legislation both among the tax authorities and between such authorities and enterprises.

Tax reports and other matters (e.g. customs or foreign currency transactions) may be audited by authorities competent to impose substantial penalties and fines, whereas any additional tax liabilities assessed during such audits have to be paid together with interest. Consequently, the figures presented and disclosed in these financial statements may change in future if a final decision is issued by tax inspection authorities.

EXPLANATORY NOTES TO THE STATEMENT OF CASH FLOWS

SELECTED ACCOUNTING PRINCIPLES

The statement of cash flows is prepared in line with the indirect method.

36. Significant items of the statement of cash flows

36.1. Cash from/used in operating activities

Changes in working capital

	Year ended 31 December 2018	Year ended 31 December 2017
Change in receivables	(243 133)	105 267
Change in inventories	(211 159)	86 371
Change in payables excluding loans and borrowings	354 023	(59 096)
Change in other non-current and current assets	23 386	11 211
Change in deferred income, government grants and accruals	2 110	(6 909)
Change in provisions	4 695	(194 062)
Change in working capital	(70 078)	(57 218)

36.2. Cash from/used in investing activities

Purchase of bonds

Payments to purchase bonds, in the amount of PLN 160 000 thousand, are related to purchases of intra-group bonds issued by TAURON Ekoenergia Sp. z o.o., subsidiary.

Acquisition of shares

Payments to acquire shares of PLN 2 646 353 thousand were mostly related to the Company's transfer of funds to increase the capital of the following companies: ••

• Nowe Jaworzno Grupa TAURON Sp. z o.o., totaling PLN 1 060 000 thousand; •
• TAURON Wytwarzanie S.A., totaling to PLN 780 000 thousand; •
• TAURON Dystrybucja Serwis S.A., totaling PLN 439 317 thousand; •
• TAURON Wydobycie S.A., totaling PLN 340 000 thousand; •
• ElectroMobility Poland S.A., totaling PLN 15 000 thousand;
• PGE EJ1 Sp. z o.o., totaling PLN 6 000 thousand;

and capital contribution to Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. of PLN 6 000 thousand.

Loans granted •

The Company's expenses related to loan granting include:

• a loan disbursed to Elektrociep³ownia Stalowa Wola S.A., a jointly-controlled entity, in the total amount of PLN 47 310 thousand, which has been discussed in more detail in Note 22 to these condensed interim financial statements; and •
• a loan granted to PGE EJ 1 Sp. z o.o. of PLN 4 800 thousand.

Under loans granted, the Company presents an increase in the balance of loans to subsidiaries under a long-term cash pool agreement in the amount of PLN 795 332 thousand.

Redemption of bonds

Proceeds from redemption of bonds, in the amount of PLN 1 334 920 thousand, are related to redemption of intra-group bonds issued by the following subsidiaries: ••

• TAURON Wytwarzanie S.A., totalling PLN 864 920 thousand;
• TAURON Dystrybucja S.A., totalling PLN 470 000 thousand.

Repayment of loans granted •

Repayment of loans of PLN 421 225 thousand includes:

• repayment of a portion of a loan of PLN 299 100 granted to Elektrociep³ownia Stalowa Wola S.A., which has been discussed in more detail in Note 22 to these financial statements; •
• repayment of a loan of PLN 120 000 granted to TAURON Ekoenergia Sp. z o.o., a subsidiary, which has been discussed in more detail in Note 22 to these financial statements.

Interest received

	Year ended 31 December 2018	Year ended 31 December 2017
Interest received in relation to debt securities	269 028	642 017
Interest received in relation to loans granted	20 149	–
Total	289 177	642 017

36.3. Cash from/used in financing activities

Loans and borrowings repaid

Expenditures due to repayment of loans resulted from repayment of a loan granted by the European Investment Bank of PLN 162 318 thousand in the year ended 31 December 2018.

Interest paid

	Year ended 31 December 2018	Year ended 31 December 2017
Interest paid in relation to debt securities	(233 275)	(221 832)
Interest paid in relation to loans	(29 109)	(41 295)
Interest paid in relation to borrowings	(39 398)	(1 446)
Interest paid in relation to the finance lease	(196)	(650)
Total	(301 978)	(265 223)

Issue of debt securities •

Proceeds from the issue of debt securities in the year ended 31 December 2018 are related to:

• the issue of bonds with the total par value of PLN 600 000 thousand under a bond issue scheme of 24 November 2015, which has been discussed in more detail in Note 29.1 to these financial statements; •
• the issue of tranches of hybrid bonds with the total nominal of value of PLN 750 000 thousand under agreements with the European Investment Bank, concluded in December 2018, as described in more detail in Note 29.1 to these financial statements.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

37. Financial instruments

37.1. Carrying amount and fair value of financial instrument classes and categories

	As at 31 December 2018			As at 31 December 2017 (restated figures)
Categories and classes of financial assets	Carrying amount	Fair value	Categories and classes of financial assets	Carrying amount	Fair value
1 Financial assets measured at			1 Financial assets at fair value through profit
amortized cost	6 733 497	6 828 930	or loss, held for trading	154 574	154 574
Receivables from buyers	819 563	819 563	Derivative instruments	53 216	53 216
Bonds	5 236 292	5 331 725	Investment fund units	101 358	101 358
Loans granted under cash pool agreement	596 533		596 533 2 Financial assets available for sale	39 244
Other loans granted	26 088	26 088	Long-term shares	39 244
Other financial receivables	55 021		55 021 3 Loans and receivables	8 228 015	8 072 480
2 Financial assets measured at fair value through			Receivables from buyers	719 133	719 133
profit or loss (FVTPL)	1 120 916	1 120 916
Derivative instruments	216 165	216 165	Bonds	6 572 696	6 506 729
Long-term shares	46 066	46 066	Loans granted under cash pool agreement	190 526	190 526
Loans granted	199 256	199 256	Other loans granted	712 654	623 086
Other financial receivables	167 441	167 441	Other financial receivables	33 006	33 006
Investment fund units	26 063		26 063 4 Financial assets excluded from the scope of IAS 39	20 873 435
Cash and cash equivalents	465 925	465 925	Shares in subsidiaries	20 457 583
3 Derivative hedging instruments	4 178	4 178	Shares in jointly-controlled entities	415 852
4 Financial assets excluded from the scope of IFRS 9	21 029 990		5 Derivative hedging instruments	28 482	28 482
Shares in subsidiaries	20 614 138		6 Cash and cash equivalents	721 577	721 577
Shares in jointly-controlled entities	415 852
Total financial assets,			Total financial assets,
of which in the statement of financial position:	28 888 581		of which in the statement of financial position:	30 045 327
Non-current assets	26 975 445		Non-current assets	27 335 016
Shares	21 076 056		Shares	20 912 679
Bonds	5 043 981		Bonds	6 009 920
Loans granted	808 760		Loans granted	382 989
Derivative instruments	43 844		Derivative instruments	26 704
Other financial assets	2 804		Other financial assets	2 724
Current assets	1 913 136		Current assets	2 710 311
Receivables from buyers	819 563		Receivables from buyers	719 133
Bonds	192 311		Bonds	562 776
Loans granted	13 117		Loans granted	520 191
Derivative instruments	176 499		Derivative instruments	54 994
Other financial assets	245 721		Other financial assets	131 640
Cash and cash equivalents	465 925		Cash and cash equivalents	721 577

	As at 31 December 2018			As at 31 December 2017 (restated figures)
Categories and classes of financial liabilities	Carrying amount	Fair value	Categories and classes of financial liabilities	Carrying amount	Fair value
1 Financial liabilities measured at amortized cost	13 893 976		14 028 032 1 Financial liabilities measured at amortized cost	12 670 253	12 699 476
Arm's length loans, of which:	3 619 943	3 662 092	Arm's length loans, of which:	4 140 424	4 135 000
Liability under the cash pool loan	2 038 520	2 038 520	Liability under the cash pool loan	2 377 034	2 377 034
Loans from the European Investment Bank	850 676	875 511	Loans from the European Investment Bank	1 042 110	1 044 424
Loans from the subsidiary	730 747	748 061	Loans from the subsidiary	721 280	713 542
Overdraft	767	767	Overdraft	93 502	93 502
Bonds issued	9 358 008	9 449 915	Bonds issued	7 940 346	7 974 993
Liabilities to suppliers	525 986	525 986	Liabilities to suppliers	413 265	413 265
Other financial liabilities	388 936	388 936	Other financial liabilities	82 586	82 586
Liabilities due to purchases of fixed and intangible			Liabilities due to purchases of fixed and intangible
assets	336	336	assets	130	130
2 Financial liabilities measured at fair value			2 Financial liabilities at fair value through profit
through profit or loss (FVTPL)	240 922	240 922	or loss, held for trading	62 466	62 466
Derivative instruments	240 922	240 922	Derivative instruments	62 466	62 466
3 Financial liabilities excluded from the scope of	3 Liabilities under guarantees, factoring
IFRS 9		– and excluded from the scope of IAS 39		23 945
Liabilities under finance leases	–		Liabilities under finance leases	23 945
Total financial liabilities,	Total financial liabilities,
of which in the statement of financial position:	14 134 898		of which in the statement of financial position:	12 756 664
Non-current liabilities	8 529 900		Non-current liabilities	9 497 797
Debt	8 474 344		Debt	9 472 454
Other financial liabilities	17 626		Other financial liabilities	20 126
Derivative instruments	37 930		Derivative instruments	5 217
Current liabilities	5 604 998		Current liabilities	3 258 867
Debt	4 504 374		Debt	2 725 763
Liabilities to suppliers	525 986		Liabilities to suppliers	413 265
Derivative instruments	202 992		Derivative instruments	57 249
Other financial liabilities	371 646		Other financial liabilities	62 590

Dividing financial instruments into classes and categories follows the accounting standards binding as at the balance sheet date (as at 31 December 2018, IFRS 9 Financial Instruments; as at 31 December 2017, IAS 39 Financial Instruments: Recognition and Measurement).

The fair value measurement methodology applied to financial instruments and fair value hierarchy levels assigned to these instruments are presented in the following tables.

Financial asset classes	Fair value measurement level	Fair value measurement methodology
Financial assets measured at fair value
Derivatives, including:
IRS	2
CCIRS	2	Derivatives have been measured in line with the methodology presented in Note 20
Currency forwards	2	hereto.
Commodity forwards and futures	1
Non-current shares	3	The Company estimated the fair value of shares held in PGE EJ 1 Sp. z o.o. using the adjusted net assets method, considering its share in the net assets and adjusting the value by relevant factors affecting the measurement, such as the non-controlling interest discount and the discount for the limited liquidity of the above instruments. As the key factors affecting the value of the assumed shares had not changed at a given end of the reporting period compared to the initial recognition, in the case of other instruments the Company assumes that the historical cost is an acceptable approximation of the fair value.
Loans originated	3	Fair value measurement of the loan had the form of the current value of future cash flows, including borrower's credit risk.
Units in investment funds	1	Fair value measurement of units is referred to current quotings of the units.
Financial assets whose fair value is disclosed
Bonds	2	Intercompany bonds purchased by the Company were measured at fair value. The fair value measurement was carried out based on the present value of future cash flows discounted using the applicable interest rate, i.e. applying market interest rates.

Financial liability class	Fair value measurement level	Fair value measurement methodology
Financial liabilities measured at fair value
Derivatives, including:
IRS	2
CCIRS	2	Derivatives have been measured in line with the methodology presented in Note 20
Currency forwards	2	hereto.
Commodity forwards and futures	1
Financial liabilities whose fair value is disclosed
Loans, borrowings and bonds issued	2	Liabilities arising from fixed interest debt, i.e. loans contracted from the European Investment Bank, a loan contracted from a subsidiary, subordinated bonds issued and eurobonds are measured at fair value. The fair value measurement was carried out based on the present value of future cash flows discounted using an interest rate applicable to given bonds or loans, i.e. applying market interest rates.

The fair value of other financial instruments as at 31 December 2018 and 31 December 2017 (except from those excluded from the scope of IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement) did not differ considerably from the amounts presented in the financial statements for the following reasons: ––

• the potential discounting effect relating to short-term instruments is not significant;
• the instruments are related to arm's length transactions.

Shares in subsidiaries and jointly-controlled entities excluded from the scope of IFRS 9 Financial Instruments are measured at cost less any impairment allowances.

In the year ended 31 December 2018 no changes occurred in the measurement methodology applied to the above financial instruments. At the same time, since 1 January 2018, following the effective date of IFRS 9 Financial Instruments, the Company has measured and disclosed the fair value of shares in entities not classified as subsidiaries or co-subsidiaries. In the comparable period, the fair value was not disclosed due to limited access to data, and the investments were measured at cost, reduced by impairment allowances, if any.

The Company classifies a loan granted to Elektrociep³ownia Stalowa Wola S.A. under an agreement of 28 February 2018 to assets measured at fair value though profit or loss, as discussed in detail in Note 22 to these financial statements.

Change in the balance of financial assets whose measurement is classified on the 3rd level of the fair value hierarchy

	Not quoted shares	Loans granted
As at 31 December 2017	38 939	–
Effects of IFRS 9 application	(13 893)	150 960
As at 1 January 2018	25 046	150 960
gains/(losses) for the period recognized in financial revenue/expenses	–	(11 581)
purchased/contracted	21 032	–
sold/repaid	(12)	(299 100)
settlement of the debt consolidation arrangement	–	358 977
As at 31 December 2018	46 066	199 256

In the year ended 31 December 2018 and 31 December 2017 no reclassification occurred between level 1 and 2 of the fair value hierarchy; nor did such reclassification occur from or to level 3 of that hierarchy.

37.2. Revenue, expenses, gain and loss items included in the statement of comprehensive income by category of financial instruments

Year ended 31 December 2018

	Assets / liabilities measured at fair value through profit or loss	Financial liabilities measured at amortized cost	Financial liabilities measured at amortized cost	Hedging instruments	Financial assets / liabilities excluded from the scope of IFRS 9	Total
Dividends	2 400	–	–	–	817 037	819 437
Interest income/(expense)	4 789	327 620	(298 796)	1 202	(196)	34 619
Commissions	–	–	(22 993)	–	–	(22 993)
Exchange differences	(7 480)	1 419	(112 082)	–	–	(118 143)
Impairment / revaluation	(9 505)	27 043	(11 994)	–	(2 469 069)	(2 463 525)
Gain/loss on disposal of investments	1 642	–	–	–	–	1 642
Gain/(loss) on realized derivative
instruments*	(6 078)	–	–	–	–	(6 078)
Net financial income/(costs)	(14 232)	356 082	(445 865)	1 202	(1 652 228)	(1 755 041)
Revaluation	(17 534)	680	–	–	–	(16 854)
Gain/(loss) on realized derivative
instruments*	16 910	–	–	–	–	16 910
Net operating income/(costs)	(624)	680	–	–	–	56
Remeasurement of IRS	–	–	–	(24 297)	–	(24 297)
Other comprehensive income	–	–	–	(24 297)	–	(24 297)

* The Company recognizes revenue and expenses related to commodity instruments in operating activities. Revenue and expenses regarding other derivatives are recognized under financial revenue/expenses.

Year ended 31 December 2017

	Assets / liabilities measured at fair value through profit or loss	Financial assets available for sale	Loans and receivables	Financial liabilities measured at amortized cost	Hedging instruments	Financial assets / liabilities excluded from the scope of IAS 39	Total
Dividends	–	2 858	–	–	–	557 974	560 832
Interest income/(expense)	19 321	–	456 413	(335 282)	1 525	(650)	141 327
Commissions	–	–	–	(19 068)	–	–	(19 068)
Exchange differences	(2 483)	–	1 689	128 270	–	–	127 476
Impairment / revaluation	(11 820)	–	(32)	–	–	(134 372)	(146 224)
Gain/(loss) on realized derivative instruments*	(4 866)	–	–	–	–	–	(4 866)
Net financial income/(costs)	152	2 858	458 070	(226 080)	1 525	422 952	659 477
Revaluation	(13 514)	–	34	–	–	–	(13 480)
Gain/(loss) on realized derivative instruments*	8 737	–	–	–	–	–	8 737
Net operating income/(costs)	(4 777)	–	34	–	–	–	(4 743)
Remeasurement of IRS	–	–	–	–	(8 159)	–	(8 159)
Other comprehensive income	–	–	–	–	(8 159)	–	(8 159)

* The Company recognizes revenue and expenses related to commodity instruments in operating activities. Revenue and expenses regarding other derivatives are recognized under financial revenue/expenses.

38. Principles and objectives of financial risk management

Financial risk is managed on the Capital Group level, meaning that in the course of managing this risk, the Company performs roles assigned to it as a member of the TAURON Capital Group, as well as managerial, controlling and monitoring functions assigned to it as the parent. •

Risks related to financial instruments which the Company is exposed to in its business operations: •

• credit risk; •
• liquidity risk; –
• market risk, including: –
  • interest rate risk; –
  • currency risk;
  • raw material and commodity price risk related to commodity derivative instruments and price risk related to units held by the Company.

Risks related to financial instruments which the Company and the TAURON Group are exposed to, including a description of the exposure and the risk management method:

Risk exposure	Risk management	Regulation
Credit risk
Possible loss resulting from the counterparty default on contractual obligations. The credit exposure involves a default risk (the amount that may be lost if a counterparty	Credit risk is managed through the control of the credit exposure at the time when companies in the TAURON Group sign contracts. As a rule, before a contract is signed, every entity is examined in terms of their financial position and is assigned a limit which determines the maximum exposure allowed. The credit exposure in this case is understood as the amount which may be lost, if the counterparty defaults on their obligations at a given time (considering the value of security they have lodged). The credit exposure is calculated at a given day and comprises a default risk and replacement risk. The TAURON Group has a decentralized credit risk management system in place, however,	Credit risk management policy
defaults on goods and service) and a replacement risk (the amount that may be lost if a delivery is not made or a service is not provided).	the control, mitigation and reporting are managed centrally at a Company-wide level. The TAURON Group's Credit Risk Management Policy sets out the credit risk management procedures for the entire Group with the view to reduce the impact of the risk on the Group's objectives.	for the TAURON Group
	Based on the value of exposure and assessment of financial standing of each client, the value of credit risk to which the TAURON Group is exposed is calculated using statistical methods to determine value at risk based on the total loss probability distribution.
Liquidity risk
Possible loss or limitation of	The Company and TAURON Group's liquidity is reviewed on an ongoing basis to detect any deviation from plans and the availability of external sources of funds, in the case of which the amount materially exceeds the expected short-term demand, mitigates the liquidity risk.
the ability to make payments on a day-to-day basis due to an inappropriate volume or structure of liquid assets as compared to current liabilities or an insufficient level of the actual net proceeds from operating activities.	To this end the Company applies the rules of determining the liquidity position both of individual companies and the entire TAURON Group which helps ensure funds that would cover any potential liquidity gaps by allocating funds between companies (cash-pooling) as well as using external financing, including overdraft facilities.	Liquidity management policy for the TAURON Group
	The Company manages the financing risk, understood as no capability to obtain new funding, an increase in funding costs and the risk of terminating the existing funding agreements. To minimize the risk, TAURON's policy assumes obtaining funding for the Group well in advance of the planned time of use, i.e. up to 24 months prior to the planned demand. The key objective of the policy is to ensure flexible selection of funding source, use favorable market conditions and reduce the risk related to the necessity to contract new debt on adverse terms.

TAURON Polska Energia S.A.

Financial statements for the year ended 31 December 2018 prepared in accordance with IFRS, as endorsed by the EU

(in PLN '000)

Risk exposure Risk management
	Market risk – interest rate and currency risks
The possibility of an adverse effect on the Group's performance through fluctuations in the fair value of financial instruments or the related future cash flows, driven by changes in interest rates or foreign exchange rates.	The TAURON Group manages the currency and interest rate risk based on the developed and approved Financial Risk Management Policy. The key objective of such risk management is to minimize the cash flow sensitivity of the Company and the TAURON Group to financial risks and to minimize finance cost and costs of hedging with the use of derivative instruments. Wherever possible and commercially viable, TAURON uses derivative instruments, whose nature allows for the application of hedge accounting. The financial risk management policy of the TAURON Group has also introduced hedge accounting principles which set out the terms and conditions and types of hedge accounting, along with the accounting treatment of hedging instruments and hedged items, to be applied as part of hedge accounting under IFRS.	Financial risk management policy for the TAURON Group
Market risk – price risk
Unplanned volatility of the operating profit/loss of the TAURON Group resulting from fluctuations of prices in the commodity markets and deviations in volumes in individual areas of commercial activities of the TAURON Group.	Effective management is ensured by a commercial risk management system linked in terms of organization and information with the TAURON Group's strategy of hedging trading positions. The policy has introduced an early-warning system and risk-exposure limiting system in various trading areas. The basic operational measure of the market risk at the TAURON Group is the Value at Risk measure which determines the maximum allowed change in the value of the position over a given time period and with a given probability.	Commercial risk management policy for the TAURON Group

38.1. Credit risk

Classes of financial instruments that give rise to credit risk exposure with different characteristics are presented in the table below.

Financial asset classes	As at 31 December 2018	As at 31 December 2017
Receivables from buyers	819 563	719 133
Bonds	5 236 292	6 572 696
Loans granted	821 877	903 180
Cash and cash equivalents	465 925	721 577
Derivative instruments	220 343	81 698
Other financial receivables	222 462	33 006

The credit risk related to financial assets of the Company results from the inability to make payment by the other party to the agreement and the maximum exposure is equal to the carrying amount of these instruments.

38.1.1. Credit risk related to receivables from buyers

The Company monitors credit risk related to its operations on an ongoing basis, in line with the Credit Risk Management Policy adopted by the TAURON Group. Following the analysis of credit standing of counterparties with material credit and replacement exposure, in justified cases the Company required appropriate collateral. The collateral in the form of deposits, bank guarantees and sureties was provided.

Pursuant to IFRS 9 Financial Instruments the Company estimates and recognizes in profit or loss allowances on projected credit losses, based on probability-weighted credit loss. For strategic counterparties, the risk assessment is based on their rating assigned with the use of an internal scoring model and restated appropriately to arrive at probability of default. For other counterparties, the Company expects the historical repayment data to reflect credit risk to be incurred in future periods. The expected credit loss on receivables from buyers is calculated upon recognition of such receivables in the statement of financial position and updated as at each subsequent reporting period end. According to the management, the carrying amount including the expected credit losses appropriately reflects the risk of default the Company is exposed to.

Company's exposure to credit risk related to receivables from buyers, including aging, impairment and risk concentration, is presented in Note 24 hereto.

38.1.2. Credit risk related to bonds and loans granted

As far as originated loans and bonds measured at amortized cost are concerned, the Company assesses the risk of insolvency on the part of the borrowers and issuers based on the ratings assigned to the counterparties using an internal scoring model, appropriately restated to account for the probability of default. The expected credit loss is calculated based on the time value of money.

For the purposes of determining the calculation horizon for expected credit losses, material credit risk increases related to certain financial assets are analyzed beginning from the initial recognition of a given asset.

When analyzing a significant increase in credit risk related to such assets, the Company considers the following indications: •

• counterparty's internal or external rating as at the reporting period end having deteriorated by more than two rating levels compared to its rating upon initial recognition; •
• counterparty's probability of insolvency projected within one-year horizon as at the reporting period end being at least twice higher than as at the initial recognition date; •
• receivables related to a given asset being overdue by more than 30 days.

If a given counterparty's receivables are overdue by more than 90 days, they are classified as bad debt, i.e. the 100% probability of insolvency is assigned to that counterparty.

Under the applied model of measuring expected credit losses, the Company recognizes and remeasures allowances for expected credit losses as at each reporting period end. Additionally, bonds and loans granted regard transactions concluded with related parties. Consequently, in Company's view, no additional credit risk occurs that would exceed the level determined by the allowance for expected credit losses, recognized for each bond and loans granted item.

Measurement of the loan granted to Elektrociep³ownia Stalowa Wola S.A., a joint venture classified as financial assets measured at fair value through profit or loss, with the carrying amount of PLN 199 256 thousand, includes credit risk effects. The loan is collateralized with a blank promissory note with a promissory note agreement.

Company's exposure to credit risk related to bonds and loans granted, including information on impairment, its changes and the underlying reasons, as well as assignment to classes of allowances for expected credit losses in line with the rating used by the Company, are presented in Notes 19 and 22 hereto.

38.1.3. Credit risk related to other financial assets

Cash and cash equivalents

The Company manages credit risk related to cash by diversifying banks where it deposits its cash surplus. These banks receive investment rating.

As at 31 December 2018, the share of three banks in which the Company holds the highest cash balances amounted to 93%. The highest balance (72%) was held on bank accounts and deposit in Bank Gospodarstwa Krajowego.

Derivative instruments

The entities the Company concludes derivative transactions with in order to hedge against interest rate and currency risk operate in the financial sector. These banks receive investment rating. The Company diversifies banks with whom derivative transactions are concluded.

Derivatives, which basis are non-financial assets, included in IFRS 9 Financial Instruments, involve futures and forward transactions. Exchange markets apply appropriate mechanisms to protect, in the form of margin and supplementary deposits. Under supplementary deposits, the Company provides and receives cash arising from changes in the measurement of the underlying instruments on an ongoing basis, which means that as at the end of the reporting period, credit risk does not occur in relation to futures transactions. Over-the-counter transactions regard mostly sales of non-financial assets, and it's measurement at 31 December 2018 was recognized as liability.

Other financial receivables

Other financial receivables are presented in the following table.

	As at 31 December 2018	As at 31 December 2017
Receivables due to income tax settlement by Tax Capital Group companies	54 458	6 133
Initial deposits	163 495	11 140
Bid bonds, deposits and collateral transferred	4 213	15 343
Other	296	390
	222 462	33 006

Margin deposits related to collateral of transactions concluded on regulated markets are the key item. Commodity exchange mechanisms and collateral used materially mitigate the credit risk.

Receivables arising from settlements of the Tax Capital Group account for another material item. Since these are ongoing settlements with related parties, regarding taxes, in Company's view, the related credit risk is low.

38.2. Liquidity risk

The Company maintains a balance between continuity, flexibility and cost of financing by using various sources of funding, which enable management of liquidity risk and effective mitigation of risk consequences.

TAURON Group carries out a centralized finance management policy, allowing effective management in this respect on the Capital Group level. Among others, the TAURON Group has adopted Liquidity management policy for the TAURON Group, which facilitates optimization of liquidity management at the TAURON Group, reduces the risk of liquidity loss, as well as financial expenses in the Group and in each company from the TAURON Group. Having implemented appropriate projection standards, the TAURON Group can precisely determine its liquidity position and optimize the time of obtaining funding, maturity and types of deposit instruments, as well as an appropriate level of the liquidity provision.

Additionally, in order to minimize the possibility of cash flow disruption and liquidity risk, the TAURON Group, as in previous years, used the cash pooling mechanism. The cash pooling structure enables the Group companies that experience short-term shortage of funds to use cash provided by companies with cash surplus, without the need to obtain borrowings from third parties.

	Bank	Currency	Currency financing	Repayment	Balance as at 31 December 2018
			available	date	currency	PLN
intraday limit	PKO BP*	PLN	500 000	17.12.2020	–	–
	PKO BP*	PLN	300 000	29.12.2020	–	–
overdraft facility	BGK	EUR	45 000	31.12.2019	–	–
	mBank	USD	500	28.03.2019	204	767

Overdraft facilities as at 31 December 2018

* Regardless of funds collected by its individual members, cash pooling is linked to a flexible credit facility.

The use of foreign currency loans is to mitigate forex risk related to commercial transactions denominated in foreign currencies.

The adopted financing policy provides for increased access to funding sources, reduction of borrowing costs and collateral established on the Group's assets, covenants required by financial institutions and allows a decrease in administrative expenses. The centralized financing model allows access to funding sources inaccessible for individual companies.

In 2018, the Company was fully able to pay its liabilities at maturity.

Aging structure of financial liabilities presenting undiscounted payments under applicable agreements has been presented below.

(in PLN '000)

Financial liabilities as at 31 December 2018

	Carrying amount	Contractual	Including contractual undiscounted payments maturing during the period (from the reporting date)
		undiscounted payments	less than 3 months	3–12 months	1–2 years	2–3 years	3–5 years	over 5 years
Financial liabilities other than derivative instruments
Interest-bearing loans and borrowings (including bonds issued)	12 978 718	(15 858 668)	(2 497 449)	(2 322 357)	(2 435 940)	(579 729)	(1 026 724)	(6 996 469)
Liabilities to suppliers	525 986	(525 986)	(525 986)	–	–	–	–	–
Liabilities due to purchases of fixed and intangible assets	336	(336)	(325)	(11)	–	–	–	–
Other financial liabilities	388 936	(388 936)	(368 794)	(2 517)	(2 500)	(2 500)	(5 000)	(7 625)
Derivative financial liabilities
Derivative instruments – commodity	233 303	(124 112)	(76 640)	(16 490)	(30 982)	–	–	–
Derivative instruments – currency	2 479	(2 479)	86	(2 565)	–	–	–	–
Derivative instruments – CCIRS	5 140	(50 950)	–	(5 627)	(5 713)	(5 695)	(11 253)	(22 662)
Total	14 134 898	(16 951 467)	(3 469 108)	(2 349 567)	(2 475 135)	(587 924)	(1 042 977)	(7 026 756)

Financial liabilities as at 31 December 2017 (restated)

	Carrying amount	Contractual	Including contractual undiscounted payments maturing during the period (from the reporting date)
		undiscounted payments	less than 3 months	3–12 months	1–2 years	2–3 years	3–5 years	over 5 years
Financial liabilities other than derivative instruments
Interest-bearing loans and borrowings (including bonds
issued)	12 174 272	(14 560 425)	(2 537 566)	(413 335)	(2 322 897)	(2 189 338)	(981 420)	(6 115 869)
Liabilities to suppliers	413 265	(413 265)	(413 265)	–	–	–	–	–
Liabilities due to purchases of
fixed and intangible assets	130	(130)	(130)	–	–	–	–	–
Other financial liabilities	82 586	(82 586)	(57 182)	(5 281)	(2 500)	(2 500)	(5 000)	(10 124)
Liabilities under finance lease	23 945	(24 142)	(1 474)	(22 668)	–	–	–	–
Derivative financial liabilities
Derivative instruments – commodity	52 821	(4 424)	–	(4 424)	–	–	–	–
Derivative instruments – currency	346	(346)	(275)	(71)	–	–	–	–
Derivative instruments – CCIRS	9 299	(47 125)	–	(4 694)	(4 694)	(4 748)	(9 427)	(23 562)
Total	12 756 664	(15 132 443)	(3 009 892)	(450 473)	(2 330 091)	(2 196 586)	(995 847)	(6 149 555)

As at 31 December 2018, the Company had granted guarantees, sureties and other forms of collateral to related parties in the total amount of PLN 1 340 248 thousand (excluding registered and financial pledges on shares) versus PLN 825 876 thousand as at 31 December 2017. As at 31 December 2018, the key items included a corporate guarantee of up to EUR 168 000 thousand (PLN 722 400 thousand) granted to a subsidiary and a bank guarantee of PLN 444 000 thousand to Bank Gospodarstwa Krajowego, described in detail in Note 40 hereto.

The guarantees and sureties granted by the Company constitute contingent liabilities and do not considerably affect the liquidity risk of the Company.

38.3. Market risk

Market risk results from possible adverse impact of fluctuations of the fair value of financial instruments or related future cash flows due to market price changes on the Company's performance. •

The Company identifies the following types of market risk it is exposed to: •

• interest rate risk; •
• currency risk;
• raw material and commodity price risk related to commodity derivative instruments and price risk related to units held by the Company.

38.3.1. Interest rate risk

The Company is exposed to the risk of interest rate changes related to floating interest rate borrowings acquired and investing in assets with floating and fixed interest rates. The Company is also exposed to lost benefit risk related to a decrease in interest rates in the case of fixed interest rate debt.

The purpose of interest rate risk management is to limit negative effects of market interest rate fluctuations on the Company's cash flows to an acceptable level and to minimize finance costs. In order to hedge interest rate risk related to floating-rate bonds issued, the Company entered into interest rate swap contracts, which has been discussed in more detail in Note 20 to these financial statements.

As the Company has adopted a dynamic financial risk management strategy where the hedged item is cash flows relating to the exposure to the floating WIBOR 6M interest rate, the interest rate risk for a portion of interest cash flows has been reduced by the hedging IRS transactions. Thus, a portion of the carrying amount of floating interest rates bonds with interest cash flow fluctuations hedged with interest rate swaps has been presented in the tables below together with valuation of these hedging instruments as fixed-rate items.

Exposed to interest rate risk are also financial instruments measured at fair value: IRS, CCIRS and loan granted to Elektrociep³owni Stalowa Wola S.A.

Financial instruments by interest rate type as at 31 December 2018

Financial instruments	Fixed interest rate	Floating interest rate	Total
Financial assets
Bonds	5 236 292	–	5 236 292
Loans granted	222 756	599 121	821 877
Cash and cash equivalents	–	465 925	465 925
Derivative instruments – IRS	4 178	–	4 178
Financial liabilities
Bank overdrafts	–	767	767
Arm's length loans	1 581 423	2 038 520	3 619 943
Bonds issued	5 800 380	3 557 628	9 358 008
Derivative instruments – CCIRS	5 140	–	5 140

Financial instruments by interest rate type as at 31 December 2017

Financial instruments	Fixed interest rate	Floating interest rate	Total
Financial assets
Bonds	6 572 696	–	6 572 696
Loans granted	142 223	760 957	903 180
Cash and cash equivalents	–	721 577	721 577
Derivative instruments – IRS	28 482	–	28 482
Financial liabilities
Bank overdrafts	–	93 502	93 502
Arm's length loans	1 763 390	2 377 034	4 140 424
Bonds issued	4 984 389	2 955 957	7 940 346
Obligations under finance leases	–	23 945	23 945
Derivative instruments – CCIRS	9 299	–	9 299

Other financial instruments of the Company which have not been presented in the tables above bear no interest and therefore are not exposed to the interest rate risk. Interest rate of floating-rate financial instruments is updated on a regular basis, more frequently than once a year. Interest on fixed-rate financial instruments is fixed throughout the entire term to maturity or until a specified point in time where the interest rates are verified and may be changed – this applies to loans from the European Investment Bank as well as hybrid bonds, which bear fixed interest in the first period and floating interest in the second period.

Interest rate risk sensitivity analysis

The analysis of sensitivity to changes in market risk factors is conducted by means of a scenario analysis. The Company relies on expert scenarios reflecting its judgment concerning the behaviour of individual market risk factors in the future. The scope of the analysis includes only those items which meet the IFRS definition of financial instruments.

The interest rate risk sensitivity analysis is conducted by the Company using the parallel shift in the yield curve by the potential change in reference interest rates within a horizon until the date of the next financial statements. The interest rate risk sensitivity analysis has been carried out based on average reference interest rates in the year. The scale of potential changes in interest rates has been estimated on the basis of implied volatility for interest rate options quoted on the interbank market for currencies which expose the Company to the interest rate risk as at the end of the reporting period.

The Company identifies its exposure to the risk of changes in WIBOR, EURIBOR and LIBOR USD interest rates. As at 31 December 2018 and 31 December 2017, its exposure to changes in EURIBOR and LIBOR USD rates was immaterial. The tables below present sensitivity of the gross profit/loss as well as other comprehensive income (gross) to reasonably possible changes in interest rates within a horizon until the date of the next financial statements, assuming that all other risk factors remain unchanged.

Year ended 31 December 2018

	31 December 2018		Sensitivity analysis for interest rate risk as at 31 December 2018
Classes of finacial instruments	Carrying amount	Value at risk	WIBOR + 34 pb		WIBOR -34 pb
			Profit/(Loss)	Other comprehensive income	Profit/(Loss)	Other comprehensive income
Loans granted	821 877	798 377	(6 767)	–	7 204	–
Cash and cash equivalents	465 925	465 925	873	–	(873)	–
Derivatives (assets)	220 343	4 178	–	10 315	–	(10 315)
Arm's length loans	3 619 943	2 038 520	(6 931)	–	6 931	–
Bonds issued	9 358 008	5 656 342	(19 232)	–	19 232	–
Derivates (liabilities)	240 922	5 140	6 618	–	(6 618)	–
Total			(25 439)	10 315	25 876	(10 315)

The exposure to risk as at 31 December 2018 is representative for the Company's exposure to risk during the annual period preceding the aforementioned date.

For the year ended 31 December 2017 (restated data)

	31 December 2017		Sensitivity analysis for interest rate risk as at 31 December 2017
Classes of finacial instruments			WIBOR + 43 pb		WIBOR -43 pb
	Carrying Value at risk amount		Profit/(Loss)	Other comprehensive income	Profit/(Loss)	Other comprehensive income
Loans granted	903 180	760 957	3 272	–	(3 272)	–
Cash and cash equivalents	721 577	721 577	3 034	–	(3 034)	–
Derivatives (assets)	81 698	28 482	–	21 217	–	(21 217)
Bank overdrafts	93 502	93 502	–	–	–	–
Arm's length loans	4 140 424	2 377 034	(10 221)	–	10 221	–
Bonds issued	7 940 346	5 053 777	(21 731)	–	21 731	–
Obligations under finance leases	23 945	23 945	(103)	–	103	–
Derivates (liabilities)	62 466	9 299	5 995	–	(5 995)	–
Total			(19 754)	21 217	19 754	(21 217)

The exposure to risk as at 31 December 2017 is representative for the Company's exposure to risk during the annual period preceding the aforementioned date, except for material transactions made at the end of 2017. They concern derivative instruments (liabilities), including CCIRS transactions entered into in November and December 2017, which are sensitive to both changes in WIBOR and EURIBOR rates.

38.3.2. Currency risk

The Company's exposure to currency risk by financial instrument class as at 31 December 20187 and 31 December 2017 has been presented below. A material exposure involves EUR/PLN rate changes, mostly due to borrowings contracted in EUR. Company's exposure to other currencies is immaterial.

Currency position as at 31 December 2018

	Total carrying	EUR
	amount in PLN	in currency	in PLN
Financial assets
Receivables from buyers	819 563	327	1 406
Other financial receivables	222 462	38 731	166 543
Cash and cash equivalents	465 925	48 019	206 482
Derivatives (assets)	220 343	35 511	152 697
Total	1 728 293	122 588	527 128
Financial liabilities
Arm's length loans	3 619 943	169 941	730 747
Bonds issued	9 358 008	686 463	2 951 789
Liabilities to suppliers	525 986	174	748
Other financial liabilities	388 936	57 866	248 824
Derivatives (liabilities)	240 922	39 493	169 820
Total	14 133 795	953 937	4 101 928
Net currency position		(831 349)	(3 574 800)

Currency position as at 31 December 2017 (restated)

		Total carrying	EUR
		amount in PLN	in currency	in PLN
Financial assets
Receivables from buyers		719 133	250	1 043
Other financial receivables		33 006	3 321	13 852
Cash and cash equivalents		721 577	2 577	10 748
Derivatives (assets)		81 698	5 237	21 843
	Total	1 555 414	11 385	47 486
Financial liabilities
Arm's length loans		4 140 424	172 932	721 282
Overdraft		93 502	22 069	92 048
Bonds issued		7 940 346	692 073	2 886 567
Liabilities to supplier		413 265	65	271
Other financial liabilities		82 586	1 717	7 162
Derivatives (liabilities)		62 466	5 129	21 391
	Total	12 732 589	893 985	3 728 721
	Net currency position		(882 600)	(3 681 235)

TAURON Polska Energia S.A. use forward contracts for currency risk management purposes. Transactions concluded in 2018 were intended to protect the Company from forex risk, related to its commercial operations, mostly to purchases of greenhouse gas emission allowances and from currency exposure generated by interest payments on borrowings denominated in EUR.

Measurement at fair value of FX forward contracts (as at 31 December 2018 liabilities arising from negative valuation of derivatives occurred in amount of PLN 2 479 thousand) and CCIRS transactions (as at 31 December 2018 liabilities arising from negative valuation of derivatives occurred in amount of PLN 5 140 thousand), whose fair value measurement is exposed to the risk of changes in the EUR/PLN exchange rate. These transactions are not subject to hedge accounting.

Currency risk sensitivity analysis

The analysis of sensitivity to changes in market risk factors is conducted by means of a scenario analysis. The Company relies on expert scenarios reflecting its judgment concerning the behaviour of individual market risk factors in the future. The scope of the analysis includes only those items which meet the IFRS definition of financial instruments.

The potential changes in foreign exchange rates have been determined within a horizon until the date of the next financial statements and calculated on the basis of annual implied volatility for FX options quoted on the interbank market for a given currency pair as at the end of the reporting period or, in the absence of quoted market prices, on the basis of historical volatility for a period of one year preceding the end of the reporting period.

The Company identifies its exposure to foreign currency risk related to EUR/PLN, USD/PLN, GBP/PLN, CZK/PLN. Significant risk exposure regards EUR; other currencies do not generate material risk for the Company. The tables below present sensitivity of the gross financial profit/loss to reasonably possible changes in the EUR/PLN exchange rate within a horizon until the date of the next financial statements, assuming that all other risk factors remain unchanged.

Year ended 31 December 2018

	31 December 2018		Sensitivity analysis for currency risk as at 31 December 2018
		EUR/PLN
Classes of finacial instruments	Carrying amount	Value at risk	exchange rate EUR/PLN +5.85%	exchange rate EUR/PLN -5.85%
			Profit/(Loss)
Receivables from buyers	819 563	1 406	82	(82)
Other financial receivables	222 462	166 543	9 743	(9 743)
Cash and cash equivalents	465 925	206 482	12 079	(12 079)
Derivatives (assets)	220 343	152 697	8 933	(8 933)
Arm's length loans	3 619 943	730 747	(42 749)	42 749
Bonds issued	9 358 008	2 951 789	(172 680)	172 680
Liabilities to suppliers	525 986	748	(44)	44
Other financial liabilities	388 936	248 824	(14 556)	14 556
Derivatives (liabilities)	240 922	177 439	38 838	(38 838)
Total			(160 354)	160 354

The exposure to risk as at 31 December 2018 is representative for the Company's exposure to risk during the annual period preceding the aforementioned date.

For the year ended 31 December 2017 (restated)

	31 December 2017		Sensitivity analysis for currency risk as at 31 December 2017
			EUR/PLN
Classes of finacial instruments	Carrying	Value at risk	exchange rate EUR/PLN +6.2%	exchange rate EUR/PLN -6.2%
	amount		Profit/(Loss)
Receivables from buyers	719 133	1 043	65	(65)
Other financial receivables	33 006	13 852	859	(859)
Cash and cash equivalents	721 577	10 748	667	(667)
Derivatives (assets)	81 698	21 843	1 354	(1 354)
Overdraft	93 502	92 048	(5 705)	5 705
Arm's length loans	4 140 424	721 282	(44 720)	44 720
Bonds issued	7 940 346	2 886 567	(178 967)	178 967
Liabilities to suppliers	413 265	271	(17)	17
Other financial liabilities	82 586	7 162	(444)	444
Derivatives (liabilities)	62 466	31 036	18 342	(18 342)
Total			(208 566)	208 566

The exposure to risk as at 31 December 2017 is representative for the Company's exposure to risk during the annual period preceding the aforementioned date, except for material transactions made in the second half of 2017. These include eurobonds issued by the Company in July 2017 and liabilities arising from negative measurement of derivatives, consisting of CCIRS transactions entered into in November and December 2017.

38.3.3. Raw material and commodity price risk related to commodity derivative instruments and price risk related to units

Commodity derivatives

The Company concludes derivative contracts, with underlying instruments being commodities and raw materials. The Company's exposure to price risk inherent in commodity derivative instruments is related to a risk of changes in the fair value of the said instruments, driven by fluctuations of prices of the underlying raw materials/commodities. The Company limits price risk related to commodity derivatives concluding offsetting transactions. The risk is limited to open long and short positions concerning a given commodity or raw material, i.e. concern unbalanced portfolio.

As at 31 December 2018, the portfolio is fully balanced, i.e. the long position is closed with an offsetting transaction (the short position), including warehouse balance, i.e. allowances held in the trading portfolio as at the reporting period end. This minimizes market risk related to the commodity derivatives portfolio, as confirmed by a sensitivity analysis, which indicated immaterial effects of potential changes in the prices of emission allowances on Company's gross profit/loss.

Participation units

As at 31 December 2018, the Company held units in investment funds with the carrying amount of PLN 26 063 thousand. As they are measured at fair value through profit or loss at the end of the reporting period, they are exposed to the price risk.

A performed analysis indicated immaterial effects of potential quotation changes on Company's gross profit/loss.

39. Operational risk

The Company is exposed to adverse effects of risks related to changes in cash flows and financial performance in the domestic currency due to changes in prices of goods in the open market position.

Commercial operational risk is managed at the level of the TAURON Group, which has been discussed in more detail in Note 46 to the consolidated financial statements of the TAURON Polska Energia S.A. Capital Group for the year ended 31 December 2018. The Company manages its commercial risk following the Commercial risk management policy developed and adopted in the TAURON Group.

The Company's exposure to the risk of prices of goods reflects the volume of electricity and gas acquired. The volume and cost of electricity and gas acquired have been presented below.

Fuel type Unit	2018		2017
	Volume	Purchase cost	Volume	Purchase cost
Electricity	MWh	38 870 705	7 207 929	42 245 897	6 962 695
Gas	MWh	3 203 779	297 451	2 561 368	201 315
Total			7 505 380		7 164 010

As for trading in coal, the Company is not exposed to the price risk, as it acts as an agent generating revenue from agency services only.

OTHER INFORMATION

40. Contingent liabilities

As at 31 December 2018 and 31 December 2017 the Company's contingent liabilities were mainly the effect of securities and guarantees given to related parties and were as follows:

Type of contingent	Company in respect of which contingent liability	Beneficiary		As at 31 December 2018		As at 31 December 2017
liability	has been granted		Validity	EUR	PLN	EUR	PLN
corporate guarantee	TAURON Sweden Energy AB (publ)	holders of bonds issued by TAURON Sweden Energy AB (publ)	3.12.2029	168 000	722 400	168 000	700 711
	TAURON Ekoenergia Sp. z o.o.	Business entities and buyers being parties to contracts with TAURON Ekoenergia Sp. z o.o. based on the electricity trading licence issued by the President of the Energy Regulatory Office	31.12.2030		16 400		16 400
blank promissory note	TAURON Wytwarzanie S.A.	Regional Fund for	15.12.2022	40 000			40 000
with a promissory note declaration	TAURON Ciep³o Sp. z o.o.	Environmental Protection and Water Management in Katowice	15.12.2022	30 000		30 000
registered pledges and financial pledge of shares in TAMEH HOLDING Sp. z o.o.	TAMEH Czech s.r.o. TAMEH POLSKA Sp. z o.o.	RAIFFEISEN BANK INTERNATIONAL AG	31.12.20281		415 852		415 852
surety contract	Kopalnia Wapienia Czatkowice Sp. z o.o.	Regional Fund for	15.06.2021		914		914
		Environmental Protection and Water Management in Kraków	31.12.2023		293		–
	Nowe Jaworzno Grupa	Fund Advisors	28.09.2025		2 500		2 350
	TAURON Sp. z o.o.	Polskie Sieci Elektroenergetyczne S.A.	31.12.2020		33 024		–
	TAURON Wytwarzanie S.A.	Polskie Sieci Elektroenergetyczne S.A.	indefinite		5 000		5 000
	TAURON Sprzeda¿ Sp. z o.o.	Polska Spó³ka Gazownictwa Sp. z o.o.	30.11.2019		20 000		15 000
	Elektrociep³ownia Stalowa	Operator Gazoci¹gów Przesy³owych GAZ-SYSTEM S.A. 30.07.2020			1 667		1 667
	Wola S.A.	Bank Gospodarstwa Krajowego 30.01.2021			9 959		–
liability towards CaixaBank S.A. being result of guarantees issued by the bank for subsidiaries	TAURON Ciep³o Sp. z o.o.	Elektrobudowa S.A.	31.01.2019		12 300		12 300
	other subsidiaries	various entities	31.01.20192 – 15.02.2020		1 791		1 534
liability towards MUFG Bank, Ltd. under guarantees issued by the bank for jointly-controlled entity	Elektrociep³ownia Stalowa Wola S.A.	Bank Gospodarstwa Krajowego 11.04.2019			444 000		–

¹ The registered pledges are valid in the collateral period, i.e. until the total repayment or until release of the pledge by the pledgee. The financial pledge is valid in the entire collateral period or until release by the pledgee, not later than on 31 December 2028.

² On 31 December 2018, the guarantee granted to a Mining sector company in the amount of PLN 103 thousand expired. A new guarantee of PLN 105 thousand, expiring on 31 December 2019, has been binding since 1 January 2019. Further, as of 1 January 2019, three guarantees have been binding, granted to a company from the Other segment and totaling PLN 413 thousand, expiring on 30 March 2020. •

Key contingent liability items referred to above:

Corporate guarantee of EUR 168 000 thousand

Corporate guarantee given in 2014 to secure the bonds issued by TAURON Sweden Energy AB (publ). The guarantee remains valid until 3 December 2029, i.e. until the date of redemption of bonds, and amounts to EUR 168 000 thousand (PLN 722 400 thousand). The beneficiaries of the guarantee are the bondholders, which purchased bonds of TAURON Sweden Energy AB (publ).

Registered and financial pledges on shares

•

On 15 May 2015, TAURON Polska Energia S.A. established a financial pledge and registered pledges on 3 293 403 issued shares of TAMEH HOLDING Sp. z o.o., representing ca. 50% of the issued capital. RAIFFEISEN BANK INTERNATIONAL AG is the beneficiary of the aforesaid pledges. They include a first lien registered pledge on shares with the maximum collateral amount of CZK 3 950 000 thousand and a first lien registered

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pledge on shares with the maximum collateral amount of PLN 840 000 thousand. On 15 September 2016, Annex 1 was executed to the aforementioned agreement, whereby the maximum collateral amount was changed to PLN 1 370 000 thousand. The Company also agreed to establish a financial pledge and registered pledges on new shares acquired or taken up. Moreover, the Company assigned the rights to dividend and other payments.

The agreement to establish registered pledges and a financial pledge was concluded to secure transactions including the agreement for term loans and working capital loans, entered into by TAMEH Czech s.r.o. and TAMEH POLSKA Sp. z o.o. as original borrowers, TAMEH HOLDING Sp. z o.o. as the parent and the guarantor, and RAIFFEISEN BANK INTERNATIONAL AG as the agent and the collateral agent. The registered pledges are valid in the collateral period, i.e. until the total repayment or until release of the pledge by the pledgee. The financial pledge is valid in the entire collateral period or until release by the pledgee, not later than on 31 December 2028.

As at 31 December 2018, the carrying amount of shares in TAMEH HOLDING Sp. z o.o. was PLN 415 852 thousand.

Blank promissory notes and promissory note agreements

The Company issued two blank promissory notes along with promissory note agreements, totalling PLN 70 000 thousand, as collateral for loan agreements entered into by its subsidiaries with the Regional Fund for Environmental Protection and Water Management in Katowice. The collateral in the form of promissory notes is valid until the subsidiaries' payment of all their liabilities to the lender. The promissory notes are valid until 15 December 2022. As at the balance sheet date, the outstanding amount of loans secured with the notes was PLN 17 000 thousand.

Liability to MUFG Bank, Ltd.

•

•

•

On 11 April 2018, a bank guarantee of PLN 444 000 thousand was issued for the benefit of Bank Gospodarstwa Krajowego at the request of the Company. The guarantee secures bank exposure under a loan agreement concluded on 8 March 2018 among the borrower, Elektrociep³ownia Stalowa Wola S.A. and Bank Gospodarstwa Krajowego and Polskie Górnictwo Naftowe i Gazownictwo S.A., which has been described in more detail in Note 22 to these financial statements. The guarantee was issued by MUFG Bank, Ltd., and is valid until 11 April 2019. The exposure of MUFG Bank, Ltd. to the Company in the form of a guarantee agreement dated 4 April 2018 is secured with a declaration of submission to enforcement up to PLN 621 000 thousand valid until 31 July 2019 (Note 41 to these financial statements). In relation to the guarantee issued, the Company recognized a liability equal to the projected credit losses, measured for the guarantee period and amounting to PLN 11 994 thousand as at 31 December 2018. The rating applied by the Company for Elektrociep³ownia Stalowa Wola S.A. ranges from BB- to B.

After the reporting period end, on 7 February 2019, per Company's order, an annex was issued to the above bank guarantee, pursuant to which as of 12 April 2019, the guarantee amount will be increased to PLN 517 500 thousand and the expiration date postponed to 11 April 2020. The annex to the bank guarantee agreement was concluded based on the guarantee agreement of 5 February 2019 concluded with the MUFG Bank, Ltd. and is secured with a declaration of submission to enforcement up to PLN 621 000 thousand valid until 31 July 2020 (Note 41 to these financial statements).

Key items of the Company's contingent liabilities arising from court proceedings:

Claims relating to termination of long-term contracts

Claims relating to termination of long-term contracts against the subsidiary Polska Energia Pierwsza Kompania Handlowa Sp. z o.o.

In 2015 companies of the following capital groups: in.ventus, Polenergia and Wind Invest filed a case against Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. to declare notices of termination submitted by Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. with regard to power purchase and ownership titles concluded with these companies ineffective. In the course of court proceedings, plaintiffs extend their scope raising new contract termination related claims. –

As at the date of approval of these financial statements for publication, the amounts claimed were as follows: –

• the in.ventus group companies: EUR 13 367 thousand; –
• the Polenergia Group companies: PLN 67 248 thousand;
• the Wind Invest Group companies: PLN 125 003 thousand.

All cases are held at first instance courts (including one remanded for re-examination by a first-instance court).

In light of the current status of the proceedings and the related circumstances, the Group believes that the probability of losing the cases both as regards declaration of ineffectiveness of the termination notices and securing non-monetary claims and the claims for compensation is less than 50%. Therefore, no provision for the related costs has been recognized.

Claims relating to termination of long-term contracts by a subsidiary TAURON Sprzeda¿ Sp. z o.o.

On 28 February 2017, TAURON Sprzeda¿ Sp. z o.o., a subsidiary, submitted termination notices regarding long-term contracts for the purchase of property rights under green certificates by the subsidiary. The party to the contracts in 2008 are companies from the in.ventus group. The contracts were terminated after the parties were unable to reach an agreement in renegotiation of the contracts in line with the terms and conditions provided for therein. Total net contractual liabilities of TAURON Sprzeda¿ Sp. z o.o. under the terminated contracts for the years 2017–2023, as at the date of the termination would be approx. PLN 417 000 thousand.

After the balance sheet date, of 7 March 2019, Hamburg Commercial Bank AG (previously HSH Nordbank AG) instigated an action against TAURON Sprzeda¿ Sp. z o.o. for compensation relating to its failure to exercise contracts on sales of property rights arising from green certificates and liquidated damages charged in relation to termination of the above contracts. The plaintiff demands TAURON Sprzeda¿ Sp. z o.o. to pay the amount of PLN 232 879 thousand with statutory interest for the delay, calculated from the date of filing the action to the date of the payment, and including the compensation totaling PLN 36 252 thousand and liquidated damages totaling PLN 196 627 thousand.

The claims of Bank arise from the acquisition of a debt initially owed, according to its statements, to the following in.ventus group companies: ––

• in.ventus Sp. z o.o. EW Dobrzyñ sp.k.; –
• in.ventus Sp. z o.o. INO 1 sp.k.;
• in.ventus Sp. z o.o. EW Go³dap sp.k.

The court competent for hearing the claims is the Regional Court for Kraków. TAURON Sprzeda¿ Sp. z o.o. has started analyzing the claim and it will respond to it in due time. Based on the preliminary analysis of the demands and the rationale, according to TAURON Sprzeda¿ Sp. z o.o., the claim has been found entirely unsubstantiated. In the company's view, the probability of losing the case, both in relation to the compensation and liquidated damages, is lower than the chance of winning the case. Therefore, no provisions for the costs of the case is recognized.

In 2018, the subsidiary TAURON Sprzeda¿ Sp. z o.o. was notified of cases filed against it by two Polenergia group companies with regard to a settlement attempt related to damages in the total amount of PLN 78 855 thousand for an alleged loss incurred by the Polenergia group companies as a result of groundless termination of the long-term agreement concluded between them and Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. In their motions the companies indicated that Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. and liquidators have acted to the detriment of the Polenergia group companies and TAURON Sprzeda¿ Sp. z o.o. benefited on the case being fully aware of it, and thus is fully liable for this, according to the plaintiffs. TAURON Sprzeda¿ Sp. z o.o. considered the claims of the Polenergia group companies groundless; thus, no settlement was reached.

Claims relating to termination of long-term contracts against TAURON Polska Energia S.A.

In 2017 and 2018 companies of the following capital groups: in.ventus, Polenergia and Wind Invest filed cases against TAURON Polska Energia S.A. regarding damages and liability for potential future losses resulting from tort, including unfair competition. Notices of termination submitted by Polska Energia Pierwsza Kompania Handlowa Sp. z o.o. regarding long-term contracts for the purchase of power and property titles related to energy certificates allegedly directed by TAURON Polska Energia S.A., provided the factual basis for these claims. –

As at the date of approval of these financial statements for publication, the amounts claimed were as follows: –

• the in.ventus group companies: EUR 12 286 thousand; –
• the Polenergia Group companies: PLN 78 855 thousand;
• the Wind Invest Group companies: PLN 129 947 thousand. –

Further, the plaintiffs indicate the following estimated future losses: –

• the in.ventus group companies: EUR 35 706 thousand; –
• the Polenergia Group companies: PLN 265 227 thousand;
• the Wind Invest Group companies: PLN 1 119 363 thousand.

The court competent for hearing the claims is the Regional Court for Katowice. All cases are held before the first instance courts. Those filed by Wind Invest group companies are held in camera. As at the date of approval of these financial statements for publication, the probability that the rulings will be favorable for the Company is high (70%).

Further, a case filed by Dobies³aw Wind Invest Sp. z o.o. against TAURON Polska Energia S.A. is pending at District Court in Kraków (the first-instance court). It concerns a demand to make a court deposit of PLN 183 391 thousand to reverse the threat of a loss. Bearing in mind the current status of the case, the chances that the rulings will be favorable for the Company are considerably higher than 50%. •

Claim against PGE EJ 1 Sp. z o.o.

On 13 March 2015, a consortium of WorleyParsons Nuclear Services JSC, WorleyParsons International Inc, WorleyParsons Group Inc (the "WorleyParsons consortium") responsible for conducting research as part of an investment project relating to the construction of a nuclear power plant by PGE EJ 1 Sp. z o.o. (the "agreement") demanded the payment of PLN 92 315 thousand from PGE EJ 1 Sp. z o.o. As a result, on 15 April 2015 the Company (as a holder of 10% of shares in the issued capital of PGE EJ 1 Sp. z o.o.) concluded an agreement with PGE EJ 1 Sp. z o.o. and its other shareholders (i.e. PGE Polska Grupa Energetyczna S.A., KGHM Polska MiedŸ S.A. and ENEA S.A.) that regulated mutual relations related to these claims, including principles of providing additional funds (if any) to PGE EJ 1 Sp. z o.o. by its shareholders.

In the Company's view, its potential additional exposure to PGE EJ 1 Sp. z o.o. arising from the agreement shall not exceed its percentage capital exposure to that entity.

In November 2015, the District Court in Warsaw served PGE EJ 1 with the claim made by the WorleyParsons consortium for the amount approximating PLN 59 million, in 2017 was increased by PLN 45 million, to approx. PLN 104 million.

PGE EJ1 did not accept the claim and believed that the probability that the court would decide in favor of the plaintiffs was remote. No provisions were recognized in relation to the above events. •

Claims filed by Huta £aziska S.A.

Following the Company's business combination with Górnoœl¹ski Zak³ad Elektroenergetyczny S.A. ("GZE"), TAURON Polska Energia S.A. became a party to a court dispute with Huta £aziska S.A. ("Huta"), against GZE and the State Treasury represented by the President of the Energy Regulatory Office. At present, the case is pending at the Regional Court in Warsaw.

Based on a decision of 12 October 2001, the President of the Energy Regulatory Office ordered GZE to resume electricity supplies to Huta (suspended on 11 October 2001 since Huta had not paid its liabilities) on such terms as set out in the agreement of 30 July 2001, in particular at the price of PLN 67/MWh, until final resolution of the dispute, and on 14 November 2001 the dispute was finally resolved pursuant to a decision stating that discontinuation of electricity supplies was not unjustified. Huta appealed against that decision. On 25 July 2006, the Court of Appeals in Warsaw issued a final and binding decision ending the dispute concerning GZE's energy supplies to Huta. The court dismissed Huta's appeal against the decision of the Regional Court in Warsaw dated 19 October 2005, in which the court had dismissed Huta's appeal against the decision of the President of the Energy Regulatory Office. Huta filed a cassation appeal against the judgment of the Court of Appeals in Warsaw, which was dismissed by the judgment of the Supreme Court dated 10 May 2007. On 15 November 2001 (following the issue of the above decision by the President of the Energy Regulatory Office on 14 November 2001 and due to the growing indebtedness of Huta to GZE due to power supply) GZE again suspended power supply. Therefore, Huta has sued GZE for damages.

Under a suit of 12 March 2007 against GZE and the State Treasury represented by the President of the Energy Regulatory Office (jointly and severally) Huta claimed the payment of PLN 182 060 thousand together with interest from the date of filing the suit to the date of payment, in respect of damages for alleged losses resulting from GZE's failure to comply with the decision of the President of the Energy Regulatory Office dated 12 October 2001.

In this case, the courts of the first and second instance passed judgments favourable for GZE; however, in its judgment of 29 November 2011 the Supreme Court overruled the judgment of the Court of Appeals and remanded the case for re-examination by that Court. On 5 June 2012, the Court of Appeals overruled the decision of the Regional Court and remanded the case for re-examination by the latter. Since 27 November 2012 the case has been heard by the court of first instance.

Based on a legal analysis of claims the Company believes that they are unsubstantiated and the risk that they must be satisfied is remote. As a result, no provision has been recognized by the Company for any costs associated with those claims. •

Claim filed by ENEA S.A.

The claim filed by ENEA S.A. ("ENEA") against TAURON Polska Energia S.A., which has been heard by the Regional Court in Katowice since 2016, regards the payment of PLN 17 086 thousand with statutory interest from 31 March 2015 until the payment date. The basis of the claim brought by ENEA is unjust enrichment of the Company due to potential errors in the calculation of aggregated measurement and billing data by ENEA Operator Sp. z o.o. (being the Distribution System Operator), which are the basis of ENEA and the Company's settlements with Polskie Sieci Elektroenergetyczne S.A., due to an imbalance in the Balancing Market between January and December 2012.

During the proceedings, at the request of ENEA S.A. the court decided to extend the suit against seven sellers for which TAURON Polska Energia S.A. acted as an entity in charge of trade balances in the distribution area of ENEA Operator Sp. z o.o. in 2012. Two subsidiaries have been sued along with TAURON Polska Energia S.A.: TAURON Sprzeda¿ Sp. z o.o. from which ENEA S.A. demanded PLN 4 934 thousand with statutory interest as of the date of serving a copy of the request to extend the suit until the date of payment; and TAURON Sprzeda¿ GZE Sp. z o.o. from which ENEA S.A. demanded PLN 3 480 thousand with statutory interest as of the date of serving a copy of the request to extend the suit until the date of payment. The demand for payment of the above amounts as well as the amounts claimed from the other five sellers was submitted by the petitioner in case the claim against TAURON Polska Energia S.A. is dismissed. The case is pending before the first-instance court.

The Company did not recognize any provision as, in the opinion of the Company, the risk of losing the case is below 50%. Provisions were recognized by the subsidiaries of TAURON Polska Energia S.A. in the total amount of PLN 5 483 thousand (TAURON Sprzeda¿ Sp. z o.o.) and in the total amount of PLN 3 900 thousand (TAURON Sprzeda¿ GZE Sp. z o.o.). The said provisions cover the principal, interest reviewed as at 31 December 2018 and the cost of the proceedings.

As at 31 December 2018, the value of the claim against the Company is PLN 17 086 thousand, including statutory interest accrued between 31 March 2015 and the payment date. Should the claim filed against the Company be dismissed, the claim for payment by the Group companies totals PLN 8 414 thousand, including statutory interest accrued between the date of service of a copy of the request filed by ENEA S.A. to extend the suit by a specific Group company and the payment date. As new measurement data were presented by ENEA Operator sp. z o.o. during the proceedings, the values of the claims against the Company and the Group companies may be expected to change.

The commitment of the Closed-end Investment Funds managed by Polski Fundusz Rozwoju in the subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o.

In the investment agreement signed by the Company and Closed-end Investment Funds managed by Polski Fundusz Rozwoju as described in detail in Note 48 to these financial statements, a number of situations were mentioned, the occurrence of which indicates a potential significant infringement of the agreement. The potential significant infringement of the agreement by the companies of the Group may lead to the potential necessity of recognizing in financial statements the liability to buy out from Closed-end Investment Funds shares in subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. owned by these funds. As at the balance sheet date, Closed-end Investment Funds own shares in subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. in the amount of PLN 100 000 thousand.

41. Security for liabilities

Key types of security for the Company's liabilities have been presented below.

Agreement/transaction	Collateral	Collateral amount
Long-term Bond Issue Scheme in Bank Gospodarstwa Krajowego of 31 July 2013 as amended	declaration of submission to enforcement	up to PLN 2 550 000 thousand, valid until 20 December 2032
Bond Issue Scheme dated 24 November 2015	declaration of submission to enforcement	up to PLN 7 524 000 thousand, valid until 31 December 2023
Subordinated Bond Issue Scheme in Bank Gospodarstwa Krajowego of 6 September 2017	declaration of submission to enforcement	up to PLN 600 000 thousand, valid until 30 June 2034
Bank guarantee agreement dated 4 April 2018 with MUFG Bank, Ltd.	declaration of submission to enforcement	up to PLN 621 000 thousand valid until 31 July 2019
Framework bank guarantee agreement concluded with CaixaBank S.A.	authorization to debit the bank account maintained by CaixaBank S.A.	up to PLN 100 000 thousand
(the Company and TAURON Group companies can use the limit for guarantees to secure transactions)	declaration of submission to enforcement	up to PLN 120 000 thousand valid until 11 July 2021
Bank guarantee issued by CaixaBank S.A. for the benefit of the Company as requested by Operator Gazoci¹gów Przesy³owych GAZ-SYSTEM S.A. – as security of transmission agreement	bank guarantee	up to PLN 6 100 thousand valid until 30 November 2019
Agreement with Santander Bank Polska S.A. on bank guarantees for Izba Rozliczeniowa Gie³d Towarowych S.A.	authorization to debit the bank account maintained by Santander Bank Polska S.A.	up to PLN 150 000 thousand
Overdraft agreement and intra-day limit (bank account agreement) at PKO Bank Polski S.A. (overdraft of up to PLN 300 000 thousand and intra-day limit of up to PLN 500 000 thousand)	authorizations to debit the bank account maintained by PKO Bank Polski S.A.	up to the total amount of PLN 800 000 thousand
	declaration of submission to enforcement	up to PLN 600 000 thousand, valid until 17 December 2021
	declaration of submission to enforcement	up to PLN 360 000 thousand, valid until 29 December 2021
Overdraft agreement with Bank Gospodarstwa Krajowego (in EUR, up to EUR 45 000 thousand)	authorization to debit the bank account maintained by Bank Gospodarstwa Krajowego	up to PLN 193 500 thousand (EUR 45 000 thousand)
	declaration of submission to enforcement	up to PLN 103 200 thousand (EUR 24 000 thousand) valid until 31 December 2020
	declaration of submission to enforcement	up to PLN 215 000 thousand (EUR 50 000 thousand) valid until 31 December 2020
Overdraft agreement with mBank (in USD, up to USD 2 000 thousand)	declaration of submission to enforcement	up to PLN 11 279 thousand (USD 3 000 thousand) valid until 31 March 2019
Overdraft agreement with mBank (in USD, up to USD 500 thousand)	declaration of submission to enforcement	up to PLN 2 820 thousand (USD 750 thousand) valid until 29 March 2020
Performance bonds related to concluded financing contracts	blank promissory notes to secure the payment of the Company's liabilities	up to the total amount of PLN 4 985 thousand

On 31 December 2018 a statement of submission to enforcement up to PLN 6 900 000 thousand, signed by the Company in relation to the Bond Issue Scheme of 16 December 2010 with annexes, expired. –

After the reporting period end, the Company:

• on 9 January 2019 signed statements of submission to enforcement up to PLN 1 500 000 thousand, valid until 31 December 2036 and securing the repayment of liabilities related to the loan agreement of 19 December 2018 concluded with Bank Gospodarstwa Krajowego, described in detail in Note 29.7 hereto; –
• on 6 February 2019 signed statements of submission to enforcement up to PLN 621 000 thousand, valid until 31 July 2020, securing the repayment of liabilities related to the guarantee agreement concluded with MUFG Bank. Ltd. on 5 February 2019, as described in detail in Note 40 hereto; –
• on 6 February 2019 provided collateral in the form of a blank promissory note for PLN 2 574 thousand related to the project co-funding contract concluded with the National Research and Development Center; –
• on 27 March 2019, under the bank guarantee agreement made with Santander Bank Polska S.A. (Spó³ka Akcyjna) per Company's order, issued a bank guarantee to secure the liabilities of the Company against Izba Rozliczeniowa Gie³d Towarowych S.A., totaling PLN 20 000 thousand, valid until 31 May 2019.

42. Capital commitments

As at 31 December 2018 and 31 December 2017, the Company did not have any material capital commitments.

43. Related-party disclosures

43.1. Transactions with related parties and State Treasury companies

The Company enters into transactions with related parties, as presented in Note 2 to these financial statements. In addition, due to the fact that the State Treasury of the Republic of Poland is the Company's majority shareholder, State Treasury companies are treated as related parties. Transactions with State Treasury companies are mainly related to the operating activities of the Company and are made on an arm's length terms.

The total value of transactions with the aforementioned entities and the balances of receivables and liabilities have been presented in the tables below.

Revenue and expenses

	Year ended 31 December 2018	Year ended 31 December 2017
Revenue from subsidiaries	9 842 724	8 629 630
Revenue from operating activities	8 701 280	7 602 324
Dividend income	800 777	542 474
Other operating income	7 241	5 669
Other finance income	333 426	479 163
Revenue from jointly-controlled entities	59 109	56 611
Revenue from State Treasury companies	164 556	411 956
Costs from subsidiaries	(2 145 541)	(3 175 156)
Costs of operating activities	(2 094 757)	(3 127 698)
Finance costs	(50 784)	(47 458)
Costs incurred with relation to transactions with jointly-controlled entities	(4 958)	(3 183)
Costs from State Treasury companies	(1 000 560)	(532 007)

Receivables and liabilities

	As at 31 December 2018	As at 31 December 2017
Loans granted to subsidiaries and receivables from subsidiaries	7 045 063	7 561 140
Receivables from buyers	777 825	658 936
Loans granted under cash pool agreement plus interest accrued	806 301	182 933
Other loans granted	–	139 268
Receivables from the TCG	54 454	6 078
Bonds	5 403 709	6 572 696
Other financial receivables	178	240
Other non-financial receivables	2 596	989
Loans granted to jointly-controlled entities and receivables from jointly-controlled entities	354 744	579 381
Receivables from State Treasury companies	21 346	49 941
Liabilities to subsidiaries	3 078 690	3 406 474
Liabilities to suppliers	236 030	288 965
Loans received under cash pool agreement plus interest accrued	2 021 198	2 355 765
Other loans received	730 747	721 280
Liabilities arising from the TCG	90 490	34 836
Other financial liabilities	18	5 257
Other non-financial liabilities	207	371
Liabilities to jointly-controlled entities	225	503
Liabilities to State Treasury companies	166 901	28 952

Revenue from subsidiaries includes revenue from sales of coal mainly to TAURON Wytwarzanie S.A. and TAURON Ciep³o Sp. z o.o., which is presented in the statement of comprehensive income less cost in the amount of the surplus constituting the revenue due to agency services, presented in detail in Note 11 to these financial statements.

In the year ended 31 December 2018, the major contracting party as regards sales revenue from transactions made by TAURON Polska Energia S.A. with State Treasury companies was PSE S.A. Sales to that entity accounted for 98% of the total revenue from State Treasury companies.

In the year ended 31 December 2018, Polska Grupa Górnicza Sp. z o.o., Wêglokoks S.A. and Jastrzêbska Spó³ka Wêglowa S.A. were the major contracting parties of TAURON Polska Energia S.A. as regards costs incurred in relation to transactions with State Treasury companies. Costs incurred in transactions with those entities represented 95% of total costs incurred in purchase transactions entered into with State Treasury companies.

The Company concludes material transactions on the energy market through Izba Rozliczeniowa Gie³d Towarowych S.A. As it is only responsible for organization of commodities exchange trading, the Company does not classify purchase and sale transactions made through this entity as related-party transactions.

43.2. Compensation of the executives

The amount of compensation and other benefits paid or payable to the Management Board, Supervisory Board and other key executives of the Company in the year ended 31 December 2018 and in the comparative period has been presented in the table below.

	Year ended 31 December 2018	Year ended 31 December 2017
Management Board	5 661	6 957
Short-term benefits (with surcharges)	4 931	4 545
Temination benefits	695	2 104
Other	35	308
Supervisory Board	833	739
Short-term employee benefits (salaries and surcharges)	833	739
Other members of key management personnel	16 370	13 832
Short-term employee benefits (salaries and surcharges)	14 330	12 151
Temination benefits	898	776
Other	1 142	905
Total	22 864	21 528

In accordance with the adopted accounting policy, the Company recognizes provisions for termination benefits allocated to members of the Management Board and other key executives, which may be paid or payable in future reporting periods. The amounts paid or payable until 31 December 2018 have been presented above.

No loans have been granted from the Company's Social Benefit Fund to members of the Management Board, Supervisory Board or other key executives.

44. Finance and capital management

Finance and capital are managed at the level of the TAURON Polska Energia S.A. Capital Group. During the period covered by these financial statements, there were no significant changes in finance and capital management objectives, principles or procedures. Capital and finance management has been discussed in more detail in Note 51 to the Consolidated Financial Statements for the year ended 31 December 2018.

45. Employment structure

The following note presents average headcount in the annual periods ended 31 December 2018 and 31 December 2017.

	Year ended 31 December 2018	Year ended 31 December 2017
Management	–	1
Administration	366	330
Sales department	90	103
Total	456	434

The above table does not include persons covered by contracts for the provision of management services.

46. Fee of the certified auditor or the entity authorized to audit financial statements

Information concerning the fee of the certified auditor has been presented in section 6. in the Management Board's report on the activities of TAURON Polska Energia S.A. and TAURON Capital Group for the 2018 financial year.

47. Structure of financial statements broken down by business activity type in line with Article 44 of the Energy Law

Under Article 44.2 of the Energy Law, TAURON Polska Energia S.A., as an energy company, is obliged to disclose specific items of the balance sheet and the statement of profit or loss broken down by individual types of business activity in notes to these financial statements. •

The Company has identified the following types of business activities in accordance with Article 44.2 of the Energy Law: •

• trade in gaseous fuels;
• other activity.

The principles of preparing a statement of comprehensive income (statement of profit or loss) broken down by type of business activity

The Company keeps accounting records which enable separate calculation of expense and revenue and the profit/loss for individual types of activities.

The Company has directly separated sales revenue and cost of sales related to individual types of activities.

Costs to sell related to the entire sales process carried out by the Company have been divided proportionally to the sales revenue generated by the Company.

Other operating and financing activities have been identified as those related to other business activities of the Company.

Administrative expenses of the Company are incurred for the benefit of the entire Capital Group, hence they have been recognized in the statement of comprehensive income as unallocated items and are not directly attributable to a specific business activity, as such attribution would be unjustified. Also CIT charged to profit or loss has been presented under unallocated items.

Statement of comprehensive income by type of activity for the 2018 financial year

	Gas	Other activity	Unallocated items	Total
Sales revenue	282 828	8 335 814	–	8 618 642
Cost of sales	(280 241)	(8 192 407)	–	(8 472 648)
Gross profit	2 587	143 407	–	145 994
Selling and distribution expenses	(679)	(20 013)	–	(20 692)
Administrative expenses	–	–	(98 716)	(98 716)
Other operating expenses	–	(3 927)	–	(3 927)
Operating profit (loss)	1 908	119 467	(98 716)	22 659
Dividend income	–	819 437	–	819 437
Interest income on bonds and loans	–	327 447	–	327 447
Interest expense on debt	–	(298 602)	–	(298 602)
Revaluation of shares	–	(2 469 069)	–	(2 469 069)
Revaluation of bonds and loans	–	15 493		15 493
Other finance income and costs	–	(149 648)	–	(149 648)
Profit (loss) before tax	1 908	(1 635 475)	(98 716)	(1 732 283)
Income tax expense	–	–	22 430	22 430
Net profit (loss) for the year	1 908	(1 635 475)	(76 286)	(1 709 853)

Statement of comprehensive income by type of activity for the 2017 financial year

	Gas	Other activity	Unallocated items	Total
Sales revenue	194 290	7 597 735	–	7 792 025
Cost of sales	(194 375)	(7 220 332)	–	(7 414 707)
Gross profit (loss)	(85)	377 403	–	377 318
Selling and distribution expenses	(580)	(22 729)	–	(23 309)
Administrative expenses	–	–	(88 751)	(88 751)
Other operating income and expenses	–	(2 470)	–	(2 470)
Operating profit (loss)	(665)	352 204	(88 751)	262 788
Dividend income	–	560 832	–	560 832
Interest income on bonds and loans	–	456 426	–	456 426
Interest expense on debt	–	(334 638)	–	(334 638)
Revaluation of shares and loans	–	(134 372)	–	(134 372)
Other finance income and costs	–	108 529	–	108 529
Profit (loss) before tax	(665)	1 008 981	(88 751)	919 565
Income tax expense	–	–	(65 214)	(65 214)
Net profit (loss) for the year	(665)	1 008 981	(153 965)	854 351

The principles of preparing a statement of financial position (balance sheet) broken down by type of business activity

The Company has directly separated receivables from buyers, liabilities to suppliers, other receivables and liabilities, as well as derivatives related to individual types of its business activities.

Equity, provisions for employee benefits, cash, receivables and liabilities relating to taxes and charges and deferred tax asset / liability have been presented as unallocated items in the statement of financial position.

The remaining assets and liabilities are related to other activities of the Company.

Statement of financial position by type of activity as at 31 December 2018

	Gas	Other activity	Unallocated items	Total
ASSETS
Non-current assets, of which:	923	27 017 397	148 180	27 166 500
Shares	–	21 076 056	–	21 076 056
Bonds	–	5 043 981	–	5 043 981
Loans granted	–	808 760	–	808 760
Derivative instruments	63	43 781	–	43 844
Deferred tax assets	–	–	148 180	148 180
Other financial assets	860	1 944	–	2 804
Current assets, of which:	32 858	1 829 050	484 582	2 346 490
Receivables from buyers	31 812	787 751	–	819 563
Income tax receivables	–	–	13 921	13 921
Bonds	–	192 311	–	192 311
Loans granted	–	13 117	–	13 117
Derivative instruments	31	176 468	–	176 499
Other financial assets	1 015	244 706	–	245 721
Other non-financial assets	–	5 110	4 736	9 846
Cash and cash equivalents	–	–	465 925	465 925
TOTAL ASSETS	33 781	28 846 447	632 762	29 512 990
EQUITY AND LIABILITIES
Equity	–	–	15 259 836	15 259 836
Non-current liabilities, of which:	27	8 529 976	3 787	8 533 790
Debt	–	8 474 344	–	8 474 344
Derivative instruments	27	37 903	–	37 930
Provisions for employee benefits	–	–	3 787	3 787
Current liabilities, of which:	10 886	5 683 607	24 871	5 719 364
Debt	–	4 504 374	–	4 504 374
Liabilities to suppliers	10 819	515 167	–	525 986
Other financial liabilities	36	371 610	–	371 646
Derivative instruments	31	202 961	–	202 992
Other non-financial liabilities	–	–	24 626	24 626
Provisions for employee benefits	–	–	245	245
TOTAL EQUITY AND LIABILITIES	10 913	14 213 583	15 288 494	29 512 990

Statement of financial position by type of activity as at 31 December 2017 (restated)

	Gas	Other activity	Unallocated items	Total
ASSETS
Non-current assets, of which:	834	27 370 850	–	27 371 684
Shares	–	20 912 679	–	20 912 679
Bonds	–	6 009 920	–	6 009 920
Loans granted	–	382 989	–	382 989
Other financial assets	834	1 890	–	2 724
Current assets, of which:	21 002	2 171 017	757 671	2 949 690
Receivables from buyers	20 413	698 720	–	719 133
Bonds	–	562 776	–	562 776
Loans granted	–	520 191	–	520 191
Other financial assets	499	131 141	–	131 640
Other non-financial assets	–	4 857	36 094	40 951
Cash and cash equivalents	–	–	721 577	721 577
TOTAL ASSETS	21 836	29 541 867	757 671	30 321 374
EQUITY AND LIABILITIES
Equity	–	–	17 377 906	17 377 906
Non-current liabilities, of which:	–	9 497 797	32 990	9 530 787
Debt	–	9 472 454	–	9 472 454
Deferred income tax liability	–	–	29 843	29 843
Provisions for employee benefits	–	–	3 147	3 147
Current liabilities, of which:	4 171	3 338 061	70 449	3 412 681
Debt	–	2 725 763	–	2 725 763
Liabilities to suppliers	4 081	409 184	–	413 265
Other financial liabilities	–	62 590	–	62 590
Income tax liabilities	–	–	37 629	37 629
Other non-financial liabilities	–	–	32 490	32 490
Provisions for employee benefits	–	–	330	330
TOTAL EQUITY AND LIABILITIES	4 171	12 835 858	17 481 345	30 321 374

48. Other material information

Signing transaction documentation related to the investment in a subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. made by Closed-end Investment Funds managed by Polski Fundusz Rozwoju S.A.

On 28 March 2018, the Company, its subsidiary, i.e. Nowe Jaworzno Grupa TAURON Sp. z o.o. and Fundusz Inwestycji Infrastrukturalnych – Kapita³owy Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych and Fundusz Inwestycji Infrastrukturalnych – D³u¿ny Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych ("Funds"), with a portion of the investment portfolio managed by Polski Fundusz Rozwoju S.A., signed transaction documentation specifying the terms of the Fund's equity investment in Nowe Jaworzno Grupa TAURON Sp. z o.o.

Transaction documentation includes an investment agreement and a shareholders' agreement together with appendices, including draft long-term electricity sales contracts and a long-term coal sale contract, concluded by the Company and its subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. by the balance sheet date.

The shareholders' agreement sets out the principles of corporate governance in Nowe Jaworzno Grupa TAURON Sp. z o.o. This agreement grants the Funds a personal right to appoint, suspend and dismiss one member of the Management Board and one member of the Supervisory Board of Nowe Jaworzno Grupa TAURON Sp. z o.o. It also specifies the matters for which a unanimous resolution of the Management Board, Supervisory Board or General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. will be required. The shareholders' agreement will enter into force as soon as the Funds become members of Nowe Jaworzno Grupa TAURON Sp. z o.o.

The investment agreement specifies the terms and conditions of the equity investment of the Funds in Nowe Jaworzno Grupa TAURON Sp. z o.o. This investment project assumes the Funds' becoming members of Nowe Jaworzno Grupa TAURON Sp. z o.o. and their participation in subsequent capital contributions to Nowe Jaworzno Grupa TAURON Sp. z o.o., by taking up new shares in exchange for cash contributions up to a total maximum amount of PLN 880 000 thousand, i.e. PLN 440 000 thousand by each of the Funds. As at the date when the 910 MW power unit in Jaworzno is put into operation, the interests of the Funds in the issued capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. should be approx. 14% and the interests of the Company should never fall below 50%+1 share. The Company will be obliged to make a capital contribution to its subsidiary – Nowe Jaworzno Grupa TAURON Sp. z o.o. – sufficient to build a 910 MW power unit in Jaworzno, after the Funds have reached their maximum equity interest.

Under the investment agreement, the Funds will become members of Nowe Jaworzno Grupa TAURON Sp. z o.o. after specified conditions precedent have been met. The conditions precedent included obtaining the consent of the President of the Office for Competition and Consumer Protection for concentration, obtaining a decision of the Head of the National Revenue Administration approving the terms of the contract for the sale of electricity as an advance pricing agreement, conclusion by the Company and its subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. of specified contracts, including a contract for the sale of electricity and a contract for the sale of coal, and performance (or the Company ensuring the performance) of certain activities by the governing bodies of Nowe Jaworzno Grupa TAURON Sp. z o.o. As at the date of approving these financial statements for publication, in Company's view, all conditions precedent required for the Funds to join Nowe Jaworzno Grupa TAURON Sp. z o.o. have been fulfilled.

On 20 December 2018, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 1 000 thousand, through the issue of 20 000 new shares with the par value of PLN 50 each. The new shares in the increased issued capital were assumed by Fundusz Inwestycji Infrastrukturalnych – Kapita³owy Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych for the total issue price of PLN 100 000 thousand and fully covered with a cash contribution. The share premium of shares totaling PLN 99 000 thousand, was transferred to the supplementary capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. The aforesaid increase in the issued capital of was registered on 15 January 2019. As a result of the transaction, the Company's share in the issued capital and decision-making body of Nowe Jaworzno Grupa TAURON Sp. z o.o. will drop from 100% to 97.89%.

After the reporting period, On 25 February 2019, the Extraordinary General Shareholders' Meeting of Nowe Jaworzno Grupa TAURON Sp. z o.o. adopted a resolution to increase the company's issued capital by PLN 2 569 thousand, through the issue of 51 385 new shares with the par value of PLN 50 each. The new shares in the increased issued capital were assumed by Fundusz Inwestycji Infrastrukturalnych – Kapita³owy Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych with the registered office in Warsaw for the total issue price of PLN 256 925 thousand. The share premium totaling PLN 254 356 thousand will be transferred to the supplementary capital of Nowe Jaworzno Grupa TAURON Sp. z o.o. As a result of the transaction, the Company's share in the capita will drop to 92.86%.

Conclusion of investment agreements to establish corporate venture capital funds

On 13 June 2018, the Company concluded two investment agreements to establish corporate venture capital funds. The agreements are conditional and their entry into force requires the satisfaction of a condition precedent in the form of an approval of the President of the Office for Competition and Consumer Protection, which was fulfilled on 8 August 2018.

Under the above-mentioned agreements, the Company will participate in two funds established as part of the PFR Starter FIZ and PFR NCBR CVC programs. Creation of the funds will allow the Company to provide multi-stage support to innovative businesses, including by enabling them to participate in acceleration programs, investing in start-ups under the PFR Starter FIZ program, and ensuring further financing rounds under the PFR NCBR CVC program. Ultimately, the capitalization of the fund established under the PFR Starter FIZ program is expected to be PLN 50 000 thousand, and of the one created under the PFR NCBR CVC program: PLN 160 000 thousand. The Company's interests in the funds will not exceed 25% and 49%, respectively.

On 21 December 2018, EEC Magenta spó³ka z ograniczon¹ odpowiedzialnoœci¹ ASI spó³ka komandytowo-akcyjna (Starter), incorporated by: the Company (Private Investor), PFR Starter Fundusz Inwestycyjny Zamkniêty with the registered office in Warsaw (Public Investor), EEC Ventures spó³ka z ograniczon¹ odpowiedzialnoœci¹ spó³ka komandytowa (Managing Team's Investor) and EEC Magenta Spó³ka z ograniczon¹ odpowiedzialnoœci¹ (General Partner), was recorded in the National Court Register. The Company assumed 12 450 shares in EEC Magenta spó³ka z ograniczon¹ odpowiedzialnoœci¹ ASI spó³ka komandytowo-akcyjna, in exchange for cash contribution equal to the par value of the shares, i.e. PLN 12 thousand. After the reporting period end, on 15 January 2019, Extraordinary General Meeting of EEC Magenta spó³ka z ograniczon¹ odpowiedzialnoœci¹ ASI spó³ka komandytowo-akcyjna (Starter), resolutions were passed regarding an increase in its issued capital by the total amount of PLN 36 thousand. The Company assumed 8 902 shares in exchange of cash contribution of PLN 890 thousand. The Company's share in the issued capital and in votes at the General Meeting did not change and amounts to 24.90%.

After the reporting period end, on 9 January 2019, EEC Magenta spó³ka z ograniczon¹ odpowiedzialnoœci¹ 2 ASI spó³ka komandytowo-akcyjna (CVC) was recorded in the National Court Register. It was incorporated by the Company (Corporate Investor), PFR NCBR CVC Fundusz Inwestycyjny Zamkniêty Aktywów Niepublicznych (Public Investor); EEC Ventures spó³ka z ograniczon¹ odpowiedzialnoœci¹ 2 spó³ka komandytowa (Managing Team's Investor) and EEC Magenta spó³ka z ograniczon¹ odpowiedzialnoœci¹ (General Partner). TAURON Polska Energia S.A. assumed 24 015 shares in the company, in exchange for cash contribution equal to the par value of the shares, i.e. PLN 24 thousand. After the reporting period end, on 25 January 2019, Extraordinary General Meeting of EEC Magenta 2 spó³ka z ograniczon¹ odpowiedzialnoœci¹ ASI spó³ka komandytowo-akcyjna (CVC), resolutions were passed regarding an increase in its issued capital by the amount of PLN 99 thousand. The Company assumed 47 751 shares in exchange of cash contribution of PLN 4 775 thousand. The Company's share in the issued capital and in votes at the General Meeting is 48.03%.

Negotiations regarding the purchase of wind farms

On 2 October 2018 the Company was invited to commence negotiations regarding the purchase of wind farms located in northern Poland, owned by the in.ventus Group. The objective of the negotiations will be to determine opportunities, principles, terms and financial parameters of the Transaction.

The total installed capacity of the wind farms referred to above approximates 200 MW.

The Transaction may take the form of the purchase of the German and Polish partnerships that operate the farms ("Project Entities") by the Company. In such a case, the Company would assume all rights and obligations of the former partners in Project Entities, at the same time acquiring their bank debt. According to the Company, another option is possible, i.e. the acquisition of enterprises of the Polish Project Entities.

As at the date of approving these financial statements, the negotiations have been pending.

Key power market auctions for 2021–2023

On 15 November, 5 December and 21 December 2018 three initial key power market auctions for 2021–2023 were held. These auctions were held by PSE S.A. in compliance with the Act on the Power Market of 8 December 2017. The closing prices for each auction, as published by the President of Energy Regulatory Office in the Official Journal amounted to, respectively: 240.32 PLN/kW/yr (2021), 198.00 PLN/kW/yr (2022) and 202.99 PLN/kW/yr (2023). The TAURON Group companies concluded power contracts for the following volumes: ––

• during the auction held on 15 November 2018 2 672.49 MW; –
• during the auction held on 5 December 2018 422.23 MW;
• during the auction held on 21 December 2018 393.23 MW.

The auctions have been described in details in Note 2.6 of the Management Board's report on the activities of TAURON Polska Energia S.A. and of the TAURON Capital Group for 2018 financial year.

49. Events after the end of the reporting period

Security for Company's liabilities

On 9 January and 6 February 2019, the Company concluded statements regarding submission to enforcement being the form of collateral related to its liabilities of up to PLN 1 500 000 thousand and up to PLN 621 000 thousand, respectively, described in detail in Note 41 hereto.

On 6 February 2019, the Company granted collateral in the form of a blank promissory note for PLN 2 574 thousand in relation to a performance bond arising from the concluded co-funding contracts as described in detail in Note 41 hereto.

Bank guarantee for joint venture Elektrociep³ownia Stalowa Wola S.A.

On 7 February 2019, per Company's order, an annex to the bank guarantee was issued, increasing to PLN 517 500 thousand the guarantee granted to secure receivables of Bank Gospodarstwa Krajowego arising from the loan agreement concluded on 8 March 2018 between Elektrociep³ownia Stalowa Wola S.A., the borrower, Bank Gospodarstwa Krajowego and Polskie Górnictwo Naftowe i Gazownictwo S.A., as described in detail in Note 40 hereto.

Claims relating to termination of long-term contracts by a subsidiary TAURON Sprzeda¿ Sp. z o.o.

On 7 March 2019 an action was instigated against TAURON Sprzeda¿ Sp. z o.o., a subsidiary, for the total amount of PLN 232 879 thousand in relation to termination of long-term contracts for the purchase of property rights under green certificates, as described in detail in Note 40 hereto.

Loan granted to a joint venture Elektrociep³ownia Stalowa Wola S.A.

On 12 March 2019 the Company concluded with Elektrociep³ownia Stalowa Wola S.A. a loan agreement up to PLN 5 175 thousand. Pursuant to the agreement, the repayment of the loan with interest accrued based on a fixed interest rate will take place until 30 June 2033. The loan, accrued interest, costs and other amounts due to the Company arising from the loan agreement are collateralized with a blank promissory note with a promissory note agreement. The loan amount was made available to Elektrociep³ownia Stalowa Wola S.A. on 20 March 2019.

Debt taken out/repaid

In March 2019 the Company redeemed bonds with a nominal value of PLN 400 000 thousand, issued bonds with a nominal value of PLN 100 000 thousand and submitted a proposal to BGK to purchase on 29 March 2019 subordinated bonds with a nominal value of PLN 400 000 thousand, as described in detail in Note 29.1 hereto.

Under the loan agreement concluded with BGK dated 19 December 2018, as described in detail in Note 29.7 hereto, in January and February 2019, tranches of the loan totaling PLN 730 000 thousand were availed.

Management Board of the Company

Katowice, 29 March 2019

Filip Grzegorczyk	– President of the Management Board
Jaros³aw Broda	– Vice-President of the Management Board
Kamil Kamiñski	– Vice-President of the Management Board
Marek Wadowski	– Vice-President of the Management Board

Oliwia Tokarczyk – Executive Director in Charge of Taxes and Accounting

REPORT OF THE MANAGEMENT BOARD

on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018

TAURON.PL

	1. TAURON POLSKA ENERGIA I TAURON CAPITAL GROUP6
1.1.	Basic information on TAURON Polska Energia S.A. and TAURON Capital Group6
1.2.	Business segments (lines of business)7
1.3.	TAURON Capital Group's organization and structure8
1.3.1.	Units subject to consolidation8
1.3.2.	Changes to TAURON Capital Group's organization9
1.3.3.	Organizational or equity ties with other entities10
1.3.4.	Major domestic and foreign investments as well as equity investments 11
1.4.	Strategy and strategic priorities of TAURON Capital Group13
1.4.1.	TAURON Capital Group's mission, vision and values13
1.4.2.	TAURON Capital Group's 2016-2025 Strategy14
1.4.3.	Key challenges for TAURON Capital Group18
1.4.4.	Opportunities and threats19
1.4.5.	Long term financial goals and assumptions of the Strategy 21
1.4.6.	Implementation of the Strategy and priorities of TAURON Capital Group in 201822
1.5.	Description of TAURON Capital Group's expansion policy and directions25
1.5.1.	Implementation of the strategic investment projects26
1.5.2.	Evaluation of the capability to complete the intended investment projects31
1.5.3.	Directions for advancing innovations as well as research and development activities 31
1.5.4.	Major achievements in the field of research and development32
	2. OPERATIONS OF TAURON POLSKA ENERGIA AND TAURON CAPITAL GROUP 37
2.1.	Factors and non-typical events that have a significant impact on earnings achieved 37
2.1.1.	Internal factors and the assessment thereof37
2.1.2.	External factors and the assessment thereof37
	2.1.2.1. Macroeconomic environment38
	2.1.2.2. Market environment38
	2.1.2.3. Regulatory environment45
	2.1.2.4. Competitive environment (landscape)49
2.2.	Material growth impacting factors 54
2.3.	Core products, goods and services55
2.4.	Markets and sources of supply57
2.4.1.	Markets 57
2.4.2.	Supply sources – fuel 62
2.5.	Timeline64
2.6.	Key events and TAURON Capital Group's accomplishments with a significant impact on its operations 65
2.7.	Prizes and accolades (honorable mentions)71

2.8.	Information on the employment at TAURON Polska Energia S.A. and TAURON Capital Group72
	3. RISK MANAGEMENT AT TAURON CAPITAL GROUP 73
3.1.	Objective and the key risk management principles (rules) at TAURON Capital Group 73
3.2.	Enterprise risk management system73
3.3.	Managing TAURON Capital Group's key risks79
3.3.1.	Commercial (trading) risk management79
3.3.2.	Financial risk management80
3.3.3.	Credit risk management81
3.3.4.	Operational risk management81
3.3.5.	Project risk management82
3.4.	Description of the most significant risks related to TAURON Capital Group's operations83
	4. ANALYSIS OF FINANCIAL POSITION AND ASSETS OF TAURON POLSKA ENERGIA S.A87
4.1.	Overview of economic and financial data disclosed in the annual financial statements 87
4.2.	Differences between the financial results reported in the annual report and the forecasts of results for the given
	year published earlier92
4.3.	Key financial ratios92
4.4.	Principles of preparing annual financial statements93
5.1.	5. ANALYSIS OF TAURON CAPITAL GROUP'S FINANCIAL POSITION AND ASSETS94 TAURON Capital Group's financial results94
	TAURON Capital Group's financial results by line of business95
5.2.
5.2.1.	Mining Segment95
5.2.2.	Generation Segment96
5.2.3.	Distribution Segment99
5.2.4.	Supply Segment100
5.2.5.	Other operations102
5.3.	Overview of economic and financial data disclosed in the consolidated annual financial statements103
5.3.1.	Characteristics of the structure of assets and liabilities in the consolidated statement of financial position 103
5.3.2.	Consolidated statement of comprehensive income108
5.3.3.	Statement of cash flows111
5.4.	Material off-balance sheet items113
5.5.	Differences between the financial results reported in the annual report and the forecasts of results for the given
	year published earlier116
5.6.	Key financial ratios116
5.7.	Most significant financial and operating data of TAURON Capital Group for the last 5 years117
5.8.	What can be expected in 2019121
5.9.	Current and forecast financial and assets situation (financial and assets outlook)121
5.10.	Principles of preparing annual consolidated financial statements122

	7. FINANCIAL RESOURCES AND INSTRUMENTS125
7.1.	Proceeds from security issues125
7.2.	Financial instruments126
7.2.1.	Application of financial instruments in order to eliminate price changes, credit risk, material disruptions of
	cash flows and loss of financial liquidity126
7.2.2.	Objectives and methods of financial risk management127
7.3.	Assessment of financial resources management127
	8. SHARES AND SHAREHOLDERS OF TAURON POLSKA ENERGIA S.A129
8.1.	Shareholding Structure129
8.2.	Dividend policy 129
8.3.	Number and nominal value of the Company's shares, as well as of the shares in units related to the Company,
	held by members of the Management Board and the Supervisory Board130
8.4.	Agreements related to potential changes to the shareholding structure130
8.5.	Own shares buybacks130
8.6.	Employee stock award programs130
8.7.	Shares performance on the Warsaw Stock Exchange (WSE)130
8.8.	Investor relations134
	9. STATEMENT ON APPLICATION OF CORPORATE GOVERNANCE 137
9.1.	Indication of applied set of corporate governance rules137
9.2.	Indication of abandoned rules of corporate governance 137
9.3.	Description of main characteristics of internal control and risk management systems in relation to the process
	of generating the financial statements and consolidated financial138
9.4.	Shareholders holding substantial blocks of shares 140
9.5.	Holders of securities providing special control rights 141
9.6.	Restrictions on exercising the voting right141
9.7.	Restrictions on transfer of the ownership right to securities 142
9.8.	Rules on appointing and dismissing managing and supervising persons and their powers143
9.8.1.	Management Board 143
9.8.2.	Supervisory Board144
9.9.	Description of the procedure of amendment of the Company's Articles of Association147
9.10.	Procedures of the General Meeting of Shareholders, its fundamental powers and description of shareholders'
	rights and the manner of exercising thereof148
9.11.	Composition of the Company's management and supervision bodies and their committees, its changes and the
	description of their operations150
9.11.1.	Management Board 150
9.11.2.	Supervisory Board154
9.11.3.	Audit Committee160
9.11.4.	Nominations and Compensation Committee164
9.11.5.	Strategy Committee165

9.11.6.		Description of the activities of the Committees of the Supervisory Board 165
9.12.		Description of the policy of diversity applied to the governing bodies of the Company 166
10. 10.1. 10.1.1.		COMPENSATION POLICY WITH RESPECT TO THE MANAGEMENT AND SUPERVISORY PERSONNEL168 Compensation system for members of the Management Board and key managers168 General information on the adopted compensation system for members of the Management Board168
10.1.2.		General information on the adopted compensation system for key managers170
10.1.3.		Agreements concluded with management personnel that envisage compensation in case of their resignation or dismissal from the position held, without a material reason, or if their dismissal or resignation takes place as a result of the merger of the Company through takeover172
10.1.4.		Non-financial components of compensation due to members of the Management Board and key managers 172
10.1.5.		Assessment of the functioning of the compensation policy in terms of the fulfilment of its objectives, in particular the long-term growth in shareholders' value and stability of the company's performance172
10.2.		Compensation system for members of the Supervisory Board173
11.		STATEMENT ON NON-FINANCIAL INFORMATION175
		11.1. TAURON Group's Business and Operational Model175
11.1.1.		TAURON Group's Business and Operational Model's assumptions175
11.1.2.		Company management principles176
11.1.3.		TAURON Capital Group management principles 176
11.1.4.		TAURON Capital Group's Lines of Business178
11.1.5.		Changes to the principles of the Company's and TAURON Capital Group's management179
11.2.		TAURON Group's 2017-2025 Sustainable Development Strategy181
11.3.		Key non-financial performance (efficiency) indicators related to TAURON Capital Group's operations183
11.4.	189	Description of TAURON Capital Group's key policies applied in 2018 and the results of the application thereof
11.5.		Key CSR projects implemented at TAURON Capital Group in 2018203
11.6.		Sponsoring activities204
11.7.		Description of material risks related to TAURON Capital Group's operations that may have an adverse impact on the policies applied by TAURON Capital Group, as well as the description of the management of such risks205
12. 12.1. authority 208		OTHER MATERIAL INFORMATION AND EVENTS208 Material proceedings pending before the court, competent arbitration authority or public administration
12.2.		Information on agreements concluded by TAURON Capital Group's subsidiaries 211
12.2.1.		Agreements significant for TAURON Capital Group's operations 211
12.2.2.		Transactions with related entities on terms other than at arm's length214
12.2.3.		Signed and terminated credit and loan agreements214
12.2.4.		Loans and sureties granted as well as sureties and guarantees received216
		Appendix A: GLOSSARY OF TERMS AND LIST OF ABBREVIATIONS 221
		Appendix B: INDEX OF TABLES AND FIGURES225

1. TAURON POLSKA ENERGIA I TAURON CAPITAL GROUP

Pursuant to art. 55 clause 2a of the September 29, 1994 act on accounting (Journal of Laws of 2018, item 395) and § 71 clause 8 of the Ordinance of the Minister of Finance of March 29, 2018 on current and periodic information to be disclosed by securities issuers and conditions for recognizing as equivalent the information required by the legal regulations in force in a non-member state (Journal of Laws of 2018, item 757), TAURON Polska Energia S.A. drew up the report of the Management Board on the operations of TAURON Polska Energia S.A. and the report of the Management Board on the operations of TAURON Capital Group in a form of a single document.

1.1. Basic information on TAURON Polska Energia S.A. and TAURON Capital Group

TAURON Capital Group's parent (holding) company is TAURON Polska Energia S.A. (hereinafter called the Company or TAURON), that was established on December 6, 2006 as part of the Program for the Power Generation Sector. The Company was registered in the National Court Register on January 8, 2007 under the name: Energetyka Południe S.A. The change of the Company's name to its current name, i.e. TAURON Polska Energia S.A., was registered on November 16, 2007.

TAURON Polska Energia S.A. Capital Group (TAURON Capital Group) is a vertically integrated energy group located in the south of Poland. TAURON Capital Group conducts its operations in all key segments of the energy market (excluding electricity transmission which is the sole responsibility of the Transmission System Operator (TSO)), i.e. hard coal mining as well as electricity and heat generation, distribution and supply.

The company does not have any branches (plants).

Figure no. 1. TAURON Capital Group

1.2. Business segments (lines of business)

Business operations, in accordance with TAURON Group's Business and Operational Model (Business Model) in force, are conducted by units defined as: Corporate Center, seven Lines of Business, i.e. Trading, Mining, Generation, Renewable Energy Sources (RES), Heat, Distribution and Supply as well as Shared Services Centers (CUW). The detailed information on the Business Model is provided in section 11.1. of this report.

For the needs of reporting TAURON Capital Group's results from operations TAURON Capital Group's operations are split into the following five Segments, hereinafter also referred to as Lines of Business:

Mining Segment, comprising mainly hard coal mining, enriching and selling in Poland with the operations conducted by TAURON Wydobycie S.A. (TAURON Wydobycie).

Generation Segment, comprising mainly electricity generation using conventional sources, including cogeneration, as well as electricity generation from renewable energy sources, including biomass burning and cofiring, and hydroelectric power plants and wind farms. The segment also includes heat generation, distribution and supply. This segment's operations are conducted by TAURON Wytwarzanie S.A. (TAURON Wytwarzanie), TAURON Ciepło sp. z o.o. (TAURON Ciepło) and TAURON EKOENERGIA sp. z o.o. (TAURON EKOENERGIA). The segment also includes TAURON Serwis sp. z o.o. (TAURON Serwis) subsidiary, dealing primarily with the generation equipment's overhauls and Nowe Jaworzno Grupa TAURON Sp. z o.o. (Nowe Jaworzno GT) company responsible for the construction of the new power generation unit at Jaworzno as well as Marselwind sp. z o.o.

Distribution Segment, comprising electricity distribution using the distribution grids located in southern Poland. The operations are conducted by TAURON Dystrybucja S.A. (TAURON Dystrybucja). This segment also includes the following subsidiaries: TAURON Dystrybucja Serwis S.A. (TAURON Dystrybucja Serwis) and TAURON Dystrybucja Pomiary sp. z o.o. (TAURON Dystrybucja Pomiary).

Supply Segment, comprising electricity and natural gas supply to the final consumers and electricity, natural gas and derivative products wholesale trading, as well as trading and management of CO² emission allowances, property rights arising from certificates of origin that confirm electricity generation from renewable sources, in cogeneration and property rights arising from energy efficiency certificates as well as fuels. The operations in this Segment are conducted by the following subsidiaries: TAURON Polska Energia S.A. (TAURON or the Company), TAURON Sprzedaż sp. z o.o. (TAURON Sprzedaż), TAURON Sprzedaż GZE sp. z o.o. (TAURON Sprzedaż GZE) and TAURON Czech Energy s.r.o. (TAURON Czech Energy).

Other operations, comprising, among others, customer service for TAURON Capital Group's customers, provision of support services for TAURON Capital Group's subsidiaries with respect to accounting, HR and ICT, conducted by TAURON Obsługa Klienta sp. z o.o. (TAURON Obsługa Klienta) subsidiary, as well as operations related to extraction of stone, including limestone, for the needs of power generation, steel, construction and road building industries as well as production of sorbing agents for wet flue gas desulphurization installations and for use in fluidized bed boilers, carried out by Kopalnia Wapienia "Czatkowice" sp. z o.o. (KW Czatkowice) subsidiary. This segment also includes the following subsidiaries: TAURON Sweden Energy AB (publ) (TAURON Sweden Energy), dealing with financial operations, Bioeko Grupa TAURON sp. z o. (Bioeko Grupa TAURON, formerly: Biomasa Grupa TAURON), dealing mainly with the utilization of the by-products of hard coal burning and extraction, biomass acquisition, transportation and processing, Wsparcie Grupa TAURON sp. z o.o. (Wsparcie Grupa TAURON), dealing primarily with real estate administration, property security as well as the technical support of vehicles and Polska Energia - Pierwsza Kompania Handlowa sp. z o.o. (PEPKH).

TAURON Capital Group conducts its operations and generates its revenue mainly from electricity and heat supply and distribution, electricity and heat generation, as well as from hard coal sales.

The below figure presents the location of TAURON Capital Group's key assets as well as the distribution area where TAURON Dystrybucja conducts operations as the Distribution System Operator (DSO).

1.3. TAURON Capital Group's organization and structure

As of December 31, 2018 TAURON Capital Group's key subsidiaries, besides the TAURON parent company, included 19 subsidiaries subject to consolidation, listed in section 1.3.1. of this report.

Furthermore, the Company held, directly or indirectly, shares in the other 39 subsidiaries.

1.3.1. Units subject to consolidation

The below figure presents TAURON Capital Group's structure, including the subsidiaries subject to consolidation, as of December 31, 2018.

Figure no. 3. TAURON Capital Group's structure, including the subsidiaries subject to consolidation, as of December 31, 2018

1 The shares in TAURON Dystrybucja Pomiary sp. z o.o. and Wsparcie Grupa TAURON sp. z o. o. are held by TAURON Polska Energia S.A. indirectly via the subsidiary TAURON Dystrybucja S.A. TAURON Polska Energia S.A. is a user of the shares of TAURON Dystrybucja Pomiary sp. z o.o. ²On October 8, 2018 Biomasa Grupa TAURON sp. z o.o. changed its name to Bioeko Grupa TAURON sp. z o.o.

After the balance sheet day the following companies were established: Finanse Grupa TAURON sp. z o.o. and EEC Magenta limited liability company 2 ASI limited joint stock partnership, TEC1 sp. z o.o., TEC2 sp. z o.o. and TEC3 sp. z o.o.

1.3.2. Changes to TAURON Capital Group's organization

The following changes to the organization of TAURON Capital Group had taken place in 2018 and by the day of drawing up this report:

Restoring the share capital of TAURON EKOENERGIA sp. z o.o. to the level before the split of the company

On January 30, 2018, the District Court for Wrocław – Fabryczna in Wrocław, 9th Commercial Department, registered in the National Court Register a change in the share capital of TAURON EKOENERGIA restoring its value to the level before the split of the company by way of spinning off and transferring selected assets constituting an organized part of the enterprise to the company Marselwind sp. z o.o. and the lowering of the share capital of TAURON EKOENERGIA related thereto passed by the Extraordinary GM of the company on February 9, 2015. Due to the restoration of the share capital to the level before the split of the company the share capital was increased from PLN 444 888 000 to PLN 573 423 000, i.e. by PLN 128 535 000, and the number of shares held by the sole shareholder of the company – TAURON Polska Energia S.A. increased from 444 888 shares to 573 423 shares.

Change of the name of "Biomasa Grupa TAURON sp. z o.o." to "Bioeko Grupa TAURON sp. z o.o."

On October 8, 2018, the change of the name of Biomasa Grupa TAURON sp. z o.o. with its seat in Stalowa Wola to Bioeko Grupa TAURON sp. z o.o. was registered in the National Court Register.

Establishing of the company Finanse Grupa TAURON sp. z o.o.

On February 15, 2019 the company Finanse Grupa TAURON sp. z o.o. with its seat in Katowice, that had been established on January 23, 2019, was registered in the National Court Register.

The company's share capital is PLN 100 000 and is split into 2 000 shares with the nominal value of PLN 50 per share that were taken up in whole by TAURON.

Furthermore, the following changes related to the entities in which TAURON has an equity stake but which are not a part of TAURON Capital Group had taken place in 2018 and by the day of drawing up this report:

Establishing of the companies TEC1 sp. z o.o., TEC2 sp. z o.o. and TEC3 sp. z o.o.

On March 4, 2019 TAURON established the following companies: TEC1 sp. z o.o., TEC2 sp. z o.o. and TEC3 sp. z o.o., all with their seats in Katowice.

The share capital of each of the above mentioned company is PLN 25 000 and is split into 500 shares with the nominal value of PLN 50 per share that were taken up in whole by TAURON.

As of the day of drawing up this report the above mentioned companies had not been registered in the National Court Register (KRS) yet.

Establishing of limited joint stock partnerships

On October 26, 2018 TAURON established the following companies:

1) EEC Magenta limited liability company ASI limited joint	2) EEC Magenta limited liability company 2 ASI limited
stock partnership with its seat in Warsaw (EEC Magenta	joint stock partnership with its seat in Warsaw (EEC
ASI).	Magenta 2 ASI).
TAURON took up 12 450 shares in the company with the	TAURON took up 24 015 shares in the company with the
nominal value of PLN 1 per share in exchange for a cash	nominal value of PLN 1 per share in exchange for a cash
contribution equal to the nominal value of the shares	contribution equal to the nominal value of the shares
taken up, i.e. PLN 12 450.	taken up, i.e. PLN 24 015.
TAURON's share in the share capital and in the votes at	TAURON's share in the share capital and in the votes at
the company's GM is 24.90%.	the company's GM is 48.03%.

EEC Magenta ASI was registered in the National Court Register by the District Court for the Capital City of Warsaw, 12th Commercial Department of the National Court Register on December 21, 2018.

EEC Magenta 2ASI was registered in the National Court Register by the District Court for the Capital City of Warsaw, 12th Commercial Department of the National Court Register on January 9, 2019.

Establishing of the above mentioned companies by TAURON is in line with TAURON Group's 2016-2025 Strategy and its goal is to expand TAURON Capital Group's cooperation with innovative companies as well as with the science sector and research and development (R&D) institutions, and also providing support for the new business development.

1.3.3. Organizational or equity ties with other entities

Apart from the equity ties with the companies presented in section 1.3.1 of this report material co-subsidiaries subject to consolidation in which the Company held, directly or indirectly, shares as of December 31, 2018 include the companies listed in the below table.

Table no. 1. List of material co-subsidiaries subject to consolidation as of December 31, 2018

#	Company name	Seat	Main subject of operations	TAURON's share in company's capital and in the parent company
1.	EC Stalowa Wola S.A.1	Stalowa Wola	Electricity generation	50.00%
2.	TAMEH HOLDING sp. z o.o.2	Dąbrowa Górnicza	Central (head office) companies and holding operations	5.,00%
3.	TAMEH POLSKA sp. z o.o.2	Dąbrowa Górnicza	Electricity and heat generation, transmission, distribution and trading	50.00%
4.	TAMEH Czech s.r.o.2	Ostrava, Czech Republic	Production, trading and services	50.00%

¹ Shares in EC Stalowa Wola are held by TAURON indirectly via TAURON Wytwarzanie subsidiary.

² Companies form a capital group. TAURON holds a direct stake in the share capital and in the parent company of TAMEH HOLDING sp. Z o.o. that holds a 100% stake in the capital and in the parent company of TAMEH POLSKA sp. z o.o. and TAMEH Czech s.r.o.

1.3.4. Major domestic and foreign investments as well as equity investments

Taking up or acquiring share securities in TAURON Capital Group companies

The below table presents a summary of share capital increases in TAURON Capital Group subsidiaries in 2018 and by the day of drawing up this report.

Table no. 2. Summary of share capital increases in TAURON Capital Group subsidiaries

Subsidiary	Share capital increase (total price for taking up shares) (PLN)	Company taking up shares	Nominal value of shares taken up (PLN)	Date of passing the resolution by the GM	Structure of the share capital following the increase
	350 000 000	TAURON	3 500 000	29.03.2018	TAURON – 100%
	350 000 000	TAURON	3 500 000	11.10.2018	TAURON – 100%
	360 000 000	TAURON	3 600 000	18.12.2018	TAURON – 100%
		Fundusz Inwestycji		20.12.2018	TAURON – 97.89%
Nowe Jaworzno GT	100 000 000	Infrastrukturalnych – Kapitałowy Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (Infrastructure Investments Fund – Non-public Assets Closed-end Equity Investment Fund)	1 000 000		FIIKFIZAN – 2.11%
		Fundusz Inwestycji			TAURON – 92.86%
	256 925 000	Infrastrukturalnych – Kapitałowy Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (Infrastructure Investments Fund – Non-public Assets Closed-end Equity Investment Fund)	2 569 250	25.02.2019	FIIKFIZAN – 7.14%
TAURON Wydobycie	340 000 000	TAURON	3 400 000	26.04.2018	TAURON – 100%
TAURON Dystrybucja Serwis	439 317 000	TAURON	4 393 170	18.06.2018	TAURON – 100%
TAURON Wytwarzanie	780 000 000	TAURON	7 800 00	09.08.2018	TAURON – 100%
Łagisza Grupa TAURON sp. z o.o.	100 000	TAURON Wytwarzanie	1 000	11.01.2019	TAURON Wytwarzanie – 100%

Additional contributions to the share capital of PEPKH

Implementing the resolution of the Extraordinary GM of PEPKH of March 1, 2018, related to imposing on TAURON, as a sole shareholder of the company, the obligation to make additional contributions to the share capital, on March 7, 2018 TAURON made additional contributions to the share capital of the above mentioned company in the total amount of PLN 6 000 000. The resolution of the Extraordinary GM was passed in order to provide financing for the operations of PEPKH.

Taking up or acquiring share securities in the other companies in which TAURON holds an equity stake

The below table presents a summary of share capital increases in the other companies in which TAURON holds an equity stake in 2018 and by the day of drawing up this report.

Company	Share capital increase (total price for taking up shares) (PLN)	Company taking up shares	Nominal value of shares taken up (PLN)	Date of passing the resolution by the GM	Structure of the share capital following the increase
	5 000 000	TAURON	5 000 000	03.01.2018	TAURON – 25%
ElectroMobility Poland S.A.	5 000 000	PGE	5 000 000		PGE – 25%
	5 000 000	ENEA	5 000 000		ENEA – 25%
	5 000 000	ENERGA	5 000 000		ENERGA – 25%
	10 000 000	TAURON	10 000 000	04.10.2018	TAURON – 25%
	10 000 000	PGE	10 000 000		PGE – 25%
	10 000 000	ENEA	10 000 000		ENEA – 25%
	10 000 000	ENERGA	10 000 000		ENERGA – 25%
	41 999 811	PGE	41 999 811	09.08.2018	PGE – 70%
	5 999 973	TAURON	5 999 973		TAURON – 10%
PGE EJ 1	5 999 973	KGHM	5 999 973		KGHM – 10%
	5 999 973	ENEA	5 999 973		ENEA – 10%
EEC Magenta ASI 2	99 557	EEC Ventures limited liability company 2 limited partnership	2 933		EEC Ventures s limited liability company 2 limited partnership – 2.95%
	4 874 200	PFR NCBR CVC Non public Assets Closed-end Investment Fund	48 742	25.01.2019	PFR NCBR CVC Non public Assets Closed-end Investment Fund – 49.02%
	4 775 100	TAURON	47 751		TAURON – 48.03%
EEC Magenta ASI	107 200	EEC Ventures limited liability company limited partnership	1 072	15.01.2019	EEC Ventures limited liability company limited partnership - 3%
	2 577 600	PFR Starter FIZ	25 776		PFR Starter FIZ – 72.1%
	890 200	TAURON	8 902		TAURON – 24.9%

Table no. 3. Summary of share capital increases in the other companies in which TAURON holds an equity stake

The other most significant equity investments in financial assets as of December 31, 2018 include stakes in the following entities:

• 1) Spółka Ciepłowniczo Energetyczna Jaworzno III sp. z o.o. (SCE Jaworzno III) with the balance sheet value of PLN 30 989 000,
• 2) Przedsiębiorstwo Energetyki Cieplnej Tychy sp. z o.o. with the balance sheet value of PLN 23 754 000,
• 3) PGE EJ 1 sp. z o.o. (PGE EJ 1) with the balance sheet value of PLN 18 651 000,
• 4) Energetyka Cieszyńska sp. z o.o. with the balance sheet value of PLN 14 697 000,
• 5) ElectroMobility Poland S.A. with the balance sheet value of PLN 17 500 000,

6) Magenta Grupa TAURON Sp. z o.o. with the balance sheet value of PLN 9 500 000.

Major investments in financial assets

TAURON Capital Group's major investments in financial assets include:

• 1) Continuation by TAURON of participation units in investment funds. As of the balance sheet day the value of participation units in investment funds reached PLN 26 062 000.
• 2) Granting by TAURON of loans to the EC Stalowa Wola S.A. (EC Stalowa Wola) joint subsidiary. As of the balance sheet day the amount of loans granted to EC Stalowa Wola reached PLN 329 036 000.
• 3) Granting by TAURON of a loan to PGE EJ1 in the amount of PLN 4 800 000. As of the balance sheet day the amount of loans granted to PGE EJ1 reached PLN 7 740 000.

Investments in financial assets were financed using own funds and the funds obtained as part of the central financing model functioning at TAURON Capital Group.

1.4. Strategy and strategic priorities of TAURON Capital Group

2018 was the continuation of the implementation of TAURON Group's 2016-2025 Strategy (Strategy), adopted by the Management Board of TAURON on September 2, 2016 and positively evaluated by the Supervisory Board. The Strategy was prepared as a response to the challenges stemming from the current and forecast, as of the day of passing thereof, situation on the electricity market and in the power sector. In the process of preparing the Strategy a thorough analysis was conducted of the macroeconomic, market and regulatory environment and forecasts on the directions of the sector's growth were developed, including translating them into opportunities and risks facing TAURON Capital Group over the next ten years, i.e. until 2025. TAURON Capital Group's ability to finance the current and planned investment projects was reviewed in detail with a view that their completion could be achieved using funds generated from operations and debt financing.

Since the date of adopting the Strategy some of its assumptions have changed, first of all the regulations that have a material impact on TAURON Capital Group's operations have become more specific, among others, the act on the capacity market, the act on promoting high efficiency cogeneration electricity, the change of the energy law act, the act on electromobility, the regulations related to quality requirements for solid fuels. At the same time, works on adopting the State Energy Policy until 2040, that sets the directions of transforming the entire power sector in Poland, are coming to an end. Another significant strategic document will be the National Plan for Energy and Climate for 2021-2030, being processed by the European Commission. Based on the above, at the end of 2018, TAURON undertook works aimed at preparing an update of the Strategy that would take into account the impact of the above mentioned policies and key regulatory changes, developed at the European and national level, on TAURON Capital Group.

1.4.1. TAURON Capital Group's mission, vision and values

Strategy defines the Mission and Vision and defines the key values of TAURON Capital Group:

Mission and vision best describe the strategic intentions of TAURON Capital Group that sees a large growth potential in developing sales of products and services that are tailored to customer needs. TAURON Capital Group is adjusting its profile in order to ensure full focus on the customer, appreciating the potential of new products, compatible services, modern contact channels as a response to customer needs.

The key values that support the implementation of the Strategy include "Partnership", "Development" and "Courage". The values reflect the way in which TAURON Capital Group wants to accomplish its goals. What is important as part of the partnership is customer orientation, development of sustainable relationships and engagement. Development means focus on innovations, developing competences, skills and knowledge as well as seeking ever better solutions, meeting customer needs and improving the quality of services. Courage means boldness and openness, determination as well as engagement and passion in achieving common goals.

1.4.2. TAURON Capital Group's 2016-2025 Strategy

2016-2025 Strategy adopted presents an optimal expansion path that will ensure financial stability and growth, while at the same time providing support for ensuring stability of the power system. It is assumed that the long term growth will be driven by solutions based on customer relationships. The mission and vision reflect such management philosophy and are in line with the customer-oriented growth concept.

Strategy describes the approach to developing individual segments of TAURON Capital Group's operations, dividing them into segments that TAURON Capital Group

Figure no. 4. Prospects of TAURON Capital Group's individual segments

is planning to strongly expand, segments that will constitute the foundation of the financial stability and segments where strong emphasis on cost efficiency is required. The above reflects a changed management philosophy and emphasizes a pivot towards the customer and his/her needs as well as towards developing an innovative, open to new challenges TAURON Capital Group.

The below figure presents the prospects of TAURON Capital Group's individual segments.

Strategy sets three priorities that will transform TAURON Capital Group into an innovative, aligned to market and customer needs, growing energy company, ultimately providing a return on invested capital for its shareholders.

• 1. Ensuring TAURON Capital Group's financial stability
• 1. Building a strong capital group
• 1. Implementing organizational changes supporting implementation of the Strategy that will transform TAURON Capital Group into a modern and innovative organization.

The below figure presents implementation of the priorities based on the pillars of TAURON Capital Group's Strategy.

Figure no. 5. Implementation of the priorities based on the pillars of TAURON Capital Group's Strategy

When adopting the Strategy for implementation in September 2016 it was assumed that its implementation would allow for increasing EBITDA from PLN 3.5 billion in 2015 to more than PLN 4 billion in 2020 and to more than PLN 5 billion in 2025.

As part of optimizing (streamlining) CAPEX the outlays initially planned for 2016-2020 were reduced from PLN 20.2 billion to approx. PLN 18 billion. The Strategy assumes that the commenced and well advanced investment projects will be continued, including the construction of the 910 MWe super critical parameters unit at Jaworzno Power Plant, the construction of the 449 MWe CCGT unit including the 240 MWt heat unit at Stalowa Wola, the investments in the heating networks, the expansion and upgrades of the distribution grid, the construction of the 800 m level at the Janina Coal Mine (ZG Janina) in Libiąż, the construction of the "Grzegorz" shaft including the infrastructure (above the ground and underground) and the accompanying longwall faces (headings) at the Sobieski Coal Mine (ZG Sobieski) as well as the planned investment projects at the Brzeszcze Coal Mine (ZG Brzeszcze).

The below figure presents capital expenditures assumed in the Strategy by individual segments in 2016-2020.

Figure no. 6.

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Strategy indicates that the overall objective in terms of CAPEX is to align the investment portfolio to the market needs. It has been assumed that the actions to be undertaken will be aimed at:

• 1. Optimizing the asset structure in all lines of business and achieving compliance with the environmental requirements.
• 1. Carrying out only those investment projects that guarantee the expected return on capital and are not burdened with material market risks.
• 1. Using off-balance sheet forms of financing, in particular by engaging third party partners.
• 1. Reviewing investment projects in the conventional generation segment, provided mechanisms that guarantee revenue are introduced (e.g. capacity market or another form of regulation).
• 1. Investing in projects in sectors that are related to the power industry (in particular, services) in order to complement the value chain that TAURON is operating in, and also developing a high margin services offering.

Directions of investments beyond 2020 outlined in the Strategy include first of all the regulated segments of the power sector (i.e., among others, electricity distribution, heat generation and distribution) and the new power industry (i.e. emobility, distributed heat and electricity generation, power generation by prosumers, Smart Home, Smart City solutions and energy related services).

The below figure presents the Strategy, strategic priorities and growth prospects in the individual Lines of Business.

Table no. 4. Strategy, strategic priorities and growth prospects in the individual Lines of Business

Mining

Strategic goals Growth prospects The main goal for the Generation Segment, defined as part of the Strategy, is to provide a stable supply of cost competitive and appropriate quality fuel for TAURON Capital Group as well as to expand its product offering and maximize the margin on the sales of the other products.

The goals set in the Strategy are to be accomplished by carrying out investment projects and implementing strategic initiatives, including, among others: optimizing the costs and capital expenditures, tri-product enrichment at ZG Sobieski and ZG Janina as well as expanding the line for packaging ecopea coal, preparing dedicated fuel for the generating units.

Strategy assumes that the strategic initiatives planned and the investment projects implemented will allow the Mining Segment to strengthen its position and to provide coal fuel for TAURON Capital Group subsidiaries, thus mitigating the risk of coal price hikes on the external market.

The current situation in the hard coal mining industry, logistical and the impact of geological factors brought about a decline of hard coal extraction output which led to low hard coal inventory levels at the coal mines stockpiles and an increase of hard coal prices in 2018. The low level of hard coal supply on the local market may lead to a rise in hard coal imports, which will also impact price levels.

The near future will be a difficult and demanding period due to the adverse prospects for this fuel in the European Union's (EU) energy policy. The introduction of further restrictions with respect to environment protection, quality of solid fuels offered on the market, taxes and local government regulations (including antismog regulations) represents a challenge for the sector. The energy and climate related regulations result in successive declines of the competitiveness of coal-fired power generation. The directions of the mining industry's growth will also be strongly correlated with the guidelines outlined in the government's documents: State Energy Policy until 2040 and the National Plan for Energy and Climate for 2021-2030. The drafts of the above mentioned present the growing importance of RES and new technologies, however coal will continue to be the key energy driver in Poland.

Generation
Strategic goals	Growth prospects
The main goals for the Generation Segment, defined as part of	Available forecasts and analyses for the coming year assume an
the Strategy, are:	increase of the domestic electricity production output, including
1) for TAURON Wytwarzanie: to develop an optimal, from the point of view of profitability and risk, generation assets	the generation from RES.
portfolio and its effective operation,

An increase of RES generation capacity on the market is forecast which represents a challenge for the grid and stability of electricity

2) for TAURON EKOENERGIA: to improve the profitability of its generation assets and prepare options for the profitable growth of this line of business,

3) for TAURON Ciepło: to achieve return on invested capital as a result of market growth and rising customer satisfaction.

The goals set in the Strategy are to be accomplished by implementing strategic initiatives, including, among others: optimizing the costs and capital expenditures, streamlining employment, optimizing production assets and selling redundant non-production assets as well as carrying out investment projects that lead to upgrading the generation fleet.

The main strategic direction set for the Generation Segment's conventional assets is achieving economic efficiency or permanent decommissioning.

In the RES line of business options for developing RES installations are being prepared assuming a favorable support system is put in place and a profitable model of their operation is developed.

In the heat generation, distribution and trading line of business significant actions include developing heat generation, distribution and supply, in particular eliminating low emissions, looking for solutions in the co-generation area, including the multi-fuel co-generation, as well as improving the rate of utilizing the existing infrastructure.

Distribution

The main goal for the Distribution Segment, defined as part of the Strategy, is to maintain its leadership position on the Polish market in terms of the security and efficiency of the grid operation.

The assumed goal is to be accomplished by implementing the key strategic initiatives: "One Distribution" Program that is made up of projects aimed at optimizing the company's operational processes, including; actions leading to raising customer satisfaction and, at the same time, improving the company's image. The Distribution Segment is carrying out important investment projects related to connecting new consumers as well as upgrading and replacing the grid assets.

Strategic goals Growth prospects

supply. Strong interest in the RES, supported by the EU policy, may translate into a rise of investments in renewable energy sources.

The key issue in the coming years will continue to be ensuring the security of the operation of the National Power System (Krajowy System Elektroenergetyczny - KSE), primarily by the conventional units. The capacity market has been introduced in Poland for that purpose, which will allow for obtaining an additional revenue source. The support mechanism introduced is one of the elements supporting the transformation of the Polish power sector. Obtaining derogations from the requirements to adapt to the BAT conclusions and ability to acquire funds for investments from the dedicated funds envisaged for 2021-2030 will represent an opportunity for the conventional power generation.

On the heat market Poland's policy, aimed at providing support for the co-generation and improving air quality, may lead to an increase of investments and the growth of this area. An important factor impacting the growth of the system heat solutions is rising social awareness, the battle against smog waged by the local governments and the national aid programs.

Strategic goals Growth prospects

The Distribution Segment should adapt its investment projects to the requirements defined by the President of ERO with respect to the quality of the services provided. Actions aimed at ensuring the reliability of electricity supply and simplifying of the procedures related to connecting new consumers will be continued. The investment projects carried out are to allow for adapting TAURON Capital Group's distribution assets to the growing volume of electricity generated by the distributed renewable sources, and also for preparing the grid to interoperate with the infrastructure to be used for charging electricity vehicles. The expansion of TAURON Capital Group with respect to implementing smart grid and smart meter solutions will allow for introducing additional functionalities, both on the distributor's side, as well as on the customer's side. The segment's growth will be significantly affected by the ability to obtain aid funds, both with respect to improving the grid security, as well as the research and development activities. The above challenges will be faced on a regulated market that makes the segment's operations dependent on the new elements of the regulatory policy towards the Distribution System Operators introduced by the President of ERO and the risks related thereto, i.e. the updated approach to the weighted average cost of capital, the adjustment coefficients (factors) related to improving the utilities' efficiency with respect to operating expenses and the level of the balancing difference, the continuation of the quality based regulation, and even the

tightening thereof. Significant changes to the functioning of the segment may be a consequence of changes to the energy law. The implementation of the smart metering at 80% of the consumers by 2026 should be regarded as one of the key changes.

Supply

The main goal for the Generation Segment defined as part of the Strategy, is to achieve the leadership position in the relationships with the customers based on the high quality customer service as well as product leadership.

The goals set in the Strategy are to be accomplished by implementing strategic initiatives, including, among others: increasing the sales potential by transforming the customer service channels into integrated customer contact channels geared towards product sales and product advisory services, increasing the value of the products and services sales to mass customers by developing the product offering and sales techniques, developing products and developing contact channels with respect to specialty products as well the partnership offering addressed to the mass customer segment, and also to the business customers, enhancing the expansion and optimization of sales margins in the business segments.

Strategic goals Growth prospects

Growing competition with respect to electricity supply, as well as the demanding situation on the electricity wholesale market leads to the decline of sales volumes and to the margin erosion.

The actions taken by the competition and growing customer expectations have an impact on developing the product offering and maintaining the highest customer service standards. Growing customer awareness has an impact on the rising requirements, both with respect to the products offered, as well as the speed and quality of the customer service. In this area TAURON Capital Group is systematically expanding its product offering, tailoring it to the expectations of individual and business customers, and developing communications channels, both on the digital platforms level, as well as direct contacts. Upgrading and expanding the traditional customer service network is a response to the expectations of that part of the society that is not ready for IT technologies.

Competing companies are also offering a broad product portfolio on the market and their products are often very similar the products offered by the Supply Line of Business. With similar price offerings the competition for a customer will take place at the level of innovative product and service proposals, in particular on the level of customer communications platforms and customer service quality.

1.4.3. Key challenges for TAURON Capital Group

Strategy is TAURON Capital Group's response to the challenges posed by the business environment and the requirements of the energy sector's customers. The fast changing situation in the regulatory area was a challenge that had been taken into account in the Strategy, while the specific regulations that took the shape of the legal acts published are the key reason for its forthcoming update in 2019.

Strategy took into account the impact of the following external factors on TAURON Capital Group that continue to be valid:

Regulations

Introduction of the dual-product market – capacity market, the European Union's (EU) decarbonization policy and successive regulations aimed at reducing emissions, introduction of the quality based regulation model in the distribution segment, changes to the support for the RES installations and EU actions aimed at developing a common electricity market.

Market

Changing forecasts of electricity and hard coal prices, hard coal availability, demand for electricity, demand for capacity, growing competition on the retail market, rising level of RES generation along with the simultaneous withdrawal of the European players and the curtailment of the financing for the conventional power generation.

Customer

Growing awareness of the customers and the requirements with respect to satisfying their needs as well as comprehensiveness of the offering, increased expectations with respect to customer service quality and availability.

Technology

Falling prices of renewable and dispersed technologies, rising competitiveness of such sources versus conventional sources, a change of the role of the distribution service due to the expansion of dispersed power generation, advancement of smart technologies, microgeneration and energy storage.

In the long term profound changes to the entire power sector, geared towards the so-called "power industry of tomorrow", are important. A transformation of the system power sector towards decentralized generation, increased role of transborder connections, energy storage and new energy services, such as for example "virtual power plants", demand side management or dispersed generation. The above direction affects both, the Distribution Segment that must deal with smart technologies, electric vehicle charging infrastructure, distributed generation, including prosumers and the bi-directional flows, while at the same time increasing the quality and security of supplies, as well as the Generation Line of Business with respect to electricity generation from the conventional sources, whose transformation will be oriented towards performing the function of adjusting and stabilizing the power system.

The below figure presents the forecast transformation of the power sector that poses a challenge facing TAURON Capital Group.

1.4.4. Opportunities and threats

The defined key challenges facing TAURON Capital Group create both opportunities as well as threats for TAURON Capital Group's operations.

The below table presents opportunities and threats for TAURON Capital Group's operations, taking into account the sector's situation as of the end of 2018.

Table no. 5. Opportunities and threats for TAURON Capital Group's operations, taking into account the sector's situation as of the end of 2018

Regulations

Opportunities Threats

• Introduction of the dual-product market additional revenue for maintaining generation capacity. Auctions won on the capacity market and contracting of the Group's conventional units.
• Support for electromobility (growing electricity consumption).
• Introduction of legal solutions supporting the curtailment of low emissions (e.g. system district heating, increasing the share of eco-pea coal in the sales).
• New regulations related to the support for the cogeneration beyond 2018.
• Use of the aid funds for the expansion of the Group's operations.

Market

Opportunities Threats

• Cost effective, own mining assets, allowing for the stabilization and predictability of the fuel cost.
• Access to the largest, among Poland's energy companies, customer base.
• Entry to the energy related services market segments based on the competences held.
• Commercialization of innovative solutions developed as part of research and development activities.

Customer

Opportunities Threats

• Competitive advantage with respect to the customer service quality.
• Customer segmentation and offering the additional products in line with customer expectations.
• Growing customer awareness and expectations towards comprehensive, personalized offering of additional services and products (greater customer product saturation).
• Expanding an offering of services for customers based on the competences held and trust in the TAURON brand.
• Growth based on the focus on a customer that is not generating large capital investments.
• Developing modern and integrated sales and customer service channels.
• New competences and business models based on the research and development activities.
• Maintaining an upward trend in electricity consumption by the final consumers.

• Developing competences and competitive advantages in the new areas of operations.

• Increase of electricity prices due to, among others, environmental costs and the decarbonization policy, rise of the fuel prices.

• New EU regulations related to the common energy market.
• Lack of stability and predictability of the regulations for the RES sources, including the costs of maintaining wind farms and hydro-electric power plants, as well as uncertain future of the RES sources based on the biomass burning and cofiring technology.

• The need to incur additional expenses due to the changes to the energy law.

• Decline of the margins and lower utilization rate (load factor) of conventional assets (deteriorating profitability, required outlays for refurbishments or the need to shutdown old generating units due to the new high efficiency units entering the system and due to the BAT requirements).

• Loss of volume and profitability of the Supply Segment, in particular in the B2B area.
• Pressure on electricity prices with the growing cross-border exchange volumes.
• Increase of the costs and limited availability of financing.

• Increase of the prices of goods and services negatively impacting investment efficiency.

• Potential loss of customers due to an increase in the number of competitors offering customers similar products and due to low electricity supply market entry barriers, and also due to the curtailment in developing a personalized offering as a result of implementing the EU regulations related to personal data protection (GDPR).

• Decrease of the customer loyalty intense activities conducted by the competitors.
• Greater customer awareness and requirements with respect to the customer service quality and product offering.
• Power independence of the consumers (prosumers, energy (power) islands, energy storage facilities, clusters).
• Tendency of the energy intensive consumers to build their own generation sources, as a result of the drive to reduce the electricity costs.
• "Carbon leakage" moving business operations to other countries due to the cost of energy.
• Incurring of high expenditures to implement the new customer service platforms and develop the contact channels.
• Rising costs of operations due to, among others, the financial expectations of the workforce, problems with ensuring the appropriate service quality.

Technologies

Opportunities Threats

• Continued and noticeable decline of the prices of renewable technologies.
• Advancement of the storage technologies, smart technologies and the technologies related to dispersed (distributed) generation.
• Additional services for the customers related to the new technologies (internet of things, dynamic tariffs, virtual power plants).

• Developing and implementing (commercializing) of own innovative solutions that provide a competitive advantage.

• The need to adapt the grid to the growth of dispersed (distributed) power generation (bi-directional flows).

• Arrival of the new, cost competitive electricity generation technologies in the countries neighboring with Poland.
• Growing number of cyberthreats and the infrastructure susceptible to such attacks.
• Multitude of the communications standards, problems with providing the expected goals for the projects implemented.

1.4.5. Long term financial goals and assumptions of the Strategy

At the stage of preparing the Strategy it was assumed that the activities outlined therein would allow for accomplishing the set key goals for TAURON Capital Group:

• 1. EBITDA above PLN 4 billion in 2020
• 1. Maintaining the net debt/EBITDA covenant below 3.5x
• 1. Maintaining a high Customer Satisfaction Index (CSI)
• 1. Power plants generating positive cash flows by 2020
• 1. Maintaining the customer base
• 1. Unit margin leadership among Poland's 4 largest electricity suppliers
• 1. New businesses are to represent at least 25% of the revenue/margin in 2025

The below figure presents the 2025 EBITDA outlook taking into account the risks and the implementation of the Strategy as well as the effects of the implementation of the Strategy.

Figure no. 8. 2025 EBITDA outlook taking into account the risks and the implementation of the Strategy as well as the effects of the implementation of the Strategy

Actions planned for the coming years will allow for arresting the profitability decline. This will be achieved by optimizing the operations in the Mining and Generation Segments, while at the same time maintaining stability in the Distribution Line of Business.

The below figure presents TAURON Capital Group's 2025 vision.

Figure no. 9. TAURON Capital Group's 2025 vision

1.4.6. Implementation of the Strategy and priorities of TAURON Capital Group in 2018

Strategy sets the priorities under which the simultaneously undertaken activities are transforming TAURON Capital Group towards the "power industry of tomorrow". The activities undertaken and the achieved values of the strategic goals, the Efficiency Improvement Program and the Strategic Initiatives are the result of the implementation of the Strategy.

2018 was another period during which the priorities assumed in the Strategy were implemented:

Ensuring TAURON Capital Group's financial stability

Ensuring TAURON Capital Group's financial stability is achieved through the Efficiency Improvement Program, the implementation of the Strategic Initiatives and the improvement of the investment efficiency. The implementation of the 2016-2018 Efficiency Improvement Program was completed in 2018.

The below figure presents the assumptions of the 2016-2018 Efficiency Improvement Program.

Figure no. 10. Assumptions of the 2016-2018 Efficiency Improvement Program

TAURON Capital Group's Efficiency Improvement Program brought, in 2016-2018, savings of PLN 1 719 million which represents 132% of the planned savings, with PLN 1 067 million impacting EBITDA and PLN 652 million having been due to the reduction of the capital expenditures. The largest contribution to the savings achieved came from the Generation Line of Business.

The below figure presents the assumptions of the Strategic Initiatives and the CAPEX rationalization in 2017-2020.

Figure no. 11. Assumptions of the Strategic Initiatives and the CAPEX rationalization in 2017-2020

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

In 2018 the Strategic Initiatives brought a financial effect of PLN 1 498 million, with PLN 651 million impacting EBITDA and PLN 847 million having been due to the reduction of the capital expenditures (including PLN 613 million as a consequence of halting the construction of the 413 MWe combined cycle power plant with the heat generation unit at Łagisza Power Plant in Będzin). The largest contribution to the savings achieved came from the Generation Line of Business (PLN 688 million) and the Distribution Line of Business (PLN 89 million). The cumulative effects achieved as of the end of 2018 reached PLN 2 435 million, with a PLN 970 million positive impact on EBITDA and PLN 1 464 million coming from the reduction of the capital expenditures.

Building a strong capital group based on three pillars

TAURON Capital Group is offering the most comprehensive product and service portfolio for the customers among Poland's electric utilities. In 2018 TAURON Capital Group was granted an award for the development of electromobility. Actions aimed at developing the Supply Segment are also supported by the dedicated projects as part of the Strategic Research Agenda (Strategiczna Agenda Badawcza (SAB). Works are underway on improving high customer service standards and developing modern and integrated sales and customer service channels. The regulated assets that deal with the operations in the field of electricity and heat distribution are an important link in TAURON Capital Group's value chain. A significant portion of the capital expenditures is spent on the construction and refurbishment of the grid. In 2018 TAURON Capital Group invested PLN 2 044 million in total in the Distribution Segment, while at the same time implementing initiatives improving the cost and organizational efficiency of this Segment as part of the implementation of the "One Distribution" program. The main activities involved unifying the processes and systems as well as implementing an optimal and coherent structure of TAURON Dystrybucja. In the Mining and Generation Segments actions improving the cost and investment efficiency were continued in 2018. The capital expenditures, that cumulatively reached PLN 1 547 million in total for the Mining and Generation Segments by the end of 2018, were optimized. At the same time, the strategic investment projects are implemented, in line with the Strategy. In 2018 the preparations of investment projects were continued as part of the undertakings aimed at adapting the generating units to the BAT conclusions' requirements. As a result of concluding agreements, as a consequence of taking part in the capacity market auctions conducted, TAURON Capital Group's generating units will be receiving additional revenue for the readiness to deliver electricity.

Introduction of the organizational changes supporting the implementation of the Strategy

The basis of the operational model is process based management and the split of tasks and responsibilities among the defined units: Corporate Center, Lines of Business and Shared Services Centers. TAURON Capital Group's cooperation with start-up companies has become important as part of the innovative culture, apart from the traditionally understood research and development activities.

The below table presents TAURON Capital Group's strategic goals realized in 2018.

Table no. 6. TAURON Capital Group's strategic goals realized in 2018
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Strategic goal	Realization in 2018
EBITDA above PLN 4 billion in 2020	The goal is being realized through the core operations of TAURON Capital Group's business segments and the implementation of the Strategic Initiatives and the Efficiency Improvement Program. In 2018 EBITDA of PLN 3.4 billion was achieved.
Net debt/EBITDA covenant below 3.5x	Maintaining the covenants is both an effect of actions leading to improved financial results as well as actions aimed at improving investment efficiency. As part of the Strategy the investment portfolio was optimized and modern financing in the form of a hybrid bond issue was obtained. At the end 2018 the net debt/EBITDA ratio reached 2.4x
Maintaining a high Customer Satisfaction Index (CSI).	TAURON Capital Group is an industry leader in customer service quality. Annual customer satisfaction surveys performed by an external company confirm a high satisfaction level of TAURON Capital Group's customers. The results of the November 2018 CSI survey were as follows: for households 81 points, for small and medium size enterprises 73 points, and for business customers 77 points.

Strategic goal	Realization in 2018
Power plants generating positive cash flows by 2020	Achievement of this goal will be the result of a number of actions undertaken within TAURON Capital Group, among others: optimizing the costs and outlays related to the generating units, TAURON Capital Group's trading (commercial) strategy, as well as the impact of the external environment, both the regulatory one, as well as the market one (capacity market, support for RES and cogeneration, fuel prices, property rights prices, electricity prices) The guaranteed revenue obtained as part of the won main auctions of the capacity market that took place in 2018 will have a significant, positive impact on achieving positive cash flows by TAURON Capital Group's generating units starting from 2021.
Maintaining the customer base	TAURON Capital Group is Poland's largest distributor and the second largest electricity supplier. Maintaining the customer base represents for TAURON Capital Group a long term growth platform and is implemented by both, actions improving the quality of services provided, among others an expansion of customer communications channels, as well as a broad product offering. At the end of 2018 TAURON Capital Group provided services for almost 5.5 million customers of the Supply Segment and 5.6 million customers of the Distribution Segment.
Unit margin leadership among Poland's 4 largest electricity suppliers	Maintaining of the leadership position is based both on maintaining a high volume of electricity supplied, as well as the ability to generate a positive financial result. TAURON Capital Group, by focusing on the customer, is developing a broad, profitable base of products and services. Based on the data for 9 months of 2018 TAURON Capital Group maintained the leading position among Poland's 4 largest utilities, calculated as the Supply Segment's EBITDA attributed to the electricity supplied to the final consumers.
New businesses are to represent at least 25% of revenue/margin in 2025	TAURON is actively preparing to take part in the new markets and areas of operations. The activities focused on the new businesses are supported by the implementation of SAB and the cooperation with start-ups. TAURON got involved in the project with the goal to deploy broadband internet access in seven regions in the south of Poland as part of the Operational Program Digital Poland (Program Operacyjny Polska Cyfrowa - POPC). The attractiveness of the project is additionally enhanced by the amount of the subsidy worth PLN 187 million. In November 2018 TAURON commissioned a network of terminals for charging electric vehicles made up of four fast charging stations (DC) and 19 accelerated charging stations (AC). Additionally, the eCar from TAURON application that allows for renting an electric vehicle was launched.

1.5. Description of TAURON Capital Group's expansion policy and directions

Strategy sets the directions of TAURON Capital Group's short and long term expansion. The tasks for TAURON Capital Group's individual Lines of Business are defined in detail until 2020 and the financial effects of such tasks are set. The priority is to maintain a stable financial position and lay down solid foundations for growth in a changing environment. TAURON Capital Group's growth means the need to incur capital expenditures.

Strategy sets the priority directions for the innovations as well as research and development activities that will be the basis for developing new products and services in the longer term. In order to achieve this goal TAURON Capital Group adopted a new model for the innovations as well as research and development activities, setting up a dedicated central organization to manage and coordinate such operations.

In the longer term the Strategy assumes the full utilization of the potential of TAURON Capital Group's assets, which is to support innovations, organizational culture and, first of all, focusing on the customer needs. Strategy assumes that beyond 2020 TAURON Capital Group's CAPEX potential will, first of all, be used for projects in the regulated areas such as: electricity distribution heat distribution and generation, RES (on the condition of a stable support system), regulated conventional generation and in the new power sector (e.g. electromobility), dispersed (distributed) electricity and heat generation, as well as smart solutions.

The below figure presents the outlook for the CAPEX directions beyond 2020.

Figure no. 12. Outlook for the CAPEX directions beyond 2020

TAURON Capital Group's main competitive advantage is the base of 5.6 million customers (Distribution Segment). The most important actions in the short and long term will be relatively low capital intensive actions related to an expansion of the product and service offering for the consumers and developing new operations based on TAURON Capital Group's competences.

1.5.1. Implementation of the strategic investment projects

Key strategic investment projects underway

The below table presents the activities carried out by TAURON Capital Group in 2018 in connection with the implementation of the key strategic investment projects.

Table no. 7. Key strategic investment projects' work progress

#	Investment project	Investment project's work progress
1.	Construction of a new 910 MWe supercritical parameters power generation unit at Jaworzno Power Plant	In the first half of 2018 the focus was on installing the parts related to the unit's technological process and continuing the construction
	Contractor: RAFAKO S.A. and MOSTOSTAL WARSZAWA S.A. Consortium	works. The boiler's pressure test was successfully completed within the boiler island. The erection works on the air and flue gases ducts and the dust mixture ducts were underway as well as the electrical
	Planned project completion date: 2019	branch and building insulation works were continued. The turbine and the furnishing of the ion exchange regeneration
	Work progress: 85%	station, the condensate polishing station and the GRP plastic piping
	Expenditures incurred: PLN 4 321 million	were installed in the machine hall.
		In the second half of 2018 the commissioning works were
		commenced. The first stage, namely the cold startup was
		commenced by energizing the coupling transformer connecting the
		Jaworzno II Power Plant's household mode of operation power
		supply systems with the new 910 MWe unit. Also the back-up and
		startup transformer providing the power supply to the unit

#	Investment project	Investment project's work progress
		installations. The successfully completed SAT (site) tests of the distributed control system allowed for commencing the operations to connect with the unit's installations and devices as well as the tests thereof.
		After completing the pressure tests operations and after rinsing the entire raw water piping the stage of installing the water connection was completed and the operation of rinsing of the site pipings and installations. The hand-overs of the process nodes for commissioning were underway. The commissionings of the ultimate water treatment station, the carburization system, the compressor station and the ignition oil installation were also continued.
2.	Construction of a 449 MWe CCGT unit, including a 240 MWt heat generation unit at Stalowa Wola (Project implemented jointly with the strategic partner - Polskie Górnictwo Naftowe i Gazownictwo S.A. (PGNiG)).	The works related to the micro tunneling drilling as part of the construction of the cooling water ducting were completed and the negotiations with the suppliers and subcontractors of the main devices were conducted in 2018.
	Contractor: the contract with Abener Energia S.A. was terminated. The project's completion is envisaged under the EPCM formula (contract manager). EPCM – Energoprojekt Katowice – Energopomiar Gliwice consortium Planned project completion date: 2019 Work progress: 86%	ECSW announced, with the support of EPCM, all the 16 proceedings aimed at selecting the contractors for the combined cycle power plant, including, among others, for: the works related to completing the installation of the gas turbine set, the installation of the steam turbine set, the general construction works in order to complete he construction of the unit and other. As a result of the tenders announced the selection was completed in 9 proceedings. The selected contractors commenced the works on site.
	Expenditures incurred: PLN 1 061.8 million	The startup (commissioning) group is systematically testing and commissioning the individual systems of the combined cycle power plant that were completed by the previous contractor, while at the same time pointing out any potential installation errors.
		The contractor to complete the construction of the Backup Heat Source was selected in August 2018. The design works were completed and the earthworks were commenced.
3.	Construction of the "Grzegorz" shaft (TAURON Wydobycie) including the infrastructure (above the ground and underground) and the accompanying longwall faces (headings).	The drilling of the headings on the 800 m level was commenced. 967 m long headings were drilled to the "Grzegorz" shaft on the 540 m level, after passing the fault the drilling will be continued.
	Contractor: KOPEX PrzedsiębiorstwoBudowy Szybów S.A., FAMUR Pemug sp. z o.o. (main task - Stage I), LINTER S.A. Consortium	As part of the shaft deepening works 42 freezing holes were drilled and the active freezing down to the depth of 485 m was commenced. The shaft was plumbed to the depth of 20 m and the panel enclosure was installed. The deliveries of the materials for the
	Planned project completion date: 2023	construction of the headframe were commenced.
	Work progress: 30%
	Expenditures incurred: PLN 164.8 million
4.	Construction of the 800 m level at the Janina Coal Mine in Libiąż (TAURON Wydobycie).	The drilling of the horizontal headings on the 800 m level is underway.

# Investment project Investment project's work progress

Contractor: Mostostal Zabrze GPBP S.A. and SIEMAG TECBERG POLSKA S.A. Consortium (Construction of the ultimate above the ground and underground infrastructure including the Janina VI shaft mine shaft elevator), KOPEX S.A. and KOPEX Przedsiębiorstwo Budowy Szybów S.A. (task completed – shaft drilling)

Planned project completion date: 2021

Work progress: 63%

Expenditures incurred: PLN 327.7 million

5. Brzeszcze CAPEX Program

As part of the works related to the construction of the ultimate infrastructure the General Contractor completed the piling for the headframe and built the shaft collar. As part of the project the 20-2 mm class Coal Processing Plant was upgraded with a new jig.

5.	Brzeszcze CAPEX Program Contractors: TRANS-JAN, FAMUR and KOPEX Machinery Consortium, FAMUR and KPRGiBSz Consortium, MAS and Carbospec Consortium, Elektrometal Cieszyn Planned project completion date: 2025 Work progress: 42% Expenditures incurred: PLN 224.5 million	The extraction of the 510 deposit is continued with the use of the longwall system purchased as part of the program. In accordance with the program's plan the decision was taken to become independent, as of the end of 2018, of Spółka Restrukturyzacji Górnictwa S.A. with respect to the coal mine's ventilation. The works related to the construction of the small sales facility, the brine water channel and with respect to the alteration of the ventilation excavations as well as boring of the new headings aimed at providing access to the 405/1 deposit were continued. The construction of the primary compressor station and the water and ash mixture dumping station was completed.
6.	Implementing the heat production at unit no. 10 and the construction of the peaking and backup boilers at Łagisza Contractor: • GE Power – steam turbine set upgrade • Mostostal Warszawa - implementing the heat production unit including upgrading the heat production part • SBB Energy – construction of the peaking and backup boilers Planned project completion date: 2019 Work progress: 21% Expenditures incurred: PLN 5.18 million	The project's goal is to adapt unit no. 10 at the Łagisza Power Plant to produce heat by upgrading the turbine, installing heat-producing heaters at unit no. 10's turbine in order to heat the heating water with the steam picked up from the turbine's flow through section and upgrading the heating station. The heat supply during the peak demand and/or a scheduled or emergency shutdown of unit no. 10 will be secured by the peaking and backup boilers being built. In June and September 2018 the agreements were signed with the contractors for the full scope of the project's implementation, to carry out: • steam turbine set upgrade, • implementing the heat production including the station's adaptation • construction of the peaking and backup boilers • All the Contractors are carrying out the project works.
7.	Low Emission Elimination Program (PLNE – Program Likwidacji Niskiej Emisji) on the territory of the Silesia and Dąbrowa conurbation Contractor: Contractors are being selected to carry out specific work stages. Planned project completion date: 2023	The program is carried out on the territory of the following cities: Będzin, Chorzów, Czeladź, Dąbrowa Górnicza, Katowice, Siemianowice Śląskie, Sosnowiec and Świętochłowice. The scope of the project includes the construction and alteration of the district heating networks: transmission networks, housing estate networks and connections, as well as the construction of heating nodes to the extent required to connect the heat

Work progress: 13%

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

consumers. Connecting of 183 MWt of thermal capacity to the

#	Investment project	Investment project's work progress
	Expenditures incurred: PLN 9.93 million	district heating network as well as an expansion of the heat supply and distribution is planned. The program's goal is to reduce smog in the Silesia and Dąbrowa conurbation.
		TAURON Ciepło subsidiary signed 8 funding agreements for the amount of approximately PLN 141 million. The total funds envisaged to carry out the program amount to approximately PLN 250 million.
		As part of the program marketing campaigns aimed at raising the awareness of the inhabitants with respect to the harmful impact of smog were conducted. Talks with the representatives of the local government units on connecting public utility buildings to the network were conducted.
		The current total contracted capacity is approx. 20 MWt.
		Due to TAURON Ciepło's failure to meet the conditions required to launch the construction works by the deadline, on March 22, 2019 TAURON Ciepło terminated all the funding agreements concluded with the Regional Fund for Environmental Protection and Water Management (WFOŚiGW) in Katowice. Termination of agreements should enable the abovementioned company participation in new grant competitions to gain funds for low emission elimination.
8.	TAURON Internet (POPC) – implementation of the project in the areas awarded Wykonawca: proceedings to select General Contractors for individual scopes underway Planned project completion date: 2022 Work progress: 2% Expenditures incurred: PLN 0.0 million	The POPC program involves implementing the infrastructure enabling high throughput internet connections for households (min 30 MB/s). The final product of the project will be the provision of the wholesale services enabling connecting of the end users by the retail operators. TAURON Obsługa Klienta subsidiary received funding for this purpose for the implementation of 7 projects in the following areas: Rybnik, Katowice and Tychy, Oświęcim, Kraków, Wałbrzych A, Wałbrzych B, Sosnowiec. On August 24, 2018 the agreements on the projects funding were signed between TAURON Obsługa Klienta and Centrum Projektów
		Polska Cyfrowa. The project value is PLN 280.2 million with PLN 187.8 million obtained as a subsidy. The process to select the general contractors is underway.

Other investment projects

Nuclear power plant construction project

In 2018 PGE EJ 1 was carrying out the scope of works related to conducting environmental and siting research at Żarnowiec and Lubiatowo-Kopalino sites.

In accordance with the provisions of the Partners' (Shareholders') Agreement concluded on September 3, 2014 by TAURON, ENEA S.A. (ENEA) and KGHM Polska Miedź S.A.(KGHM) (Business Partners) with PGE Polska Grupa Energetyczna S.A. (PGE), governing the rules of cooperation in the implementation of Poland's first nuclear power plant construction project, TAURON, as of the day of drawing this report, acquired and took up 263 020 shares in the share capital of PGE EJ 1, constituting 10% of the share capital in exchange for the cash contribution in the amount of PLN 32 543 760.

Additionally, TAURON granted PGE EJ1 loans for the total amount of PLN 7 739 991. The detailed information on the loans granted is provided in section 12.2.4. of this report.

In November 2018 TAURON received a letter from PGE in which PGE expressed preliminary interest in acquiring all of the shares in PGE EJ 1 owned by TAURON. In response to the letter TAURON expressed preliminary interest in selling all of its shares in PGE EJ 1

Coal gasification project

On April 20, 2017 TAURON signed a letter of intent with Grupa Azoty S.A., defining the general rules of commencing cooperation aimed at implementing the coal gasification project. The validity of the letter of intent expired on December 31, 2017, nevertheless the parties continued working on the project.

On May 18, 2018 the parties signed an agreement on the handover of the documentation prepared by Grupa Azoty S.A. (Documentation) the subject of which was to conduct the PreFEED stage and the acquiring by TAURON of a stake in the property copyrights to the Documentation. The results of the Project Feasibility Study handed over indicate that the project is feasible and can be implemented (technically and economically) both in the ammonia as well as the methanol production variant. The findings indicated a large potential for the implementation of the technology to utilize the hard coal for the chemical industry purposes.

On November 20, 2018, as part of joint actions, the parties signed the Term sheet, defining the general rules of further cooperation and the conditions of signing the Partners' Agreement and the Shareholder's Agreement. On November 19. 2018 the Management Board of TAURON expressed its consent for the signature of the Partners' Agreement and for further actions in the Coal2Gas project aimed at signing the Shareholder's Agreement and establishing a Special Purpose Vehicle (SPV).

The subject of the operations of the SPV will be the performance of studies and analyses (continuation of the PreFEED stage for Option III – coal gasification in order to produce methanol) of the project that are to bring about the obtaining of the recommendations related to the ability of the parties (partners) to make the decision on continuing or abandoning the project.

413 MWe CCGT unit construction project including an approx. 250 MWt, heat production unit at TAURON Wytwarzanie Łagisza Power Plant Branch in Będzin

In September 2016, in accordance with the Strategy, as part of the priority to ensure TAURON Capital Group's financial stability, the 413 MWe CCGT unit construction project including a heat production unit at TAURON Wytwarzanie Łagisza Power Plant Branch in Będzin was halted due to the loss of its business justification. Currently TAURON Capital Group is conducting analyses, as well as works that would enable a potential resumption of the project, for example related to updating of the applicable documents. Taking of the investment decision will, on one hand, be based on the assessment of the project's profitability, and, on the other hand, on TAURON Capital Group's financial standing. Due to the planned

in 2019 capacity market auction for 2024 TAURON Capital Group assumes that the final decision on the resumption of the project's implementation will be made in 2019.

Project related to adapting TAURON Wytwarzanie's generating units to comply with the operational conditions in force beyond 2021.

On August 17, 2017 the Commission's (EU) Executive Decision no. 2017/1442 of July 31, 2017, establishing the conclusions related to the Best Available Technologies (BAT), was published.

TAURON Wytwarzanie is planning to ensure operation for 12 generating units after August 17, 2021 when the BAT conclusion come into force. The implementation of the projects related to the adaptation to the BAT conclusions or obtaining derogations from the BAT conclusions will allow for achieving compliance with the requirements related to the emissions to the atmosphere, wastewater and monitoring of the pollutants (emissions of SO2, NOx, dust and HCl to the atmosphere).

On November 15, 2018 the main auction of the capacity market was held as a result of which TAURON concluded capacity contracts for the period of 5 years, starting from 2021, for the following generating units: Jaworzno II Power Plant unit no. 2 and no. 3, Jaworzno III Power Plant unit no. 1, no. 3 and no. 5, Siersza Power Plant unit no. 1 and no. 2, Łagisza Power Plant unit no. 10 and Łaziska Power Plant unit no. 9.

For units no. 11 and 12 of Łaziska Power Plant one year capacity market contracts for years 2021, 2022 and 2023 were concluded.

Capital expenditures

In 2018 TAURON Capital Group's capital expenditures reached PLN 3 672 million and were approx. 6% higher than the expenditures incurred in 2017 that stood at approx. PLN 3 474 million. This is primarily due to the higher outlays in the Distribution and Mining Segments.

The below table presents selected capital expenditures, the highest outlays by value, incurred by TAURON Capital Group's Lines of Business in 2018.

Table no. 8. Capital expenditures, the highest outlays by value, incurred by TAURON Capital Group's Lines of Business in 2018

Item	Capital expenditures (PLN m)
Distribution
Grid assets' upgrades (refurbishments) and replacements	1 118
Construction of new connections	676
Generation
Construction of a new 910 MWe super critical parameters generation unit at Jaworzno	991
CAPEX on replacements and upgrades (refurbishments) as well as components at TAURON Wytwarzanie	76
Connecting new facilities	28
Investment projects related to the maintenance and development of district heating networks	17
Mining
Brzeszcze Coal Mine's (ZG Brzeszcze) Investment Program	87
Construction of the "Grzegorz" shaft, including the infrastructure and the accompanying headings	68
Construction of the 800 m level at the Janina Coal Mine (ZG Janina) in Libiąż	34

The detailed information on the capital expenditures incurred in the individual segments of TAURON Capital Group's operations is provided in section 5 of this report. .

1.5.2. Evaluation of the capability to complete the intended investment projects

TAURON Capital Group's strategic investment projects and the financing thereof are centrally managed at the Company level. Based on the analyses completed the Company's Management Board assesses that TAURON Capital Group is able to finance the current and future intended investment projects included in the Strategy using funds generated from the operations and by obtaining debt financing.

1.5.3. Directions for advancing innovations as well as research and development activities

The research and development as well as innovations related activities that TAURON Capital Group is placing its bet on in the Strategy are reflected in the Strategic Research Agenda (SAB) adopted in 2018.

As part of the research and development as well as innovations Line of Business (R+D+I) TAURON Capital Group introduced portfolio based management of research and development projects in accordance with the priority directions of innovations as well as research and development related activities.

SAB is in line with four directions of innovations as well as research and development related activities assumed in the Strategy.

The below figure presents the priority directions of innovations as well as research and development related activities..

Figure no. 13. Priority directions of innovations as well as research and development related activities

SAB is the document that describes in a precise manner the directions of innovations pursued and it is a detailed extension of the Strategy. For each direction a separate portfolio of projects is created and the key challenges, development goals and research areas are defined within such projects. Such a structure of SAB supports selecting specific projects and rejecting others, and it will also allow for an optimum allocation of the financial resources. SAB includes the following portfolios: Customer and His/Her Needs, Smart Grid Services, Dispersed Power Generation and Low Emission Generation Technologies. This way TAURON Capital Group's innovations as well as research and development related activities are carried out and developed based on complete and detailed assumptions of strategic nature – with clearly defined goals and results tied to a timeline.

SAB is in line with and complementary to the other strategic documents, prepared or adopted by TAURON Capital Group, including, first of all, in the capex or asset management area.

1.5.4. Major achievements in the field of research and development

In 2018, in accordance with the assumptions defined in the Strategy, approx. 0.4% of the consolidated revenue was allocated to the R+D+I line of business. 16 new projects (including one start-up) were launched in all lines of business. As of the end of 2018 four portfolios of the Research and Innovations Line of Business included 57 projects with the total value of more than PLN 261 million. For the implementation of some of these projects TAURON Capital Group obtained funding from external sources in the total amount of almost PLN 45 million.

The below table presents selected research and development projects implemented in 2018 by TAURON Capital Group's subsidiaries, co-financed from external sources.

Table no. 9. Research and development projects implemented in 2018 by TAURON Capital Group's subsidiaries, co-financed from external sources

#	Projects/programs/tasks	Co-financing source
1.	Projects co-financed using KIC InnoEnergy funds: • CO2-SNG project involving chemical accumulation of energy through the production of methane from captured CO2, • POLYGEN project the concept of which is based on the use of the polygeneration processing system in the process of gasifying the locally available fuels (e.g. selected waste fractions).	Wspólnota Wiedzy i Innowacji (Community of Knowledge and Innovations) KIC InnoEnergy (KIC InnoEnergy)
2.	Programs and tasks co-financed using the NCBR funds: • system for assessing propagation and improvement of the quality of electricity in distribution grids, • Developing a platform allowing for aggregating the generation and regulatory potential of the dispersed (distributed) renewable energy sources and energy storage devices as well as the selected categories of controllable consumers, • integrated Grid Diagnostics System, • development of the industrial design of carbonate fuel cells and ceramic electrolizers enabling integration with the power-to-gas installations, • flexibility of the existing power generation units with limited capital expenditures, • system for optimizing the operation of conventional generating units aiming to increase their adjustability in order to ensure ongoing stability of the power system and long term conditions for further integration of renewable energy sources, • platform for managing data from advanced metering infrastructure, • dispersed (distributed) power solutions model 2.0 – self-balancing power grid areas model, • production of demineralized water to supplement the water and steam circulation using electromembrane methods, • development of an innovative system for effective monitoring and supporting of the protection devices compliant with the DMS assumptions, • development and implementation of the technological process for processing waste from fluidized bed boilers with the use of CO2 for the production of cement substitute, • development of the hybrid system for reducing the emission of acid components and fly ash from flue gases, • development of advanced technology for monitoring and predictive analysis of the technical condition of the boiler in order to increase the reliability of the boiler unit.	National Research and Development Center (Narodowe Centrum Badań i Rozwoju - NCBR)
3.	Project co-financed using the European Union's Coal and Steel Research Fund: • CERES project aimed at introducing a number of technology improvements in order to reduce the risk related to the mining waste produced.	European Union's Coal and Steel Research Fund
4.	Projects co-financed using the Horizon 2020 (Horyzont 2020) funds: • ICP4Life project related to developing integrated collaboration platform for managing the technology and product services life cycle, • MOBISTYLE project related to technology solutions that will allow for positively influencing customer behavior by raising the consumers' awareness and feeling of ownership, • UtilitEE project aimed at implementing a solution that will increase electricity consumption efficiency by actively engaging customers in their behaviors related to electricity consumption with the use of information and communications technologies and DSM mechanisms, • GEMINI+ project aimed at developing a design of a high temperature gas cooled nuclear reactor (HTGR) for electricity and heat production.	Horizon 2020 (Horyzont 2020): Framework Program with respect to scientific research and innovations

The project that combines the research and development activities of TAURON, TAURON Dystrybucja, TAURON EKOENERGIA and TAURON Sprzedaż is M-GRID 2.0 - "Dispersed (distributed) power solutions model 2.0". As part of the project a demonstration of the self-balancing power grid area is prepared. The project's goal is to develop the technology to be used to build local power grids with the main advantages being the reduction of transmission losses, improvement of the reliability and flexibility of the system. Gained knowledge and experience with respect to developing and operating microgrids will allow for offering a new type of TAURON services to external customers, and also for applying the solution within TAURON Capital Group.

One of the more important research and development projects implemented in 2018 by TAURON Capital Group is the CO2- SNG project, related to converting CO² arising in the process of fuel combustion in industrial installations into synthetic natural gas (SNG). The project is carried out by an international consortium grouping Polish and French entities, with TAURON Wytwarzanie as the consortium leader. The process being developed involves CO² reacting with hydrogen coming from the electrolysis process, powered using cheap surplus electricity coming from RES (in the power system's load valleys). The project assumes that this can be the method used to store electricity surplus from renewable sources, and at the same time a future-proof solution for utilizing CO² produced by TAURON Capital Group's installations. In 2018 the construction of the pilot installation located at Łaziska Power Plant was completed and the research campaign with the use of CO² captured from the flue gases of a 200 MW hard coal-fired unit was commenced.

Funding from the EIT InnoEnergy funds was obtained to implement the project. The CO2-SNG project also constitutes the basis for other projects: POLYGEN and TENNESSEE.

The goal of the POLYGEN project is to develop an environmentally friendly thermal waste and alternative fuel processing for small and medium size applications. The project's product will be the development of a technology to produce heat, electricity and synthetic natural gas based on gasifying alternative fuels such as municipal waste, sewage sediments or biomass.

The goal of the TENNESSEE project is to improve energy storage process in the chemical form – natural gas substitute, aimed at improving the operating parameters of the ultimate installation, mainly based on the higher efficiency of the high temperature electrolysis and the use of carbonate fuel cells to capture CO² from flue gases. As a result it will be possible to substantially reduce the volume of electricity supplied from the power plant to the capture system. In particular the project will contribute to the lowering of the energy intensity per a unit of SNG produced.

In the Supply Line of Business the key research and development project is PROmoc - active management of the energy balance and customer preferences in order to optimize the use of the potential for adjusting (controlling) demand for electricity. The project's task is to obtain benefits from efficient electricity consumption management for three market participants: customer, utility company contracting electricity and the entity managing the national power system's security.

The final product of the PROmoc project is to be a prototype of the tool supporting active management of the power balance and preferences of the customers of TAURON Capital Group.

In 2018 TAURON intensified its works related to the so-called Internet of Things. On May 24, 2018 TAURON and Ericsson sp. z o.o. (Ericsson) signed a consortium agreement with the goal to jointly implement smart city services with the use of the Internet of Things (IoT) technologies. The implementation of this type of solutions will be Poland's first undertaking that uses Internet of Things on the scale of a city with several hundred thousand inhabitants.

The implementation assumes a comprehensive optimization of the use of and developing new services based on the city, municipal, power and telecommunications infrastructure. It will be possible due to the use of a network of sensors providing information facilitating management of the individual functions of the metropolitan area. Appropriately selected modern technology solutions will enable safe and efficient management of street lighting or parking spots, making the city more comfortable for the inhabitants. The existing distribution infrastructure of TAURON Capital Group will be used to provide advanced technology solutions for the inhabitants and businesses.

In 2018, apart from the traditionally understood research and development activities the cooperation with start-up companies became very important for TAURON Capital Group. In March 2018 the Pilot Maker program, implemented in cooperation with TechBrainers, was completed. The above initiative, as part of the Pilot Maker competition organized by the Polish Agency for Enterprise Development (PARP), obtained funding in the amount of almost PLN 6 million.

128 ideas were submitted as part of the Pilot Maker program and 36 start-ups were qualified to the program. As part of the subsequent stages 28 start-ups commenced cooperation with TAURON Capital Group's subsidiaries.

The outcomes of the Pilot Maker program include specific innovative projects, tested and implemented by TAURON Capital Group. In the smart home area a system of devices enabling a customer to monitor electricity consumption at home is being developed. A communications platform that uses a virtual voice assistant, supporting selected customer service processes, is also being created. Technology that enables customers to collect meter readings, providing them with a solution with the use of a smartphone is also being developed.

A solution that monitors low voltage outflows at the MV/LV transformer substations is being developed with an idea to upgrade distribution grids. As part of another project a solution that enables remote measuring of the distance between a MV (HV) power line and the ground using a sensors and transmitting the measurements completed across long distances using wireless ultra-energy efficient data communications technology is being prepared.

Pilot Maker is also one of the paths for TAURON Capital Group's entry into the electromobility area – in cooperation with a start-up a solution for dynamic power balancing in the electric vehicles charging stations network is being developed.

Continuing the cooperation model developed as part of the Pilot Maker program TAURON also got involved in the Pilot Maker Elektro ScaleUp program, launched in 2018, dedicated to the solutions in, among others: electric vehicle, scooter or bicycle carsharing, developing and managing their charging stations, alternative vehicle power supply systems, big data, dynamic service valuation and billing (settlement) systems.

In order to build a strategic position of TAURON Capital Group in the start-ups area on June 13, 2018 TAURON, the Polish Development Fund (Polski Fundusz Rozwoju – PFR) and the National Center for Research and Development signed an agreement on establishing a Corporate Venture Capital (CVC) type fund, set up with a view to focus on designing innovative solutions for the power sector that will respond to market challenges arising on the territory of TAURON Capital Group's operations. The new EEC Magenta fund is the first entity of this type on the Polish market.

TAURON will be a participant of two funds established as part of the PFR Starter – FIZ and BRIdge VC / PFR NCBR CVC programs. This will enable TAURON to provide a multi-stage support for innovative companies, among others by enabling participation in acceleration programs, investing in businesses at an early stage of their development under the PFR Starter FIZ program or providing successive rounds of financing as part of the PFR NCBR CVC program. The ultimate capitalization of the fund established as part of the PFR Starter FIZ program will reach PLN 50 million, while the capitalization of the fund established as part of the PFR NCBR CVC program will come in at PLN 160 million. TAURON's participation in the funds will not surpass, respectively, 25% and 49%.

In the first quarter of 2018 TAURON began cooperation with the American Electric Power Research Institute and as part of that project TAURON will be participating in two research programs related to energy storage and identifying electricity consumers needs carried out by that company.

The selected areas of cooperation are of particular importance for TAURON Capital Group and stem directly from the technological challenges identified by TAURON Capital Group. Energy storage is one of the most important challenges for electricity distribution and effective dispersed power generation. On the other hand, understanding customer needs provides support for customer relations that are of key importance from the point of view of TAURON Capital Group's Strategy.

The energy storage project uses modern tools that allow for estimating the costs of installing and operating energy storage facilities or software that enables verifying the benefits and requirements in specific energy storage cases. Such solutions will constitute the basis for implementing TAURON's research and development projects, i.e. the construction of an energy storage facility in order to provide uninterrupted power supply to electricity consumers, the second life for batteries, microgrids or demand side response (DSR) mechanisms.

Participation in the electricity consumers' needs identification program will enable TAURON Capital Group's subsidiaries to identify customer needs faster and more precisely, and, what follows, to develop a portfolio of energy services and products aligned with the changing market trends. The program will also allow for tailoring, to a larger degree, products and services that are just being developed in the new lines of business, such as electromobility or smart home, to customer expectations.

In 2018 TAURON, submitted further applications for project funding as part of continuing activities related to the Pan-European Horizon 2020 (Horyzont 2020) program. Up to now more than 20 applications have been submitted in various types of international consortia as part of the program. In 2018 TAURON Capital Group launched its already fourth project co-financed under the Horizon 2020 (Horyzont 2020) program.

In 2018 TAURON Capital Group was also carrying out works as part of KIC InnoEnergy, in particular the Polish node of InnoEnergy Central Europe sp. z o.o. with its seat in Kraków (one of six in the EU). Within the structures of KIC InnoEnergy TAURON holds the Associated Partner status. One of TAURON's areas of interests are the so-called clean coal technologies. At the same time conducting of tests and coordinating of activities in this area are the main tasks of InnoEnergy Central Europe sp. z o.o., with TAURON as one of its shareholders. In 2018 TAURON's representatives were also engaged in the works of KIC InnoEnergy related to evaluating projects/initiatives proposed to be implemented by other partners operating within the structures of KIC InnoEnergy, both on the national, as well as on the international level.

2. OPERATIONS OF TAURON POLSKA ENERGIA AND TAURON CAPITAL GROUP

2.1. Factors and non-typical events that have a significant impact on earnings achieved

2.1.1. Internal factors and the assessment thereof

The operations and earnings of the Company and TAURON Capital Group in 2018 were impacted, among others, by the following internal factors:

• 1. steadfast implementation of the Strategy and achieving the assumed financial and non-financial effects,
• 1. actions with respect to optimizing processes taken by all of TAURON Capital Group's subsidiaries,
• 1. implementation of TAURON Capital Group's 2016- 2018 Efficiency Improvement Program, including the consolidation and restructuring projects, the Voluntary Redundancy Programs for the workforce,
• 1. decisions with respect to the implementation of the key investment projects,
• 1. developing and implementing the 2018-2025 Strategic Asset Management Plan – one of the fundamental documents constituting the core of the integrated asset management system at TAURON Capital Group,
• 1. resolution of the tenders related to the investment projects with respect to adapting TAURON Capital Group's power plants to the so-called BAT conclusions by reducing, starting from 2021, emissions of sulphur and nitrogen compounds as well as chlorine and mercury,
• 1. loyalty building measures aimed at retaining the existing customers and marketing activities with respect to acquiring new customers,
• 1. centralizing TAURON Capital Group's financial management, supported by the use of such tools as: central model of financing, cash flow (financial liquidity) management policy using the cash pooling mechanism, risk management policy in the financial area, insurance policy,
• 1. ability to obtain debt financing on the international markets,
• 1. Tax Capital Group's operations, primarily aimed at optimizing the performance of the obligations associated with the payment of the corporate income tax by TAURON Capital Group's key subsidiaries,
• 1. TAURON's procurement management, in particular, management of fuel purchases for the needs of TAURON Capital Group's generation entities,
• 1. geological and mining conditions of hard coal extraction,
• 1. failures of TAURON Capital Group's equipment, installations and grids.

The impact of the above mentioned factors on the financial result achieved in 2018 is described in sections 4 and 5 of this report. The effects of this impact are visible both in the short term as well as in the long term outlook.

No material. non-typical (one-off) internal events that would have a significant impact on the financial result achieved occurred in 2018.

2.1.2. External factors and the assessment thereof

The operations and earnings of TAURON and TAURON Capital Group in 2018 were impacted by the following external factors

1. macroeconomic environment.

2. Regulatory environment.

3. market environment.

4. competitive environment (landscape).

2.1.2.1. Macroeconomic environment

TAURON Capital Group's core business operations are conducted on the Polish market and TAURON Capital Group takes advantage of the positive trends occurring thereupon as well as it is affected by the changes thereof. The macroeconomic situation, both in the individual sectors of the economy as well as on the financial markets, is a significant factor impacting the earnings generated by the Company and TAURON Capital Group

2018 was a positive period for the world economy Consumer demand and rising investments were catalysts for economic growth. However, at the end of 2018 the differentiation of the GDP growth rates among the world's leading economies increased, as demonstrated by the decline of the main economic indicators, i.e. PMI, industrial production output indicators and the world trade growth rates, which may represent the first signs of a slight slowdown of the economic activity growth rates in the future growth.

Poland's GDP growth rate continues at a relatively high level - approx. 5% year on year, similar to the levels observed over several recent quarters. The main growth driver for the Polish economy is internal consumption. Such factors as increased public investments (financed using the EU funds) and rising investments in the large and medium size enterprises sector, which is a consequence of accelerated growth of exports and growing imports, also have a positive impact.

In spite of Poland's strong economic growth the consumer prices are stable as compared to other European countries. According to the preliminary data published by the Central Statistics Office (GUS) the inflation rate in November 2018 came in at 1.2% year on year, versus 1.75% year on year in October 2018.

GDP growth has an impact on the increase of wages and the decrease of the unemployment rate (registered jobless rate stood at 5.7% in November).

According to the data published by Polskie Sieci Elektroenergetyczne S.A. (PSE, TSO) gross domestic electricity consumption rose to 170.93 TWh (+1.66% year on year) in 2018. This demand was satisfied by the domestic power plants' production that reached 165.22 TWh (-0.38% year on year) and the record breaking imports from the neighhboring countries – at the level of 5.72 TWh (+150%).

2.1.2.2. Market environment

Electricity

Wholesale electricity price on the Day Ahead Market (RDN) of the Polish Power Exchange (Towarowa Giełda Energii S.A. - TGE) reached 223.22 PLN/MWh in 2018. As compared to 2017 the price went up by 41% (+65.38 PLN/MWh). The average settlement price on the Balancing Market (RB) came in at 227.95 PLN/MWh in 2018, i.e. up 37% (+61.52 PLN/MWh) versus the year ago. The factors behind the rising prices were: increases of CO² emission allowances prices and of the commodity (coal, oil and gas) prices, tight capacity balance, hot and unusually dry summer as well as an emergency shutdown of the 485 MW combined cycle power plant at Włocławek. Based on the analysis of the average monthly RDN prices January was the cheapest month, with its average price at 161.12 PLN/MWh, while September was the most expensive month, with its average price at 272.24 PLN/MWh.

The impact of the rising electricity consumption on the increase of electricity prices was to a certain extent offset by the record volume of electricity imported into the Polish National Power System.

In 2018 the generation output from hard coal fired power plants rose to 82.38 TWh (+3.14% year on year). However the lignite fired power plants' production declined (to 49.07 TWh, i.e. 2.91 TWh less than in 2017), primarily due to the permanent shutdown of the Adamów power plant with the installed capacity of 600 MW.

The rising demand in the National Power System (KSE) was satisfied by increased production at more expensive power, for example, the gas-fired ones, the output from which, on an annualized basis, went up by 2.42 TWh - to 9.59 TWh. Electricity generation from wind farms reached 11.68 TWh (down by 15.71% year one year) in 2018.

The below figure presents average monthly electricity prices on the SPOT and RB markets, as well as average temperatures.

The reference base load contract with the delivery in 2019 (BASE_Y-19) was in a clear upward trend on the futures market almost throughout 2018. BASE_Y-19 contract prices fluctuated within a range with the low of 175.13 PLN/MWh (February 8, 2018) and the high of 311.56 PLN/MWh (September 20, 2018) last. The prices of the above contract in the first two months of the year were stable and moved within the 175-182 PLN/MWh range. In the subsequent months of the first half of the year the prices were in an upward trend that was broken only momentarily at the beginning of June. In July and August the BASE_Y-19 contract prices returned to a stable growth trend.

Between September 5 and September 10, 2018 the prices of the above contract went up by 40.50 PLN/MWh. It was caused by the rising CO² emission allowances prices (the multi-year high, of 25.97 EUR/MgCO2, was reached on September 10, 2018), and also by the news of the emergency shutdown of the CHP Włocławek's new combined cycle power plant. The final days of the last month of 2018 brought a small, technical correction and a drop of the BASE_Y-19 prices to the average level of 281 PLN/MWh. The average trading volume weighted BASE_Y-19 contract price reached 241.53 PLN/MWh, i.e. it was higher by almost 75 PLN/MWh (+44.6%) as compared to the BASE_Y-18 contract price in 2017. The total BASE_Y-19 contract trading volume came in at 133.2 TWh, i.e. it was more than two times higher than the BASE_Y-18 contract trading volume.

The PEAK5_Y-19 contract displayed similar volatility patterns, as in January and February 2018 its volatility was low (224 - 230 PLN/MWh), while starting from the beginning of March its prices were gradually rising, similar to the prices of the main base load contract. In September PEAK5_Y-19 reached its historic high of 429.50 PLN/MWh. The average trading volume weighted PEAKS_Y-19 contract price reached 341.25 PLN/MWh and it was higher by as much as 126.01 PLN/MWh (+58.5%) than the average contract price last year (PEAK5_Y-18).

The below figure presents the BASE Y-19 contract performance.

Figure no. 15. BASE Y-19 contracts performance

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Crude oil and coal

In case of Brent oil the first three quarters of 2018 brought a continuation of the 2016-2017 upward trend. In October 2018 the price reached the highest level since 2014, reaching 86.74 USD/bbl. The last quarter of 2018 brought a correction – the prices dropped to the level slightly below 50 USD/bbl. Finally, the year came to a close with the price of 53.8 USD/bbl, down 19.13% as compared to the opening price.

The oil prices were rising at the beginning of the year which was due, in particular, to the deliberate production cuts introduced by OPEC and Russia, as well as the reduction of oil supply by Venezuela and Syria. This led to the decline of the oil inventory levels on the world market to the level of the five year average.

In the US, in the first half of 2018, the oil extraction output went up by 1 million bpd, while over the full 2018 on average it rose by 2 million bpd - from 9.7 million bpd in December 2017 to 11.7 million bpd in December 2018.

A significant event impacting the oil price was the withdrawal of the US, in May 2018, from the nuclear agreement related to the control over the Iranian nuclear weapon development program concluded in July 2015 between Iran and six superpowers: US, Russia, Great Britain, France, China, Germany and additionally the European Union. US unilaterally announced the imposition of economic sanctions on Iran, including the total ban on oil exports. The ban was to come into force as of November 15, 2018 and it was to totally restrict trading in the Iranian commodity. At the same time the US President was persuading the existing consumers of the Iranian oil to stop purchasing it, while at the same time urging OPEC to increase its oil production output again in order to replace the lower production volume. Finally, the US administration agreed that the Iranian oil could continue to be imported by such countries as, for example, Japan, North Korea, Turkey, China. As a result of this situation the oil oversupply (glut) reemerged on the market and the oil inventory levels began to rise.

Another important event was the levying of trade tariffs by the US on some goods imported from China. The other party responded reciprocally. The parties of the conflict declared the will to cooperate in order to work out a compromise.

The above mentioned factors caused a decline of oil prices. Brent oil price dropped by approx. 42% only in the last quarter of 2018. Finally the year closing price reached 53.8 USD/Mg.

The growth trend on the coal market began in 2016 and continued in 2017-2018. A correction occurred in the first quarter of 2018 – during that period ARA coal prices with the delivery in 2019 dropped by approx. 20% - to 72.5 USD/Mg. Subsequently, between April and October 2018 the prices were rising quite fast. The one year contracts price in October 2018 broke through a psychological barrier reaching 100.45 USD/Mg, which meant an approx. 38% increase versus the low price observed at the end of March 2018.

High coal prices were related to the supply and demand situation in the world, mainly in the Pacific region. Starting from April 2018 China experienced very high temperatures which reduced the supply of electricity from hydroelectric plants, while the electricity consumption and demand for electricity produced from coal were higher than usually at this time of year. Strong demand for the imported commodity came also from such countries as India, Japan, Vietnam and South Korea. Hot weather and adverse hydrological situation continued also in Europe.

Only in the last quarter of 2018 the demand and supply balance improved. Indonesia and China increased coal extraction output substantially. Electricity generation from hydroelectrical power plants rose, and the demand for coal dropped due to a warm fall and the beginning of winter. In the last quarter of 2018 ARA cola prices declined by approx. 15% - to 85 USD/Mg.

According to the preliminary data published by the Chinese customs agency, coal imports to China rose 3.9% in 2018 as compared to 2017.

In Europe, as a result of the record low level of water in the rivers, Rhein in particular, coal transportation over rivers became impossible. ARA ports inventory levels rose to record levels – approx. 7 million Mg in December 2018.

Poland experienced a negative supply balance on the coal market which, in combination with high coal prices on the world market, led to an increase of domestic coal prices. Polish Steam Coal Market Index (PSCMI1) rose to 10.94 PLN/GJ in the January to November 2018 time frame, while the 2017 average was 9.26 PLN/GJ, which meant a 19% increase year on year. The coal price index for sales to industrial and municipal heat plants (PSCMI2) reached 12.41 PLN/GJ in the January to November 2018 time frame, rising versus the 2017 price by approx. 23%.

Coal extraction output dropped in the January to November 2018 time frame by approx. 2% as compared to the same period of 2017, reaching 58.65 million Mg. As of the end of November 2018 the hard coal inventory level was 2.43 million Mg, i.e. it was approx. 0.9 million Mg higher than at the beginning of the year.

During the 2017/2018 winter season there was a serious threat of the strategic coal inventory level being not achieved by utility scale power plants. Because of this situation, in 2018, increased coal imports could be observed, including also to utility scale power plants. It is estimated that in the first three quarters of 2018 approx. 16 million Mg of coal was imported to Poland.

Natural gas

2018 brought price increases on the gas market as compared to 2017. The average price on the Day Ahead Market for gas on the Polish Power Exchange (TGE) reached 106.29 PLN/MWh in 2018 and it was approx. 22 PLN/MWh higher than in 2017. Contracts with the delivery on the day ahead were particularly high priced at the beginning of March 2018 and then the year's high of 208,39 PLN/MWh was reached. The reasons were very low air temperatures that were observed for several days in a row, numerous shutdowns of nuclear units in France (which led to larger generation from the sources using the gas fuel), and also low gas inventory levels. On the other hand, in January, April and May 2018 the average weighted price for the given month was below 100 PLN/MWh – these were the cheapest months on the gas RDN in 2018.

On the gas RDB market the weighted average price was approx. 25 PLN/MWh higher than in 2017. The maximum weighted average price was also reached at the beginning of March 2018, and the cheapest months on the RDBg market were, similar as in case of the RDNg market, January, April and May 2018.

For the RDNg and RDBg markets the most expensive month was September 2018, subsequently shipments of material quantities of LNG to Europe commenced and the prices in the following months, instead of rising, which stems directly from the seasonality factor, began to drop.

On the futures commodity market (RTT) the most expensive month for gas was September 2018, when the prices of individual monthly and quarterly contracts reached highs above 130 PLN/MWh. The cheapest month was February 2018. Some contracts reached then their lowest prices (below 80 PLN/MWh). Analyzing the total trading volume on RTT, the lowest total volume was recorded in April 2018 (below 4 million), with the highest volume observed in September and October 2018 (18.6 and 19,5 million, accordingly).

The weighted average reference price of the GAS_BASE_Y-19 contract in 2018 came in at 106.02 PLN/MWh. The maximum value was reached at the end of September 2018, coming in at 124.09 PLN/MWh. The total trading volume on TGE in 2018 reached more than 143.3 TWh versus 138.5 TWh in 2017, which meant an increase by 3.4% year on year.

The forward contracts market had the biggest share in the trading volume in 2018, generating a volume at the level close to 120 TWh. On the spot market the total volume of the day ahead contracts and weekend contracts reached 17.6 TWh and it was 1.4 TWh less than in 2017 (down 7.4% year on year). A similar slight decline was also observed on the RDB market where the trading volume reached 6.1 TWh versus 4.7 TWh in 2017 (up 29% year on year)

LNG imports (form Qatar, Norway and the US) in 2018 rose by almost 1 billion m3 (up 58.2% year on year) and it reached more than 2.71 billion m3 (after regasification) versus 2017 when approx. 1.72 billion m3 of LNG (after regasification) was imported. LNG imports represented more than 20% of total imports. The balance of the imports are coming from the West and South.

The key event on the gas market in 2018 was the signing by PGNiG of three long term LNG purchase contracts with American Venture Global and Cheniere companies with the total volume of almost 70 million tons (95 billion m3 after regasification). The shipments from Cheniere are scheduled to begin in 2019. On the other hand, Venture Global will begin shipments in 2022 and 2023.

The below figure presents average monthly SPOT and Y-19 contract prices on TGE in 2018.

Figure no. 16. Average monthly SPOT and Y-19 contract prices on TGE in 2018

The CO² emission allowances market was characterized by substantial price volatility in 2018. The CO² emission allowances prices moved within the 7.6-25.79 EUR/MgCO² range.

The new MiFID II regulations package, aimed at strengthening the financial markets, came into force in January 2018. As a result of the newly introduced regulations the CO² emission allowances became a financial instrument as of the beginning of 2018. Additionally, in January 2018 the European Commission informed that the CO² emission allowances owned by Great Britain would not be marked and they would not be subject to redemption (retirement) in 2019. No marking of the emission allowances addressed to the British participants of the market constituted a protection of the EU ETS system against any potential sale of these allowances that would lose their value in 2019, thus bringing about the fall of the EUA prices on the community EU ETS market. In the following month of 2018 the European Parliament accepted the draft new EU ETS directive prepared in 2017 that, following the notification, would be in force in 2021-2030.

The EUA prices in March 2018 were characterized by the increased transaction volume related to the need to purchase CO² emission allowances for the redemption purposes. Increased demand brought about a rise of the EUA prices and led to such a situation that the highest price in the entire settlement period – 14.13 EUR/MgCO² - was recorded on the SPOT market in March 2018. A factor that had an additional impact on the price rise were market analyses suggesting an increase of the system emissions level in 2017, due to the improving economic conditions in the European Union countries. Finally, in accordance with forecasts, for the first time in seven years the CO² emissions went up in 2017 by 0.3 % year on year.

In the subsequent months the main factor impacting the EUA prices was the weather in Europe. Due to the prolonged drought the Community countries had problems with cooling the generation units, while rising daily average temperatures led to increased demand for electricity. As a consequence increased demand for CO² emission allowances was observed. The additional element influencing an increase of the prices of CO² emission allowances were the shutdowns of some nuclear reactors in France and in Belgium. In July 2018 the EU Climate Action and Energy Commissioner informed of the possibility of raising the greenhouse gases emission reduction target that the European Commission was working on. Eventually, the raising of the reduction target was not accepted by the European Parliament. In September 2018 the EUA prices reached a new high of 25.79 EUR/MgCO2, the level not seen on the market since 2012. As a result the average price in Q2 and Q3 2018 reached 16.69 EUR/MgCO2.

CO² emission allowances

The rising, initially in 2018, prices of CO² emission allowances fell only in the second half of September 2018. The average price in September reached 21.47 EUR/MgCO2.

At the beginning of Q4 2018 the EFTA countries, in agreement with the European Commission, informed that the blocked volume (42 million) of CO² emission allowances, that had not been sold at primary auctions in 2013-2018, would be placed on the market in 2019. Additionally, in October 2018 Great Britain officially confirmed its exit from the EU ETS system following its Brexit.

Ultimately, the average price for the entire 2018 reached 15.96 EUR/MgCO2, which represented an increase by 10.12 EUR/MgCO² as compared to 2017.

The below figure presents the impact of political actions and the environment on the EUA SPOT product price in 2018.

Figure no. 17. Impact of political actions and the environment on the EUA SPOT product price in 2018

Property rights

2018 on the renewable energy sources was characterized by a high volatility of the prices of green certificates, with the continued upward trend. During that period the index rose from the low of 45.53 PLN/MWh in January 2018, to the high of 162.71 PLN/MWh in November 2018. Such high levels were observed in 2014/2015. Prices rose 3.5 times within 11 months. The weighted average price for the OZEX_A index for 2018 came in at 103.82 PLN/MWh and it was higher by almost 170% than the weighted average price in 2017. The property rights prices were higher, on average by 114%, than the substitution fee that in 2018 reached 48.53 PLN/MWh and it constituted 125% of the 2017 weighted average price. The trading volume in the period under review was the highest in history and it reached 14 635 GWh (up 46% as compared to 2017). The balance of the green certificates register reached a surplus of 29.08 TWh as of the end of December 2018, and taking into account the certificates blocked for retirement this register dropped by almost 6.86 TWh - to 22.22 TWh. The obligation to present the PMOZE_A certificates for redemption rose to 17.5%.

Prices of certificates confirming electricity generation from agricultural biogas (the so-called "blue" certificates), for which the redemption obligation was 0.5% in 2018, were invariably above the substitution fee that reached 300.03 PLN/MWh. Between the beginning of January and December 2018 the prices of TGEozebio index were successively declining, accordingly from 318.33 PLN/MWh to 303,03 PLN/MWh. Finally, the weighted average value of the index as of the end of 2018 reached 312.55 PLN/MWh and it was lower by more than 6% from the 2017 weighted average price. The total trading volume came in at 505.30 GWh, while the balance of the PMOZE_BIO register reached 358 GWh. Taking into account the certificates blocked for retirement this balance drops to 265 GWh.

According to the act of 10 April 1997, the Energy Law, amended in 2016, until June 30 of the given calendar year the property rights issued to cogeneration units for generation in the previous year may be redeemed. Due to the above, until the end of H1 2018 listings included the property rights for cogeneration produced both in 2017 as well as in 2018, while in H2 2018 listings included solely the property rights confirming energy generation in 2018.

The PMEC-2017 (high-efficiency cogeneration) product was traded until the end of June 2018, moving within the 9.68 PLN/MWh to 9.85 PLN/MWh price range. The weighted average price for this contract came in at 9.80 PLN/MWh in the first half of 2018, with the substitution fee set at 10 PLN/MWh. As of the beginning of 2018 also the PMEC-2018 contracts began trading on TGE, with their prices also fluctuating near the substitution fee set at 9 PLN/MWh. The weighted average price reached 8.77 PLN/MWh.

In gas cogeneration the situation was very much alike. Until the end of June 2018, the PMGM-2017 product was still listed, with its average price at 117.51 PLN/MWh. This level, similar as in case of the coal based cogeneration, was determined by the substitution fee, for 2017 set at 120 PLN/MWh. The PMGM-2018 instrument, related to generation in 2018, was listed already in March 2018, with the average KGMX index at 116.37 PLN/MWh. Until the end of 2018 its value was increasing on month to month basis, reaching 111.97 PLN/MWh in December. The average price in 2018 for the PMGM-2017 product was 110.41 PLN/MWh and was only approx. 4.60 PLN/MWh below the substitution fee, which for 2018 was reduced to 115 PLN/MWh.

The situation on the market in PMMET property rights confirming energy generation from firing methane was developing similarly to that in case of yellow and red certificates. Until the end of June 2018 the PMMET-2017 instrument was still listed. The average value of the KMETX index reached 55.39 PLN/MWh. The substitution fee related to the production both in 2017 as well as in 2018 was 56 PLN/MWh and it determined the market prices. The PMMET-2018 instrument for the 2018 production was listed on average at 55 PLN/MWh.

The property rights due to the PMEF certificates of energy efficiency (the so-called "white" certificates), after rising in January and February 2018, continued the downward trend. The price range was between the historic low of 298.33 PLN/toe reached in December 2018 and the high of 899.67 PLN/toe achieved in February 2018. The weighted average index stood at 643.14 PLN/toe and it was substantially lower than the substitution fee set for 2018 at 1 575 PLN/toe.

The below figures present the property rights indices, the so-called "green", "blue", "red", "yellow" and "violet" certificates.

Figure no. 18. Property rights indices

National regulations

Act on capacity market

The act of December 8, 2017 on capacity market (Journal of Laws of 2018, item 9) came into force on January 18, 2018. This act changed the architecture of the electricity market from the existing single product energy market into the dual product market: electricity and capacity. The act defines the rules of organizing and conducting periodic capacity auctions by TSO in order to conclude capacity agreements with capacity providers (entities that control the individual generating units connected to the grid), and also of providing the service of maintaining readiness to deliver electric capacity and the actual delivering of such capacity to the National Power System (KSE) during the stress periods announced by the TSO, as well as the principles of remuneration for fulfilling such obligation. The individual capacity market processes are defined by the Capacity Market Regulations approved by the President of ERO (URE), as well as by the executive ordinances of the Minister of Energy issued based on the act.

Act on the amendment to the act on the excise tax and some other acts

The act of December 28, 2018 on the amendment to the act on the excise tax and some other acts (Journal of Laws of 2018, item 2538, as amended) is to provide protection in 2019 for the electricity consumers against a material increase of the costs of purchasing electricity. For this purpose the act envisages, apart from reducing the excise tax rate from 20 PLN/MWh to 5 PLN/MWh and reducing the transition fee rates for all of the consumers by 95%, the "freezing" in 2019 of the prices stemming from the tariffs of the trading companies applicable on December 31, 2018, and also of the prices and rates of the fees set by the trading companies in a different manner than by way of implementing the tariff. At the same time the act grants the obligated entities the right to compensations for the lost revenue. The compensations are to be financed using the funds of the newly established Price Difference Payout Fund (Fundusz Wypłaty Różnicy Ceny), controlled by the Minister of Energy, managed by Zarządca Rozliczeń S.A. (Settlements Manager).

The act also enables funding new investment projects in electricity distribution, renewable Energy sources, high efficiency cogeneration, environmental requirements (including BAT conclusions) and electricity storage facilities as part of the National Green Investment Projects System.

The Ministry of Energy is conducting works on the draft resolution on the manner of calculating compensations for the obligated utilities. As of the day of drawing up the report it will be possible to estimate the consequences of implementing the regulation for TAURON Capital Group only after the indicated, intended legislative actions have been completed.

Amendment to the act – Energy law related to the level of the so-called exchange obligation

2018 was a year of successive raising of the level of the so-called exchange obligation, i.e. the obligation for electricity generators to publicly sell electricity on a commodity exchange or on other organized platforms or in the trading systems. With the coming into force of the act of 8 December 2017 on the capacity market, as of January 1, 2018, the level of the exchange obligation was raised from 15% to 30% of the electricity generated in the calendar year by the generator thereof that would not be exercising the right to have the so-called stranded costs covered. By way of the act of November 9, 2018 on the amendment to the act – Energy law and some other acts (Journal of Laws of 2018, item 2348) as of January 1, 2019 the level of the so-called exchange obligation was raised from 30% to 100% of the electricity volume generated. The amendments upheld the existing exclusions from the exchange obligation. Additionally, the last amendment of November 9, 2018 introduced exemptions, dedicated to the new generating units that commenced electricity generation for the first time after July 1, 2017, as part of the electricity supply carried out under the project finance or corporate finance type financing formulas. In accordance with the interim regulations of the amendment of November 9, 2018, the existing, lower levels of the exchange obligation shall be applicable with respect to the electricity that is the subject of agreements concluded by the day of this amendment coming into force.

Act on promoting electricity generated from high efficiency cogeneration

As of the end of 2018 the existing support system for the cogeneration units, based on the certificates of origin of electricity, expired. It was replaced by the mechanisms stemming from the act of December 14, 2018 on promoting electricity generated from high efficiency cogeneration (Journal of Laws of 2019, item 42).

The act introduces numerous limitations in the use of the cogeneration support mechanisms, in particular by narrowing down the group of generating units using it to the combined heat and power plants for which the unit CO² emission level does not exceed 450 kg/MWh of the electricity generated (calculated in total for electricity and heat production) and depriving of the support the generators of electricity at RES installations, using the RES support system, and also the generators receiving remuneration under the agreement with the TSO on the regulation system services indicated in the act, in the part related to the electricity for which such remuneration is due. In case of units introducing to the public district heating network less than 70% of the heat generated the support was limited (with certain exceptions) in proportion to the share of heat introduced to the network in the heat generated.

The type of support provided was made dependent on the electric capacity installed, the date of generating electricity for the first time and the foreseen capital expenditures for the unit and it will take the form of an additional cash benefit in the form of the cogeneration bonus or guaranteed bonus. In case of the largest units, with the capacity of not less than 300 MWe, it will be possible to grant the bonus (calculated individually), only after the Commission has issued the decision recognizing the support as allowed public aid. The period of using the support shall not be longer than 15 years (the shorter periods, i.e. 5, 6 and 7 years, are envisaged for the refurbished units).

The costs of the new support system will be allocated to all of the final consumers of the power system, by introducing a separate charge ("cogeneration charge") as part of the tariffs of the power system operators. In 2019 the cogeneration charge is 1.58 PLN/MWh.

Amendment to the Act on the Renewable Energy Sources (RES)

The goal of the act of June 7, 2018 on the amendment to the act on the renewable energy sources (Journal of Laws of 2018, item 1276) was first of all to enable organizing and conducting by the President of ERO of successive RES auctions and to ensure full compliance of the regulations of the above act with the European Union's "Guidelines on public aid related to environment protection and energy goals in 2014-2020". Among others, new rules of cumulating public aid, a new split into auction baskets (five baskets based on the type of the energy source used and installed capacity were introduced), and also an additional support in the form of Feed-in-Tariffs (FIT) and Feed-In-Premium (FIP) tariffs for electricity generators from renewable sources, dedicated to micro and small RES installations, using stable and predictable energy sources (hydroelectricity, biogas, agricultural biogas) were introduced. Taking advantage of the new form of support, such as the FIT and FIP Tariffs, the relevant applications were submitted to the President of ERO for a change of the support system for seven hydroelectric plants with the installed capacity of up to 0.5 MW (FIT Tariff) and three hydroelectric plants with the installed capacity in the 0.5-1 MW (FIP Tariff) range. The majority of the generating units obtained affidavits on the possibility of selling unused electricity in accordance with art. 70a-70e of the act on RES. Additionally, three power plants, that have up to now used the auction based system, also took advantage of the change of the support system.

Amendment to the act on trading in financial instruments

On April 21, 2018 the act of March 1, 2018 on amending the act on trading of financial instruments and some other acts (Journal of Laws of 2018, item 685) came into force. The act, in line with the MIFID II / MIFIR package, extended the definition of financial instruments so as to cover CO² emission allowances SPOT contracts and derivative contracts on such emissions. The derivative contracts on commodities, including electricity or natural gas, implemented through physical delivery and concluded bilaterally, if they are equivalent (with respect to all of their parameters) to contracts concluded on the regulated market or in the alternative trading system, were also classified as financial instruments.

The amended act upheld the existing exemption for persons entering into transactions on their own account (proprietary) or providing investment services with respect to commodity related derivative financial instruments, emission allowances and their derivative instruments, on the condition that these are the so-called additional activities in relation to the main subject of such persons' operations. A new requirement is, however, the need to conduct, by the interested entities, annually, in the first quarter of every financial year, two of the so-called additional activities tests, conducted in accordance with the delegated ordinance of the Commission. Furthermore, the precondition for exercising the said exemption is an annual notification of the competent supervision authority of the intention to exercise the described exemption, including the obligation to present, at the authority's request, the positive results of the above mentioned tests. The law also introduced a dedicated exemption from the obligation to hold a broker's license for the installation operators concluding SPOT transactions related to the CO² emission allowances and maintained the existing exemption for the investment activities or services related to the financial instruments provided for other entities – members of the capital group.

The new regulations on the financial markets also enable establishing and introducing, by the competent regulatory authorities, the so-called net position (exposure) limits, i.e. the maximum net position (exposure) in the commodity related derivative instruments that the given entity may hold (in the financial instruments trading system or outside of it).

European Union regulations

Amendment to the directive on the CO² emissions allowances trading

The Directive of the European Parliament and of the Council (EU) 2018/410 of March 14, 2018, amending directive 2003/87/WE in order to strengthen cost effective emission reductions and low emission investments, and the decision (EU) 2015/1814 (Journal of Laws UEL 76, 19.03.2018, page 3) defined the principles of the CO2 emission allowances trading in the 4th trading period (2021-2030). The most important changes include:

• 1) raising of the linear reduction factor (LRF) from the current level of 1.74% to 2.2%,
• 2) introduction of the market stability reserve (MSR) mechanism that, as a principle, is to reduce the number of allowances available on the market,
• 3) setting the total available auctioning pool In the fourth trading period basically at the level of 57%,
• 4) establishment of the Innovation and Modernization Funds. The Innovation Fund is to support modern low emission technologies with the pool of 400 million allowances. The Modernization Fund will support the lowest GDP Member States in the modernization of their energy sectors, skipping the support for electricity generation from fossil fuels (with the exception of the energy sectors in Romania and Bulgaria).
• 5) maintaining the possibility of the transitional allocation of free allowances for the modernization of the energy sector (art. 10c), however a tender procedure is required for projects with an investment outlay of more than EUR 12.5 million. The support with the use of free allowances is capped at 70%.
• 6) creating the possibility for the member states to use the entire allocation of free allowances granted pursuant to art. 10c or a part thereof to support the Modernization Fund.

Winter package "Pure Energy for all the Europeans"

In 2018, at the EU level, work on drawing up the final provisions of 11 documents constituting the so-called "Winter Package" were conducted. The key documents include: Regulation on the Governance of the Energy Union, amendment of the Regulation on the Internal Energy Market, amendment of the Directive on the Internal Energy Market, amendment of the Directive on the Use of Energy from Renewable Sources, amendment of the ACER regulation, amendment of the Energy Efficiency Directive and the Regulation on Risk Preparedness in the Electricity Sector.

Regulation on the Governance of the Energy Union defines the following issues:

• 1) obligation for the Member States to draw up the national climate and energy plans that are the key energy union management instrument and cover its 5 pillars (security of supply, internal energy market, energy efficiency, decarbonization, as well as research development and competitiveness),
• 2) reference points with respect to a contribution to achieving the target related to the share of electricity from RES in 2022, 2025 and 2027 were finally adopted at the level of, respectively, 18%, 43% and 65% of the EU's 32% target,
• 3) contribution to achieving the EU's energy efficiency target,
• 4) 15% target for the interconnector transmission capacity for the power grids by 2030.

The most important element of the "Winter Package" is an amendment to the internal energy market regulation due to the future limitations in the ability to use the capacity mechanisms introduced thereby. As a result of the trilog of the European Parliament, the European Union Council and the European Commission it was agreed that:

• 1) fossil based generating units with emissions of more than 550 gr CO2/kWh of electricity produced, that commenced commercial production following the regulation's entry into force, will not be able to be engaged in capacity mechanisms and will not be able to receive payments under such mechanisms, as well as they will not be covered by the obligations to receive future payments under capacity mechanisms,
• 2) fossil based generating units with emissions of more than 550 gr CO2/kWh of electricity produced and more than 350 kg CO² on average annually per kWe of installed capacity, that commenced commercial production prior to the regulation's entry into force, will not be able to be engaged in capacity mechanisms and will not be able to receive payments under such mechanisms, as well as they will not be covered by the obligations to receive future payments under capacity mechanisms starting from July 1, 2025 at the latest,

3) member states applying capacity mechanisms upon the regulation's entry into force should adapt such mechanisms by introducing the above mentioned emission limitations, however without prejudice for the commitments or contracts concluded before December 31, 2019.

With respect to the revision of the directive in relation to the common internal market rules, the key element of the agreement reached is related to the power (right) of the electricity suppliers to set electricity prices autonomously, in order to strengthen competition and create an efficient market based process for the setting thereof. At the same time, it was ensured that the so-called sensitive consumers and microenterprises should continue to be protected, by way of empowering the member states to set regulated prices for such groups of consumers.

Furthermore, a number of agreed provisions of the revised directive are related to strengthening the position of the consumers.

Another element of the "Winter Package", that was agreed in 2018 as a part of the trilogs, was a revision of the directive on the promotion of the use of energy from renewable sources. The main items of the agreement are:

• 1) 32% target for the share of electricity from RES in 2030, binding at the EU level, with a clause providing for a review in 2023 in order to verify if it could be raised,
• 2) exclusion from charges for RES electricity for household needs for small installations with the capacity of up to 30 kW,
• 3) RES target in heat and cold 1.3% with a 40% option for waste heat,

As part of the revision of the directive with respect to energy efficiency it was agreed that:

• 1) non-binding target for improving energy efficiency for the entire EU is 32.5% in 2030,
• 2) mandatory target for savings every year at 0.8% of the annual volume of the supply to the final consumers,
• 3) Primary Energy Factor (PEF) at 2.1, applicable not only in the area regulated by the directive on energy efficiency, but also in the area of eco-design and product labeling, subjected to a regular review every 4 years.

2.1.2.4. Competitive environment (landscape)

Apart from TAURON Capital Group currently 3 large, vertically integrated energy groups are operating on the Polish market: PGE, ENEA and ENERGA S.A. (ENERGA). The below figure presents TAURON Capital Group's competitive environment (landscape) based on the data available, i.e. for 2017.

Based on the vertically integrated structure the above entities have a strong position on the domestic market. Furthermore, also foreign energy groups are present on the Polish market.

According to the 2017 data the consolidated energy groups (PGE, TAURON, ENEA, ENERGA) held a 58% market share in the electricity generation subsector. Key market transactions took place in 2017:

• PGE acquired generation assets from French EDF Polska, corresponding to annual electricity production of approx. 12 TWh. Following the transaction PGE's installed capacity rose from 12.8 GW in 2016 to 16.3 GW as of the end of 2017.
• ENEA took over ENGiE Energia Polska's assets, including the Połaniec Power Plant, producing approx. 10 TWh per annum.

TAURON Capital Group is a fully vertically integrated energy (utility) enterprise that utilizes synergies resulting from the size and scope of the operations conducted.

TAURON Capital Group controls the value chain, from hard coal mining to the delivery of electricity to the final consumers. TAURON Capital Group conducts its operations in all key segments of the energy market (excluding electricity transmission), i.e. hard coal mining as well as electricity and heat generation, distribution, supply and trading.

The below figure presents information on EBIT structure by the main segments.

Figure no. 20. EBITDA - estimated structure by the main segments in 2017¹

1 In order to make the segments presented comparable the Generation Segment includes also Mining, RES and Heat; Generation Segment includes impairment charges. Source: Companies' Annual Reports

Generation

TAURON Capital Group is Poland's key electricity producer

TAURON Capital Group's share in the domestic electricity generation market, based on gross electricity production output, reached approx. 11% in 2017. As a result of acquisitions that took place in 2017 electricity production volumes of PGE and ENEA increased. TAURON Capital Group became the third largest electricity producer on the Polish market.

90% of TAURON Capital Group's generation assets are hard coal fired units, 10% of which are modern high efficiency generating units. TAURON Capital Group's total installed capacity reaches almost 5.0 GW. Wind farms' installed capacity represents 4%, hydroelectric power plants' installed capacity represents 2.7%, biomass-fired generating units' installed capacity represents 2.9% of TAURON Capital Group's total installed capacity.

Electricity generation market shares changed significantly last year. PGE Group finalized the acquisition of EDF assets and ENEA Group finalized the acquisition of ENGIE assets in 2017. In case of ZE PAK, Adamów Power Plant, a part thereof, was shut down at the beginning of January 2018. The decommissioning of the power plant's generating units was due to the European Commission's decision, indicating the need to finish the operation of Adamów Power Plant's generation assets at the beginning of January 2018.

PGE's share in the domestic electricity generation market reached approx. 36% in 2017, with its installed capacity of 16.3 GW.

ENEA was Poland's second largest electricity generator in 2017, with its market share reaching approx. 14% and installed capacity of 6.3 GW.

Meanwhile ENERGA had the largest, on the Polish market, share of its electricity output coming from RES in 2017, reaching approx. 37%. ENERGA Group's total installed capacity stood at 1.34 GW.

TAURON Capital Group's generation assets are concentrated in the south of Poland. The hard coal deposits used to fire TAURON Capital Group's power plants and combined heat and power plants are also located in this region. The location of generation assets near the hard coal deposits allows for optimizing the costs related to the transportation of this commodity.

The below table presents information on installed capacity as of December 31, 2017 and on electricity generated in 2017.

#	Group	Installed capacity		Generation1
		Value (GW)	Share (%)	Volume (TWh)	Share (%)
1.	PGE	16.3	37	62	36
2.	ENEA	6.3	14	23	14
3.	TAURON	5.0	12	18	11
4.	PAK	1.9	4	9	5
5.	ENERGA	1,3	3	4	2
6.	CEZ	0.7	2	3	2
7.	Other	12.0	28	51	30
	Suma	43.5	100	170.3	100

Table no. 10. Installed capacity and electricity generation by energy groups in 2017

¹Volume of gross electricity generated in 2017

Source: ARE, information from companies published on their websites, own estimates in case of companies publishing the net production

The below figures present information on electricity generated in 2017 and installed capacity as of December 31, 2017.

Source: ARE, information from companies published on their websites

Distribution

TAURON Capital Group is the Polish market leader in terms of the number of distribution customers and volume of electricity distributed.

TAURON Capital Group is Poland's largest electricity distributor. TAURON Dystrybucja's share in electricity distribution to final consumers reached approx. 35% in 2017 (taking into account top 5 distributors). TAURON Capital Group's distribution grids cover more than 18% of Poland's territory.

The below table presents basic information on the share of individual energy groups in terms of electricity distribution based on the 2017 data.

#	Group	Distribution
		Volume (TWh)	Share (%)
1.	TAURON	49.1	35%
2.	PGE	35.3	25%
3.	ENERGA	22.1	16%
4.	ENEA	19.3	14%
5.	Other	14.6	10%
	Total	140.4	100%

Table no. 11. Electricity distribution to final consumers by energy groups

Source: ARE, information from companies published on their websites

The below figure presents estimated market share of individual energy groups in terms of electricity distribution based on the 2017 data.

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Based on the data for recent years TAURON Capital Group was number one in terms of volume of electricity delivered, with the volume of electricity delivered by the Distribution Segment to the final customers at 49.1 TWh. In 2019 the volume of electricity delivered to the final consumers reached 49.9 TWh. TAURON Capital Group is Poland's largest electricity distributor also in terms of revenue from the distribution operations.

It should be emphasized that TAURON Capital Group's distribution operations, due to the natural quasi monopoly in the designated area, are a source of stable and predictable revenue, representing a material part of the consolidated revenue of the entire TAURON Capital Group. The electricity distribution geographical area on which the Distribution and Supply Segments subsidiaries are historically operating is a strongly industrialized and densely populated area which impacts the demand for electricity both among households, as well as businesses. The number of the Distribution Segment's customers is more approx. 5.6 million.

Supply

TAURON Capital Group is Poland's second largest electricity supplier.

The below figure presents basic information on the share of individual energy groups in terms of electricity supply to final consumers based on the 2017 data.

#	Grupa	Supply
		Volume (TWh)	Share (%)
1.	PGE	40.4	30%
2.	TAURON	34.9	26%
3.	ENERGA	20.6	16%
4.	ENEA	17.9	13%
5.	Other	19.9	15%
	Total	133.7	100%

Table no. 12. Electricity supply to final consumers by energy groups

Source: ARE, information from companies published on their websites

The below figure presents estimated market share of individual energy groups in terms of electricity supply to final consumers based on the 2017 data.

Figure no. 24. Electricity supply to final consumers

- estimated market shares in 2017

Source: ARE, information from companies published on their websites

TAURON Capital Group was Poland's second largest electricity supplier behind PGE in 2017. Electricity retail supply reached 34.9 TWh in 2017. In 2018 the volume of electricity retail supply reached approx. 34,5 TWh. The number of the Supply Segment's customers is approx. 5.5 million.

In the electricity supply segment the individual energy groups are geographically tied, first of all, to the areas in which they are performing the DSO function – this is applicable especially to customers classified as households and small enterprises. A broader and more open competition among the groups is limited due to the continued obligation to submit tariffs for households for approval to the President of ERO. The need to apply tariff based prices leads to limited options of positioning prices in the product offerings, and what follows, it impacts their attractiveness for customers. These restrictions do not apply to business and institutional customers.

Among the main competitors of TAURON Capital Group in this segment, on one hand, an upward trend in terms of electricity supply volume is visible, but, on the other hand, a downward trend in terms of earnings can be observed, which can be the effect of the assumptions adopted in the market strategies of these groups.

The below table presents the main sources of competitiveness.

Table no. 13. Sources of competitiveness

#	Line of Business	Initiatives	Sources of competitiveness
1.	Mining Generation	1. Reducing the fuel price and supply risk 2. Investments in generating units 3. Operating expenses	1. Own coal resources – security of fuel supply and control over mining costs 2. High efficiency generating units with a competitive unit production cost 3. Improvement of operational efficiency
	RES Heat	1. Operating expenses 2. Investments in district heating networks	1. Improvement of operational efficiency 2. Expanding regulated operations
2.	Distribution	1. Operating expenses 2. Investment efficiency 3. Improvement of grid reliability indicators	1. Implementing the ultimate business model 2. Implemented IT systems, separate processes, clear (transparent) split of responsibilities
3.	Supply	1. Operating expenses 2. Sales margin, developing products tailored to customer needs, growth in new Lines of Business	1. Efficiently allocated operating expenses 2. Brand, current customer base, sales channel in place, experience in product and purchasing portfolio management

The impact of the external factors on the financial result achieved in 2018 is described in sections 4 and 5 of this report. The effects of this impact are visible both in the short term as well as in the long term outlook.

No material. non-typical (one-off) external events that would have a significant impact on the financial result achieved occurred in 2018.

2.2. Material growth impacting factors

The most material impact on the operation of TAURON and TAURON Capital Group will come, similar as it was in the past, from the following factors:

• 1. macroeconomic situation, particularly in Poland, as well as the economic situation of the area on which TAURON Capital Group is conducting operations and at the EU and global economy level, including changes of interest rates, FX rates, etc., impacting valuation of assets and liabilities listed by the Company in the statement of financial position,
• 1. political environment, particularly in Poland and at the EU level, including the positions and decisions of the state administration institutions and offices, e.g.: UOKiK, URE (ERO) and the European Commission,
• 1. changes to the regulations related to the power sector, and also changes in the legal environment, including: tax law, commercial law, environment protection law,
• 1. introduction of the generation capabilities compensation mechanism (the so-called capacity market), in particular the results of the main auctions for the delivery of electricity in 2021-2023 and decisions on the future shape of the OCR (ORM) and cold intervention reserve,
• 1. support system for electricity generation from high efficiency cogeneration, resulting, on one hand, in the costs of redeeming "red" and "yellow" certificates with the suppliers of electricity to final consumers, on the other hand, in revenue from the sale of "red" and "yellow" certificates with the generators of electricity from cogeneration.
• 1. new RES support system, the so-called RES auctions,
• 1. modification of the regulatory model for the DSO operations with its goal to make the electricity distribution quality indicators (SAIDI, SAIFI) independent of the weather conditions, including natural disasters,
• 1. situation in the power sector, including the activities and actions of the competition on the energy market,
• 1. number of CO² emission allowances allocated for free, and also prices of allowances purchased in case of a deficit of free allowances,
• 1. wholesale electricity prices,
• 1. level of tariff for the electricity supply to households (tariff group G) for 2019 approved by the President of ERO,
• 1. electricity and coal sales prices and distribution tariffs based on the adopted DSO operations regulation model, as factors impacting the revenues level,
• 1. prices of certificates of origin of energy from renewable sources and from cogeneration,
• 1. prices of fuels (energy commodities),
• 1. high probability of a deficit of appropriate quality fuels for the generating units on the domestic market,
• 1. environment protection requirements as a consequence of changes to the Environment Protection Law act (Journal of Laws of 2001 no. 62, item 627 as amended), the so-called anti-smog resolutions,
• 1. planned changes to the regulations related to the act of August 25, 2006 on the system for monitoring and inspecting fuel quality (Journal of Laws of 2006 no. 169, item 1200), among others the quality requirements for solid fuels,
• 1. science (research) and technical progress,
• 1. demand for electricity and the other energy market products, taking into account changes due to seasonality and weather conditions.

TAURON Capital Group's operations are characterized by seasonality which is applicable, in particular, to heat production, distribution and supply, electricity distribution and supply to individual consumers and hard coal sales to individual consumers for heating purposes. Heat sales depend on weather conditions, in particular, on air temperature, and are higher in the autumn and winter season. Volume of electricity supply to individual consumers depends on the length of day which usually makes electricity supply to this group of consumers lower in the spring and summer season and higher in the autumn and winter season. Hard coal sales to individual consumers is higher in the autumn and winter season. Seasonality of TAURON Capital Group's other lines of business is low.

2.3. Core products, goods and services

TAURON Polska Energia S.A.

As the parent entity of the Capital Group TAURON performs the consolidating and management function at TAURON Capital Group. As a result of implementing the Business Model and centralizing of the functions, TAURON concentrated many competences related to the functioning of TAURON Capital Group's subsidiaries and is currently carrying out operations, among others, in the following areas:

• 1. wholesale trading in electricity and related products, in particular, with respect to providing commercial services for the subsidiaries, securing the fuel requirements, CO² emission allowances and certificates of origin electricity,
• 1. purchasing management,
• 1. finance management,
• 1. corporate risk management,
• 1. managing the functioning of the IT model,
• 1. coordinating research and development activities carried out by TAURON Capital Group,
• 1. advisory services with respect to accounting and taxes,
• 1. legal support (services),
• 1. audit.

The above functions are gradually limited at TAURON Capital Group's subsidiaries. Such centralization is aimed at improving TAURON Capital Group's efficiency.

The core operations of the Company, besides managing TAURON Capital Group, include wholesale electricity trading on the territory of the Republic of Poland, based on the license for trading in electricity issued by the President of ERO for the period from June 1, 2008 until December 31, 2030.

The Company is focusing on purchasing and selling electricity for the needs of securing the buy and sell positions of TAURON Capital Group's entities and on wholesale electricity trading. In 2018 the Company bought and sold 39.7 TWh of electricity. Electricity sales performed by TAURON in the financial year 2018 were mainly addressed to the following subsidiaries: TAURON Sprzedaż and TAURON Sprzedaż GZE, to which 87% of purchased electricity was sold. These companies are performing retail electricity supply – to the final consumers, and therefore TAURON is not dependent on any electricity consumer. The other consumers (trading companies outside TAURON Capital Group, exchanges) accounted for less than 10% of the revenue.

The Company's additional operations include wholesale trading in natural gas on the territory of the Republic of Poland based on the license for trading in gas fuels issued by the President of ERO for the period from May 4, 2012 until May 4, 2022. In 2018 the Company purchased and sold 3 TWh of gas fuel. The Company is focusing on selling natural gas for the sales needs of TAURON Sprzedaż with 53% of the purchased fuel gas sold thereto. The other volume was sold mainly on the exchange (37%). The other consumers accounted for less than 10%.

The competences of the Company also include management, for the needs of TAURON Capital Group, of the property rights related to certificates of origin of electricity, representing the confirmation of electricity generation from renewable sources (including sources using agricultural biogas), in high-performance co-generation, in gas-fired co-generation, in mining methane-fired co-generation as well as the property rights related to electricity efficiency certificates. In 2018 the Company did not carry out trading in the property rights, such trading was carried out by TAURON Capital Group's subsidiaries obligated to redeem the above mentioned property rights.

The Company is a competence center with respect to management and trading in CO² emission allowances for TAURON Capital Group's subsidiaries. As a result of centralizing trading in emissions a synergy effect was obtained, involving optimizing of the costs of utilizing the resources of TAURON Capital Group's entities. Due to centralizing of this function in TAURON the Company is responsible for settlements of the subsidiaries' CO² emission allowances, securing the subsidiaries' emission needs taking into account the allowances allocated and the support in the process of acquiring allowance limits for the subsequent periods. In 2018 the Company purchased and sold 17.7 million tons, including 73% of the volume to TAURON Wytwarzanie, 10% to TAURON Ciepło 10% and 17% of the volume outside TAURON Capital Group (primarily on exchanges).

TAURON is actively participating in consultations related to legal acts on the national and European level, and it is also providing support for its Generation Line of Business subsidiaries in the process of obtaining free allowances. As part of the process of accomplishing the above goals with respect to trading in CO² emission allowances the Company is actively participating in trading on the European Climate Exchange (The ICE) in London, EEX exchange in Leipzig and on the OTC market.

In addition, TAURON also acts as the Market Operator and the entity responsible for trade balancing for TAURON Capital Group's subsidiaries and for external customers. These functions are carried out under the Transmission Agreement concluded with the TSO – PSE. In 2018 the value of trading services related to electricity, provided by the Company, reached PLN 14.5 million, including 87% within TAURON Capital Group (largest consumers: TAURON Wytwarzanie 54%, TAURON Sprzedaż 30%) and 13% on the market. The Company currently holds exclusive control over generation capacity with respect to trading and technical capabilities related thereto, it is responsible for optimizing the generation, i.e. the selection of generation units for operation as well as relevant distribution of loads in order to execute the contracts concluded, taking into consideration the technical conditions of the generation units as well as the grid constraints and other factors, in various time horizons. As part of the services provided for the Generation Segment the Company participates in preparing the overhaul plans, plans of available (dispatchable) capacity as well as production plans for the generation units, in various time horizons, as well as in agreeing them with the relevant grid operator. TAURON is also developing its competences with respect to the Market Operator function for gas under the transmission agreement with GAZ – System S.A. Since July 2015 TAURON, as one of the first entities in Poland, launched a balancing group for entities trading in gas.

In 2018 TAURON conducted, on behalf of TAURON Capital Group's subsidiaries, the general certification of physical units, existing and planned, and subsequently the certification of the capacity market units for the auctions for 2021-2023 under the capacity market being implemented. As a result TAURON Capital Group's physical generating units and controllable loads were able to take part in the auctions conducted in November and December 2018, which allows TAURON Capital Group to obtain revenue under this mechanism starting from 2021.

In accordance with TAURON Group's adopted Business and Operational Model TAURON is performing the management function with respect to managing the purchasing of production fuels for the needs of TAURON Capital Group's generation entities.

TAURON Capital Group

TAURON Capital Group's core products are electricity and heat as well as hard coal. Additionally, the Group is trading in: electricity and energy market products as well as coal and gas, and it is also providing electricity distribution and supply services, including to the final consumers, heat distribution and transmission and other services related to the operations conducted.

The below table presents TAURON Capital Group's 2018 – 2016 production and sales volumes.

Table no. 14. 2018-2016 production and sales volumes

#	Production and sales volumes		2018	2017		Change
					2016	(2018/2017)
1.	Commercial coal production	Mg m	5.01	6.45	6.37	78%
2.	Coal sales by the Mining Segment	Mg m	4.87	6.77	6.06	72%
3.	Gross electricity production	TWh	16.21	18.41	16.80	88%
	including production from RES	TWh	0.97	1.30	1.32	75%
4.	Heat production	PJ	11.29	12.20	11.52	93%
5.	Electricity and heat supply by the Generation	TWh	15.68	19.61	15.54	80%
	Segment	PJ	15.23	16.38	15.82	93%
6.	Electricity distribution	TWh	51,.97	51.37	49.68	101%
7.	Retail electricity supply (in total, by Segments: Supply and Generation)	TWh	34.52	34.94	32.04	99%
8.	Number of customers - Distribution	'000	5 598	5 533	5 474	101%

2.4. Markets and sources of supply

2.4.1. Markets

Coal sales

Coal sales are conducted primarily by TAURON Wydobycie – the Generation Segment subsidiary and TAURON.

TAURON Wydobycie subsidiary is selling coal from its own extraction and production, offered for sale on the market in coarse, medium coal assortments and as steam coal dust as well as methane being the accompanying mineral from the Brzeszcze deposit.

Depending on the coal assortment, coal has the following commercial parameters: calorific value from 19 MJ/kg to 31 MJ/kg, ash content from 4.3% to 45.2%, sulphur content from 0.23% to 1.68%.

TAURON Wydobycie conducts the sales of coal in two directions:

• 1. sales of fine coal and coal sludge to power plants and co-generation plants, mostly within TAURON Capital Group,
• 1. sales of coarse, medium and small amount of fine coal assortments through the nationwide organized sales network, primarily on the domestic market.

TAURON Wydobycie is selling coal mainly in southern and central Poland, in particular in the following regions (provinces): Silesia, Małopolska, Podkarpacie, Świętokrzyskie and Lower Silesia, to enterprises and individual consumers.

In 2018 hard coal sales by TAURON Wydobycie reached approx. 4.9 million Mg, including 3.7 million Mg (approx. 76%) to TAURON Capital Group's Generation Segment companies. It means a 28% decrease as compared to 2017 and is due to lower commercial coal production by the individual coal mines. The Janina Cola Mine (ZG Janina) suffered the biggest drop which was due to, among others, halting extraction on one of the coal faces as a result of increased water outflows. Lower extraction output by the other coal mines is a consequence of deteriorated geological and mining conditions.

The below figure presents the summary of the Company's 2018 fuel shipments.

Figure no. 25. Summary of the Company's 2018 coal sales (Mg m)

Sales of generated electricity and heat

TAURON Capital Group's electricity and heat generation (Generation Segment's operations) is performed by:

• 1. coal-fired and biomass burning power plants and combined heat and power plants,
• 1. hydroelectric power plants,
• 1. wind farms.

Generation Segment's companies operations also include trading, distribution and transmission of heat.

The total installed electric capacity of TAURON Group's generation units reached 5.0 GWe of electric capacity and 2.4 GWt of thermal capacity at the end of 2018.

The below figure presents the structure of installed electric capacity as of December 31, 2018 (no material changes versus 2017).

In 2018 TAURON Capital Group's subsidiaries produced 16.2 TWh of electricity (including 1.0 TWh from RES), i.e. 12% less in relation to 2017 when the production of electricity reached 18.4 TWh (including 1.3 TWh from RES). It is a consequence of lower sales of electricity from own production year on year and a result of the adopted commercial (trading) strategy. Lower production from RES is due to less favorable wind and hydrological conditions and the reduction of biomass burning.

Sales of electricity from own production plus energy purchased for trading (resale) purposes reached 15.7 TWh in 2018, which meant a decrease by 20% in relation to 2017.

In 2018 the electricity produced by TAURON Capital Group's subsidiaries was sold on the domestic market, first of all to TAURON Capital Group's Supply Segment companies (55%), as well as on TGE (26%) and on the balancing market (PSE Operator) (19%). The shares of electricity sales on TGE and on the balancing market were materially higher in 2018 versus 2017 (due to an increase of the exchange obligation).

Heat sales by TAURON Capital Group's subsidiaries reached 15.2 PJ in 2018 and it was lower by 7% in relation to 2017. The share of heat generated from own sources in the total heat sales reached 63% in 2018. TAURON Wytwarzanie subsidiary's power plants are selling heat in Upper Silesia and Zagłębie, and also in parts of the Podkarpackie region – Stalowa Wola and Nisko supplied by the Stalowa Wola Power Plant and Małopolska region – a part of Trzebinia supplied by the Siersza Power Plant.

Heat is sold mainly via the heat distributors: TAURON Ciepło, SCE Jaworzno III, Przedsiębiorstwo Energetyki Cieplnej Tychy and others, and on the Podkarpackie market - Przedsiębiorstwo Energetyki Cieplnej sp. z o.o. and ENESTA sp. z o.o. Small volumes of heat are sold directly to the consumers located in the vicinity of the generation companies.

On the other hand, TAURON Ciepło's heat sales market - mainly for heating purposes, production of hot water for domestic use, process water, includes diverse consumers:

• Cooperative sector (47%)
• Private sector multi-family buildings (housing communities) and single family houses (14%)
• Municipal sector (17%)
• Offices and institutions sector (11%)
• Industrial sector and other (10%).

Moreover, TAURON Capital Group's generation companies obtain certificates of origin due to electricity generation from RES and in co-generation, which are subsequently purchased by the Supply Segment companies and submitted to the President of ERO for redemption.

Sales of electricity distribution services

TAURON Dystrybucja is a company conducting sales of electricity distribution services in TAURON Capital Group and, pursuant to the decision of the President of ERO, it is a Distribution System Operator (DSO) operating under the natural monopoly conditions.

The regulated market on which TAURON Capital Group's company is operating includes the operations of 5 large distribution system operators that are subject to the full regulatory model. Each DSO is operating on the territory defined in the license. Following changes to the law, also more than a hundred of small distribution system operators are operating on this market serving small portions of the market (small market share), with respect to which the President of ERO is applying a simplified regulatory model. Their operations are local, based on the technical infrastructure held. One of the larger entities holding a license for distribution operations nationwide is PKP Energetyka sp. z o.o.

TAURON Capital Group's company is providing electricity distribution services for approx. 5 598 000 final consumers. The company covers with its operations the area of about 57 thousand km2, located mainly in the Lower Silesia, Małopolska, Opole and Silesia regions and, in addition, in the Łódź, Podkarpacie and Świętokrzyskie regions. The operational functions are performed by 11 branches located in: Bielsko-Biała, Będzin, Częstochowa, Gliwice, Jelenia Góra, Kraków, Legnica, Opole, Tarnów, Wałbrzych and Wrocław.

In 2018 the electricity distribution services sales volume reached 51.97 TWh, rising in relation to 2017 by 0.6 TWh, i.e. 1%.

Sales to the tariff eligible consumers on individual voltage levels: high voltage (A group), medium voltage (B group) and low voltage (C,G,R), represent 95.5% of the distribution services sales volume. The total electricity volume supplied to the tariff eligible consumers connected to the TAURON Dystrybucja grid in 2018, as part of the sales of distribution services, reached 52 TWh (estimated) and it was higher as compared to 2017 by approximately 0.8 GWh, i.e. by 1.68%.

The below figure presents electricity distribution by tariff groups in 2018 (the structure in relation to 2017 did not change).

Figure no. 27. Electricity distribution by tariff groups in 2018 r. (MWh)

Sales of the distribution services are carried out on the basis of comprehensive agreements as well as agreements on the provision of distribution services concluded with consumers. The first type of agreement covers both electricity supply by the companies of the Supply Segment as well as the delivery of this energy by the company acting as a DSO. The second type of agreement regulates only the delivery of electricity by the company acting as a DSO. In case of this type of agreements, the purchase of electricity is governed by separate electricity supply agreements, concluded by a consumer with the supplier selected thereby.

Wholesale and retail supply of electricity and gas

Electricity supply is conducted by the Supply Segment companies, with respect to the wholesale trading of electricity, natural gas and other products of the energy market as well as with respect to retail electricity and natural gas supply.

TAURON's wholesale trading operations comprise mainly wholesale of electricity, trading and management of CO² emission allowances, property rights arising from the certificates of origin of energy and trading in natural gas, primarily for the needs of securing the buy and sell positions of TAURON Capital Group's entities.

The Company is operating on the wholesale markets both in Poland and abroad, also on the SPOT market and the futures market. The Company is an active participant of TGE and the OTC platform run by a London energy broker - Tradition Financial Services. On January 19, 2018 TAURON signed an agreement with TGE on performing a market maker function with respect to instruments related to electricity on RTT. In accordance with the aforementioned agreement TAURON provides not only the liquidity of products defined in the agreement, through issuance of buy and sell orders during the session but also animates the market through increasing own transactions made on the market. As a result, after exceeding a certain level of transactions market share, TAURON benefits by obtaining preferential clearing rates.

With respect to wholesale gas fuels trading operations the Company is an active participant of the gas market run by TGE executes transactions on the SPOT market as well as on the products of the RTT forward market. It is involved in proprietary trading activity on an international gas exchange POWERNEXT Pegas. The Company is present on the hub: GASPOOL, New Connect Germany and Tittle Transfer Facility. TAURON is operating on foreign markets due to agreements concluded by the Company with German transmission system operators: GASCADE Gastransport and ONTRAS Gastransport GmbH as well as Czech NET4GAS s.r.o. TAURON is actively participating in auctions related to the cross-border (interconnector) exchange of electricity transmission capacity on the Polish-Czech, Polish-German and Polish-Slovak border, managed by the CAO auction office. Trading on the German market with respect to trading in financial instruments such as futures, is mainly carried out through the EEX exchange. On the other hand, on the Czech and Slovak markets trading is performed through a subsidiary - TAURON Czech Energy. Moreover, the Company is operating on exchanges of KOTE a.s. (Czech Republic) and OKTE a.s. (Slovakia).

Furthermore, the Company is a participant of the Intercontinental Exchange (ICE) on the National Balancing Point (NBP) hub. Gaining access to new hubs is a consequence of the activity aimed at increasing TAURON's gas related competences and access to new sources. The volume of the OTC market transactions concluded by the Company is also successively increasing. By operating on the gas market the Company is securing commodity supplies for entities of TAURON Capital Group; moreover, prop trading operations are carried out on the futures market, aimed at taking advantage of the volatility of gas prices to generate additional margins.

TAURON is also a participant of the European transmission capacity trading platform PRISMA European Capacity Platform GmbH, where it is purchasing inter-system (interconnector) transmission capacities. With respect to booking transmission capacity on the Polish market the Company is operating as a participant of the GSA GAZ-SYSTEM Aukcje.

Electricity and natural gas retail supply – to the final consumers – is conducted by TAURON Sprzedaż and TAURON Sprzedaż GZE subsidiaries, include electricity and gas sales to the final customers, including also the key accounts.

The customer segmentation applied by TAURON Capital Group (strategic, business and mass customers), depending on the volume of electricity consumed, is aimed at tailoring the product offering, sales channels and marketing communications to the expectations of the specific customer segment.

The below table presents categories of TAURON Capital Group's final customers, resulting from the market segmentation used and the specific nature of their business.

#	Customer group	Description of customers
1.	Strategic customers	Customers with the annual potential energy consumption at a level not lower than 40 GWh or strategic business partners of TAURON Capital Group, i.e. mainly entities representing the sector of heavy industry, among others: metallurgical industry, chemical industry, mining industry, automotive industry
2.	Business customers	Customers with the annual potential energy consumption at a level above 250 MWh (other than consumers), or purchasing energy based on the provisions of the Act of 29 January 2004 on Public procurement law, i.e. entities representing other sectors of industry, producers of equipment, consumers from food industry, public sector, construction sector and public utilities sector
3.	Mass customers - small and medium-sized enterprises	Customers dealing with sales, services, banking, catering and small entrepreneurs
4.	Mass customers - households	Households

Table no. 15. Categories of TAURON Capital Group's final customers

In 2018 the supply companies were operating in a market environment where the level of competitiveness in individual segments did not change significantly as compared to the previous years. In 2018 the household market (individual customers) continued to be covered by the obligation to have electricity sales prices approved by the President of ERO.

According to the ERO data, from mid-2007 until December 2018, i.e. since the beginning of the energy market liberalization process, approximately 605 thousand households and approximately 201 thousand institutional entities switched their electricity supplier.

In the institutions and business entities (business customer) market segment the competition is strong and companies have already been taking advantage of the liberalization of electricity prices for several years. The progress of the liberalization has resulted in the increasing awareness of business customers expecting competitive solutions. The enhanced sales activities of energy companies exert ever increasing price pressure. Business customers are more and more willing to switch their supplier. The consequences of such a situation include activities aimed at protecting own customer base against actions taken by the competition by introducing loyalty building agreements. In TAURON Capital Group's business customer segment almost 96% of the volume under the concluded agreements is the result of individually negotiated commercial terms.

The household segment, where the number of supplier switch cases represents a small percentage, is considered to offer a strong potential. In 2018 over 71 thousand consumers of electricity switched their suppliers (including approximately 13 thousand institutional customers and approximately 58 thousand households). In 2018 the growth rate of changes in case of households reached 10.6%, and in case of institutional entities – 6.8%.

In 2018 the offering of TAURON Sprzedaż for the business segment included two media – electricity and gas fuel. The Company continued its activities geared towards building customer loyalty – with particular emphasis placed on developing an offering meeting customer expectations. Customers were offered a number of products to choose from, taking into account their needs and the specifics of electricity consumption, including ecological, exchange based and technical products.

In 2018 sales of the TAURON Giełda product, structured based on RTT TGE indices performance, were continued. Furthermore, in order to intensify electricity and gas contracting, the TAURON Multipakiet product that provided simultaneous customer contracting with respect to both media within a single contracting negotiations process, continued to be a part of the offering. The Wakacje od faktury product was very successful with its sales rising four times in 2018 versus the previous year.

The process of mass segment customers (individual customer and small and medium size enterprises) migrating from the tariff based pricing covered area to the product based pricing was also observed in 2018. As of the end of 2018 TAURON Capital Group was selling electricity under agreements guaranteeing commercial terms over the specified period to 42% of the segment's customers (loyalty agreements), while 58% of the customers were buying electricity at tariff based prices.

Key elements of the commercial offering for the mass customers in 2018 were combined products: Elektryk and Serwisant, based on the assistance functionality, that were used by more than 1.2 million customers (medical packages were launched, the functionality of the Serwisant 24h PLUS product was extended).

Furthermore, in 2018 the range of products addressed to the customers was extended by adding specialized products, e.g. TAURON Smart Home, with its sales in 2018 reaching 24 thousand. The assistance products will represent the core of the offering also in 2019.

In 2018 the retail supply of electricity realized by the Supply Segment companies to approx. 5.5 million customers reached approx. 34.5 TWh, i.e. 99% of the 2017 level when the supply came in at approx. 34.9 TWh. Decreased supply volume is visible primarily in the Business Customer Segment, which is due to the reduction of the of PPEs of the customers included in the portfolio of TAURON Capital Group's supply companies (e.g. Jastrzębska Spółka Węglowa S.A., Spółka Restrukturyzacji Kopalń S.A.). On the other hand, gas supply volume to the final consumers reached 1.5 TWh and it was 1% higher than the supply volume in 2017, while gas supply volume to the other consumers and to the exchanges rose significantly: from 0.9 TWh in 2017 to 1.43 TWh in 2018.

The below table presents information on the volume of electricity sold by TAURON Capital Group's subsidiaries operating with respect to retail electricity supply to customers, as well as the number of customers, broken down into individual customer segments, in 2018.

Customer type	Electricity volume sold (TWh)	Number of customers ('000)
Strategic customers	7.1	0.5
Business customers	12.9	198
Mass customers, including:	11.2	5 247
Households	9.5	4 889
Sales to TAURON Dystrybucja to cover balancing differences	2.9	0.001
Other (exports, own needs)	0.4	-
Supply Segment	34.5	5 445.5

Table no. 16. Volume of retail electricity sold by the Supply Segment and the number of customers in 2018

2.4.2. Supply sources – fuel

Coal (domestic market)

TAURON Capital Group purchases coal solely on the domestic market.

In 2018 TAURON continued coal purchases, for the needs of TAURON Wytwarzanie and TAURON Ciepło subsidiaries, under the agreements concluded with the suppliers from outside TAURON Capital Group:

• 1. Polska Grupa Górnicza Sp. z o.o. (PGG), (53%*),
• 1. Węglokoks S.A., (22%*),
• 1. Jastrzębska Spółka Węglowa S.A. (JSW), (10%*),
• 1. TRANSLIS Sp. z o.o. (8%*),
• 1. EP Coal Trading Polska S.A. (3%*),
• 1. HALDEX S.A. (2%*),
• 1. Grupa CZH S.A. (1%*),
• 1. Węglokoks Kraj Sp. z o.o. (1%*).

* shares of the suppliers in the total value of coal supplies from outside TAURON Capital Group

The Company purchased, in total, 4.4 million tons of coal from the suppliers outside TAURON Capital Group in 2018.

Additionally, TAURON Wytwarzanie and TAURON Ciepło purchased coal and coal sludge for the needs of electricity and heat production directly from TAURON Wydobycie - 3.7 million tons in total.

The below figure presents the quantity of coal and coal sludge purchased by TAURON Capital Group in 2018.

Figure no. 28. Coal purchases in 2018 (in Mg m) 3,7 4,4 from within TAURON Group from outside TAURON Group

In 2018 approx. 44% of the demand for coal required to produce electricity and heat was satisfied with hard coal from TAURON Wydobycie's own coal mines. The remaining part of the demand was covered from external sources, among which PGG had the largest share and the second significant external supplier was Węglokoks S.A. with its seat in Katowice. TAURON does not have any equity ties with the above mentioned companies.

Gas (domestic and foreign market)

TAURON Capital Group purchases fuel gas, mainly through the Company's operations, on the domestic market, via exchanges.

The Company is an active participant of the gas market managed by TGE, carries out transactions on the SPOT market, as well as on the RTT futures market products.

The Company is also involved in the proprietary trading activity on an international gas exchange POWERNEXT Pegas. The Company is present in the hub: GASPOOL, New Connect Germany and Tittle Transfer Facility.

Furthermore, the Company is a participant of the Intercontinental Exchange (ICE) on the National Balancing Point (NBP) hub. It is also systematically increasing the volume of transactions concluded by the Company on the OTC market.

Operating on the gas market the Company is securing gas supplies for TAURON Capital Group's entities.

2.5. Timeline

The below figure presents the timeline of selected highlights associated with the operations of TAURON Polska Energia S.A. and TAURON Capital Group that took place in 2018.

Figure no. 29. Timeline

JANUARY -	• TAURON is a participant of the international research program MOBISTYLE with the goal to raise
FEBRUARY	customer awareness with respect to optimal energy consumption, air quality improvement, health and
	lifestyle.
	• Signing with PGNiG, PGG and JSW of a letter of intent related to the development of the Geo-Metan
	program with the goal to develop and improve domestic technologies for the exploration and extraction
	of methane from the coal deposits prior to commencing the mining operations.
	• Updating of TAURON Group's Business and Operational Model.
MARCH –	• Concluding of the cooperation agreement with Electric Power Research Institute with respect to
APRIL	implementing two international research and development projects (Energy Storage and Distributed
	Generation, Understanding Electric Utility Customer).
	• Extending the term of the agreements related to the Bond Issue Program worth up to PLN 6 270 000
	PLN and adapting their content to the requirements introduced by the MiFID2 regulatory package.
	• Concluding with PGNiG, PGNiG TERMIKA S.A., TAURON Wytwarzanie and EC Stalowa Wola of the
	agreement related to the implementation of an additional investment project in the form of the Back-up
	Heat Source as part of the construction of the CCPP unit at EC (CHP) Stalowa Wola.
	• Publishing of TAURON's and TAURON Capital Group's 2017 earnings
	• Concluding with the Polish Development Fund (Polski Fundusz Rozwoju - PFR) of the investment
	agreement defining the terms of engagement in the implementation of the construction of the 910 MW
	power generating unit at Jaworzno.
	• Launching of the language consultants program as part of the initiative "TAURON mówi po ludzku"
	("TAURON speaks human language").
	• Holding of the Ordinary GM of TAURON.
	• Successful pressure test of the 910 MW power generating unit at Jaworzno.
	• Adoption of the 2018-2025 Asset Strategic Management Plan.
MAY -	• Launching, in a consortium with Ericsson, of a research and development project "Internet Rzeczy
JUNE	• w Inteligentnym Mieście" ("Internet of Things in a Smart City") involving developing a smart city offering.
	• Signing with ING Bank Śląski S.A. of a letter of intent on initiating the cooperation with respect to the
	development of the infrastructure for electromobility and expanding electric vehicles carsharing.
	• Publishing of TAURON's and TAURON Capital Group's Q1 2018 earnings.
	• Adoption by TAURON Capital Group of the Personal Data Protection Policy and the Compliance Policy.
	• Concluding with the Polish Development Fund (Polski Fundusz Rozwoju - PFR) and the National
	Research and Development Center (Narodowe Centrum Badań i Rozwoju - NCBR) of the agreement on
	establishing the Corporate Venture Capital (CVC) fund supporting innovations in the power sector.
	• Adoption of TAURON Group's 2018-2025 Communications Strategy.
	• Completing the successive stage of constructing the skewed carburization bridge at the 910 MW unit at
	Jaworzno.
JULY -	• Signing with NCBR, ENEA, Energa-Operator S.A., PGE Dystrybucja S.A. and TAURON Dystrybucja of the
AUGUST	letter of intent on the joint implementation of the e-VAN program aimed at developing innovative,
	emission free utility vehicles.
	• Adoption of TAURON Group's Security Management Policy and TAURON Group's Information Classification and
	Handling.
	• Publishing of TAURON Capital Group's multimedia 2017 Integrated Annual Report on TAURON Capital Group's
	operations.
	• Adoption of TAURON Group's Counterparties (business partners, contractors) Credibility Evaluation Procedure.
	• Launching of the project aimed at building a broadband internet access network in seven regions of
	southern Poland.
	• Adoption of TAURON Group's Document Falsification Countering Procedure and TAURON Group's Tender
	Collusion Countering Procedure.
	• Publishing of TAURON's and TAURON Capital Group's H1 2018 earnings.
	• Adoption of TAURON Group's Intellectual Property Management Model.

SEPTEMBER - OCTOBER	• Agreement with TechBrainers sp. z o. o. of the agreement on the participation in the acceleration project under the name Pilot Maker Electro as part of the Elektro ScaleUp program conducted by the Polish Agency for Enterprise Development Agency (Polska Agencja Rozwoju Przedsiębiorczości). • Adoption of TAURON Group's Trading Planning Policy.
	• Concluding with the Ministry of National Education of the agreement on the vocational education and training aligned to the needs of the changing economy.
	• Launching of the research and development program "Human Centric Lab" aimed at creating a unit to be used for the development of new technologies, products and services, and also business solutions and models for TAURON Capital Group's lines of business.
	• Commencing of the negotiations on the acquisition by TAURON of the wind farms located in the north of Poland owned by the in.ventus farm group.
	• TAURON included among The Best of The Best and awarded the first special prize for the best integrated
	annual report in The Best Annual Report competition.
	• Adoption of TAURON Group's Business and Operational Model with respect to IT.
NOVEMBER –	• Publishing of TAURON's and TAURON Capital Group's Q3 2018 earnings.
DECEMBER	• TAURON joining International Project Management Association Polska.
	• Participation in the capacity market main auctions with the delivery in 2021, 2022 and 2023.
	• Launching of the 2nd edition of the Ambasador Grupa TAURON Program with the goal to engage
	students in the process of building TAURON Group's positive image in the academic community and generate interest among top students and graduates in the internship, apprenticeship and job offering.
	• Concluding of the investment loan agreement in the amount of PLN 1 000 000 000 with Bank Gospodarstwa Krajowego and launching of the said financing.
	• Launching jointly with ING Bank Śląski S.A. of the electromobility system in Katowice in the form of the electric vehicles carsharing pilot project.
	• Launching of the electric vehicles renting service in Katowice.
	• Concluding of the hybrid financing agreements with the European Investment Bank and launching of the financing in the form of subordinate bonds.
	• Launching of the Mój TAURON (My TAURON) service mobile application.

• Polish Development Fund (Polski Fundusz Rozwoju - PFR) joining the Nowe Jaworzno Grupa TAURON special purpose vehicle implementing the construction of the 910 MW unit at Jaworzno.

2.6. Key events and TAURON Capital Group's accomplishments with a significant impact on its operations

The more important events and accomplishments that had a significant impact on TAURON Capital Group's operations that occurred in 2018, as well as until the day of drawing up this report are listed below. Additionally the above events should include concluding agreements significant for TAURON Capital Group's operations, described in detail in section 12.2.1. of this report.

Key business events in 2018

Filing of the lawsuits in connection with the termination of long-term contracts for the purchase of power and property rights

On June 18, 2018 TAURON received an official copy of the lawsuit filed by the companies that are members of Polenergia S.A. Capital Group:

• 1) company under the name of Amon sp. z o.o. with its seat in Łebcz ("Amon") for the payment of damages in the amount of PLN 47 556 025.51 and the demand to determine the Issuer's liability for the losses that may arise in the future due to tort in the total amount of PLN 158 262 177.70, and
• 2) company under the name of Talia sp. z o.o. with its seat in Łebcz ("Talia") for the payment of damages in the amount of PLN 31 299 182.52 and the demand to determine the Issuer's liability for the losses that may arise in the future due to tort in the total amount of PLN 106 964 520.73.

On June 29, 2018 TAURON received an official copy of the lawsuit filed against the Issuer by in.ventus sp. z o.o. Mogilno I sp. k. in Wrocław ("Plaintiff") for the payment by the Company, as damages, for the benefit of the Plaintiff, of the amount of EUR 12 286 229.70 and determining liability for damages that may arise in the future, due to tort, with the total value estimated to be worth EUR 35 705 848.71

Under the lawsuit the Plaintiff is asserting its own claims, as well as those taken over by the Plaintiff by way of liability transfer agreements from: in.ventus sp. z o.o. Mogilno II sp. k., in.ventus sp. z o.o. Mogilno III sp. k., in.ventus sp. z o.o. Mogilno IV sp. k., in.ventus sp. z o.o. Mogilno V sp. k., in.ventus sp. z o.o. Mogilno VI sp. k.

The competent court to rule on the lawsuits is the Regional Court in Katowice (Sąd Okręgowy w Katowicach). The preliminary assessment of the lawsuits and their justifications indicates that the claims asserted by Amon and Talia as well as by Mogilno I are without merit and completely groundless.

The detailed information on the above events was disclosed in the regulatory filings (current reports): no. 7/2015 of March 19, 2015, no. 21/2018 of June 18, 2018 and no. 22/2018 of June 29, 2018.

Commencement of the negotiations on the acquisition of wind farms

On October 2, 2018 the Management Board of TAURON received an invitation to commence negotiations on the acquisition by TAURON of wind farms located in the north of Poland farm, owned by the in.ventus group. The total installed capacity of the above mentioned wind farms is approx. 200 MW.

The transaction can be carried out by way of TAURON acquiring German and Polish partnership companies operating the farms (Project Companies). In such case TAURON will take over all rights and obligations of the current partners in the Project Companies while at the same time acquiring the bank's claim towards the Project Companies. TAURON allows for such a way to proceed with the transaction by acquiring the enterprise of the Polish project companies.

On March 7, 2019 TAURON informed of continuing the negotiations on the acquisition of wind farms located in the north of Poland farm, owned by the in.ventus group.

The detailed information on the above event was disclosed in the regulatory filings (current reports): no. 27/2018 of October 2, 2015 and no. 5/2019 of March 11, 2019.

Preliminary interest of Polska Grupa Energetyczna S.A in the acquisition of the shares in PGE EJ1 sp. z o.o.

On November 28, 2018 TAURON received a letter from Polska Grupa Energetyczna S.A. in which Polska Grupa Energetyczna S.A. expressed preliminary interest in acquiring all of the shares in PGE EJ 1 owned by TAURON.

PGE EJ1 is the company responsible for the preparation and implementation of the investment project involving the construction and operation of Poland's first nuclear power plant. TAURON holds a 10 percent stake in PGE EJ1.

On November 30, 2018 TAURON expressed preliminary interest in selling all of its shares in PGE EJ 1

The Company disclosed information on the above events in the regulatory filings (current reports): no. 32/2018 of November 28, 2018 and no. 33/2017 of November 30, 2018.

Capacity market main auctions with the delivery in 2021-2023

On November 15, December 5 and December 21 2018 the first three capacity market main auctions with the delivery in 2021-2023 were held. The auctions were conducted by PSE in accordance with the act of December 8, 2017, on the capacity market (Act). In the capacity market auctions TAURON Capital Group subsidiaries offered the so-called capacity obligation, i.e. the obligation to:

• 1. maintain, during the delivery period, readiness to deliver specified electric capacity to the National Power System by TAURON Group's individual Capacity Market Units (units generating electricity or demand side response units),
• 1. deliver specified electric capacity to this system during stress periods that may be announced by Polskie Sieci Elektroenergetyczne S.A. ("PSE") in accordance with the Act.

On November 27, 2018 the President of the Energy Regulatory Office (ERO) published in the Bulletin of Public Information (Biuletyn Informacji Publicznej) the final results of the main auction with the delivery in 2021. In accordance with the information published the auction's closing price reached 240.32 PLN/kW/year, and TAURON Capital Group's subsidiaries concluded capacity agreements for the total volume of capacity obligations amounting to 2 672.49 MW, including the contracts for:

• 1. 17 years (i.e. for 2021-2037) with the capacity obligation of 4.66 MW, under which the annual revenue estimated by the Company will reach PLN 1.12 million,
• 1. 15 years (i.e. for 2021-2035) with the capacity obligation of 768 MW, under which the annual revenue estimated by the Company will reach PLN 184.57 million,
• 1. 5 years (i.e. for 2021-2025) with the total capacity obligation of 1 474 MW, under which the annual revenue estimated by the Company will reach PLN 354.23 million,
• 1. 1 year (i.e. for 2021) with the total capacity obligation of 425.83 MW, under which the annual revenue estimated by the Company will reach PLN 102.34 million.

On December 14, 2018 the President of the Energy Regulatory Office (ERO) published the final results of the main auction with the delivery in 2022. In accordance with the results published the auction's closing price reached 198.00 PLN/kW/year, and TAURON Capital Group's subsidiaries concluded one year agreements (for 2022) with the capacity obligation amounting to 422.23 MW, under which the revenue estimated by the Group will reach PLN 83.60 million in 2022.

The final results of the last, third auction with the delivery in 2023 were published by the President of the Energy Regulatory Office (ERO) on January 14, 2019. In accordance with the content of the message the auction's closing price reached 202.99 PLN/kW/year, and TAURON Capital Group's subsidiaries concluded one year capacity agreements (for 2023) with the capacity obligation amounting to 393.23 MW. The estimated revenue under the agreements concluded in the auction for 2023 will reach PLN 79.82 million.

Taking into account all three capacity market main auctions organized in 2018 TAURON Capital Group's estimated revenue as a result of the auctions conducted will reach:

• 1. in 2021: PLN 642.26 million,
• 1. in 2022: PLN 623.52 million,
• 1. in 2023: PLN 619.74 million,
• 1. in 2024-2025: 539,92 million per annum,
• 1. in 2026-2035: 185,69 million per annum,
• 1. in 2036-2037: 1.12 million per annum.

The detailed information on the above events was disclosed in the regulatory filings (current reports): no. 30/2018 of November 15, 2018, no. 31/2018 of November 20, 2018, no. 34/2018 of November 20, 2018, no. 35/2018 of December 7, 2018, no. 39/2018 December 23, 2018 and no. 40/2018 of December 23, 2018

Important corporate events in 2018

Shareholders' requests to include particular items in the agenda of the General Meeting of the Company

On March 23, 2018 the Company received from shareholders representing more than one twentieth of TAURON's share capital a request to include in the agenda of the Ordinary General Meeting of the Company convened on April 16, 2018 the following items:

• 1. from the Minister of Energy, exercising the rights of the shareholder State Treasury, the item: passing a resolution on amending the Articles of Association of TAURON Polska Energia S.A.,
• 1. from KGHM the items: passing a resolution on determining the number of members of the Company's Supervisory Board, passing a resolution on making changes to the composition of the Company's Supervisory Board.

The Minister of Energy sent a draft resolution of the Ordinary GM on amending § 17 of the Articles of Association of TAURON Polska Energia S.A., and its content was disclosed in the regulatory filing (current report) no. 9/2018 of March 24, 2018 and provided the justification that the purpose of the proposed amendment was to optimize the process of selecting a Member of the Management Board in the qualification proceeding conducted by the Supervisory Board.

On the other hand, the shareholder KGHM stated in the justification that including the above mentioned items in the agenda of the Ordinary GM would enable the shareholder KGHM to submit, during the Ordinary GM ZWZ, the applicable motions enabling subjecting to a vote resolutions aimed at introducing changes to the current composition of the Company's Supervisory Board.

The Company disclosed the information on the above event in the regulatory filing (current report) no. 9/2018 of March 24, 2018. Furthermore, The Company disclosed the information on the content of the proposed amendments to the Articles of Association in the regulatory filing (current report) no. 10/2018 of March 24, 2018.

Ordinary General Meeting of the Company

The Ordinary GM of the Company was held on April 16, 2018 and it adopted resolutions concerning, inter alia, the approval of the consolidated financial statements of TAURON Capital Group and the report of the Management Board on the operations of TAURON Capital Group for the financial year 2017, the approval of the financial statements of TAURON and the Report of the Management Board on the operations of the Company for the financial year 2017, the distribution of the net profit for the financial year 2017, the acknowledgement of the fulfillment of duties by members of the Company's Management Board and Supervisory Board, determining the number of members of the Company's Supervisory Board and appointing a new member of the Supervisory Board.

The decision was taken to allocate the Company's net profit for the financial year 2017, in the amount of PLN 854 350 522.56, in full to the spare (supplementary) capital.

The amendments to the Company's Articles of Association proposed by the shareholder, that TAURON informed of in the regulatory filing (current report) no. 10/2018 of March 24, 2018, were not adopted at the Ordinary GM of the Company.

The Company disclosed the information on convening the Ordinary GM and on the content of the draft resolutions in the regulatory filings (current reports) no. 7/2018 of March 20, 2018, no. 8/2018 of March 20/2018, no. 9/2018 of March 24, 2018, 10/2018 of March 24, 2018, no. 13/2018 of April 10/2018 and no. 14/2018 of April 13, 2018,. The Company disclosed the information on the adopted resolutions in the regulatory filing (current report): no. 15/2018 of April 16, 2018.

Appointment of a member of TAURON's Supervisory Board

On April 16, 2018 the Ordinary General Meeting of the Company, acting pursuant to § 22, clause 1 of the Company's Articles of Association, passed a resolution on appointing Mr. Marcin Szlenk to be a member of TAURON's Supervisory Board of the 5th common term of office.

The information on appointing a new member of the Supervisory Board was disclosed by the Company in the regulatory filings (current reports) no. 16/2018 of April 16, 2018 and no. 18/2018 of April 18, 2018.

Other important events in 2018

Appointment of certified auditor

On February 26, 2018 TAURON's Supervisory Board appointed the audit firm Ernst & Young Audyt Polska Limited Liability Company Limited Joint-Stock Partnership ("Ernst & Young") to conduct an audit of the standalone and consolidated financial statements of TAURON for the financial year 2018 and a review of the interim standalone and consolidated financial statements of TAURON for the six months ending on June 30, 2018, by concluding the Amendment to the 2017 agreement. This Amendment was concluded for the period required to complete the entrusted activities.

The audit firm was appointed in accordance with the regulations in force and professional standards.

On November 23, 2018 TAURON's Supervisory Board appointed the audit firm Ernst & Young to conduct an audit of the standalone and consolidated financial statements of TAURON for the financial year 2019-2021 and a review of the interim standalone and consolidated financial statements of TAURON for the six months ending on June 30, 2019, June 30, 2020 and June 30, 2021.

The above audit firm was appointed following the completion of the public procurement procedure, in accordance with the policy for selecting the audit firm to conduct the audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A. adopted by the Audit Committee of the Supervisory Board of TAURON Polska Energia S.A. (Audit Committee), the Supervisory Board selected the audit firm from among two bidders indicated by the Audit Committee in its recommendation and having studied the justification of the preferences for selecting one of them.

Dissolving of the provisions related to the employee benefits (entitlements) at TAURON Wytwarzanie

On April 6, 2018, the Management Board of TAURON Wytwarzanie passed a resolution based on which it dissolved a provision in the amount of PLN 168 million, related to the cash equivalent for the subsidized consumption of electricity by retirees, pensioners and other eligible persons that are not employees (a positive impact on the Generation segment's EBIT in Q1 2018).

The Management Board's resolution was passed based on the agreement reached between the Management Board of TAURON Wytwarzanie with the workforce (social party) and an additional protocol to the Corporate Collective Bargaining Agreement (Zakładowy Układ Zbiorowy Pracy) of TAURON Wytwarzanie registered by the Chief Labor Inspectorate (Państwowa Inspekcja Pracy).

In addition, TAURON Wytwarzanie concluded agreements with the workforce to amend labor contracts, under which service anniversary awards will not be paid out.

Furthermore, TAURON Wytwarzanie dissolved a provision related to the Company's Social Benefits (Entitlements) Fund (Zakładowy Fundusz Świadczeń Socjalnych) for former employees in the amount of PLN 18 million.

The detailed information on the above events was disclosed in the regulatory filings (current reports): no. 12/2018 of April 6, 2018.

Implementation of the GDPR regulation at TAURON Capital Group

Due to the coming into force, on May 25, 2018, of the EU's General Data Protection Regulation, the so-called GDPR, TAURON Capital Group took a number of measures in order to adapt the individual areas of its organization to the requirements defined in the act.

In particular, the following actions were taken:

• 1. documentation in four main subject matter streams: personal data protection and compliance with the law, management of processes, data and IT systems as well as risk analysis, was prepared and implemented;
• 1. Personal Data Protection Policy was developed and adopted;
• 1. Data Protection Officers at TAURON Capital Group's 14 entities were appointed;
• 1. 12 new processes where personal data is processed were developed and published and 55 such processes were modified;
• 1. model for assessing the critical importance level of IT systems processing personal data, including the guidelines for IT systems with respect to personal data protection, was developed and implemented;
• 1. personnel of entities included in the project were trained with respect to the knowledge of the personal data protection issues stemming from the GDPR regulation (approx. 28 000 persons).

The above actions prepared TAURON Capital Group to operate in the reality of the new requirements, and the adopted solutions will enable persons whose data is processed by TAURON Capital Group's subsidiaries to exercise their rights that are defined in detail in the GDPR regulation.

Signing of the letter of intent between TAURON and PKN Orlen

On October 10, 2018 TAURON and PKN Orlen signed a letter of intent on cooperation. Under the signed letter the companies declared setting up a working team with the task, among others, to analyze the terms of cooperation on which an ORLEN capital group's company will provide to the Company a plot of land for a potential construction of a modern generation source at Neratovice in the Czech Republic. The team will be made up of the representatives of each of the companies, while TAURON will be the leader and the coordinator of its works.

The investment project that the analyses are related to is to be a high efficiency source of electricity and heat in the form of steam for, among others, one of the largest chemical firms in the Czech industry that is a member of ORLEN capital group - Spolana.

Signing of the letter of intent between TAURON and KGHM

On October 19, 2018 TAURON and KGHM signed a letter of intent on cooperation under which the parties would launch fast charging stations at the locations that are strategic for KGHM and TAURON. Joint activities of TAURON and KGHM will also be applicable to the development of carsharing and improving electricity consumption efficiency.

Important events after December 31, 2018

Filing of a lawsuit against TAURON Sprzedaż

On March 7, 2019 TAURON Sprzedaż subsidiary was served an official copy of the statement of claim filed against the Subsidiary by Hamburg Commercial Bank AG (formerly HSH Nordbank AG) with its seat in Hamburg ("Plaintiff").

The subject of the statement of claim is the payment by TAURON Sprzedaż, in favor of the Plaintiff, of the total amount of PLN 232 878 578.36,00 along with the statutory interest for a late payment, accrued from the day of filing the lawsuit until the payment date, on account of:

• 1. damages (in the total amount of PLN 36 251 978.36) due to the Subsidiary's failure to perform agreements on the sale of property rights arising from the certificates of origin constituting the confirmation of electricity generation from a renewable energy source, and
• 1. liquidated damages (in the total amount of PLN 196 626 600) assessed due to the termination of the above mentioned agreements.
• 1. The plaintiff is seeking redress arising from the purchase by way of a transfer of claims originally due to, according to its assertions, the in.ventus group subsidiaries, i.e.:
  2. in.ventus sp. z o.o. EW Dobrzyń sp.k.,
  3. in.ventus sp. z o.o. INO 1 sp.k.,
  4. in.ventus sp. z o.o. EW Gołdap sp.k.

The competent court to rule on the lawsuit is the Regional Court in Cracow (Sąd Okręgowy w Krakowie). The preliminary assessment of the lawsuit and its justification indicates, in the opinion of TAURON Sprzedaż that the claims asserted are without merit and completely groundless.

TAURON disclosed the information on the termination by TAURON Sprzedaż of the long-term contracts for the purchase of property rights arising from certificates of origin of electricity from renewable sources in the regulatory filing (current report) no. 6/2017 of February 28, 2017.

TAURON disclosed the information on the above event in the regulatory filing (current report) no. 4/2019 of March 7, 2019.

Shareholder's request to include particular items in the agenda of the General Meeting of the Company

On March 11, 2019 the Company received from KGHM – a shareholder representing 10.39% of the Company's share capital - a request to include in the agenda of the nearest Ordinary General Meeting of the Company an item related to passing resolutions on making changes to the composition of the Company's Supervisory Board.

KGHM informed that it was intending to propose making changes to the composition of the Company's Supervisory Board and will file applicable motions at Ordinary General Meeting.

The Company disclosed the information on the above event in the regulatory filing (current report) no. 5/2019 of March 11, 2019.

2.7. Prizes and accolades (honorable mentions)

TAURON and TAURON Capital Group's subsidiaries received the following awards and accolades (honorable mentions) in 2018.

Figure no. 30. Prizes and accolades (honorable mentions)

• TAURON's investor relations recognized as the best investor relations among WIG30 index companies in the survey organized by the Stock Market and Investors Paper "Parkiet" and the Chamber of Brokerage Houses.
• Awarding TAURON Ciepło the Eko Karlik 25-lecia (The 25-year anniversary Karlik) trophy for the above standard promotional and educational activities for environment protection as well as investment projects directly impacting the reduction of the low emission, as part of celebrating the 25-year anniversary of the Regional Natural Environment Protection and Water Management Fund in Katowice (Wojewódzki Fundusz Ochrony Środowiska i Gospodarki Wodnej w Katowicach).
• Awarding the 2017 Transparent Company of the Yeartitle to TAURON for business transparency as well as the quality and accuracy of the market communications in the ranking organized by the Stock Market and Investors Paper "Parkiet" and the Accounting and Taxes Institute (Instytut Rachunkowości i Podatków).
• Awarding TAURON Dystrybucja the main prize in the Handlowiec Roku (Salesman of the Year) category in the Liderzy Świata Energii (Leaders of the Energy World) competition, among others, for undertaking innovative projects and implementing modern technology solutions that contribute to the development of the energy sector.
• Honorable mention for twenty six initiatives implemented by TAURON Capital Group's subsidiaries in the field of sustainable growth in the report "Responsible business in Poland 2017. Best practice" authored by the Responsible Business Forum (Forum Odpowiedzialnego Biznesu).
• Awarding TAURON the Eko-Inspiracja 2017 (Eco-Inspiration 2017) prize as part of the "Ekologicznie Odpowiedzialni" ("Ecologically Responsible") program for the implementation of TAURON's own "Oddychaj powietrzem" ("Breathe with air") program, aimed at providing education on the causes of smog origination, prevention methods and making the consumers take note of the consequences of air pollution.
• Honorable mention for KW Czatkowice and awarding the Certificate "Solid Aggregates" 2018 – Industry Sign of Quality (Certyfikat "Solidne Kruszywa" 2018 – Branżowy Znak Jakości) by the Polish Association of Aggregate Producers, granted to the producers of aggregate that provide shipments of products with the guaranteed, stable and recurring quality, as well as actively implement the sustainable development policy.
• Awarding TAURON The Best of the Best prize and the top special prize for the best integrated report in The Best Annual Report competition organized by the Institute of Accounting and Taxes (Instytut Rachunkowości i Podatków).
• Honorable mention for own motherhood supporting program "Mama pracuje!" ("Mother is working!"), implemented by TAURON Dystrybucja, TAURON Dystrybucja Serwis and TAURON Dystrybucja Pomiary in the publication by the Responsible Business Forum (Forum Odpowiedzialnego Biznesu) as one of the seventeen projects corresponding to the seventeen challenges on the UN's Agenda for Sustainable Development 2030.
• Awarding TAURON the Wprost Innovators 2018 prize for innovative activities, based on the completed Innovation Research 2018 survey, verifying outlays on research and development as well as investments in innovations and their practical applications in business.
• Awarding TAURON Dystrybucja the Eagle of Wprost 2018 trophy in the Business Leader category as one of the companies to have achieved the highest net profit over the last three years and also the highest average net profit growth by percentage.
• Awarding TAURON'S Investment Projects Area the BEST PMO title for the best PMO (Project Management Office) in Poland as part of the nationwide IPMA PMO Award 2018 competition, organized by IPMA Polska.
• Awarding the Dzierżoniów Energy Cluster, coordinated by TAURON EKOENERGIA the Honorable Mention Certificate in the 2nd Competition for the Pilot Energy Cluster Certificate, organized by the Ministry of Energy
• Awarding TAURON Dystrybucja the OSGP European Utility Week 2018 Award for the AMIPlus Smart City Wrocław project implemented by the company, rewarded for providing customers with access to the metering data from smart meters, allowing them for implementing smart home type solutions.
• TAURON's inclusion, for the sixth time in a row, in the RESPECT Index a group of socially responsible companies and conducting accurate communications with the market
• Awarding Magenta Grupa TAURON sp. z o.o. the Electromobility Leader 2018 (Lider Elektromobilności 2018) prize for the comprehensive, well thought through and responsible approach to the development of electromobility as part of the company's operations, in particular with respect to implementing pilot projects and supporting innovations, in the survey of the e-mobiity market in Poland completed by the Polish Alternative Fuels Association (Polskie Stowarzyszenie Paliw Alternatywnych) and PwC.

• Awarding of the anniversary EMAS Certificate to TAURON Wytwarzanie as one of ten organizations, longest registered in the National Eco-management and Audit System (Krajowy System Ekozarządzania i Audytu) (EMAS).

2.8. Information on the employment at TAURON Polska Energia S.A. and TAURON Capital Group

TAURON's average headcount reached 456 FTEs in 2018 which meant an increase by 22 FTEs versus the headcount in 2017, when the average employment was 434 FTEs.

The below figure presents TAURON's average headcount in FTEs (rounded up to the full FTE) in 2017 and in 2018.

TAURON Capital Group's average headcount reached 25 622 FTEs in 2018 which meant an increase by 602 FTEs versus the headcount in 2017, when the average employment was 25 020 FTEs. This increase is primarily caused by the expansion of the operations of the Wsparcie Grupa TAURON subsidiaries.

The below figure presents TAURON Capital Group's average headcount in FTEs (rounded up to the full FTE) per Segment in 2017 and in 2018.

Figure no. 32. TAURON Capital Group's average headcount per Segment in 2017 and in 2018 1 (FTEs)

¹ Average headcount includes Wsparcie Grupa TAURON subsidiary that took over the security personnel as of January 1, 2018 due to the expansion of its operations

3. RISK MANAGEMENT AT TAURON CAPITAL GROUP

3.1. Objective and the key risk management principles at TAURON Capital Group

Risk at TAURON Capital Group is understood as an uncertain occurrence or a group of occurrences that, in case of materializing, will have an impact on achieving by TAURON Capital Group of its defined strategic goals, both negatively (threat), as well as positively (opportunity).

In line with its Strategy the Company is implementing the process of managing the risk related to the operations of TAURON Capital Group. The primary goals of risk management include ensuring the broadly understood security of TAURON Capital Group's operations. In particular, risk management is to ensure increased predictability of TAURON Capital Group achieving its strategic goals, including sustainable financial generation of its financial results.

TAURON Capital Group's risk management:

• 1. covers all elements of the value chain,
• 1. provides centralized risk measurement, monitoring and control function, and also ability to evaluate the full risk profile in the organization and coherent risk management principles,
• 1. ensures independence of the risk taking function from its control and monitoring
• 1. ensures a clear split of competences and responsibilities, in particular by introducing the risk ownership function,
• 1. is an active process, focused on an appropriately early identification of threats, allowing for taking preventive measures,

3.2. Enterprise risk management system

• 1. is a systematic and continuously improved process which allows for aligning it on an ongoing basis to TAURON Capital Group's specifics and organizational structure, as well as to the changing environment,
• 1. places a strong emphasis on developing awareness, training and encouraging personnel to use the knowledge of risks in daily activities,
• 1. co-creates at TAURON Capital Group the internal audit system, constituting, along with the compliance and security management functions, an element of the three line defense.

The enterprise risk management system (ERM), implemented at TAURON Capital Group's level, constitutes a set of rules, standards and tools allowing for implementing the primary goal of risk management which is, broadly understood, ensuring safety (security) of TAURON Capital Group's operations. This system is governed by the document entitled Corporate Risk Management Strategy at TAURON Group that defines TAURON Capital Group's corporate risk management rules and its goal is to ensure the consistency of managing the individual risk categories that were detailed in separate regulations, aligned with the specifics of the individual threat groups.

The below figure presents the ERM system:

Figure no. 33. Basic classification of the enterprise risk

The Center of the ERM System is the risk management process encompassing such activities as risk identification, its measurement as well as developing and implementing reactions to risk. Moreover, the architecture of the ERM system comprises elements to ensure effective functioning of the process, including:

1. risk management tools,

Architecture of the ERM System at TAURON Capital Group

1. risk model,

Figure no. 34.

1. control and monitoring rules,

2. 1. organization of the ERM system,
3. 1. assessment of the ERM System's adequacy and functioning.

The below figure presents the architecture of the ERM System functioning at TAURON Capital Group.

Risk management tools used by TAURON Capital Group allow for effective implementation of the individual stages of the process. TAURON Capital Group uses, in particular, the following tools:

• 1. risk identification questionnaire is a document in the form of a table, specifying the detailed information that should be collected in the risk identification process,
• 1. risk card containing the detailed information on the identified risk,
• 1. risk register is a document in the form of a table with a summary of the risks associated with the operations of TAURON Capital Group, containing in particular their descriptions, categories, valuations, and in justified cases also reaction to risk, back-up and system of metrics (indicators) subject to monitoring,
• 1. risk model, i.e. an orderly list of risks allowing for classification of risks occurring in the operations of TAURON Capital Group,
• 1. risk map, i.e. a graphical presentation of identified risks in a manner that takes into account the probability of risk materializing and its potential impact,
• 1. risk tolerance and risk limits, i.e. maximum, permitted by the Management Board of TAURON, risk level that can occur in the operations conducted,
• 1. key risk indicators and early warning indicators informing of the risk status and of the need to take additional mitigation measures.

3.2.1. Risk management process and its participants

The process of enterprise risk management ensures the comprehensive and consistent risk management rules linked with each other in terms of methodology and information. The process of enterprise risk management means continuous measures comprising risk identification, risk assessment, planning of risk response, implementation of the adopted risk response and communication between risk management process participants.

The below figure presents the risk management process.

Figure no. 35. Risk management process Risk identification - consisting in determining the potential events that may affect the implementation of business goals of TAURON Capital Group.

Risk assessment - consisting in determining potential financial and non-financial effects of risk materialization influencing the implementation of specific goals.

Planning - consisting in preparation of the dedicated response to the risk identified in order to achieve the desirable results

Implementation of risk response - consisting in practical implementation of the responses to identified risk prepared in the planning process

75

Communication - consisting in continuous information flow among participants of the process which should ensure full knowledge concerning the current risk status and effectiveness of activities conducted within the response to risk. The periodical risk reporting is also an element of this process. The below figure presents the diagram of the management risk communication.

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

The key assumption of the risk management system is a clear and precise split of tasks and responsibilities, ensuring no conflict of interest. In particular the system guarantees independence of the risk taking function from risk control and monitoring. This is achieved through the centralization of the control function at the parent Company level while maintaining the organizational and functional separation of the risk taking function. The rules in place at TAURON Capital Group introduce the owner risk function, i.e. the person responsible for managing the given risk as well as developing and implementing an effective reaction to a threat. While the control function, process coordination, as well as the responsibility for the correct functioning of the risk management system was placed in the holding Company in the Area of the Executive Director for Risk.

A special role, as part of the risk management process, is performed by the Risk Committee as an expert team that persistently and continuously initiates, analyzes, monitors, controls, supports and oversees the functioning of TAURON Capital Group's risk management system. The members of the Risk Committee include persons with appropriate knowledge of the Company and its environment as well as the required qualifications and empowerments. The task of the Risk Committee is to set norms and standards for risk management at TAURON Capital Group and oversight of the risk management process effectiveness. Within the Risk Committee two separate teams are set up, one for the commercial (trade) risk area and the other for the financial and credit risk area. Oversight of the enterprise risk management (ERM) system at TAURON Capital Group is performed directly by the Risk Committee.

The below table presents the links between individual roles in the context of the ERM Strategy and the other documents regulating in detail TAURON Capital Group's ERM system.

Supervisory Board
Audit Committee
	Management Board
			Risk Committee
Management	Commercial (Trade) Risk Management Team				Financial and Credit Risk Management Team	Internal Audit
	TAURON Group's corporate risk management strategy
Organizational Regulations (By laws)	TAURON Group's commercial risk (trade) management policy	TAURON Group's operational risk management policy	TAURON Group's project management risk policy	TAURON Group's credit risk management policy	TAURON Group's financial area specific risk management policy	Internal audit regulations
	Market Risk Team		Corporate Risk Team	Credit Risk Team	Executive Director for Finance	Internal Audit Team
	Executive Director for Risk			Executive Director for Internal Audit and Internal Control
Reporting to Supervisory Board, Management Board of TAURON, Members of Risk Committee			Reporting to President of Management Board

Table no. 17. Links between individual roles in the context of the ERM Strategy and the documents regulating TAURON Capital Group's ERM system

Within the ERM System the roles and responsibilities of all the participants of TAURON Capital Group's risk management system are defined in detail. The detailed description of the roles and responsibilities is provided in the below table.

Participant	Participant's roles and responsibilities
TAURON Supervisory Board	1. Assessment of the ERM System, especially of its adequacy and effectiveness. 2. Empowerment to audit the Company's operations with respect to enterprise risk management, in terms of compliance with the expectations of the shareholders, supervisory and regulatory authorities.
Audit Committee, TAURON Supervisory Board	Monitoring the ERM System's effectiveness.
TAURON Management Board	1. Assessment of the ERM System's adequacy, effectiveness and efficiency. 2. Taking formal decisions related to the key elements TAURON Capital Group's enterprise risk management, including approving the list of risks with respect to which the Management Board will be performing the Risk Owner's function. 3. Approving TAURON Capital Group's risk tolerance and global limits for the key risks. 4. Managing the risks of special importance for TAURON Capital Group's operations.
Risk Committee	1. Overseeing TAURON Capital Group's risk management process. 2. Auditing TAURON Capital Group's risk exposure. 3. Providing opinions and recommending to the Management Board the shape of the individual elements of the risk management infrastructure. 4. Defining TAURON Capital Group's risk tolerance and global limits for the key risks, and also applying to the Management Board for the approval or change thereof. 5. Overseeing the preparation of the quarterly information for the Management Board on all important issues related to TAURON Capital Group's risk.
Executive Director for Risk	1. Coordinating the risk management process on all levels and in all areas (lines of business) of the organization's operations. 2. Responsibility for the development of the ERM System (threat identification, evaluation monitoring and checking methods, processes and procedures). 3. Support and oversight over the system's participants in the risk management implementation and evaluation of its efficiency. 4. Preparing and providing the risk reports to authorized risk management process participants. 5. Actions aimed at developing supportive organizational culture and raising awareness with respect to TAURON Capital Group's risk management.
Executive Director for Internal Audit	Periodic review of the correctness of designing and implementing as well as the effects of actions taken within the ERM System.
Management Board of a subsidiary	1. Responsibility for risk management within a subsidiary. 2. Promoting risk management culture in a subsidiary. 3. Responsibility for the appropriate reactions to risk and the effectiveness thereof. 4. Appointing Risk Owners at the given subsidiary. 5. Approving plans of reaction to risks and taking ongoing decisions related to dealing with risk in case the established risk values (escalation threshold) are exceeded.
Risk Owner	1. Responsibility for actions related to the implementation of the risk management process as part of the entrusted area of responsibility, in context of an impact on the ongoing operations as well as on the implementation of the strategic, operational and financial goals of the unit. 2. Responsibility for preparing a plan and for implementing a reaction to risk in case its established values are exceeded, and also for the communications and reporting within the risk management implemented.

3.2.2. Risk model

Risk model defines a consistent risk classification, enabling a consistent and comprehensive capturing of risk across TAURON Capital Group. Each risk identified is assigned to specific categories and sub-categories.

The below figure presents the main risk categories defined by TAURON Capital Group, including the number of key threats: Figure no. 37. Number of risks monitored, broken down into categories

The most important risks identified at the TAURON Capital Group level broken down into individual risk categories are described further on in this report.

3.2.3. Risk control and monitoring rules

The purpose of the adopted risk control and monitoring rules is to limit TAURON Capital Group's exposure to factors that may have an adverse impact on its functioning. The basic risk control tool is the risk tolerance approved by the Management Board that defines the value of the maximum permitted risk exposure at TAURON Capital Group.

The process of defining the risk tolerance takes into account the specifics and scope of TAURON Capital Group's operations. Its level is defined as a value, and the rules of measurement of individual risks in the organization ensure the consistency of risk measurement with the applied tolerance definition. The risk tolerance constitutes the basis for allocation of its level to the global limits dedicated to a single risk or many specific risks. Subsequently global limits are allocated to operating limits within the specific risk management. The key assumption is to guarantee independence of the risk taking function from risk control and monitoring which guarantees safety of the functioning of the organization.

A supplementary tool used for risk monitoring and control comprises the Early Warning System based on the catalogue of Key Risk Indicators - KRI and Early Warning Indicators - EWI. The system functioning based on the KRI and EWI indicators enables an appropriately early identification of threats by measuring the causes of the individual threats. At the same time this system allows for an appropriately early taking of remedy actions, before the individual threats actually materialize.

3.2.4. Assessment of the adequacy of the functioning of the ERM System

Risk management is a systematic process subject to continuous improvement which allows for aligning it on an ongoing basis to TAURON Capital Group's specifics and organizational structure, as well as to the changing environment. It is also subject to a periodic, internal and independent assessment of adequacy and reviews:

• ERM System is subject to continuous reviews with respect to its adequacy and alignment with the structure and specifics of TAURON Capital Group's operations, as well as to the changing environment,

• not less seldom than once a year the Executive Director for Risk prepares a report on the assessment of adequacy of the ERM System's architecture for the members of the Risk Committee.

Executive Director for Audit, as part of performing the institutional (third line of defense), periodically conducts an independent audit of risk management at TAURON Capital Group verifying the appropriate implementation of the rules by the process participants, as well as its adequacy and effectiveness.

3.3. Managing TAURON Capital Group's key risks

The Company is actively managing all risks, seeking to eliminate or to maximum degree reduce their potential negative impact, in particular on TAURON Capital Group's financial result.

3.3.1. Commercial (trading) risk management

TAURON Capital Group's commercial (trading) risk management is understood as reducing unplanned volatility of its operating result, due to price fluctuations on the commodity markets and volume deviations in the individual areas of TAURON Capital Group's commercial (trading) operations. The commercial (trading) risk, due to the specifics of the operations conducted, constitutes one of TAURON Capital Group's key risks. TAURON Capital Group is made up of subsidiaries operating both in the Mining and the Generation Lines of Business as well as in the Supply Line of Business. Due to the opposing positions in these Lines of Business the risk is, to a certain degree, naturally diversified. However since these Lines of Business do not fully offset each other, and due to the diverse nature of the exposures, TAURON Capital Group is displaying sensitivity to the volatility of the prices of electricity, gas and related products.

In order to efficiently manage this group of risks the commercial (trading) risk management system was established, tied on the organizational and information level to TAURON Capital Group's process used to develop a commercial (trading) position hedging strategy. In particular TAURON Group's commercial (trading) risk management policy introduces an early warning system and a system used to limit risk exposure in the individual commercial areas. The basic operating measure of TAURON Capital Group's market risk is Value at Risk, defining the maximum admissible change of the position's value over the given time horizon and at a specific probability level. Value at Risk represents a dynamic risk measure which in contrast to static measures allows for determining potential negative effects before their factual occurrence. Due to the limitations of the statistical measures the commercial (trading) risk management system also uses a number of supplementary risk measures enabling a safe operation of the commercial (trading) areas.

The organizational structure of the commercial (trading) risk management system envisages a strict split of competences as part of which risk management is decentralized, where the supervision and risk control are performed centrally at TAURON level. In particular an element of the organizational structure of the commercial risk management system is the split of TAURON Capital Group's trading operations into: Front Office, Middle Office and Back Office. The goal of such a split of tasks is to guarantee the independence of the operating functions carried out by the Front Office from the risk control carried out by the Risk Area, and it ensures an appropriate level of operational flexibility. For the needs of the risk management process such placement of responsibility is assumed in order to ensure an optimal approach to the given type of threat, especially taking advantage of the economy of scale and the synergy effect. Such approach ensures efficiency of the commercial processes conducted and appropriate supervision over one of the main business processes conducted by TAURON Capital Group.

The below figure presents a breakdown of TAURON Capital Group's trading operations.

3.3.2. Financial risk management

As part of financial risk management TAURON and TAURON Capital Group is managing the FX risk and interest rate risk, based on the developed and adopted for use Policy for financial risk management at TAURON Group. The main goal of managing these risks is to minimize the sensitivity of TAURON's and TAURON Capital Group's cash flows to the financial risk factors and to minimize the financial costs and the hedging costs as part of a transaction with the use of derivative instruments. In cases when it is possible and economically justified TAURON uses the derivative instruments the characteristic of which allows for applying the hedging accounting.

With respect to the financial risks TAURON and TAURON Capital Group also identifies and actively manages the liquidity risk understood as a potential loss or limitation of the ability to pay current expenses, due to an inadequate value or structure of liquid assets in relation to short term obligations or an insufficient level of the actual net inflows from the operations. TAURON's and TAURON Capital Group's liquidity position is monitored on an ongoing basis for any potential deviations from the assumed plans and the availability of external sources of financing the amount of which substantially exceeds the expected short term demand, mitigates the risk of losing liquidity. TAURON Group's liquidity position policy put in place defines specific rules of determining the liquidity position, both of the individual subsidiaries, as well of entire TAURON Capital Group, which allows for securing funds to cover a potential liquidity gap, both by allocating funds among subsidiaries (cash pool mechanism), as well as with the use of external financing, including overdrafts.

TAURON, within the identified risks associated with financing, is also managing the risk of financing understood as a lack of the possibility to acquire new funding, increase of the cost of funding and the risk of termination of the existing financing agreements. In order to minimize the financing risk TAURON conducts a policy of funding acquisition for TAURON Capital Group at least 24 months in advance in relation to the planned date of its use. It means that TAURON and TAURON Capital Group should hold signed programs of guaranteed financing or hedge this financing through collection of funds on TAURON"s or TAURON Capital Group's accounts. Such a policy is mainly aimed at ensuring a higher comfort in acquisition of external financing and reducing the risk of incurring new liabilities under unfavorable market conditions. TAURON"s policy also covers standardizing of the covenants and provisions of the financing agreements in the key elements of the documentation.

3.3.3. Credit risk management

Credit risk is understood as a possibility to incur a loss due to trade partners (counterparties) failing to fulfill their contractual obligations (default). TAURON Capital Group is using a decentralized credit risk management system, however the control, limiting and reporting of this risk category is carried out centrally, on the parent Company level. TAURON Group's Credit Risk Management Policy in place defines credit risk management principles on TAURON Capital Group's level, aimed at effectively minimizing the impact of this risk on achieving TAURON Capital Group's goals.

Credit risk management is carried out by controlling the credit exposure generated upon the conclusion of

The below figure presents credit exposure components.

contracts by TAURON Capital Group's subsidiaries. The general rule is that prior to concluding a contract every entity is subjected to an examination of its financial standing and receives a credit limit which caps the maximum exposure due to the given trade. Credit exposure is, in this context, understood as an amount that may be lost if a counterparty (business partner, contractor) fails to fulfill its obligations (defaults) within a certain time (taking into account the value of collaterals contributed thereby). Credit exposure is calculated as of the current day and is split into exposure due to payment (payment exposure) and replacement exposure.

Based on the exposure value and the evaluation of the financial standing of specific customers the credit risk value that TAURON Capital Group is exposed to is calculated using the statistical methods according to which the exposure value is calculated based on the total loss probability distribution.

3.3.4. Operational risk management

Operational risk, in accordance with the Policy for operational risk management at TAURON Group, is understood as a possibility to incur a loss due to inappropriate or unreliable internal procedures, human and system errors or as a consequence of external events. It also includes legal risk, reputational risk and non-compliance risk. Operational risk, due to the specific nature of the threats and the ability to manage them, constitutes a separate group of risks affecting TAURON Capital Group's operations. This risk is a complex issue, occurs in every process and type of operations, it is multi-dimensional and applies to various types of activities and operations. In particular, the exposure to the operational risk factors is related to the size and complexity of the organizational structure, the number and complexity of IT systems and to the number of business processes conducted. The operational risk is characterized by the lack of the ability to totally eliminate its sources, and the analysis of its factors and parameters (among others, frequency and severity), and also the evaluation thereof requires the use of complex measurement and analysis methods.

In order to effectively manage the operational risk TAURON Capital Group is using appropriate tools, presented on the below diagram. In particular, they include the operational risk profile, operational events database, global operational risk limit and the related system of operational limits and also the early warning system operating on a large scale.

The below figure presents the risk management system tools.

Global operational risk limit is the basic tool for the operational risk control and represents the allocation of risk tolerance adopted by TAURON Capital Group. The global operational risk limit can be subsequently allocated to TAURON Capital Group's individual lines of business, the operational risk sub-categories as well as to the specific operational risks.

Operational risk profile is aimed at identifying areas, processes or activities with an excessive exposure to threats stemming from specific operational risk factors. Operational risk profile is expressed in particular in the structural dimension that includes types of operational events, TAURON Capital Group's organizational structure and processes, in the scale dimension that includes estimated potential losses, taking into account especially historical values of actual losses, as well as the tools used to mitigate the threats. For the needs of measuring the operational risk and defining the operational risk Profile the individual types of the operational risk are broken down (due to the nature of the occurrence thereof) into continuous and one-off risks.

Early warning system is defined in order to monitor the operational risk level for each identified threat. Early Warning Indicators (EWI) are selected from the Key Risk Indicators (KRI) set as the ones that are subject to continuous control with respect to the caution thresholds set for them, i.e. acceptance, mitigation and escalation thresholds.

Operational events database is created for the needs of identifying new risk factors, and in parallel in order to define the risk profile for TAURON Capital Group. It allows for keeping the records of cases that are characterized by a potential or actual loss for the organization. The goal of maintaining the operational events database is to determine the frequency and severity of the individual operational risk factors, as well as the areas and processes they occur in.

Risk identification questionnaire is a document in the form of a table form that constitutes a tool supporting the performance of the risk management process with respect to risk identification, specifying the detailed information that should be collected in this process.

3.3.5. Project risk management

TAURON Capital Group is conducting a number of investment projects in many lines of its business operations. These projects, due to their scale and often very complicated nature of implementation, represent a source of threats that may have an impact on the schedule, budget or quality of the final products. Systematic use of the provisions of TAURON Group's Project Risk Management Policy is aimed at mitigating these risks, supporting at the same time the accomplishment of the organization's strategic goals. This regulation, in particular, defines the basic principles of project risk management, ensuring coherence, comprehensive approach and unequivocal understanding in this area. The goal of the actions taken is to achieve the required probability of the project's completion while complying with the defined schedule, budget and quality of the products received. The overall objective is to obtain the expected benefits from the project's completion and to achieve TAURON Capital Group's strategic goals.

Project risk management is also applicable to managing the risk stemming from the projects and having an impact on the organization. The process of managing the risk stemming from the projects includes identification, valuation of such risks, defining and monitoring early warning indicators as well as planning and implementing actions related to managing such risks. In case of risks having an impact on the organization the risk valuation is made as the absolute value of the impact including indicating the impact period broken down into individual accounting periods, in reference to the assumed EBITDA or the assumptions made in the organization for the long term projections. In case of the most important risks having an impact on the organization the Plans of reactions to the risk and back-up Plans are developed. The evaluation of project risks and risks stemming from the projects for the organization is taken into account when making the key decisions related to launching and implementing such projects.

The below figure presents the project risk management model.

3.4. Description of the most significant risks related to TAURON Capital Group's operations

The below table presents the most significant risks identified for TAURON Capital Group.

Table no. 19. Most significant risks identified for TAURON Capital Group

#	Risk name	Risk description	Risk rend	Reaction to risk
	Finance and credit
1.	Market factors risk	Risk related to an unfavorable impact of interest rates and FX rates on TAURON Capital Group's financial results.		• Ongoing monitoring of risk exposure in order to minimize negative impact of changes to the market factors, • Transfer of risk through the use of derivative instruments
2.	Liquidity / financing risk	Risk related to the manner of financing operations, due to the enterprise's capital structure.		• Diversification of the sources of financing including arranging guaranteed financing programs and securing alternative sources of financing. • Implementing the central financing policy. • Analyzing the market and the availability of the sources of financing. • Monitoring the schedules and the date of announcing the financing program.
3.	Credit risk	Risk related to a potential occurrence of overdue accounts payable or a conclusion of a contract with a counterparty (business partner, contractor) that may turn out to be insolvent.		• Regular monitoring of the counterparties (business partners, contractors)' financial standing. • Periodic customer scoring, credit rating of each customer prior to submitting an offer/concluding a contract. • Use of protection mechanisms (hedging) in commercial agreements
Trade
4.	Market risk	Risk related to an unfavorable change of prices on the electricity market and on the related products markets, having a negative		• Monitoring and updating the position hedging strategy. • Ongoing monitoring of exposure to the above mentioned risk in order to minimize negative impact of changes to the market factors. • Limits (caps) on trade positions within risk mandates.

#	Risk name	Risk description	Risk rend	Reaction to risk
		impact on TAURON Capital Group's financial results.
	Workforce and organizational culture
5.	Social dispute risk	Risk related to collective disputes, strikes, social conflicts being the consequence of a lack of the personnel's satisfaction with the economic and social situation. Risk related to the temporary or permanent		• Conducting social consultations with respect to the changes planned. • Conducting a policy of dialogue with the workforce. • Preparing and implementing motivational solutions for the personnel. • Standardizing the tasks and requirements towards the personnel. • Developing organizational culture based on values. • Conducting active internal communications on personnel matters. • Taking measures aimed at developing a model that would enhance
6.	Human resources risk	loss of specialized staff and difficulties in its restoration.		workforce motivation. • Developing competences by training the personnel.
7.	Work Health and Safety (WHS) Risk	Risk related to accidents at work resulting from non-compliance with the Work Health and Safety (WHS) as well as Fire Protection regulations.		• Implementing manuals and rules defining safe organization of work. • Stimulating workforce development by conducting periodic Work (Occupational) Health and Safety and additional specialist training. • Analyzing and updating, based on needs, the evaluation of the professional risk at individual work stations (positions). • Maintaining a high standard of equipping the personnel with protection means and enforcing the appropriate use thereof. • Performing measurements of harmful factors in the work environment.
8.	Communications risk	Risk related to providing inaccurate, untrue information or a lack of information disclosure at specific time.		• Use of the available communications tools for providing information. • Organizing direct meetings of the management personnel with the workforce. • Building good relations with the workforce of TAURON Capital Group.
9.	Customer service risk	Customers and counterparties (business partners, contractors) Risk related to non-compliance with the customer service standards.		• Monitoring and analyzing external customer satisfaction indicators and indicators related to complaints • Taking additional measures, e.g. with respect to internal regulations, defining standards of conduct as a result of the analysis of indicators. • Taking additional measures, e.g. introducing new internal regulations in order to improve customer service standards. • Developing key account managers' competences and skills. • Continued raising of customer service standards.
10.	Risk related to performance of agreements by subcontractors	Risk related to improper performance by subcontractors of the works commissioned, termination of the agreement and delays, changes to the budget, scope related thereto		• Concluding agreements with subcontractors in accordance with TAURON Capital Group's standards. • Analyzing the performance of the subject of the agreement, examining the quality of services provided by subcontractors. • Evaluating the financial standing and credibility of the subcontractors.
11.	Volume and margin risk	Unfavorable changes or terminations of commercial agreements by customers, leading to the declining revenue from operations; loss and lack of acquiring new customers.		• Conducting marketing campaigns, acquiring new customers. • Taking actions focused on retaining the existing customers and recovering the lost ones. • Ongoing updating of the offering, launching sales of multi-package type products.
12.	Purchasing process risk	Risk related to the volatility of the situation on the supplies/services market, volatility of demand for the given type of product/supply/service on the market, decline of the availability of supplies/services of appropriate quality, leading to the purchase order value increase risk.		• Preparing a Plan of Purchase Orders and updating thereof. • Aggregating purchases of selected product groups. • Consolidating purchase orders. • Concluding long term agreements. • Taking into account the price risk related to commodity prices/FX rate fluctuations in contracts with contractors
	Compliance risk

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

#	Risk name	Risk description	Risk rend	Reaction to risk
		Capital Group's property, abuse of work position to derive various types of personal gain by forcing specific behavior of customers while performing work related activities.		• Conducting compliance type activities. • Promoting best practices, improving procedures, training. • Enforcing and promoting the provisions of TAURON Group's Code of Responsible Business in force. •
14.	External fraud risk	Third party actions aimed at, among others, theft, robbery, physical burglary, computer hacking, information theft, forgery.		• Monitoring potential and actual security incidents. • Anti-virus protection of workstations. • Physical protection of facilities. • Conducting security tests
15.	Risk of unethical behaviors	Risk related to the occurrence of behaviors not in line with the generally accepted by the society social coexistence rules, moral standards and mobbing.		• Functioning of the whistleblowing system in the organization. • Developing organizational culture based on TAURON Capital Group's values and principles. • Training, building awareness through meetings, TAURONET, press materials. • Functioning of Ethics Committees in the organization operating based on the adopted regulations
16.	Legal risk	Risk related to non-compliance with the legal regulations, misinterpretation of the new provisions and regulations, court disputes (litigations), requirements imposed by URE/UOKiK/KNF/GIODO, etc.		• Continuous monitoring of the legal environment and changes to the legal regulations. • Implementing the required changes to internal regulations. • Appointing working groups tasked with preparing and implementing the required changes stemming from the legal environment. • Continuous cooperation with the authorities overseeing the energy market and the capital market. • Training for the personnel on the changes being introduced.
17.	Personal data protection risk	Inappropriate storing and processing of personal data resulting in an undesirable leak or violation of the rights of data subjects related to personal data protection		• Defining and implementing appropriate technical or organizational meassures ensuring the degree of personal data protection. • Monitoring the compliance with the legal regulations related to personal data protection. • Raising the level of awareness of the workforce with respect to personal data protection, in accordance with the applicable regulations. • Defining and implementing a process for handling the requests of data subjects, in accordance with the Company's regulations in force and the process documentation. • Informing and advising the organization's personnel on personal data protection.
	Environment
18.	Reputational risk	Current and future impact on the company's revenue and capital (equity) due to the negative public opinion backlash.		• Continuous monitoring of the Company's external and internal threats. • Media monitoring, developing contacts and relationships with the media within TAURON Capital Group. • Preparing procedures for the Company's communications with the external and internal environment (stakeholders).
19.	Regulatory risk	Unfavorable impact of the domestic and European level legislation due to the need to pass or adapt to the legal regulations and to incur the required financial costs in order to comply therewith.		• Continuous monitoring of the legal environment and changes to the regulations. • Analyzing draft legal acts and planning the required adaptation steps. • Implementing the required changes into internal regulations.
20.	License risk	No possibility to conduct operations as a result of a prolonged process of obtaining a license or amending the licenses held. Unfavorable legal changes with respect to licensed operations.		• Ongoing control of the correct performance of licensing obligations. • Monitoring changes to the legal acts with respect to licensing obligations. • Legal support for the license extension and obtaining process.
	Technology and infrastructure
21.	Environmental risk	Potential negative impact of the operations on the environment and of non-alignment to and non-compliance with the environmental requirements of the domestic and community law		• Ongoing supervision over compliance with the conditions of the environmental decisions. • Maintaining the required efficiency of the devices reducing the emission of pollutants. • Frequent evaluation of the compliance of actions with the legal requirements with respect to environment protection.

#	Risk name	Risk description	Risk rend	Reaction to risk
				• Implementing investment projects in environment protection in order to minimize the adverse impact of the mining and processing operations conducted.
22.	Weather risk	Impact of weather conditions on the operations of the enterprise, both with respect to technological aspects as well as the commercial ones.		• Upgrading (refurbishing) hydroelectric structures aimed at optimizing the utilization of water resources. • Preparing plans of overhauls, inspections and maintenance activities with flexible provisions on deadlines for completing the works. • Continuous monitoring of wind conditions and icing on the wind farms' blades. • Continuous technical oversight over the operation of individual wind farms, conducted by the companies operating the farms. • Monitoring and analyzing new technological solutions that reduce the impact of adverse weather conditions on the volume of electricity generated.
23.	Company asset failure risk	Impact of failures of machines and devices, overhauls, upgrades (refurbishments), maintenance and management of production and non-production assets on achieving the company's goals.		• Optimizing capital expenditures on asset replacements, ongoing monitoring of the condition of machines, devices and installations. • Raising professional qualifications and work culture of the personnel by organizing courses and training. • Responding to an emergency situation by the technical personnel and automatic process safety interlocks (safeguards). • Insuring assets against fortuitous events (excluding underground assets). • Introducing IT tools with respect to improving the monitoring and managing failure indicators (ratios).
24.	IT risk	Risks related to the IT infrastructure security, failures of the IT infrastructure		• Developing and maintaining plans aimed at ensuring continuity of IT infrastructure's operation. • Periodic identifying and categorizing IT resources based on the service restoration targets/ • Use of IT solutions with appropriate technical parameters, providing an acceptable level of reliability and efficiency of operation (including also UPS devices, GSM modem, mobile phones). • Planning and conducting training on IT infrastructure continuity of operation and security. • Storing and protecting the back-up data.
25.	Asset (property) security and protection risk	Risk related to compromising the integrity of machines/devices and to the security of information, including its improper processing and unauthorized disclosure.		• Monitoring the implementation of the developed plans to protect the facilities that are subject to mandatory protection. • Maintaining and updating contingency procedures/plans. • Implementing/updating and oversight over compliance with the information security rules in force. • Regular personnel training with respect to security procedures in force.
26.	Geological risk	Impact of geological factors on the mining operations		• Making test drillings for the better intelligence on the positioning of coal deposits. • Continuing to take preventive measures in areas under threat in order to improve the geological and mining conditions and to provide protection against natural threats (including, among others, long drilled blasting hole shooting in order to break the rock mass)

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4. ANALYSIS OF FINANCIAL POSITION AND ASSETS OF TAURON POLSKA ENERGIA S.A

4.1. Overview of economic and financial data disclosed in the annual financial statements

Statement of comprehensive income

The below table presents the annual standalone statement of comprehensive income in 2018-2016.

Table no. 20. Annual standalone statement of comprehensive income in 2018-2016

Statement of comprehensive income prepared in accordance with the IFRS (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Sales revenue	8 618 642	7 792 025	7 995 328	111%
Own cost of goods, materials and services sold	(8 472 648)	(7 414 707)	(7 837 567)	114%
Gross profit (loss) from sales	145 994	377 318	157 761	39%
Cost of sales	(20 692)	(23 309)	(19 326)	89%
Overheads	(98 716)	(88 751)	(81 368)	111%
Other operating revenues and costs	(3 927)	(2 470)	(91 670)	159%
Operating profit (loss)	22 659	262 788	(34 603)	9%
Operating profit margin (%)	0.3%	3.4%	(0.4)%	8%
Financial revenue	1 146 884	1 017 258	1 989 049	113%
Costs of interest on debt	(298 602)	(334 638)	(356 947)	89%
Revaluation of stocks and shares	(2 469 069)	(134 372)	(1 610 396)	1 837%
Revaluation of bonds and loans	15 493	0	0	-
Other financial revenues and costs	(149 648 )	108 529	(136 237)	-
Gross profit (loss)	(1 732 283)	919 565	(149 134)	-
Gross profit margin (%)	(20.1)%	11.8%	(1.9)%	-
Income tax	22 430	(65 214)	(17 119)	-
Net profit margin (%)	(1 709 853)	854 351	(166 253)	-
Net profit margin (%)	(19.8)%	11.0%	(2.1)%	-
Other net comprehensive income	(19 666)	(6 713)	104 024	293%
Total comprehensive income	(1 729 519)	847 638	(62 229)	-
EBITDA	27 287	268 220	(27 078)	10%
EBITDA margin (%)	0.3%	3.4%	(0.3)%	9%

In 2018 the Company posted an operating profit of PLN 23 million, lower than in 2017, primarily due to dissolving in 2017, in full, of the provisions, set up in 2015 and updated in 2016, stemming from the agreements involving charges related to the joint venture "Construction of the CCGT unit in Stalowa Wola".

Positive, on the operating level, 2018 result is a consequence of TAURON achieving positive margins, first of all on trading in electricity, coal and CO² emission allowances.

In 2018, similar as in 2017, impairment charges related to the value of stocks and shares in subsidiaries were recognized in the financial results, due to the completed impairment tests related to the loss of the carrying amount of stocks and shares in subsidiaries as well as bonds and loans as of June 30, 2018 and as of December 31, 2018. The detailed information is provided further on in this report.

The Company disclosed the information on the above events in the regulatory filings (current reports): no. 25/2018 of July 27, 2018 and no. 2/2019 of February 18, 2019.

Revenue

The below table presents the Company's sales revenue in 2018 -2016.

Table no. 21. Company's sales revenue in 2018-2016

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Sales total	9 815 951	8 963 044	10 011 343	110%
Sales revenue	8 618 642	7 792 025	7 995 328	111%
Revenue from sales of goods and materials:	8 506 398	7 664 715	7 899 621	111%
Electricity (without excluding excise tax)	7 555 021	7 117 988	7 255 819	106%
Gas	277 887	190 507	236 215	146%
Greenhouse gas emission allowances	666 306	336 566	363 500	198%
Property rights related to origin of electricity	1 586	14 939	36 137	11%
Other	5 598	4 715	7 950	119%
Revenue from sales of services:	112 244	127 310	95 707	88%
Sales of commercial (trading) services	67 014	52 711	54 517	127%
Other	45 230	74 599	41 190	61%
Revenue from other operations	1 698	1 427	1 041	119%
Revenue from financial operations	1 195 612	1 169 592	2 014 974	102%
Revenue from dividend	819 437	560 832	1 485 152	146%
Revenue from bonds and loans interest	327 447	456 426	503 897	72%
Other financial revenue	48 728	152 334	25 925	32%

Revenue from the sales of goods and materials represents 87% of the total revenue, while financial revenue represents 12%, which is a consequence of the implemented Business Model and centralizing of functions by TAURON.

The goal of the adopted solution is to hedge the buy and sell positions of TAURON Capital Group's entities, to perform the function of the Market Operator and entity responsible for the trading balances of TAURON Capital Group's subsidiaries and to optimally manage, among others, the property rights and the CO2 emission allowances.

A relatively large share of revenue from bonds and loans interest is a consequence of the implemented central financing model and the Policy for managing TAURON Group's liquidity including the cash pooling functioning at TAURON Capital Group, which allows for efficient management of the finances of all of TAURON Capital Group's subsidiaries.

The revenue from the sales of goods and materials achieved in the reporting period was impacted by:

• 1. higher revenue from the sales of electricity as a result of higher electricity sales prices (13.8%) as compared to 2017,
• 1. increase of revenue from the sales of greenhouse gas emission allowances (sales to TAURON Capital Group's subsidiaries for the purpose of redeeming the allowances in conjunction with the fulfillment of the obligation due to greenhouse gas emissions) as a result of a rise of the sales prices of greenhouse gas emission allowances,
• 1. higher revenue from the sales of natural gas as a result of an increase of prices and sales volume,

• lower revenue from the sales of property rights related to the origin of electricity due to the end of the trading of the property rights.

As part of the revenue from the sales of services TAURON recognizes revenue from:

• 1. intermediary services related to coal purchase transactions on the market for TAURON Capital Group's subsidiaries (+2% as compared to 2017),
• 1. services related to electricity (+4% as compared to 2017; including: 3. provision of the Trading Operator/Trading and Technical Operator service (+6% as compared to 2017),
• 1. management of the portfolio of CO² emission allowances (+220% as compared to 2017).

Due to its holding operations the Company is reporting material financial revenue. Its rise by 2% is mainly a consequence of higher revenue from dividends (by 46%) and lower bonds and loans interest by (29%).

The Company's operations are primarily conducted on the territory of Poland. Sales to foreign customers in the years ended on December 31, 2018 and December 31, 2017 came in at, respectively, PLN 97.5 million and PLN 147.5 million.

Costs

The below table presents the level and structure of the costs incurred by the Company in 2018-2016.

Table no. 22. Level and structure of the costs incurred by the Company in 2018-2016

Item (PLN '000))	2018	2017	2016	Change in % (2018/2017)
Total costs	(11 548 235)	(8 043 479)	(10 160 477)	144%
Cost of goods, materials and services sold	(8 472 648)	(7 414 707)	(7 837 567)	114%
Costs of sales and overheads	(119 408)	(112 060)	(100 694)	107%
Costs of other operations	(5 625)	(3 897)	(92 711)	144%
Costs of financial operations	(2 950 554)	(512 815)	(2 129 505)	575%

In 2018 the total costs of the Company's operations represented 144% of the level of costs in 2017, mainly as a result of recognizing, in the financial costs in 2018, of the consequences of setting up and reversing the impairment charges related to the carrying amount of stocks and shares in subsidiaries in the amount much higher than the amount recognized in 2017. The costs of goods, materials and services sold constitute the largest share of the total cost (73%). The higher costs of electricity purchase, due to the higher electricity purchase price (by 14.3%), had the biggest impact on the increase of these costs by 14% as compared to 2017.

In 2018, in relation to 2017, the costs of sales and overheads were higher by 7%. The rise was mainly related to the costs of advertising, stock market services and labor costs which is associated with centralizing of functions by TAURON in accordance with the implemented Business Model.

Costs of other operations include mainly premiums paid to sector organizations and donations, and the increase of the costs by 44% is mainly due to an increase of the premiums paid to sector organizations as compared to 2017.

The financial costs include an excess of the booked impairment charges related to the carrying amount of stocks and shares, which is primarily associated with booking and reversing the impairment charges related to the carrying amount of stocks and shares in subsidiaries as a result of the impairment tests conducted as of June 30 and December 31, 2018. With respect to the standalone financial statements of TAURON Polska Energia S.A. for 2018 the analyses completed demonstrated:

• validity of booking write-downs related to the loss of the carrying amount of the shares in TAURON Wydobycie in the amount of PLN 1 094.8 million,
• validity of booking write-downs related to the loss of the carrying amount of the shares in TAURON Wytwarzanie in the amount of PLN 2 287.8 million,

• validity of reversing write-downs related to the loss of the carrying amount of the shares in TAURON EKOENERGIA in the amount of PLN 940.5 million.

Furthermore, an impairment charge related to the shares in the PEPKH subsidiary in the amount of PLN 6 million and an impairment charge related to the shares in the TAURON Sweden Energy subsidiary in the amount of PLN 20.9 million were booked.

The excess of the write-downs booked over the write-downs reversed in the standalone financial statements (net charges) is PLN 2 469 million, and the total estimated impact on the decrease of the standalone net financial result reached PLN 2 469 million.

The Company's assets and financial position

The below table presents the Company's annual standalone statement of financial position.

Table no. 23. Annual standalone statement of financial position (material items)

Statement of financial position prepared in accordance with the IFRS (PLN '000)	As of December 31, 2018	As of December 31, 2017	As of December 31, 2016	Change in % (2018/2017)
ASSETS
Fixed assets	27 166 500	27 371 684	25 855 329	99%
Stocks and shares	21 076 057	20 912 679	14 874 418	101%
Bonds	5 043 980	6 009 920	9 615 917	84%
Loans granted	808 760	382 989	1 292 800	211%
Current assets	2 346 490	2 949 690	1 817 047	80%
Inventory	409 587	198 428	284 799	206%
Trade receivables and other receivables	833 484	719 133	961 242	116%
Bonds	192 311	562 776	242 465	34%
Cash and equivalents	465 925	721 577	198 090	65%
TOTAL ASSETS	29 512 990	30 321 374	27 672 376	97%
Liabilities
Equity	15 259 836	17 377 906	16 530 268	88%
Long-term liabilities	8 533 790	9 530 787	8 969 976	90%
Liabilities due to debt	8 474 344	2 725 763	8 754 047	311%
Short-term liabilities	5 719 364	3 412 681	2 172 132	168%
Liabilities due to debt	4 504 374	2 725 763	1 433 929	165%
Liabilities towards suppliers and other liabilities	885 639	545 974	605 605	175%
TOTAL EQUITY AND LIABILITIES	29 512 990	30 321 374	27 672 376	97%

As of December 31, 2018 fixed assets represented the biggest share of the total assets (92%), where the dominating item is the value of stocks and shares (71% of the total assets) and bonds (17% of the total assets).

The following events had the biggest impact on an increase of the value of stocks and shares by 1% year on year:

• 1. increase of the share capital of TAURON Wydobycie in the amount of PLN 340 million,
• 1. increase of the share capital of TAURON Wytwarzanie in the amount of PLN 780 million,
• 1. increase of the share capital of Nowe Jaworzno GT in the amount of PLN 1 060 million,
• 1. increase of the share capital of TAURON Dystrybucja Serwis in the amount of 439 million,
• 1. additional contribution to the equity of PEPKH in the amount of PLN 6 million,
• 1. increase of the share capital of ElectroMobility Poland S.A. in the amount of PLN 15 million,
• 1. increase of the share capital of PGE EJ 1 in the amount of PLN 6 million.

Additional factors that led to a change of this balance sheet item were impairment charges related to the stocks and shares that were booked and reversed as a result of impairment tests conducted due to the loss of the carrying value of stocks and shares of subsidiaries. The impairment tests completed proved the need for booking or increasing the already booked writedowns in the following subsidiaries:

• TAURON Wydobycie in the amount of PLN (1 094.8) million,
• TAURON Wytwarzanie in the amount of PLN (2 287.8) million,

and also reversing of the write-downs on the value of stocks and shares in:

• TAURON EKOENERGIA in the amount of PLN 940.5 million.

Furthermore, in the year ended on December 31, 2018 an impairment charge related to the shares in the PEPKH subsidiary in the amount of PLN 6 million and an impairment charge related to the shares in the TAURON Sweden AB (publ.) subsidiary in the amount of PLN 20.9 million were booked.

Under the Bonds item the value of bonds issued by the subsidiaries and purchased by TAURON is provided. A year on year decline is the result of redeeming of the bonds issued in previous years by the subsidiaries.

As of December 31, 2018 and December 31, 2017, equity represented, respectively, 52% and 57% of total equity and liabilities.

The liabilities of the Company due to loans and credits received and due to bonds, as of December 31, 2018, were related to bonds issued under the bond issue program worth PLN 9 358.0 million, including the subordinated hybrid bonds in the amount of PLN 1 541.7 million, loans from related entities drawn under the Agreement on cash pool services, in the amount of PLN 2 038.5 million, loans received from the European Investment Bank (EIB) in the amount of PLN 850.7 million (including interest), the loan from a subsidiary in the amount of PLN 730.7 million and an overdraft in the amount of PLN 0.8 million.

Statement of cash flows

The table below presents the statement of cash flows prepared according to the IFRS.

Table no. 24. Statement of cash flows (material items)

Statement of Cash Flows prepared in accordance with the IFRS (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Cash flows from operating activities
Gross profit / (loss)	(1 732 283)	919 565	(149 134)	-
Adjustments	1 607 137	(673 538)	(83 753)	-
Net cash from operating activities	(125 146)	246 027	(232 887)	-
Cash flows from investing activities
Purchase of stocks and shares	(2 646 353)	(6 169 590)	(543 603)	43%
Purchase of bonds	(160 000)	(350 000)	(2 770 000)	46%
Loans granted	(847 442)	(307 132)	(23 575)	276%
Redemption of bonds	1 334 920	3 547 110	540 000	38%
Repayment of loans granted	421 225	1 000 000	142 024	42%
Dividends received	819 437	359 787	1 485 152	228%
Interest received	289 177	642 017	474 126	45%

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Statement of Cash Flows prepared in accordance with the IFRS (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Net cash from investing activities	(720 432)	(1 353 288)	(619 543)	53%
Cash flows from financing activities
Redemption of debt securities	0	(1 650 000)	(3 300 000)	0%
Credits/ loans repayment	(162 318)	(175 695)	(132 818)	92%
Interest paid	(301 978)	(265 223)	(351 147)	114%
Issue of debt securities	1 350 000	2 707 462	4 284 607	50%
Net cash from financing activities	844 776	593 470	486 164	142%
Increase/(decrease) in net cash and equivalents	(802)	(513 791)	(366 266)	-
Net FX differences	(526)	2 038	1 179	-
Cash opening balance	(1 559 232)	(1 045 441)	(679 175)	149%
Cash closing balance	(1 560 034)	(1 559 232)	(1 045 441)	100%

The balance of cash received from operating, investing and financing activities of the Company for 2018, taking into account the opening cash balance, was PLN (1 560.2) million. The closing cash balance results from the adjustment of cash by the balance of loans granted and received under cash pooling transactions, due to the fact that they do not constitute cash flows from investing or financing activities, as they are used mainly for current liquidity management.

4.2. Differences between the financial results reported in the annual report and the forecasts of results for the given year published earlier

The Management Board of the Company did not publish any forecasts of the earnings of TAURON for 2018. This decision was due to the considerable volatility of the market and a substantial number of factors affecting its predictability.

4.3. Key financial ratios

The below table presents key financial ratios of TAURON.

Table no. 25. Key financial ratios of TAURON

#	Item	2018	2017	2016	Change in % (2018/2017)
1.	Gross Profitability (gross profit / sales revenue)	(20.1)%	11.8%	(1.9)%	-
2.	Net Profitability (net profit / sales revenue)	(19.8)%	11.0%	(2.1)%	-
3.	Return on equity (gross profit / equity)	(11.4)%	5.3%	(0.9)%	-
4.	Return on assets (net profit / total assets)	(5.8)%	2.8%	(0.6)%	-
5.	EBIT (PLN '000) (operating profit)	22.658	262 788	(34 603)	9%
6.	EBIT margin (EBIT / sales revenue)	0.3%	3.4%	(0.4)%	8%
7.	EBITDA (PLN '000) (operating profit before depreciation)	27 286	268 220	(27 078)	10%

#	Item	2018	2017	2016	Change in % (2018/2017)
8.	EBITDA margin (EBITDA / sales revenue)	0.3%	3.4%	(0.3)%	9%
9.	Current liquidity ratio (current assets / short-term liabilities)	0.41	0.86	0.84	48%

The Company's low 2018 EBIT, as compared to 2017, was primarily affected by the dissolving, in 2017, of the provision related to the agreements involving charges stemming from the EC Stalowa Wola joint venture in the amount of PLN 203.4 million.

The 2018 gross and net profits were impacted by the booked and reversed impairment charges related to the stocks and shares in subsidiaries and the value of loans granted.

The value of the operating profit is typical for a company conducting operations involving managing a holding entity (costs related to managing TAURON Capital Group are included in operating activities while revenues gained from dividends are recognized under financial activities).

The Company's ability to pay its accounts payable was not in jeopardy in 2018.

4.4. Principles of preparing annual financial statements

Financial statements have been drawn up in accordance with the IFRS approved by the EU.

The IFRS comprise standards and interpretations approved by the International Accounting Standards Board as well as the International Financial Reporting Interpretation Committee.

The financial statements have been prepared with the assumption of the continuation of business operations by TAURON in the foreseeable future. As of the date of approval of the consolidated financial statements for publication, no circumstances have been detected, indicating any risk for business continuity by TAURON.

The accounting principles (policy) adopted for drawing up of the consolidated financial statements are presented in note 9 of the Consolidated financial statements for the year ended on December 31, 2018

5. ANALYSIS OF TAURON CAPITAL GROUP'S FINANCIAL

POSITION AND ASSETS

5.1. TAURON Capital Group's financial results

The below table presents TAURON Capital Group's EBITDA in 2011-2018.

Figure no. 42. TAURON Capital Group's EBITDA in 2011-2018

The below table presents TAURON Capital Group's 2018-2016 EBITDA broken down into individual lines of business (segments). Data for the individual segments do not include consolidation exclusions.

EBITDA (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
Mining	(207 181)	(83 036)	(82 130)	-	(124 145)
Generation	731 372	537 024	545 311	136%	194 348
Distribution	2 517 465	2 282 685	2 394 812	110%	234 775
Supply	320 543	841 222	490 005	38%	(520 679)
Other	134 793	118 043	114 570	114%	16 749
Unassigned items	(122 066)	(78 297)	(125 754)	-	(43 769)
Total EBITDA	3 374 926	3 617 641	3 336 814	93%	(242 721)

Table no. 26. TAURON Capital Group's 2018-2016 EBITDA broken down into individual lines of business (segments)

The below figure presents TAURON Capital Group's 2016-2018 EBITDA structure (composition).

Figure no. 43. TAURON Capital Group's 2016-2018 EBITDA structure (composition)

Distribution, Generation and Supply Segments are the biggest contributors to TAURON Capital Group's EBITDA..

The below figure presents the change in TAURON Capital Group's EBITDA in 2016-2018.

5.2. TAURON Capital Group's financial results by line of business

5.2.1. Mining Segment

The below table presents the Mining Segment's 2018-2016 results..

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
Mining
Sales revenue	1 266 024	1 541 425	1 311 143	82.1%	(275 401)
coal - coarse and medium assortments	367 449	509 348	346 251	72.1%	(141 899)
thermal coal	831 875	973 549	918 647	85.4%	(141 674)
other revenue	66 700	58 528	46 245	114.0%	8 172
Operating profit (EBIT)	(1 053 469)	(211 070)	(205 163)	-	(842 399)
Depreciation and write-downs	846 288	128 034	123 033	661.0%	718 254
EBITDA	(207 181)	(83 036)	(82 130)	-	(124 145)

Table no. 27. Mining Segment's 2018-2016 results

In 2018 the Mining Segment's revenue was 18% lower as compared to 2017 as a consequence of the lower coal volume sold, which was due to the lower production of the commercial coal by the Company's coal mines.

Mining Segment's 2018 operating results, EBIT and EBITDA, were significantly lower as compared to the 2017 earnings, which was due to the following factors:

• 1. lower sales volumes of each product assortment by 22% on average mainly as a result of lower production of commercial coal and selling some coal inventory in 2017,
• 1. higher average price of products sold by 12% on average, which is a consequence of the situation on the coal market due to an increase of demand for this commodity,
• 1. higher coal production unit cost which is a consequence of a 22% drop of the volume of coal produced and the lower variable direct costs with the fixed costs flat as compared to 2017. The decline of the variable direct costs is due to the lower costs of electricity consumed and the accounted for (settled) costs of the preparatory works, which is related to the lower extraction output,

• recognizing, as assets on the 2018 balance sheet, of some coal produced and not sold, while in 2017 the company sold some of the coal produced in the preceding period.

TAURON Capital Group recognized, in the 2018 results, the booking of the impairment charges related to the loss of the carrying amount on the balance sheet of the Mining Segment's cash generating units (CGU), whose total impact on the charge to the Segment's operating profit reached PLN 733 million.

The below figure presents the Mining Segment's 2016 - 2018 financial data.

Figure no. 45. Mining Segment's 2016 - 2018 financial data

The below figure presents the Mining Segment's EBITDA, including the material factors affecting the year on year change.

Figure no. 46. Mining Segment's EBITDA

Major investments

In 2018 the Mining Segment's total capital expenditures came in at PLN 247 million, including the outlays on the following strategic investment projects:

• 1. PLN 68 million on the construction of the "Grzegorz" shaft, including the construction of the infrastructure and the accompanying headings,
• 1. PLN 34 million on the construction of an 800 m level at Janina Coal Mine (ZG Janina),
• 1. PLN 87 million on Brzeszcze Coal Mine's (ZG Brzeszcze) capex program.

Mining Segment's other capital expenditures are spent on coal extraction preparations and operations (mainly the purchase of machines and equipment, drilling of headings, longwall preparation).

5.2.2. Generation Segment

The below table presents the Generation Segment's 2018-2016 results.

Table no. 28. Generation Segment's 2018-2016 results

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
Generation
Sales revenue	4 638 494	4 537 002	4 356 101	102.2%	101 492
Electricity	3 598 195	3 484 071	3 101 505	103.3%	114 124
Heat	833 410	873 777	861 029	95.4%	(40 367)
property rights arising from certificates of electricity origin	153 637	114 840	335 673	133.8%	38 797
other revenue	53 252	64 314	57 894	82.8%	(11 062)
Operating profit (EBIT)	196 658	89 645	(752 813)	219.4%	107 013
Depreciation and write-downs	534 714	447 379	1 298 124	119.5%	87 335
EBITDA	731 372	537 024	545 311	136.2%	194 348

In 2018 the Generation Segment's sales revenue was higher by 2% as compared to 2017 due to higher electricity and property rights sales revenue (mainly due to the higher electricity and PM OZE sales prices). Lower revenue from the heat sales is a consequence of the lower sales volume which was due to the higher outdoor temperatures year on year.

Generation Segment's EBITDA was 36% higher in 2018 as compared to last year.

The following factors had an impact on the results achieved:

• 1. higher margin on electricity mainly due to the higher electricity sales price year on year,
• 1. lower margin on heat lower heat sales and transmission services volume (the effect of the higher outdoor temperature and the higher heat production unit costs (an increase of coal and biomass prices year on year)),
• 1. higher costs of the obligation to redeem (retire) CO² emission allowances which is the result of:
  2. a smaller number of free CO2 emission allowances related to electricity (1.7 million free CO2 emission allowances were settled (retired), while in 2018: no free CO2 emission allowances),
  3. lower CO2 emission volume (lower electricity and heat production year on year),
  4. higher prices of CO2 emission allowances year on year,
• 1. dissolving of the provision related to the employee benefits (entitlements) (cash equivalent for the subsidized consumption of electricity (employee tariff), service anniversary awards and the Company's Social Benefits (Entitlements) Fund (Zakładowy Fundusz Świadczeń Socjalnych)) at TAURON Wytwarzanie – a one-off event,
• 1. other (mainly lower costs of the real estate tax on wind farms and lower costs related to bonuses for the workforce and the Voluntary Redundancy Program year on year).

TAURON Capital Group recognized, in the 2018 results, the booking and reversing of the impairment charges related to the loss of the carrying amount on the balance sheet of the Generation Segment's cash generating units (CGU), whose total impact on the charge to the Segment's operating profit reached PLN 122 million.

The below figure presents the Generation Segment's 2016-2018 financial data.

Figure no. 47. Generation Segment's 2016-2018 financial data

The below figure presents the Generation Segment's EBITDA, including the material factors impacting the change year on year.

Figure no. 48. Generation Segment's EBITDA

Major investments

In 2018 the Generation Segment's total capital expenditures came in at PLN 1 300 million, including the outlays on the following strategic investment projects:

• 1. PLN 991 million on the construction of the new 910 MWe unit in Jaworzno,
• 1. PLN 17 million on investment projects related to expanding and maintaining the district heating networks,
• 1. PLN 28 million on connecting new facilities,
• 1. PLN 7 million on connecting facilities heated from low emission sources to the district heating networks,
• 1. PLN 76 million on the replacement expenditures and overhaul components at TAURON Wytwarzanie.

Furthermore, the financial costs constitute approx. PLN 147 million out of the segment's total capex.

Apart from the above capex an investment project in Stalowa Wola with the participation of the strategic partner, PGNiG, is underway. TAURON and PGNiG hold a 50% stake each in the special purpose vehicle implementing the project that includes the construction of the 449 MWe CCGT unit, including the 240 MWt heat generation component. In January 2016, the contract with the general contractor Abener Energia S.A was terminated. In March 2017, thanks to the repayment of the existing institutions financing the project, the signed amendments to the gas and electricity agreements as well as the agreement on the project's restructuring came into force. The agreement was reached and the decision was taken on the construction of the backup heat source. In March 2018 financing was obtained from Bank Gospodarstwa Krajowego S.A. (BGK) and PGNiG. As a result of completing a number of analyses, among others due to the project's advancement level the contract manager formula (EPCM) was chosen. Energopomiar Gliwice - Energoprojekt Katowice consortium was selected to implement the EPCM project. The project's completion is scheduled for 2019. Expected capital expenditures on the project (excluding the financial costs) amount to PLN 1.4 billion. Approx. PLN 1.06 billion had been spent by the end of 2018.

5.2.3. Distribution Segment

The below table presents the Distribution Segment's 2018-2016 results.

Table no. 29. Distribution Segment's 2018-2016 results

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
Distribution
Sales revenue	6 158 215	6 719 943	6 310 216	91.6%	(561 728)
distribution services	5 789 487	6 311 594	5 892 510	91.7%	(522 107)
connection fees	81 129	114 112	103 636	71.1%	(32 983)
maintenance of street lighting	121 650	115 265	116 462	105.5%	6 385
other revenue	165 949	178 972	197 608	92.7%	(13 023)
Operating profit (EBIT)	1 417 102	1 210 925	1 363 236	117.0%	206 173
Depreciation and write-downs	1 100 362	1 071 760	1 031 576	102.7%	28 602
EBITDA	2 517 465	2 282 685	2 394 812	110.3%	234 775

In 2018, as compared to 2017, the Distribution Segment reported an 8% sales revenue decrease, while the increases of EBIT and EBITDA reached 17% and 10%, respectively. The following factors had an impact on the results:

• 1. decrease of the average rate of the distribution service sales to the final consumers (data following the exclusion of the transition fee in 2018 as a consequence of the introduction of the application of IFRS 15),
• 1. rising supplies to consumers, in particular, among consumers in A and B groups, as a result of favorable economic conditions and rising production,
• 1. lower transmission services purchase costs (data following the exclusion of the transition fee in 2018 in accordance with IFRS 15),
• 1. higher costs of purchasing electricity to cover the balancing difference,
• 1. drop of revenue from connection fees primarily as a result of carrying out a material investment project in 2017 and the IFRS 15 change,
• 1. increase of charges for exceeding contractual connection capacity (power), above-standard passive energy off-take and the revenue due to fixing power line collisions,
• 1. decline of labor costs as a result of lower headcount, realignment of indirect costs overhead on investment projects carried out using in-house resources and the effect of the voluntary redundancy program,
• 1. increase of the grid assets value as a result of the investment projects carried out which as a consequence leads to a rise of the costs of taxes and charges.

The below figure presents the Distribution Segment's 2016-2018 financial data.

Figure no. 49. Distribution Segment's 2016-2018 financial data

* Due to the IFRS 15 change the transition fee is excluded from the 2018 revenue and costs

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

The below figure presents the Distribution Segment's EBITDA, including the material factors impacting the year on year change.

Figure no. 50. Distribution Segment's EBITDA

¹ Due to the IFRS 15 change the transition fee is excluded from the 2018 revenue and costs

Major investments

In 2018 the Distribution Segment's total capital expenditures came in at PLN 2 044 million. The main capex directions of investment included:

• 1. PLN 1 118 million on investment projects related to the grid upgrades (refurbishments) and replacements,
• 1. PLN 676 million on investment projects related to connecting new consumers.

Moreover, in 2018 expenditures in the total amount of approx. PLN 250 million were also spent on: communications and IT, buildings and structures, means of transportation, modernization of street lighting.

5.2.4. Supply Segment

He below table presents the Supply Segment's 2018 – 2016 results.

Table no. 30. Supply Segment's 2018 – 2016 results

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
Supply
Sales revenue	14 074 115	13 567 887	14 016 190	103.7%	506 226
electricity, including	9 011 153	8 740 196	8 814 692	103.1%	270 957
revenue from retail electricity supply	7 928 888	7 554 291	7 145 644	105.0%	374 597
greenhouse gas emission allowances	666 306	336 566	363 500	198.0%	329 740
fuel	1 371 117	1 024 912	1 583 672	133.8%	346 205
distribution service (transferred)	2 948 322	3 400 487	3 183 232	86.7%	(452 165)
other revenue, including trading services	77 217	65 726	71 094	117.5%	11 489
Operating profit (EBIT)	306 481	832 216	479 374	36.8%	(525 7325)
Depreciation and write-downs	14 062	9 006	10 631	156.1%	5 056

Item (PLN '000)	2018	2017	2016	Change in % (2018/2017)	Change (2018-2017)
EBITDA	320 543	841 222	490 005	38.1%	(520 679)

Sales revenue was 3.7% higher In 2018 as compared to 2017, mainly due to the higher electricity sales revenue as a result of an increase of the sales prices. The fuel sales revenue was also higher as a result of rising gas fuel sales prices as was the revenue from the sales of the other goods and services due to the higher turnover of the emission allowances sales as a consequence of an increase of the CO² market prices. On the other hand, the lower revenue from the distribution service are the result of applying IFRS 15 and the netting of the transition fee related thereto.

2018 EBIT and EBITDA were lower than last year due to the following factors:

• 1. lower margin on electricity as a result of a faster growth rate of purchase prices versus the growth rate of the sales prices. The situation on the electricity market had a direct impact on the decline of the margin in the mass customer segment, where there is a large share of customers with a fixed sales price (customers using the products and customers with prices based on the G tariff regulated by ERO). In spite of an increase of the G tariff, the price hikes in the ABC group and the last resort tariff sales, a lower unit margin was reported than last year,
• 1. recognizing in the current reporting period by the Supply Segment's subsidiaries of the provisions related to the agreements giving rise to the charges in the amount of PLN 214 million, due to the coming into force of the Act on the amendment to the act on the excise tax and some other acts (it is described in more detail in note 36 to the consolidated financial statements of TAURON Group for the financial year ended on December 31, 2018),
• 1. higher costs of the obligation to redeem (retire) the property rights which is the result of: a. increase of the obligation level for the "green" certificates from 15.4% to 17.5%; for the "violet" certificates from 1.8% to 2.3%, for the "yellow" certificates from 7.0% to 8.0%, a decrease of the obligation level for the "blue" certificates from 0.60% to 0.50% and maintaining of the obligation to retire the certificates from cogeneration for the "red" certificates in the amount of PLN 23.2%,

b. lower property rights prices due to taking advantage of the favorable market situation, mainly related to the "green" certificates (contracting and purchasing PMOZE to fulfil the redemption obligation at lower prices) and at the same time a change of the model used to set up provisions related to hedging the property rights (FIFO model),

• 1. dissolving, in 2017, of the provision related to the agreements giving rise to the charges with the joint venture (ECSW) , which led to an improvement of the Supply Segment's financial result by PLN 203 million due to the coming into force of the Agreement concluded between TAURON i PGNiG on the gas and electricity agreement and the amendments to the multi-year (long term) gas and electricity sale agreements related to the CCGT unit construction project at Stalowa Wola,
• 1. other other trading products margins reached on the other trading products, primarily an increase of the margin on the CO² emission allowances trading.

The below figure presents the Supply Segment's 2016-2018 financial data.

Figure no. 51. Supply Segment's 2016 – 2018 financial data

The below figure presents the Supply Segment's EBITDA, including the material factors impacting the year on year change.

Figure no. 52. Supply Segment's EBITDA

Major investments

The Supply Segment's total capital expenditures came in at PLN 7 million in 2018.

5.2.5. Other operations

The below table presents the Other Operations Segment's 2018-2016 results.

				Table no. 31. Other Operations Segment's 2018-2016 results
--	--	--	--	------------------------------------------------------------	--	--	--	--

Item (PLN '000)	2018	2017	2016	Change in % 2018/2017	Change (2018/2017)
Other operations
Sales revenue	857 462	804 560	827 928	106.6%	52 902
customer service services	190 765	198 113	205 388	96.3%	(7 348)
support services	424 468	392 394	386 323	108.2%	32 074
biomass	78 699	74 248	111 087	106.0%	4 451
aggregates	101 495	101 343	90 490	100.1%	152
other revenue	62 035	38 462	34 640	161.3%	23 573
Operating profit (EBIT)	46 023	35 902	42 642	128.2%	10 121
Depreciation and write-downs	88 770	82 141	71 928	108.1%	6 628
EBITDA	134 793	118 043	114 570	114.2%	16 749

The Other Operations Segment's revenue was 6.6% higher in 2018 as compared to 2017, which is primarily due to an increase of revenue from the support services as part of real estate management, property security and maintenance. Furthermore, the revenue rose as a result of centralizing the services provided by CUW HR and selling the by-products of coal burning and extraction.

The below figure presents the Other Operations Segment companies' 2016-2018 financial data.

Figure no. 53. Other Operations Segment companies' 2016-2018 financial data

Major investments

The Other Operations Segment companies' total capital expenditures came in at PLN 73 million in total in 2018. They include mainly expenditures on the IT systems.

5.3. Overview of economic and financial data disclosed in the consolidated annual financial statements

5.3.1. Characteristics of the structure of assets and liabilities in the consolidated statement of financial position

The below table shows the structure of the annual consolidated statement of financial position.

Consolidated statement of financial position	As of December 31, 2018	As of December 31, 2017	As of December 31, 2016
ASSETS
Fixed assets	87.7%	86.6%	81.3%
Current assets	12.3%	13.4%	12.0%
TOTAL ASSETS	100.0%	100.0%	93.4%
LIABILITIES
Equity attributable to shareholders of the parent entity	49.3%	50.3%	46.5%
Non-controlling stakes	0.4%	0.1%	0.1%
Total equity	49.7%	50.4%	46.5%
Long-term liabilities	30.7%	35.5%	33.4%
Short-term liabilities	19.6%	14.0%	13.4%
Total liabilities	50.3%	49,6%	46,8%
TOTAL EQUITY AND LIABILITIES	100,0%	100,0%	93,4%
Financial liabilities	9 637 700	9 108 126	8 138 506
Net financial liabilities	8 611 372	8 090 507	7 703 602
Net debt/EBITDA ratio	2.6x 1	2.2x	2.3x
Current liquidity ratio	0.62	0.95	0.90

Table no. 32. Structure of the annual consolidated statement of financial position

1 The Company disclosed information on the increase of the net/EBITDA ratio in the regulatory filing (current report) no. 7/2019 of March 15 this year. The below figure presents the structure of assets, and equity liabilities.

Figure no. 54. Structure of assets, and equity and liabilities

As of December 31, 2018, similar as in 2017, the value of fixed assets represents the largest share in the structure of assets. In the structure of fixed assets, the tangible fixed assets of the following Segments represent the largest share: Distribution (59%), Generation (36%) and Mining (4%).

As of December 31, 2018, equity and financial liabilities represent the largest share in the structure of equity and liabilities.

The level of debt of TAURON Capital Group remains at a safe level, which is indicated by the value of the leverage ratio as compared to the European benchmarks for the sector, and the positive cash flows from operating activities. The current liquidity ratio and the net debt to EBITDA ratio remain at a safe level.

The below figure presents the current liquidity ratio and the net debt to EBITDA ratio in 2018-2016.

Figure no. 55. Current liquidity ratio and the net debt to EBITDA ratio in 2018-2016

The below table presents the annual consolidated statement of financial position - assets

Table no. 33. Annual consolidated statement of financial position - assets (material items)¹

Statement of financial position (PLN '000)	As of December 31, 2018	As of December 31, 2017	As of December 31, 2016	Change in % (2018/2017)
ASSETS
Fixed assets	32 541 865	31 048 542	29 148 253	105%
Tangible fixed assets	29 238 051	28 079 886	26 355 189	104%
Current assets	4 555 612	4 786 474	4 308 641	95%
Cash and equivalents	823 724	909 249	384 881	91%
Fixed assets classified as held for sale	13 712	15 910	19 612	86%
TOTAL ASSETS	37 097 477	35 835 016	33 456 894	104%

¹Due to the limited comparability of earlier periods, data is presented in a three-year horizon. Data comprising earlier periods is presented in section no. 5.7 of this report.

As of 31 December 2018 the statement of the financial position of TAURON Capital Group indicates the balance sheet total higher by approx. 4%.

The below figure presents the change in the level of assets and current assets.

Figure no. 56. Change in the level of assets and current assets

^{980 652 202} 486 ^{295 510} 2 158 2 277 2 454 ^{280 637 553} 385 909 824 0 1 000 2 000 3 000 4 000 5 000 6 000 As of December 31, 2016 As of December 31, 2017 As of December 31, 2018 Change in current assets [PLN m] Cash and equivalents Other short term assets Acc. rec. due to supplies and services and other acc. rec. Inventory Intangible assets

In the year ended on December 31, 2018 TAURON Capital Group, having taken into account the following premises:

• 1. long-term hovering of the market value of Company's net assets at a level below the balance sheet carrying amount,
• 1. changes to the commodity, electricity and greenhouse gas emissions prices on the worldwide markets;
• 1. substantial volatility of electricity prices on the futures market and continued problems with a lack of liquidity,
• 1. raising of the electricity price limits on the electricity wholesale regular market and the balancing market,
• 1. regulatory actions aimed at curbing an increase of electricity prices for the final consumers,
• 1. continued variability of the mining and geological conditions,
• 1. adverse configuration of the extraction faces (short coal face longwall runs) generating additional rearrangement costs,
• 1. limited competition on the market for mining materials and services resulting in a substantial increase of their prices,
• 1. results of the completed capacity market auctions with delivery in 2021, 2022 and 2023,
• 1. proceeding with the winter package provisions, including the emissions standard, that has an adverse impact on the ability of the coal-fired units to take part in the capacity market after July 1, 2025,
• 1. continued unfavorable market conditions from the point of view of the conventional power generation's profitability,
• 1. coming into force of the December 14 2018 act on promoting electricity from high efficiency cogeneration,
• 1. increase in risk-free rate,

recognized (booked) impairment charges and reversed previously booked write-downs related to tangible fixed assets as a result of impairment tests conducted as of December 31, 2018 and June 30, 2018. The results of the tests conducted demonstrated the validity of booking write-downs in the total amount of PLN 855 million (excess of the booked writedowns over the reversed write-downs).

The value of fixed assets increased by PLN 1 493 million (4.8%), which is the result of the following events:

• 1. increase in the value of fixed assets as a result of investments in tangible fixed assets underway at TAURON Capital Group's subsidiaries (mainly at TAURON Dystrybucja, TAURON Wytwarzanie, Nowe Jaworzno GT and TAURON Ciepło) and intangible assets (mainly at TAURON Dystrybucja), and also the impairment charges booked as a result of impairment tests conducted,
• 1. purchase of property rights to the certificates of origin of electricity and greenhouse gases emission allowances in connection with the requirement to fulfil the legal obligation of their redemption.

The following factors had an impact on the decrease in the value of current assets by PLN 231 million (4.8%):

• 1. decrease of the level of cash and equivalents by PLN 86 million which was more extensively described in the section on the cash flow account,
• 1. decline of the value of certificates of origin of electricity and greenhouse gas emission allowances to be redeemed by PLN 451 million, which is a result of the partial fulfilment, already in 2018, of the obligation to submit certificates of origin of electricity for redemption, under the regulations of the act of April 10, 1997, Energy Law and the CO² emission allowances as well as setting up a provision towards fulfilling the obligations for 2018,
• 1. decrease of the value of loans granted to joint ventures by PLN 330 million, due to the agreement signed between TAURON and ECSW, as well as the repayment of a part of the principal of the loan granted by TAURON,
• 1. increase of the value of accounts receivable from the consumers by PLN 197 million,
• 1. increase in the value of other financial assets by PLN 223 million mainly due to the positive valuation of the derivative instruments, which is a consequence of TAURON Group recognizing the valuations on the futures transactions separately for assets and liabilities, and the repayment values of the initial margins related to the futures contracts,
• 1. increase of the inventory value by PLN 214 million, mainly due to the higher coal inventory levels at TAURON Wydobycie and the Generation Segment's companies.

The below table presents the annual consolidated statement of financial position - liabilities.

Table no. 34. Annual consolidated statement of financial position - liabilities (material items)¹

Statement of financial position (PLN '000)	As of December 31, 2018	As of December 31, 2017	As of December 31, 2016	Change in % (2018/2017)
LIABILITIES
Equity attributable to shareholders of the parent entity	18 295 824	18 036 446	16 649 266	101%
Non-controlling stakes	132 657	31 367	30 052	423%
Total equity	18 428 481	18 067 813	16 679 318	102%
Long-term liabilities	11 382 254	12 739 852	11 968 719	89%
Liabilities due to debt	8 488 210	9 501 414	8 759 789	89%
Short-term liabilities	7 286 742	5 027 351	4 808 857	145%
Liabilities due to debt	2 475 167	351 382	219 740	704%
Total liabilities	18 669 996	17 767 203	16 777 576	105%
TOTAL EQUITY AND LIABILITIES	37 097 477	35 835 016	33 456 894	104%

¹dUE to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report

The below figure presents the change in the level of liabilities and equity.

Change in equity attributable to majority Change in equity and liabilities [PLN m]

Similar as in the previous years, in 2018 the dominating source of assets financing was equity whose share in the total equity and liabilities reached 50.1%.

The below figure presents the change in the level of liabilities.

Figure no. 58. Change in the level of liabilities

The following factors had an impact on the decrease in the value of TAURON Capital Group's long-term liabilities by PLN 1 325 million (10%):

• 1. decrease of the liabilities due to debt by PLN 1 013 million, which is a result of issuing in 2018 bonds with the total value of PLN 1 350 million and reclassifying, as short term financial liabilities to be repaid in 2019, the bonds issued in the previous years with the total value of PLN 2 259 million,
• 1. decline of the provisions related to employee benefits (entitlements) by PLN 266 million, which is primarily the result of dissolving the provision related to employee benefits (entitlements) (cash equivalent for the subsidized consumption of electricity (employee tariff), service anniversary awards and the Company's Social Benefits (Entitlements) Fund

(Zakładowy Fundusz Świadczeń Socjalnych)) at TAURON Wytwarzanie in accordance with the changes to the provisions of the Company's Social Benefits (Entitlements) Fund (Zakładowy Fundusz Świadczeń Socjalnych)),

1. drop of prepayments and accruals as well as government subsidies (grants) by PLN 101 million, which is the result of mainly transferring the balance of prepayments and accruals, related to the revenue due to connection fees for the tasks completed before July 1, 2009, to the equity item, which stems from the coming onto force of IFRS 15 Revenue from Contracts with Customers and receiving subsidies (grants) as part of the European funds.

The value of short-term liabilities of TAURON Capital Group increased by PLN 2 259 million (45%), which resulted from the following factors:

• 1. increase of the liabilities due to debt by PLN 2 124 million, which is a result of reclassifying, out of long term financial liabilities, the bonds to be repaid in 2019, issued in the previous years, and the repayment of the loans,
• 1. increase of accounts payable towards suppliers by PLN 85 million,
• 1. drop by PLN 453 million of the value of the provisions, which is a result of the partial fulfilment, already in 2018, of the obligation to submit certificates of origin of electricity for redemption, under the regulations of the act of April 10, 1997, Energy Law and the CO² emission allowances,
• 1. increase in the value of other financial assets by PLN 431 million which is due to an increase of the value of liabilities due to the negative valuation of the derivative instruments as a consequence of the Group recognizing the valuations on the futures transactions separately for assets and liabilities, i.e. per a single contract and an increase of the value of the variation (mark to market) margin deposits, to a large degree related to the futures contracts for the delivery of the greenhouse gasses emission allowances concluded on the foreign exchange markets,
• 1. drop of prepayments and accruals as well as government subsidies (grants) by PLN 96 million, which is related to the lower value of the prepayments and accruals set up for bonuses, environment protection and the other prepayments and accruals of the costs as compared to the value as of December 31, 2017

5.3.2. Consolidated statement of comprehensive income

The below table presents the annual consolidated statement of comprehensive income. Due to the changes in the segments and in order to maintain the comparability, the results are presented for three years.

Statement of comprehensive income (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Sales revenue	18 121 748	17 424 551	17 646 489	104%
Own cost of sales (including the costs of sales and overheads)	(17 325 825)	(15 614 201)	(16 829 480)	112%
Including the loss of the carrying amount of the non financial fixed assets	(815 796)	(40 857)	(832 092)	1 997%
Other operating revenues and costs	160 519	(4 079)	(15 487)	-
Share in the profit (loss) of the joint venture	54 890	73 050	60 040	75%
Operating profit (loss)	790 729	1 879 321	861 562	42%
Operating profit margin (%)	4.4%	10.8%	4.9%	40%
Cost of interest on debt	(147 372)	(209 322)	(259 564)	70%
Other financial revenue and costs	(138 710)	87 653	(93 137)	-
Gross profit (loss)	504 647	1 757 652	508 861	29%
Gross profit margin (%)	2.8%	10.1%	2.9%	28%
Income tax	(297 602)	(374 706)	(138 724)	79%

Table no. 35. Annual statement of comprehensive income for 2018-2016¹

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Statement of comprehensive income (PLN '000)	2018	2017	2016	Change in % (2018/2017)
Net profit (loss) for financial year	207 045	1 382 946	370 137	15%
Net profit margin (%)	1.1%	7.9%	2.1%	14%
Total income for financial year	182 523	1 389 312	647 885	13%
Profit attributable to:
Shareholders of the parent entity	204 880	1 380 663	367 468	15%
Non-controlling stakes	2 165	2 283	2 669	95%
EBIT and EBITDA
EBIT	790 729	1 879 321	801 522	54%
EBITDA	3 374 926	3 617 641	3 336 814	99%

¹Due to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report

The below figure presents TAURON Capital Group's 2016-2018 financial results.

Figure no. 59. TAURON Capital Group's 2016-2018 financial results

In the reporting period ended on December 31, 2018, TAURON Capital Group generated sales revenue higher by 4% as compared to the values achieved in 2017, due to the following factors:

• 1. higher revenue from electricity sales (by 15%) mainly as a result of a 12% increase of the electricity sales price and a 1% increase of TAURON Capital Group's electricity supply volume,
• 1. higher revenue from gas sales (by 44%), due to a 16% increase of the gas sales prices and a 24% rise of the volume,
• 1. lower revenue from heat sales(by 5%) lower heat and transmission services sales volume due to the higher outdoor temperatures as compared to 2017,
• 1. lower revenue from distribution and trading services sales (by 8%), mainly due to a decrease of the rate of the distribution service sales to the final consumers as a consequence of the introduction of the application of IFRS 15 and the exclusion of the transition fee from revenue in 2018,
• 1. lower revenue from coal sales (by 27%) as a result of a decrease of coal sales volume by 37%, along with the rise of the coal sales price by 16%.

The below figure presents the structure of TAURON Capital Group's revenue in 2016-2018.

Figure no. 60. Structure of TAURON Capital Group's revenue in 2016-2018¹

¹Due to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report.

The below figure presents TAURON Capital Group's financial results and the level of margins realized..

Figure no. 61. TAURON Capital Group's financial results and the level of margins realized in 2016-2018¹

¹Due to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report.

In 2018 TAURON Capital Group's costs of operations came in at PLN 17.5 billion, which meant that they were 12% higher than the costs incurred in 2017.

One of the reasons for the rising costs was the booking, in 2018, of the impairment charges related to the loss of the carrying amount on the balance sheet of the Mining Segment's cash generating units (CGU) as well as the booking and reversing of the impairment charges related to the loss of the carrying amount on the balance sheet of the Generation Segment's cash generating units (CGU), of which the Company disclosed information in the regulatory filings (current reports) no. 25/2018 and 2/2019.

The total value of the booked and reversed impairment charges related to the loss of the carrying amount reached PLN 855 million.

Apart from the above mentioned one-off events the level of TAURON Capital Group's costs in 2018 was impacted by the following factors:

• 1. increase of the costs of purchasing electricity, mainly due to an increase of sales prices by 13% on average,
• 1. higher volume of electricity purchased from counterparties (business partners, contractors) from outside TAURON Capital Group, which is the result of a higher sales volume on the exchange by the Generation Segment's subsidiaries due to the amendment to the act on the capacity market increasing, in 2018, the obligation to trade electricity on the Polish Power Exchange (TGE) to 30% and the lower production of electricity by the generating units,
• 1. increase of the costs of purchasing gas, due to the increase of gas sales prices by 19% on average,
• 1. higher costs of materials and electricity consumption, mainly as a result of higher costs of fuels used in the production,
• 1. decrease of the costs of the distribution service as due to the lower costs of purchasing of the transmission services as a consequence of the introduction of the application of IFRS 15,
• 1. higher costs of the obligation to retire greenhouse gases emission allowances mainly due to an increase of prices year on year,
• 1. lower labor costs primarily as a result of dissolving the provision related to employee benefits (entitlements) (cash equivalent for the subsidized consumption of electricity (employee tariff), service anniversary awards and the Company's Social Benefits (Entitlements) Fund (Zakładowy Fundusz Świadczeń Socjalnych)) at TAURON Wytwarzanie in accordance with the changes to the provisions of the Company's Social Benefits (Entitlements) Fund (Zakładowy Fundusz Świadczeń Socjalnych),
• 1. including the hard coal not sold in 2018 in the Group's assets, while in 2017, due to a rise in demand, hard coal sales also included some hard coal inventory sales,
• 1. growth of the cost of providing services for the unit's own needs, which is due to the increase of the in-house resources' engagement in the investment projects carried out by the Group,
• 1. recognizing in the current reporting period by the Supply Segment's subsidiaries of the provisions related to the agreements giving rise to the charges in the amount of PLN 214 million, due to the coming into force of the Act on the amendment to the act on the excise tax and some other acts (it is described in more detail in note 36 to the consolidated financial statements of TAURON Group for the financial year ended on December 31, 2018) ,
• 1. recognizing, in 2017, of the effects of dissolving by TAURON of the provisions related to the agreements giving rise to the charges with the joint venture in the net amount of PLN 201.2 million.

EBITDA margin achieved in 2018 came in at 18.6% and it was 2.2 pp lower as compared to 2017. As a result of the writedowns booked, the value of which was much higher in 2018 than the write-downs booked in 2017, the EBIT margin and the net profit margin were significantly lower in the reporting period than achieved a year ago, reaching4.4% and 1.1%, respectively. Should the effects of the impairment charges be disregarded, the EBIT margin and the net profit margin would have reached in 2018, respectively, 9.1% and 5.0%, and in 2017, respectively, 11.0% and 8.1%.

In accordance with the presented consolidated statement of comprehensive income, the total comprehensive income of TAURON Capital Group for 2018, taking into account the net profit increased or decreased by the change in the value of hedging instruments, FX differences arising from the conversion of the foreign entity and the other revenue after tax, reached PLN 182.5 million in 2018, versus PLN 1 389.7 million generated in 2017, while the net profit attributable to the shareholders of the parent entity reached PLN 204.9 million versus PLN 1 380.7 million posted in 2017.

5.3.3. Statement of cash flows

The below table presents the statement of cash flows.

Table no. 36. Statement of cash flows (material items) in 2016-2018¹

Statement of Cash Flows (PLN '000)	Year ended on December 31, 2018	Year ended on December 31, 2017	Year ended on December 31, 2016	Change in % (2018/2017)
Cash flows from operating activities
Gross profit/(loss)	504 647	1 757 652	508 861	29%
Adjustments	1 552 129	1 801 015	2 555 354	86%
Net cash from operating activities	2 056 776	3 558 667	3 064 215	58%
Cash flows from investing activities
Purchase of tangible fixed assets and intangible assets	(3 575 711)	(3 561 758)	(3 516 296)	100%
Net cash from investing activities	(3 221 547)	(3 871 676)	(3 627 458)	83%

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Statement of Cash Flows (PLN '000)	Year ended on December 31, 2018	Year ended on December 31, 2017	Year ended on December 31, 2016	Change in % (2018/2017)
Cash flows from financing activities
Redemption of debt securities	0	(1 650 000)	(3 300 000)	0%
Issue of debt securities	1 350 000	2 707 462	4 284 607	50%
Repayment of loans/credits	(168 874)	(154 918)	(140 331)	109%
Interest paid	(160 170)	(184 550)	(255 116)	87%
Net cash from financing activities	1 171 400	759 629	590 261	154%
Increase / (decrease) in net cash and equivalents	6 619	446 620	27 018	1%
Cash opening balance	801 353	354 733	327 715	226%
Cash closing balance	807 972	801 353	354 733	101%

¹Due to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report.

The below figure presents the 2018-2016 cash flows.

Figure no. 62. 2018-2016 cash flows

The realized positive value of cash flows from operating activities in 2018 was higher than the cash flows realized in 2017 by PLN 1 502 million. The following factors had the biggest impact on the change in this item of the cash flow account:

• 1. rise in the inventory levels, mainly of hard coal (PLN -222 million), while in 2017 the Group's hard coal sales also included some hard coal inventory sales (PLN +188 million,
• 1. purchase of the CO2 emission allowances and certificates of origin of electricity for the amount of PLN 717 million higher than in 2017,
• 1. payment of income tax higher by PLN 249 million, which is due to:
  2. advance payments made by the Tax Capital Group in 2018 on the account of the 2018 income tax, in the amount of PLN 343 million (in 2017 the advance payments came in at PLN 215 million),
  3. payment by the Tax Capital Group in 2018 of the tax on the account of the 2017 income tax in the amount of PLN 46 million,
  4. receipt in 2017 of the 2016 income tax overpayment in the amount of PLN 79 million,
• 1. negative change of the balance of the accounts receivable and accounts payable in the amount of PLN 76 million.

The biggest impact on cash flows from investing activities came from the expenditures to purchase tangible fixed assets, which were flat in the reporting period versus the outlays incurred in 2017. The largest expenditures were incurred by the Distribution and Generation Segments.

The positive value of cash flows from financing activities is due to the bond issue completed in 2018, worth PLN 1 350 million in total, while at the same time credits and loans, taken in the previous years, were repaid in the amount of PLN 169 million. On the other hand, TAURON Capital Group issued bonds for the total nominal amount of PLN 2 707 million, redeemed the bonds issued in the previous years for the total nominal amount of PLN 1 650 million and repaid credits and loans in the total amount of PLN 155 million in 2017.

The value of financial expenses due to interest paid on financial liabilities amounted to PLN 160 million in 2018 and it was lower by 13% year on year.

The below figure presents TAURON Capital Group's 2018 cash flows.

Figure no. 63. TAURON Capital Group's 2018 cash flows

TAURON Capital Group is continuing its expansion process and continues to maintain its market position. It should be noted that the balance of cash flows from operating activities is positive, consequently enabling TAURON Capital Group to autonomously finance its ongoing operations.

5.4. Material off-balance sheet items

Material off-balance sheet items included in the consolidated financial statements

As of December 31, 2018, material contingent liabilities of TAURON Capital Group include:

• 1. Lawsuits related to the termination of long-term contracts:
  2. lawsuit of the companies that are a part of the following groups: in.ventus, Polenergia and Wind Invest against PEPKH for determination that the statements submitted by PEPKH on the termination of the contracts for the purchase of electricity and property rights concluded with the above mentioned companies are not valid (are ineffective). The amount of damages claimed in the lawsuits is: EUR 4 687 000 (in.ventus group companies), PLN 67 248 000 (Polenergia group companies), PLN 125 003 000 (Wind Invest group companies),
  3. lawsuits of the companies that are a part of the following groups: in.ventus, Polenergia and Wind Invest against TAURON for payment of damages and for determination of liability for damages that may arise in the future due to torts, including unfair competition acts. The factual basis for the lawsuits, according to the plaintiff, is the termination by PEPKH of the long term contracts for the purchase of electricity and property rights arising from certificates of origin and alleged management (directing) of this process by TAURON. The amount of damages claimed in the lawsuits is: EUR 12 286 000 (in.ventus group companies), PLN 78 855 000 (Polenergia group companies), PLN 129 947 PLN. (Wind Invest group companies).

Furthermore, the plaintiffs indicate in their lawsuits the following values of the estimated damages that may arise in the future: EUR 35 706 000 (in.ventus group companies), PLN 265 227 000 (Polenergia group companies), PLN 1 119 363 000. (Wind Invest group companies),

• termination by the TAURON Sprzedaż subsidiary termination of the long term contracts, concluded with the in.ventus group companies, for the purchase of property rights arising from certificates of origin electricity from renewable sources. The contracts were terminated due to the parties' failure to reach an agreement as a result of contractual renegotiations in accordance with the procedure set forth in the contracts . The total amount of the contractual obligations of TAURON Sprzedaż estimated for the 2017-2023 years under the terminated contracts would, as of the termination date, reach the net amount of approx. PLN 417 000 000. On March 7, 2019 Hamburg Commercial Bank AG (formerly HSH Nordbank AG) filed a lawsuit against TAURON Sprzedaż for payment of damages due to a failure of TAURON Sprzedaż to perform agreements on the sale of property rights arising from the certificates of origin constituting the confirmation of electricity generation from a renewable energy source and liquidated damages assessed due to the termination of the above mentioned agreements. The subject of the statement of claim is the payment by TAURON Sprzedaż, in favor of the bank, of the total amount of PLN 232 879 000 along with the statutory interest for a late payment, accrued from the day of filing the lawsuit until the payment date, including the damages in the total amount of PLN 36 252 000 and the liquidated damages in the total amount of PLN 196 627 000. The Company does not set up a provision related to the costs associated with the case. The above event is described in detail in section 2.6 of this report.
• in 2018 TAURON Sprzedaż subsidiary received notifications in the cases filed by two Polenergia group companies against TAURON Sprzedaż of applications for a summons to a conciliation hearing with respect to the total amount of PLN 78 855 000, due to damages for alleged harm done to Polenergia group companies, as a result of the groundless termination of the long term contract concluded between these companies and PEPKH. The companies indicated in the applications that the company, PEPKH and the liquidators of PEPKH did and continue to do harm to Polenergia group companies, and TAURON Sprzedaż consciously took advantage of this harm and – according to Polenergia group companies - bears full responsibility for such harm. No settlements have been reached at the court hearings.

No provisions have been set up with respect to the above events.

• 1. potential claims not reported by owners of land with unregulated status due to the lack of detailed records of unregulated land and the resulting inability to reliably estimate the amount of potential claims, and as a consequence, lack of a possibility to set up provisions,
• 1. proceedings initiated on September 17, 2013 by the President of UOKiK against TAURON Sprzedaż in connection with the suspected use of practices violating the collective interests of consumers, by providing electricity prices in price lists and information materials without including the value added tax, which constitutes the infringement of the Act of 23 August 2007 on prevention of unfair market practices,
• 1. proceedings initiated on October 13, 2017 by the President of UOKiK in conjunction with the suspected applying by TAURON Sprzedaż and TAURON Sprzedaż GZE of a practice violating the collective interests of consumers involving hindering a switch of an electricity supplier,
• 1. proceedings initiated on May 11, 2017 by the President of UOKiK against TAURON Sprzedaż, related to the mechanism for automatic extending of the period for settling the charges for electricity supply according to the price list in case a consumer has not taken any actions having been presented with a new offer,
• 1. proceedings initiated on July 13, 2017 by the President of UOKiK against TAURON Sprzedaż GZE, related to the violation of the provisions of art. 6b clause 3 of the Energy Law act with respect to setting additional deadlines for payment of overdue accounts receivable in the summons to pay (dunning letters),
• 1. proceedings initiated on April 27, 2018 by the President of UOKiK against TAURON Sprzedaż in connection with a suspected violation of the collective interests of consumers by sending of a letter with the information on the personal

data updates to the customers,

• 1. clarification proceedings initiated on December 31, 2018 against TAURON Sprzedaż in connection with the suspicion of violating the collective interests of consumers by applying practices related to concluding electricity sales agreements over the phone. The Company submitted relevant clarifications regarding this issue.
• 1. proceedings initiated by the President of ERO against TAURON Dystrybucja concerning imposing of a fine due to the failure to maintain facilities, equipment and installations in due technical condition and the violation of the terms defined in the license for electricity distribution. By way of the decision of July 10, 2017 a penalty was imposed on the company in the amount of PLN 350 000. The company submitted an appeal against the above decision to SOKiK and is waiting for the setting of the date of the next hearing. The above company set up a provision in the amount of PLN 351 000,
• 1. proceedings initiated by the President of ERO against TAURON Sprzedaż and TAURON Sprzedaż GZE with respect to the validity of halting the supply of electricity to the final consumers, proceedings with respect to adapting the terms of the granted license for electricity trading to the legal regulations currently in force, proceedings in connection with detecting irregularities involving preventing the final consumers from selecting the given offer or tariff group. The above companies do not set up provisions with respect to potential fines related to the initiated proceedings,
• 1. proceedings initiated by the President of ERO against TAURON EKOENERGIA with respect to imposing a monetary fine, in connection with the suspected conducting of the operations involving electricity generation at Dąbie Hydroelectric Plant (Elektrownia Wodna Dąbie) and at Przewóz Hydroelectric Plant (Elektrownia Wodna Przewóz) without the water permits for the special use of water for energy related purposes, required by the regulations of the act of July 20, 2017 Water Law. By way of the decision of February 15, 2019 a fine of PLN 2 000 was imposed on the company. The above company did not set up a provision related to the said proceedings,
• 1. court dispute between TAURON as a legal successor of Górnośląski Zakład Elektroenergetyczny S.A (GZE) and Huta Łaziska S.A. as a result of the failure by Huta Łaziska S.A. to fulfil the obligation to pay the accounts payable for electricity supplies, which consequently caused the halting of electricity supplies to Huta Łaziska S.A. by GZE in 2001; the claim for the payment of damages is PLN 182 060 000. No provisions were set up for the costs related to these claims,
• 1. lawsuit brought by ENEA against TAURON as well as TAURON Sprzedaż and TAURON Sprzedaż GZE as third party respondents (defendants) due to alleged unjustified benefit gained by the Company in connection with the settlements of unbalancing on the Balancing Market, made with PSE (TSO) in the period from January to December 2012; the claim for payment by TAURON amounts to PLN 17 086 000, in case the lawsuit against TAURON is dismissed, the claim for payment by TAURON Sprzedaż and TAURON Sprzedaż GZE amounts to PLN 8 414 000 along with interest. The company did not set up a provision, while TAURON's subsidiaries set up provisions in the total amount of PLN 5 483 000 in case of TAURON Sprzedaż and in the total amount of PLN 3 900 000 in case of TAURON Sprzedaż GZE,
• 1. registered pledge and financial lien on TAMEH HOLDING shares, established by TAURON in favor of RAIFFEISEN BANK INTERNATIONAL AG in order to hedge transactions comprising the agreement for term and working capital loans, concluded between TAMEH Czech and TAMEH POLSKA, TAMEH HOLDING as well as RAIFFEISEN BANK INTERNATIONAL AG. The balance sheet value (carrying amount) of the shares inTAMEH HOLDING sp. z o.o., as of December 31, 2018, stood at PLN 415 852 000.
• 1. A Generation segment subsidiary corrected its 2017 tax returns relating to the real estate tax due to the Supreme Administration Court dismissing the cassation related to the rules on the taxation of wind farms. As of the balance sheet date the provisions in the total amount of PLN 39 356 000 and passive prepayments and accruals in the amount of PLN 2 314 000 related to the 2017 wind farms' tax were set up for the real estate tax disputes and the business risk related thereto.
• 1. lawsuit of Galeria Galena Sp. z o.o. against TAURON Wydobycie for payment of PLN 22 785 000 due to the refund of the expenditures incurred to protect a facility against the impact of mining operations and the lawsuit against the legal

successors to Kompania Węglowa S.A. The above cases were combined for a joint hearing. No provision has been set up with respect to the above event,

1. Lawsuit of the consortium of WorleyParsons Nuclear Services JSC, WorleyParsons International Inc and WorleyParsons Group Inc against PGE EJ 1 with the current value of the dispute of approx. PLN 104 million, and TAURON being a shareholder of PGE EJ 1 with a 10% stake in the share capital. TAURON concluded an agreement with the other shareholders governing the mutual relationships among the parties to the agreement related to the said claims. In accordance with the Company's assessment a potential financial engagement of the Company in PGE EJ1, under this agreement should not exceed 10% of the claim of the WorleyParsons consortium.

The detailed information concerning off-balance sheet items is included in notes 47 and 48 of the Consolidated financial statements for the year ended on December 31, 2018.

Off-balance sheet items included in the standalone financial statements

The Standalone financial statements for the year ended on December 31, 2018 include off-balance sheet items indicated above in clauses 1, 12, 13, 14 and 17.

The detailed information concerning off-balance sheet items indicated above is included in note … of the Standalone financial statements for the year ended on December 31, 2018

5.5. Differences between the financial results reported in the annual report and the forecasts of results for the given year published earlier

The Management Board of the Company did not publish any forecasts of the earnings of TAURON Capital Group for 2018. This decision was due to the considerable volatility of the market and a substantial number of factors affecting its predictability.

5.6. Key financial ratios

The below table presents the key financial ratios of TAURON Capital Group.

Table no. 37. Key financial ratios of TAURON Capital Group¹

Ratios	Definition	2018	2017	2016
PROFITABILITY
EBIT Margin	Operating profit / Sales revenue	4.4%	10.8%	4.9%
EBITDA Margin	EBITDA / Sales revenue	18.6%	20.8%	18.9%
Net Profitability	Net profit/ Sales revenue	1.1%	7.9%	2.1%
Return on Equity (ROE)	Net profit/ Equity at the end of the period	1.1%	7.7%	2.2%
LIQUIDITY
Current liquidity ratio	Current assets (excluding assets held for trade) / Short-term liabilities	0.62	0.95	0.90
DEBT
Total debt ratio	Total obligations/ total liabilities	0.50	0.50	0.50
Net financial debt/ EBITDA	(Financial liabilities - Cash)/ EBITDA	2.6x	2.3x	2.3x
OTHER RATIOS
Earnings per share (EPS)	Net result attributable to shareholders of the parent entity / Number of ordinary shares	0.12	0.79	0.21

¹Due to the limited comparability of earlier periods, data are presented in a three-year horizon. Data comprising earlier periods are presented in section no. 5.7 of this report.

In 2018 the net profitability ratio of TAURON Capital Group was lower than in 2017, as a result of recognizing of the balance of impairment charges in 2018 in the amount higher than in 2017. Due to the differences in the values of the write-downs these ratios are not comparable.

Disregarding the write-downs, the net profitability ratio came in at 5.0% in 2018 and 8.1% in 2017, and its decline is a consequence of the lower EBIT margin and the negative result on the other revenue and financial costs (primarily due to the negative FX differences), while in 2017 the above result was positive (primarily due to the positive FX differences).

The current liquidity ratio reached, as of December 31, 2018, a lower a value than as of December 31, 2017, which does not affect maintaining of a stable financial position of TAURON Capital Group.

The total debt ratio and the net debt/EBITDA ratio reflect the share of liabilities in TAURON Capital Group's financing. The current level of this ratio enables TAURON Capital Group to acquire external financing required to implement the investment projects planned. The levels of both ratios confirm a stable financial position of TAURON Capital Group.

EPS ratio (calculated in relation to the net profit attributable to shareholders of the parent entity) is lower in 2018 than in 2017 due to recognizing the balance of the impairment charge related to the tangible fixed assets in 2018 in the amount higher than the amount recognized in 2017.

5.7. Most significant financial and operating data of TAURON Capital Group for the last 5 years

The below table presents the most significant financial data and operating data of TAURON Capital Group for the last 5 years, i.e. for the 2018-2014 period.

Key data	Unit	2018	2017	2016	2015	2014	Change in % (2018/2017)
Statement of comprehensive income
Sales revenue	PLN m	18 122	17 425	17 646	18 264	18 577	104%
Operating profit	PLN m	791	1 879	802	(1 901)	1 830	42%
Financial revenue (total)	PLN m	83	191	125	81	86	43%
Financial expenses (total)	PLN m	(369)	(313)	(418)	(368)	(418)	118%
Gross profit	PLN m	505	1 758	509	(2 188)	1 498	29%
Income tax	PLN m	(298)	(375)	(139)	384	(313)	79%
Net profit	PLN m	207	1 383	370	(1 804)	1 186	15%
attributable to shareholders of the parent entity	PLN m	205	1 381	367	(1 807)	1 181	15%
attributable to non-controlling shares	PLN m	2	2	3	3	5	95%
EBITDA	PLN m	3 375	3 618	3 337	3 523	3 695	93%
Statement of financial position
Fixed assets	PLN m	32 542	31 049	29 148	28 124	28 163	105%
Current assets	PLN m	4 556	4 786	4 309	3 947	6 396	95%
Total equity	PLN m	18 428	18 068	16 679	16 048	17 997	102%
Total liabilities	PLN m	18 669	17 767	16 778	16 023	16 563	105%
Long-term liabilities	PLN m	11 382	12 740	11 969	8 584	11 744	89%
Short-term liabilities	PLN m	7 287	5 027	4 809	7 439	4 819	145%
Net financial debt2	PLN m	8 611	8 091	7 704	7 764	6 665	106%

Table no. 38. Financial and operating data for 2018-2014¹

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Key data	Unit	2018	2017	2016	2015	2014	Change in % (2018/2017)
Capital expenditures	PLN m	3 672	3 474	7 730	7 764	6 665	106%
Cash flow account
Net cash from operating activities	PLN m	2 057	3 559	3 064	3 387	2 618	58%
Net cash from investing activities	PLN m	(3 222)	(3 872)	(3 627)	(3 942)	(3 387)	83%
Net cash from financing activities	PLN m	1 171	760	590	(526)	1 636	154%
Cash closing balance	PLN m	808	801	355	328	1 408	101%
Ratios
EBIT margin	%	4.4	10.8	4.5	(10.4)	9.9	40%
EBITDA margin	%	18.6	20.8	18.9	19.3	19.9	90%
Net financial debt/ EBITDA	multiple	2.6x	2.3x	2.3x	2.2x	1.8x	114%
Net earnings per share	PLN/ share	0.12	0.79	0.21	(1.03)	0.67	15%
Operating data
Commercial coal production	Mg m	5,01	6.45	6.37	4.91	5.40	78%
Gross electricity production	TWh	16.21	1.,41	16.80	18.56	17.35	88%
Electricity production from RES	TWh	0.97	1.30	1.32	1.63	1.82	75%
Heat production	PJ	11.29	12.20	11.52	11.51	13.41	93%
Retail supply of electricity	TWh	34.52	34.91	32.04	35.94	36.43	99%
Distribution of electricity	TWh	51.97	51.37	49.68	49.20	47.90	101%
Number of customers (Distribution)	m	5.6	5.53	5.47	5.42	5.38	101%

1 the values presented do not reflect the values compliant with the IFRS and are not directly comparable due to the changes in organization of Segments ²excluding the issue of hybrid bonds

Table no. 39. TAURON Capital Group's EBITDA, broken down into Segments (Lines of Business)¹

#	EBITDA (PLN m)	2018	2017	2016	2015	2014	Change in % (2018/2017)	Change (2018-2017)
1.	Mining	(207)	(83)	(82)	9	98	-	(124)
2.	Generation	731	537	545	755	793	136%	194
3.	Distribution	2 517	2 283	2 395	2 372	2 172	110%	235
4.	Supply	321	841	490	380	608	38%	(521)
5.	Other	135	118	115	100	106	114%	17
6.	Unallocated items	(122)	(78)	(126)	(94)	(83)	-	(44)
	Total EBITDA	3 375	3 618	3 337	3 523	3 695	93%	(243)

¹The values presented do not reflect the values compliant with the IFRS and are not directly comparable due to the changes in organization of Segments

The below figure presents the structure of TAURON Capital Group's EBITDA in 2018-2014.

Figure no. 64. Structure of TAURON Capital Group's EBITDA in 2018-2014

The below figures present the financial data for 2014-2018 by Segments.

Figure no. 65. Data of the Mining Segment for 2014-2018

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Figure no. 68. Data of the Supply Segment for 2018-2014

Figure no. 69. Data of the Other Operations for 2018-2014

5.8. What can be expected in 2019

According to the World Bank analysts, 2019 will be a period of a slowdown of the world economic growth rate (from the current 3% to 2.9% in 2019 and 2.8% in 2020). The main factors behind the slowdown include: tightening of the investment financing conditions, weakening of the world's industrial production and the risk of trade restrictions between the United States and China. A slowdown is also expected in the EU – the forecast GDP rate in 2019 for the region is 1.8% (from 2.1% in 2018).

According to the forecasts of the National Bank of Poland, in 2019-2020 the growth rate of the national GDP will be gradually declining. In 2018 Poland's GDP growth rate came in at approx. 5%, and in the subsequent year it will drop to approx. 3.6%.

Poland's economic growth slowdown will be affected, amount others, by the slowdown of the economic growth in the euro zone and the expected increases of electricity prices. The factor driving the growth of the domestic demand will be a continued good situation on the labor market, an increase of income households and positive sentiment of the consumers.

Noticeable problems of enterprises, related to insufficient labor supply, will lead to continued high wages, however in view of a limited production growth it may lead to a rise of unit labor costs.

Poland's unemployment rate will fall to 3.2% (from 3.6% in 2018) and it will stay at a similar level also in the subsequent year.

Rising pressure on costs and demand in the Polish economy will lead to a rise of inflation in the subsequent years. In 2019 r. we can expect an inflation rate of 3.2% (in 2018 CPI stood at 1.8%). An increase of the prices of consumer goods and services will also be fueled by the situation on the energy commodities market and the rising electricity prices.

In the energy sector in 2019 the first commissioning and putting into operation of the new generation capacities are expected: units 5 and 6 in Opole, the 910 MW^e unit at Jaworzno and the CCGT unit at Stalowa Wola.

Additionally further works will be conducted on the government documents: Poland's Energy Policy until 2040 and the National Plan for Energy and Climate in 2021-2030.

5.9. Current and forecast financial and assets situation (financial and assets outlook)

Taking into account the current market situation, it is expected that the results of TAURON Capital Group in the coming years will be affected by both internal factors as well as external factors.

The results of the Mining Segment in the coming years will, to a large degree, be dependent on the work progress in the implementation of the investment projects and the technical and organizational changes introduced. The effects of actions aimed at increasing the efficiency of this segment will be achieved through the initiatives included in the program for increasing productivity and in the assets strategic management plan.

It is expected that the financial situation in the Generation Segment in the next few years will improve in relation to the current situation, mainly due to the commissioning of the 910 MWe unit in 2019 and due to the revenue from the capacity market. The additional revenue from the capacity market starting from 2021 will allow for refurbishing the generating units and extending the time of their operation. The segment's cost efficiency improvement measures undertaken will have an impact on the improvement of the results of the entire line of business.

In the Distribution Segment, the estimated level of remuneration on the invested capital and the cost efficiency improvement measures undertaken will play a key role impacting the level of the operating result. New elements of the regulatory policy and the associated risks will have a significant impact on results in the years to come, i.e. the updated approach to the average weighted cost of capital, enterprise efficiency improvement correction factors with respect to the operating expenses and the level of the balancing difference, change of the quality based regulation model, as well as the actions taken by the government in order to protect the final consumers against steep electricity price hikes.

Supply Segment - in the coming years the need to curtail expansion activities, while focusing on the goal of minimizing the number of customers leaving as well as recovering of customers lost in the previous years has to be kept in mind, and also threats related to the level of electricity tariffs approved by the EROl.

Other operations is mainly responsible for providing the shared services as well as for the implementation and finalization of the projects used mainly to provide services to the Distribution and Supply Segments with respect to contacts and settlements with customers assuring the highest quality. In addition, services for TAURON Capital Group's subsidiaries are provided, inter alia, with respect to the financial and accounting, services, IT services, property security services, fleet management services and real estate management services. These activities enable achieving synergy effects across TAURON Capital Group and improve cost efficiency.

5.10. Principles of preparing annual consolidated financial statements

The consolidated financial statements have been drawn up in accordance with the IFRS approved by the EU.

The IFRS comprise standards and interpretations approved by the International Accounting Standards Board as well as the International Financial Reporting Interpretation Committee.

TAURON Capital Group's subsidiaries and the parent entity keep their accounting books and prepare their financial statements in accordance with the IFRS, excluding TAURON Czech Energy and TAURON Sweden Energy that are keeping their books and preparing their financial statements in accordance with the accounting principles applicable, respectively, in the Czech Republic and in Sweden.

The consolidated financial statements contain adjustments which are not included in the ledgers of TAURON Capital Group's entities, introduced in order to bring the consolidated statements into compliance with IFRS.

The consolidated financial statements have been prepared with the assumption of the continuation of business operations by TAURON Capital Group's subsidiaries in the foreseeable future. As of the date of approval of the consolidated financial statements for publication, no circumstances have been detected, indicating any risk for business continuity by TAURON Capital Group's subsidiaries.

The accounting principles (policy) adopted for drawing up of the consolidated financial statements are presented in note 6 to the Consolidated financial statements for the year ended on December 31, 2018.

6. INFORMATION ON THE AUDIT FIRM

On February 26, 2018 the Supervisory Board, based on the recommendation of the Audit Committee, appointed the audit firm Ernst & Young Audyt Polska Limited Liability Company Limited Joint-Stock Partnership (Ernst & Young Audyt Polska) to conduct an audit of the financial statements and consolidated financial statements of TAURON for 2018, by concluding the Amendment to the agreement concluded by TAURON on April 27, 2017 that was related to conducting the audit of:

• 1. financial statements of the Company for 2017, prepared in accordance with the requirements of the IFRS,
• 1. financial statements of selected subsidiaries of TAURON Capital Group for 2017, prepared in accordance with the IFRS,
• 1. consolidated financial statements for 2017, prepared in accordance with the requirements of the IFRS.

The above agreement was concluded for the time required to perform the activities entrusted and also covered conducting a review of the interim, half year financial statements of the Company and the consolidated financial statements of TAURON Capital Group, prepared in accordance with the IFRS requirements for the period ending on June 30, 2017. The appointment of the audit firm Ernst & Young Audyt Polska to audit the financial statements and consolidated financial statements of TAURON for 2017 was made by the Supervisory Board on March 15, 2017.

The act of May 11, 2017 on certified auditors, audit companies and public oversight that implemented the new EU audit regulations into the national legal order, came into force on June 21, 2017.

Under the above law, among others, the regulations of the act of September 29, 1994 on accounting were changed, including art. 66, clause 5, that was given the following wording: "(…) In case of the statutory audit in the understanding of art. 2, section 1 of the act on certified auditors, the first agreement on the audit of the financial statements shall be concluded with an audit firm for a period not shorter than two years with an option to extend it for another at least two-year periods (…).". In accordance with art. 284 of the act on certified auditors, audit companies and public oversight, the regulations of that act, and the regulations of the act on accounting changed thereby, shall be applicable with respect to the audits of the financial statements prepared for the financial years commencing after June 16, 2016. Taking into account the content of art. 284 of the act on certified auditors, audit companies and public oversight, an agreement on the audit concluded prior to the day of coming into force of the act on certified auditors with an audit firm other than the existing one (the first agreement on the audit), if it is applicable to the financial statements prepared for the financial years commencing after June 16, 2016, should meet the requirements under the new legal regulations related to the audit, including those of art. 66, clause 5 of the act on accounting.

In order to meet the requirements under the above legal regulations, and implementing the resolution of the Supervisory Board of February 26, 2018 on the appointment of the audit firm, TAURON, on June 5, 2018, concluded an amendment to the act of April 27, 2017 with Ernst & Young Audyt Polska. Under the signed amendment the agreement also covered the audit of:

• 1. financial statements of the Company for 2018, prepared in accordance with the requirements of the IFRS,
• 1. financial statements of selected subsidiaries of TAURON Capital Group for 2018, prepared in accordance with the IFRS,
• 1. consolidated financial statements for 2018, prepared in accordance with the requirements of the IFRS.

The amended agreement also covered conducting a review of the interim, half year financial statements of the Company and the consolidated financial statements of TAURON Capital Group, prepared in accordance with the IFRS requirements for the period ending on June 30, 2018.

Prior to 2018 the services provided for the Company by Ernst & Young Audyt Polska included the audit of the standalone financial statements and consolidated financial statements of the Company for the years from 2008 until 2012 and the year 2017 as well as the reviews of the interim, half year standalone financial statements and the consolidated financial statements of the Company for the period ended on June 30 in the individual years from 2010 until 2012 and in 2017. The Company also used the advisory and training services provided by Ernst & Young Audyt Polska, to the extent in line with the legal regulations in force and not leading to the limitation of the level of impartiality and independence of the auditor.

The compensation of the audit firm for the services provided for TAURON Capital Group's subsidiaries is shown in the below table.

#		Year ended on December 31, 2018 (PLN '000)	Year ended on December 31, 2017 (PLN '000)
1.	Mandatory audit, including:	1079	1 018
	consolidated financial statements	124	124
	standalone financial statements of the parent entity	54	54
	standalone financial statements of the subsidiaries	901	840
2.	Other certifying services provided to TAURON Capital Group, including reviews of financial statements	585	565
3.	Tax advisory services	0	0
4.	Other services (including training) provided for
	TAURON Capital Group	0	3
	Total	1 664	1 586

Table no. 40. Compensation of the audit firm for the services provided for TAURON Capital Group's subsidiaries

7. FINANCIAL RESOURCES AND INSTRUMENTS

7.1. Proceeds from security issues

Under the bond issue program concluded on November 24, 2015 between TAURON and Bank Handlowy w Warszawie S.A., BGŻ BNP Paribas S.A., Santander Bank Polska S.A., CaixaBank S.A. (Spółka Akcyjna) Oddział w Polsce, Industrial and Commercial Bank of China (Europe) S.A. Oddział w Polsce, ING Bank Śląski S.A., mBank S.A. (mBank), MUFG Bank (Europe) N.V., MUFG Bank (Europe) N.V. S.A. Oddział w Polsce and Powszechna Kasa Oszczędności Bank Polski S.A., TAURON issued in 2018 bonds with the total nominal value of PLN 600 000 000, in accordance with the below specification:

1. on November 9, 2018 a bond issue with the total nominal value of PLN 200 000 000,

2. on December 9, 2018 a bond issue with the total nominal value of PLN 400 000 000.

The proceeds from the above mentioned issues were used in accordance with the issue documentation, i.e. for the general corporate purposes.

TAURON also completed a hybrid bond issue in 2018.

On December 11 and 13, 2018 the Company and the European Investment Bank (EIB) signed the hybrid bond (subordinated) issue agreements with the total value of PLN 750 000 000 (Bonds), i.e.

• 1. two project related agreements defining detailed requirements related to the financing of investment projects,
• 1. subscription agreement (Subscription Agreement I), constituting the basis for issuing hybrid bonds with the total nominal value of PLN 400 000 000,
• 1. subscription agreement (Subscription Agreement II), constituting the basis for issuing hybrid bonds with the total nominal value of PLN 350 000 000.

The proceeds from the Bond issue will be used to cover the expenditures of TAURON Dystrybucja S.A. related to the expansion and upgrading of the power grid infrastructure in 2018-2022.

The bonds issued constitute subordinated, unsecured, coupon bearer securities to be subscribed by the EIB as part of the European Fund for Strategic Investments launched by the EIB jointly with the European Commission in order to implement the so-called Juncker Plan.

In accordance with the Subscription Agreements I and II the Bonds were issued in series of December 17, 2018 and December 19, 2018. The maturity dates fall 12 years from the issue date, however in accordance with the nature of hybrid financing the first financing period has been defined as 7 years (1st Financing Period) during which TAURON shall not be able to redeem the Bonds early and the EIB shall not be able to sell the Bonds to third parties early (in both cases subject to the exceptions defined in the Subscription Agreements I and II). The Bonds bear a fixed interest rate in the 1st Financing Period, while in the subsequent 5-year financing period (2nd Financing Period) the Bonds will bear a floating interest rate (WIBOR 6M), increased by a set margin. The Agreement provides for an option to defer the Bonds interest payment dates until, at the latest, the Bonds maturity date or until the fifth day from the day of taking the decision to pay out the dividend. The subordinated nature of the Bonds means that in case of a bankruptcy or winding up of TAURON the obligations related to the Bonds shall be repaid only ahead of the liabilities of TAURON's shareholders. The Bond issue has a positive impact on TAURON Capital Group's financial stability as the Bonds are excluded from the calculation of the net debt / EBITDA ratio which is a covenant in some of TAURON's domestic bond issue programs. Furthermore, the Bonds will be classified by a rating agency in its rating model as equity in the amount of 50 percent of this financing which has a favorable impact on TAURON Capital Group's rating. The bonds were granted a BB+ rating by the Fitch rating agency.

The below table presents the summary of TAURON Capital Group's issued and non-redeemed bonds in 2018 underwritten by entities other than TAURON Capital Group's subsidiaries, listed according to maturity.

Table no. 41. Summary of TAURON Capital Group's issued and non-redeemed bonds in 2018 underwritten by entities other than TAURON Capital Group's subsidiaries (listed according to maturity)

#	Issuer	Investor	Type and level of interest rate	Issue date	Maturity date	Nominal (par) value ('000)
1.	TAURON	Domestic Investors	WIBOR 6M+fixed margin	04.11.2014	04.11.2019	PLN 1 750 000
2.				14.12.2018	14.03.2019	PLN 400 000
3.	TAURON	Banks (issue program	WIBOR 6M+fixed margin	09.11.2018	09.11.2020	PLN 200 000
4.		underwriters)		29.02.2016	29.12.2020	PLN 1 600 000
5.	TAURON	Eurobonds	Fixed interest rate	05.07.2017	05.07.2027	EUR 500 000
6.	TAURON Sweden Energy	German market investors	Fixed interest rate	03.12.2014	03.12.2029	EUR 168 000
7.	TAURON	BGK	WIBOR 6M+fixed margin	2014 – 2016	2019 – 2029	PLN 1 700 000
8.	TAURON	EIB	Fixed interest rate	17.12.2018	17.12.2030	PLN 400 000
9.	TAURON	EIB	Fixed interest rate	19.12.2018	19.12.2030	PLN 350 000
10.	TAURON	EIB	Fixed interest rate	16.12.2016	16.12.2034	EUR 190 000

After the balance sheet date, under the Bonds issue program of November 24, 2015 the Company:

• redeemed bonds of nominal value amounting to PLN 400 000 000 in line with maturity date,
• on March 25, 2019 issued PLN 100 000 000 worth bonds with maturity date falling on March 25, 2020.

Additionally, under the subordinated bonds issue program signed with BGK on September 6, 2017 the Company submitted proposal to purchase PLN 400 000 000 worth subordinated bonds on March 29, 2019 with maturity date falling on March 29, 2031 and BGK confirmed the receipt of the proposal.

7.2. Financial instruments

7.2.1. Application of financial instruments in order to eliminate price changes, credit risk, material disruptions of cash flows and loss of financial liquidity

The financial risk at TAURON Capital Group is managed by TAURON. The centralizing of the financial risk management function is aimed at optimizing the process, including minimizing TAURON Capital Group's costs in the above mentioned respect. As part of financial risk management in 2018 TAURON Capital Group continued to hedge the risk of volatility in cash flows resulting from its debt based on WIBOR reference rate.

Moreover, in 2018 TAURON Capital Group hedged the currency exposure arising from the trading operations (mainly due to the purchase of CO² emission allowances) by concluding forward contracts. In 2018 TAURON Capital Group was also continuing the strategy of hedging its foreign currency exposure generated by interest payments on the financing obtained in EUR by concluding forward contracts and CIRS transactions. The goal of these transactions was to hedge against the risk of cash flow volatility resulting from currency rate fluctuations.

The below table presents active futures derivative transactions as of December 31, 2018 (due to the adopted centralized model of financial risk management, the data refers only to TAURON).

Table no. 42. Information on futures transactions and derivatives as of December 31, 2018

	Type of	Total denomination of the specific type		Currency			Maturity date of the specific type of transaction	Valuation of transaction of the specific type as of December 31, 2018 ('000)
#	transaction concluded	of transaction ('000)	PLN	EUR	other	up to one year	beyond one year
1.	IRS	2 100 000	X				X	4 178
2.	CIRS	2 095 100	X				X	- 5 140
3.	Forward	90 400		X		X		- 2 455

With respect to hedging the risk arising from price volatility and the credit risk TAURON Capital Group did not use financial instruments.

As part of the implemented Portfolio Management Policy, the contracting of electricity sales is followed by the contracting of the CO² emission allowances. Such a way of hedging positions allows for minimizing of the risk of the CO² costs not being covered by the contracted electricity price. The basis for setting the CO2, sales price for the emission allowances volume defined this way is the CO² price on the exchange from the period in which the CO2 volume is contracted.

On the other hand, as part of liquidity loss risk management debt instruments referred to in section 7.3 are used.

7.2.2. Objectives and methods of financial risk management

The objectives and methods of financial risk management at TAURON and TAURON Capital Group are presented in section 3.3.2 of this report.

7.3. Assessment of financial resources management

TAURON has a centralized financial management function in place and thus effective management of finance of entire TAURON Capital Group is possible. The main tools enabling effective management include: the implemented central financing model and the appropriate internal corporate regulations as well as the cash pooling implemented by TAURON Capital Group. Additionally, the financial management system is supported by the central policy of managing the financial risk at TAURON Capital Group and the central Insurance policy of TAURON Capital Group. In these areas TAURON plays the role of the management body and decision maker with respect to the directions of measures undertaken, enabling determining the relevant limits of risk exposure.

In accordance with the adopted central model of financing TAURON is responsible for acquiring the financing for TAURON Capital Group's subsidiaries. Funds acquired both internally (from TAURON Capital Group's subsidiaries generating financial surpluses), as well as externally (from the financial market) are subsequently transferred to TAURON Capital Group's subsidiaries, reporting the requirement for financing.

Such policy of acquiring the funding sources enables, first of all, increasing the possibility to obtain financing, decreasing of the cost of external capital, reducing the number and form of hedges established on assets of TAURON Capital Group and covenants required by financial institutions, as well as leads to the reduction of the administrative costs. The central model of financing also enables acquiring financing sources unavailable for individual subsidiaries.

Another key element influencing the efficiency of financial management is the policy of financial liquidity management. Through implementation of relevant forecasting standards it becomes possible to establish the precise liquidity position of TAURON Capital Group allowing for optimizing the moment of fund raising as well as the maturity term and types of deposit instruments as well as the appropriate level of the liquidity reserve. The above factors lead to both, cost reduction as well as liquidity safety improvement. The current liquidity management is supported by the implemented cash pooling mechanism. Its overriding goal is to provide for current financial liquidity at TAURON Capital Group, while at the same time limiting the costs of short term external financing and maximizing the financial revenue due to investing cash surpluses. Owing to the cash pooling structure TAURON Capital Group's subsidiaries facing short term deficits of funds, may use funds of the subsidiaries generating financial surpluses, without the need to acquire external financing.

Both, the financing policy, as well as TAURON Capital Group's liquidity management policy conducted by TAURON are aimed at, apart from increasing the efficiency of managing TAURON Capital Group's finances, first of all, eliminating threats of limiting or losing the Group's financial liquidity. The guaranteed sources of financing, obtained with an appropriate lead time, effectively eliminate the risk of TAURON Capital Group losing liquidity. The description of the liquidity risk is presented in detail in section 3.3.2 of this report.

Moreover, a unified program of bank guarantees was implemented at TAURON. Under the agreements concluded by TAURON with banks it is possible to issue guarantees to secure the liabilities of TAURON Capital Group's subsidiaries companies within the centralized limit. The above mentioned measure reduced the cost of guarantees acquired, made their acquisition independent of the individual subsidiaries' financial standing and limited the total number of actions required to obtain a guarantee.

In 2018 TAURON and TAURON Capital Group demonstrated full capacity to pay its accounts payable within the payment deadlines thereof.

8. SHARES AND SHAREHOLDERS OF TAURON POLSKA ENERGIA S.A.

8.1. Shareholding Structure

As of December 31, 2018 and as of the day of drawing up this report the Company's share capital was, in accordance with an entry in the National Court Register, PLN 8 762 746 970 and was split into 1 752 549 394 shares with a nominal value of PLN 5 per share, including 1 589 438 762 ordinary AA series bearer shares and 163 110 632 registered BB series shares.

The below figure presents the shareholding structure as of December 31, 2018 and as of the day of drawing up this report. Figure no. 70. Shareholding structure as of December 31, 2018 and as of the day of drawing up this report

8.2. Dividend policy

As part of its Strategy adopted on September 2, 2016 the Company adopted its dividend policy. In the long term TAURON is planning to pay out a dividend of minimum 40 percent of the consolidated net profit. The Company's intention is to provide a dividend yield that would be competitive versus the yield offered by long term debt instruments issued on the Polish market by investment grade rated companies. The final recommendation on the dividend will be impacted by additional factors, including in particular:

• 1. TAURON Capital Group's liquidity position,
• 1. market situation,
• 1. implementation of the investment policy,
• 1. cost and ability to obtain financing,
• 1. legal requirements and provisions of the financing agreements, in particular related to not breaching the defined level of the leverage ratio,
• 1. ensuring investment grade rating.

Based on the forecasts developed as part of the process of preparing the Strategy, the Company assumed that 2020 would be the first year in which the dividend payout would be possible.

The below table presents the dividends paid out in 2010-2014. Starting from 2015 Spółka did not pay out the dividend.

Table no. 43. Dividends paid out in 2010-2014

Dividends paid out in 2010-2014
#	Financial year for which the dividend was paid out	Dividend amount paid out (PLN)	Net profit %	Dividend per share (PLN)	Dividend record date	Dividend payout date
1.	2010	262 882 409.10	31%	0.15	30.06.2011	20.07.2011
2.	2011	543 290 312.14	44%	0.31	02.07.2012	20.07.2012
3.	2012	350 509 878.80	24%	0.20	03.06.2013	18.06.2013
4.	2013	332 984 384.86	25%	0.19	14.08.2014	04.09.2014
5.	2014	262 882 409.10	23%	0.15	22.07.2015	12.08.2015

8.3. Number and nominal value of the Company's shares, as well as of the shares in units related to the Company, held by members of the Management Board and the Supervisory Board

As of December 31, 2018 and as of the day of drawing up this report members of the Management Board and members of the Supervisory Board did not have any TAURON shares, nor they held any shares in units related to the Company.

8.4. Agreements related to potential changes to the shareholding structure

The Company has no information on the existence of agreements (including also the agreements concluded past the balance sheet date), as a result of which changes in the proportions of shares held by the existing shareholders and bondholders may occur in the future.

8.5. Own shares buybacks

In 2018 and as of the day of drawing up this report TAURON and the subsidiaries did not own any of its shares

8.6. Employee stock award programs

In 2018 no employee stock award programs were implemented by the Company.

8.7. Shares performance on the Warsaw Stock Exchange (WSE)

TAURON shares have been listed on the Main Market of the Warsaw Stock Exchange since June 30, 2010. In 2018 TAURON share price fluctuated between PLN 1.67 and PLN 3.28 (at closing prices). During the last session of 2017 the share price came in at PLN 3.05, while a year later the price stood at PLN 2.19.

In spite of Poland's good economic situation and the country's economy growing at the fastest clip since 2011, the shares of companies listed on the Warsaw Stock Exchange (WSE) did not perform well. In 2018 WSE listed shares were in a downward trend that affected almost all of the main WSE indices. Over the full year WIG dropped 9.5 percent, WIG20 was 7.5 percent down, while WIG-Energia fell 19.4 percent. In terms of individual sectors only WIG-Paliwa (WIG-Fuels) finished the year in the positive territory.

The bear market observed on the Warsaw Stock Exchange in 2018 was due to the external factors, such as the trade conflict between the United States of America and China, and uncertainty regarding Brexit, as well as the local factors, including the GetBack scandal that significantly undermined investors' confidence in investing on the capital market. Also Poland's classification as a developed country by the FTSE Russell agency did not lead to the improvement of the investment sentiment on the WSE.

As of December 31, 2018 TAURON shares were included in the following stock exchange indices:

• 1. WIG index that includes all companies listed on WSE's Main Market that meet basic criteria for inclusion in indices. TAURON's share in WIG: 0.76 percent
• 1. WIG-Poland national index that groups solely shares of domestic companies listed on WSE's Main Market that meet basic criteria for inclusion in indices. TAURON's share in WIG-Poland index: 0.78 percent
• 1. WIG20 index calculated on the basis of the value of the portfolio of shares of 20 largest and most liquid companies listed on WSE's Main Market. TAURON's share in WIG20 index: 1.06 percent
• 1. WIG30 index that includes 30 of the largest and most liquid companies listed on WSE's Main Market. TAURON's share in WIG30 index: 0.99 percent.
• 1. WIG-Energia sector based index that comprises companies included in WIG index and are also qualified to the energy sector. TAURON's share in WIG-Energia: 14.23 percent
• 1. RESPECT Index index that groups in its portfolio companies that operate in accordance with the highest corporate social responsibility standards. TAURON's share in RESPECT Index: 1.59 percent
• 1. MSCI Emerging Markets Europe index that includes key companies in 15 developed countries in Europe
• 1. MSCI Poland Index index that includes more than 20 key companies listed on WSE. TAURON's share in MSCI Poland Standard Index: 0.96 percent.

The below table presents key data on the Company's shares in 2011-2018.

Table no. 44. Key data on the Company's shares in 2011-2018

#		2011	2012	2013	2014	2015	2016	2017	2018
1.	Share price high (PLN)	6.81	5.61	5.39	5.69	5.29	3.19	4.12	3.28
2.	Share price low (PLN)	4.65	4.08	3.85	4.04	2.37	2.31	2.75	1.67
3.	Last share price (PLN)	5.35	4.75	4.37	5.05	2.88	2.85	3.05	2.19
4.	Capitalization at the end of the period (PLN m)	9 376	8 325	7 659	8 850	5 047	4 995	5 345	3 838
5.	Capitalization at the end of the period (%)	2.1	1.59	1.29	1.5	0.98	0.9	0.8	0.66
6.	Book value (PLN m)	15 922	16 839	17 675	18 107	18 837	16 349	17 880	18 967
7.	P/E	8.1	5.5	5.5	7.8	4.2	-	3.02	3.7
8.	P/BV	0.59	0.49	0.43	0.49	0.27	0.31	0.31	0.2
9.	Rate of return ytd1 (%)	-16.73	-5.03	-3.64	20.07	-40.78	-1.04	7.02	-28.2
10.	Dividend yield (%)	2.8	6.5	4.6	3.8	5.2	-	-	-
11.	Trading volume (PLN m)	5 575	3 199	3 104	3 135	3 063	3 199	2 737	3 104
12.	Trading volume share (%)	2.21	1.7	1.41	1.53	1.5	1.69	1.16	1.52

Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

13.	Average votume per session	3 721 539	2 667 725	2 793 020	2 489 329	3 190 195	4 662 087	3 261 765	5 622 737
14.	Average number of transactions per session (pcs)	1 373	960	1 022	1 106	1 431	1 465	1 323	1 769

Source: WSE Statistical Bulletin

¹Rate of return calculated taking into account the investor's income from the dividend and assuming that the additional income realized is re-invested. Methodology in accordance with WSE Statistical Bulletin.

The below graphs present historical TAURON share price performance and trading volumes, including against WIG20 and WIG-Energia indices.

Figure no. 71. TAURON share price(in PLN) and trading volumes in 2018 (in PLN '000)

Figure no. 73. TAURON share price (in PLN) versus WIG20 and WIG-Energia indices since the market debut until December 31, 2018 (in PLN '000)

Recommendations for the shares of TAURON Polska Energia S.A.

In 2019 analysts from brokerage houses and investment banks issued 1- recommendations for TAURON shares in total, including:

• 1. two "Buy" recommendations,
• 1. seven "Hold" recommendations,
• 1. one "Sell" recommendation.

The below table presents a list of recommendations issued in 2018.

Table no. 45. Recommendations issued in 2018.

#	Date of issuing recommendation	Institution issuing recommendation	Recommendation / target price
1.	12.12.2018	BM Santander	Sell / PLN 1.60
2.	29.11.2018	mBank DM	Buy / PLN 3.06
3.	26.11.2018	Societe Generale CIB	Hold / PLN 2.50
4.	18.10.2018	Wood&Co	Hold / PLN 1.98
5.	2.10.2018	Erste Securities	Hold / PLN 1.78
6.	24.07.2018	DM BOŚ	Hold / PLN 2.53
7.	4.07.2018	Raiffeisen Centrobank	Hold / PLN 2.40
8.	26.06.2018	DM Banku Handlowego (Citi)	Hold / PLN 3.50
9.	9.04.2018	Trigon DM	Buy / PLN 2.60
10.	15.01.2018	BM Exane BNP Paribas	Hold / PLN 4.00

8.8. Investor relations

Transparent, accurate and regular communications is the foundation of TAURON's investor relations (IR) program. The Company places a lot of weight on building good relations with all stakeholder groups, which, as a consequence, leads to a higher trust of investors, financing institutions and business partners.

Information on TAURON Capital Group's operations and results is provided both in the form of mandatory activities required by law (e.g. by disclosing information in the current and periodic regulatory filings) but also using many additional tools addressed directly to institutional and individual investors. Analysts, shareholders – current and potential – have access to a broad spectrum of information on corporate, economic and financial events that occurred at TAURON Capital Group.

As part of its IR program the Company organizes quarterly earnings conferences as well as participates in many investor conferences and roadshows in Poland and abroad.

During meetings with investors members of TAURON's Management Board and key managers are presenting and discussing such topics as: strategy, implementation of capex projects, financial situation, as well as the current standing and outlook for the energy sector.

The quarterly earnings conferences each time attract several dozen representatives of the capital market. These events can also be followed over the internet and listened via telephone. Separate meetings devoted to discussion of financial results are also regularly arranged for representatives of key media, so that earnings information could reach all investors via diverse channels

Besides meetings accompanying the publication of periodical reports, in 2018 members of the Management Board and representatives of the Investor Relations Team took part in more than a dozen conferences and roadshows, during which several dozen meetings with managers and capital market analysts were held. Representatives of TAURON met institutional investors not only in Poland, but also in the US, Canada, Great Britain, Austria and Czech Republic.

In 2018, similar as in previous years, TAURON also participated in events addressed to individual investors. The Company was, inter alia, a partner of the "Wall Street" conference in Karpacz organized by the Individual Investors Association. As part of the regular communications with this sizeable group of investors, 4 chats with representatives of the Management Board took place in 2018, with approximately one hundred individual investors taking part each time.

In connection with the growing role of Internet channels and social media, much emphasis was placed on their development with respect to the communications with investors. Broadcasts of events important for investors were provided via the YouTube service: earnings conferences, GMs and comments of the President of the Management Board on the financial results. On the other hand, announcements of significant events are published by the Company on Facebook. TAURON also launched a corporate profile on Twitter where entries related to, among others, investor relations appear. Being aware of the fact that the website is a significant source of information for investors, in particular, the Investor Relations tab; the Company takes cares of its content and validity of the content provided therein. Investor Relations section contains a lot of useful information on the current events, financial results or GMs. It also provides presentations and video broadcasts of conferences summarizing the financial results.

TAURON has been included in the RESPECT Index since 2013 – a group of socially responsible stock market listed entities that apply the highest sustainable growth standards and conduct dependable communications with the market.

The below table presents a timeline of investor relations highlights and activities that took place in 2018.

Table no. 46. Timeline of investor relations highlights and activities that took place in 2018

#	Date	Highlight (event)
1.	13.03.2018	Full year 2017 stand-alone and consolidated earnings reports published
2.	14.03.2018	Management Board's meeting with analysts and fund managers to present FY 2017 earnings, Warsaw
3.	14.03.2018	Chat for individual investors as part of cooperation with the Individual Investors Association
4.	19-20.03.2018	Participation in the DM PKO BP CEE Capital Markets Conference, London
5.	29.03.2018	Meetings with fund managers, IPOPEMA, Warsaw
6.	10-11.04.2018	Participation in Raiffeisen Centrobank Investor Conference, Austria, Zürs
7.	16.04.2018	TAURON's Ordinary GM
8.	16.05.2018	Q1 2018 earnings report published
9.	17.05.2018	Meetings of the Management Board with analysts and fund managers following Q1 2018 earnings, Warsaw
10.	17.05.2018	Chat for individual investors as part of cooperation with the Individual Investors Association
11.	23.05.2018	Meetings with fund managers, mBank, Warsaw
12.	22.08.2018	H1 2018 earnings report published
13.	23.08.2018	Meeting of the Management Board with analysts and fund managers, Societe Generale, Warsaw
14.	23.08.2018	Chat for individual investors as part of cooperation with the Individual Investors Association
15.	30.08.2018	Meetings with fund managers, Societe Generale, Warsaw
16.	11.09.2018	Participation in the 15th Annual Emerging Europe Investment Conference, Pekao Investment Banking, Warsaw
17.	17-19.09.2018	Roadshow US, Kanada, Wood&Co

#	Date	Highlight (event)
18.	27.09.2018	Investor Daya: Power, Mining and Fuels, Cracow, DM PKO BP
19.	10.10.2018	Meeting of the Management Board with analysts and fund managers - Erste Group Investor Conference, Stegersbach, Austria
20.	6.11.2018	Q3 2018 earnings report published.
21.	7.11.2018	Management Board's meeting with analysts and fund managers to present Q3 2018 earnings, Warsaw
22.	7.11.2018	Chat for individual investors as part of cooperation with the Individual Investors Association
23.	28.11.2018	Participation in Santander's Annual UTILITY / OIL & GAS / METALS & MINING Sector Conference, Warsaw
24.	6.12.2018	Participation in the Wood's Winter in Prague Conference, Prague, Czech Republic

9. STATEMENT ON APPLICATION OF CORPORATE GOVERNANCE

Pursuant to § 70, clause 6, sub-clause 5) § 91(5)(4) of the Regulation of the Minister of Finance of March 29, 2018 on current and periodical information disclosed by issuers of securities and conditions to acknowledge as equivalent information required by legal regulations of a non-member state (i.e. Journal of Laws of 2018, item 757), the Company's Management Board presents the statement on application of corporate governance in 2018.

9.1. Indication of applied set of corporate governance rules

In 2018 the Company was subject to the corporate governance rules, described in the document Best Practice of WSE (GPW) Listed Companies (Best Practice 2016), adopted by the Supervisory Board of the WSE (GPW) in resolution no. 26/1413/2015 of October 13, 2015, which came into force on January 1, 2016.

The text of the Best Practice 2016 the Company is subject to is published on the GPW website at the address: www.gpw.dobre-praktyki.pl.

9.2. Indication of abandoned rules of corporate governance

In 2018 the Company did not apply the following detailed rules provided in the Best Practice 2016:

• 1) IV.Z.2. concerning ensuring of publicly available real-time broadcasts of general meetings, due to the lack of the relevant provisions of the Articles of Association enabling the aforementioned broadcast. In order to enable the application of the rule, the Company's Management Board requested the Ordinary GM of the Company to adopt the relevant amendment to the Company's Articles of Association ensuring publicly available real-time broadcast of general meetings. However, the Ordinary GM of the Company convened on 8 June 2016 did not adopt the amendment to the Company Articles of Association proposed by the Company Management Board in this respect
• 2) VI.Z.1. concerning the construction of incentive schemes in a way necessary, among others, to tie the level of compensation of members of the Company's management board and key managers to the actual long-term financial standing of the Company and long-term shareholder value creation as well as the Company's stability. This rule was not applied due to the compensation and bonus system applicable in TAURON in relation to members of the Management Board of the Company and its key managers stipulates that the level of compensation will be tied to the financial situation of the Company within the annual perspective, in conjunction with the implementation of strategic objectives,
• 3) VI.Z.2. concerning tying the compensation of members of the management board and key managers to the Company's long-term business and financial goals. The period between the allocation of options or other instruments linked to the Company's shares under the incentive scheme and their exercisability should be no less than two years. 2 years This rule was not applied due to the compensation and bonus system applicable in TAURON in relation to Members of the Management Board of the Company and its key managers does not provide that compensation should be tied to instruments linked with the Company shares.

In 2018 the following rules did not apply to the Company:

• 1) I.Z.1.10. concerning placing financial projections on the Company website if the company has decided to publish them - published at least in the last 5 years, including information about the degree of their implementation - due to the fact that financial forecasts are not published,
• 2) III.Z.6. stating that where the Company has no separate internal audit function in its organization, the audit committee (or the supervisory board if it performs the functions of the audit committee) should review on an annual basis whether such function needs to be separated - due to the fact that the Company has a separate Internal Audit Department in its organizational structure.

Furthermore, the Management Board of the Company, adopting the detailed rules of Best Practice 2016 designated as: I.Z.1.3, I.Z.1.15, I.Z.1.16, II.Z.1, II.Z.6, II.Z.10.1, II.Z.10.2, II.Z.10.3, II.Z.10.4, V.Z.5, V.Z.6, VI.Z.4., indicated the manner of applying them. The detailed description of the manner of applying the above rules is provided in the Information on the status of applying by the Company of the recommendations and rules provided in Best Practice 2016, constituting an appendix to the above mentioned report on not applying the detailed rules provided in Best Practice 2016 and provided on the Company's website.

Information concerning abandonment of recommendations provided in Best Practice 2016 for application

In 2018 the Company did not apply only the recommendation provided in Best Practice 2016, designated as IV.R.2 concerning ensuring a possibility to shareholders to participate in the GM using electronic communication means, due to the lack of such shareholders' expectation. This decision is expressed by the failure of the Company GM on 8 June 2016 to adopt the relevant amendments to the Company Articles of Association ensuring publicly available real-time broadcast of general meetings.

The other recommendations provided in Best Practice 2016 were applied by the Company in 2018.

9.3. Description of main characteristics of internal control and risk management systems in relation to the process of generating the financial statements and consolidated financial

The internal audit and risk management system with respect to the process of drawing up the financial statements and consolidated financial statements is implemented on three levels:

TAURON Capital Group's subsidiaries operate based on organizational regulations and possess defined organizational structures based on internal documents adopted for the entire Group. These define the business units responsible for preparing financial statements and consolidated financial statements. Such units have the duty to perform regular control of the tasks vested and functional control of their activities.

Business Model of the TAURON Capital Group resulted in implementation of Process Documentation of Megaprocess 3.4 Accounting, containing procedures associated with financial reporting of the Company and the TAURON Capital Group. Process documents define responsibilities of business units within the reporting processes.

TAURON Capital Group implemented a Risk Area managed by the Executive Director for Risk Management, whose role is to oversee and establish the risk management process for the entire TAURON Capital Group. These functions are implemented within the Company by Corporate, Market and Credit Risk Management Teams. The purpose of risk management is to improve the predictability of attaining strategic objectives by the TAURON Capital Group, including stable creation of the financial result through early identification of

threats allowing preventive activities to commence. Risk management standards applicable at the TAURON Capital Group have been defined in the Strategy for corporate risk management at the TAURON Group and in policies for managing specific risks. The ERM system encompasses all spheres of TAURON Capital Group business and business processes within the Group, including the process of preparing financial statements. Risks associated with his process are managed, monitored and reported within the ERM system. Standardization aims to ensure coherence in managing the individual risk categories, defining general principles, standards and tools of system architecture. Oversight of the ERM system at the TAURON Capital Group is performed by the Risk Committee.

Internal Audit Department is functioning in the Company. The goal of the Internal Audit is planning and implementing audit tasks, including performance of commissioned ad-hoc inspections, and also activities of advisory and opinion (feedback) providing nature. Methods and rules of implementing the Internal Audit function are defined by the Process Documentation of the Megaprocess 1.5 Audit along with the related document Regulations of Internal Audit at TAURON Group. The introduction of Megaprocess 1.5 Audit was a consequence of the adoption of the Business Model by the Management Board of TAURON. In implementing the internal audit function the Company shall be acting in compliance with TAURON Group's Corporate Social Responsibility Code and the International Standards for the Professional Practice of Internal Auditing. In the second half of 2018 an initiative was launched to develop a model for evaluating the functioning Internal Audit System whose results are presented to the Audit Committee of the Company's Supervisory Board. As of the end of 2018 also internal reorganization of the audit function was undertaken aimed at separating the functioning of the "audit stream" and the "control stream" within the structures. As part of the "control stream", among others, fraud detection tasks will be carried out. Also a dedicated cell specializing in auditing IT, OT and security systems was set up.

The below table presents the most important aspects related to internal audit and risk management with respect to the process of drawing up financial statements and consolidated financial statements.

Most important aspects related to internal audit and risk management with respect to the process of drawing up financial statements and consolidated financial statements

Most important aspects related to internal audit and risk management with respect to the process of drawing up financial statements and consolidated financial statements

Supervision over application of consistent accounting rules by TAURON Capital Group's subsidiaries when developing reporting packages for the purpose of drawing up TAURON Capital Group's consolidated financial statements

In order to ensure consistent accounting principles based on International Financial Reporting Standards (IFRS) approved by the European Union the Accounting Policy of TAURON Polska Energia S.A. Capital Group (Accounting Policy) was developed and implemented by TAURON Capital Group. This document shall be accordingly updated in case there are changes to the regulations. The rules defined in the Accounting Policy shall be applicable to TAURON's stand-alone financial statements and TAURON Capital Group's consolidated financial statements. TAURON Capital Group's subsidiaries shall be obligated to apply the Accounting Policy when preparing the reporting packages that provide the basis for preparing TAURON Capital Group's consolidated financial statements.

Furthermore, TAURON Capital Group developed and implemented an intra-group regulation that comprehensively regulates issues related to the rules and deadlines for preparing the reporting packages for the purpose of consolidated financial statements. The reporting packages shall be validated by the holding company's Consolidation and Reporting Office and by an independent certified auditor during an audit or review of TAURON Capital Group's consolidated financial statements.

Procedures used to authorize and provide opinions on the Company's financial statements and TAURON Capital Group's consolidated financial statements

The Company has implemented financial statements' authorization procedures. Quarterly, half year and full year financial statements of the Company and TAURON Capital Group's consolidated financial statements shall be approved by the Company's Management Board before being published. Full year financial statements of TAURON and TAURON Capital Group's consolidated financial statements shall be additionally presented for evaluation to the Company's Supervisory Board before being published. Vice President of the Management Board for economic and financial affairs (Chief Financial Officer) shall oversee the preparation of financial statements, while the Management Boards of the subsidiaries included in the consolidation shall be responsible for preparing the reporting packages for TAURON Capital Group's consolidated financial statements.

Supervisory Board's structure includes the Audit Committee of the Supervisory Board of TAURON Polska Energia S.A., whose membership, competence and description of activities are provided in clause 9.11.3 of this report

IT systems as well as financial and accounting processes

TAURON Capital Group's subsidiaries maintain accounting books (ledgers) which constitute the basis for preparing financial statements using ERP financial and accounting computer systems, enabling system audits of the correctness of the document flow and classifying of the business events. Consolidated financial statements are prepared using an IT tool used to consolidate financial statements, providing system control with respect to the coherence (integrity) and timeliness of preparing the consolidation data.

TAURON Capital Group's subsidiaries have implemented IT and organizational solutions that provide control of access to the financial and accounting system and ensure adequate protection and archiving of the accounting books. Access to IT systems is restricted based on applicable access rights assigned to authorized personnel. Control mechanisms are applied in the process of granting and changing access rights to the financial and accounting systems. Granted rights are also subject to periodic verification.

Due to the integration of the accounting functions and the transfer of TAURON Capital Group's material subsidiaries' financial and accounting services to CUW-R (Shared Cervices Center – Accounting) TAURON Capital Group's financial and accounting processes were Most important aspects related to internal audit and risk management with respect to the process of drawing up financial statements and consolidated financial statements

gradually unified. The subsidiaries adjusted their own procedures to the flow of the financial and accounting processes, taking into account the specifics of the individual segments.

TAURON Capital Group's Business Model clearly distributes responsibilities with respect to the financial and accounting processes between the Company (indicated as the Corporate Centre) and the subsidiaries and CUW R, indicating that the Corporate Centre is the owner of processes associated with accounting and reporting of TAURON Capital Group. With respect to the tasks of the Corporate Centre, strategic functions associated with the development of the model of operations and standards of TAURON Capital Group were indicated in the area of accounting and supervision of the implementation of standards in the accounting area in the subsidiaries and CUW R. Moreover, it was indicated that the Company as the Corporate Centre is responsible for drawing up the Company's financial statements and the consolidated financial statements of TAURON Capital Group. A clear split of responsibilities and strong emphasis on the fulfillment of the supervisory functions by the Corporate Centre in relation to CUW R and the subsidiaries is, inter alia, aimed at improving the process of preparing the financial statements.

Subjecting the Company's financial statements and TAURON Capital Group's consolidated financial statements to an audit and reviews by an independent certified auditor

Full year financial statements of the Company and full year consolidated financial statements of TAURON Capital Group are subject to an audit by an independent certified auditor. Half year financial statements of the Company and half year consolidated financial statements of TAURON Capital Group are subject to a review by a certified auditor. In 2017 the Company appointed an entity authorized to audit and review the financial statements of the material subsidiaries of TAURON Capital Group and the consolidated financial statements. The agreement with the entity authorized to audit financial statements was concluded to conduct an audit and review of the 2017 financial statements, and subsequently, following the coming into force of the act of May 11, 2017 on certified auditors, audit firms and public supervision, was adapted to the new regulations by way of concluding an amendment, covering the conducting of the audit of the 2018 financial statements.

Rule related to changing the Company's and TAURON Capital Group's audit firm

The following rule was established in the Policy for selecting an audit firm to conduct an audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A., adopted by the Audit Committee of the Company's Supervisory Board on October 16, 2017:

• 1) maximum period of continuous orders for audits to be conducted by the same audit company or an entity related to that audit company or any member of the network operating in the European Union countries that such audit companies are members of, shall not exceed 5 years,
• 2) after a 5-year duration of the order neither the audit company, nor any member of its network operating within the European Union shall conduct an audit of the Company for the subsequent 4 years,
• 3) a key certified auditor shall not conduct an audit of the Company for a period longer than 5 years,
• 4) a key certified auditor may again conduct an audit of the Company after at least 3 years have elapsed from the completion of the last audit.

9.4. Shareholders holding substantial blocks of shares

The below table presents shareholders holding, as of December 31, 2018 and as of the day of drawing up this report, directly or indirectly substantial blocks of the Company's shares.

#	Shareholders	Number of shares held	Percentage share in share capital	Number of votes held	Percentage share in the total number of votes
1.	State Treasury	526 848 384	30.06%	526 848 384	30.06%
2.	KGHM	182 110 566	10.39%	182 110 566	10.39%
3.	Nationale-Nederlanden	88 742 929	5.06%	88 742 929	5.06%

Table no. 47. Shareholders holding, directly or indirectly, substantial blocks of shares

Shareholders

Number of shares held

Otwarty Fundusz Emerytalny (Open Pension Fund)

Since the day of publishing the previous periodical report, i.e. since November 6, 2018, until the day of publishing this report the Company did not receive any notifications from its shareholders on any changes in the ownership structure of substantial blocks of TAURON shares.

9.5. Holders of securities providing special control rights

The Company did not issue securities that would grant special control rights with respect to the Company.

9.6. Restrictions on exercising the voting right

Restrictions on exercising the right to vote are included in § 10 of the Company's Articles of Association which are available on the Company's website http://www.tauron.pl/.

The above restrictions on exercising the voting right are formulated in the following way:

• 1) The voting right of shareholders holding over 10% of total votes in the company shall be limited so that none of them can exercise more than 10% of the total votes in the company at the General Meeting of Shareholders.
• 2) The restriction on exercising the voting right mentioned in clause 1 above shall not apply to the State Treasury and entities controlled thereby in the period during which the State Treasury, together with entities controlled thereby, hold a number of the company's shares that entitle them to exercise at least 25% of the total votes in the company.
• 3) Votes of shareholders who have a parent/subsidiary relationship in the understanding of § 10 of the Articles of Association (Shareholder Cluster) shall be aggregated; in case the aggregate number of their votes exceeds 10% of total votes in the company it shall be subject to reduction. Rules of votes' aggregation and reduction are defined in clauses 6 and 7 below.
• 4) A shareholder, in the understanding of § 10 of the Articles of Associations, shall be any party (entity), including its parent and subsidiary company, entitled directly or indirectly to a voting right at the General Meeting of Shareholders on the basis of any legal title; it shall also be applicable to a party (entity) that does not hold the company's shares, and in particular to a user, lien holder, party (entity) entitled on the basis of a depositary receipt under regulations of the Act of July 29, 2005 on financial instruments trading, as well as a party (entity) entitled to take part in the General Meeting of Shareholders in spite of disposing of its shares after the date of establishing (registering) the right to take part in the General Meeting of Shareholders.
• 5) A parent company and subsidiary company, for the purposes of § 10 of the Articles of Association, shall be understood, accordingly, as a party (entity:
  • a) with a status of a controlling undertaking, controlled undertaking or, at the same time, both the status of a controlling undertaking and controlled undertaking in the understanding of the Act of February 16, 2007 on the protection of competition and consumers, or
  • b) with a status of a parent company, higher level parent company, subsidiary company, lower level subsidiary company, co-controlled company or one that has both the status of a parent company (including a higher level parent company) and the status of a subsidiary (including a lower level subsidiary company and a co-controlled company) in the understanding of the Act of September 29, 1994 on accounting, or
  • c) which has (parent company) or one which is under controlling influence (subsidiary company) in the understanding of the Act of September 22, 2006 on transparency of financial relationships between public bodies and public undertakings and on financial transparency of some undertakings, or
• d) whose votes due to the company's shares owned directly or indirectly are subject to aggregation with votes of another party (entity) or other parties (entities) on conditions defined in the Act of July 29, 2005 on a public offering and conditions of introducing financial instruments to an organized trading system and on public companies in connection with holding, disposing of or acquiring substantial blocks of the Company's shares.
• 6) Aggregation of votes is based on totaling the number of votes held by individual shareholders that are members of the Shareholders' Cluster.
• 7) Reduction of votes involves decreasing the total number of votes in the company that shareholders that are members of the Shareholders' Cluster, are entitled to exercise at the General Meeting of Shareholders to the level of 10% of total votes in the company. Reduction of votes shall take place in accordance with the following rules:
  • a) number of votes of a shareholder who holds the largest number of votes in the company among all shareholders that are members of the Shareholders' Cluster shall be reduced by a number of votes equal to a surplus above 10% of total votes in the company held by all shareholders that are members of the Shareholders' Cluster,
  • b) if, despite the above mentioned reduction, the total number of votes that shareholders that are members of the Shareholders' Cluster are entitled to exceeds 10% of the total votes in the company, a further reduction of votes held by other shareholders that are members of the Shareholders' Cluster shall be made. The further reduction of individual shareholders' votes shall take place in an order established on the basis of the number of votes that individual shareholders that are members of the Shareholders' Cluster hold (from the highest to the lowest one). The further reduction shall take place until the total number of votes held by shareholders that are members of the Shareholders' Cluster does not exceed 10% of the total votes in the Company,
  • c) in any case a shareholder whose voting rights have been reduced shall have the right to exercise at least one vote,
  • d) restriction on exercising the voting right shall also apply to a shareholder absent at the General Meeting of Shareholders.
• 8) Each shareholder who is going to take part in the General Meeting of Shareholders, in person or through a proxy, shall be obliged to, without a separate notice mentioned in clause 9 below, notify the Management Board or the Chairperson of the General Meeting of Shareholders that she/he holds, directly or indirectly, more than 10% of the total votes in the Company.
• 9) Notwithstanding the provisions of clause 8 above, in order to establish the basis for aggregating and reducing the votes, a Company's shareholder, Management Board, Supervisory Board and individual members of such bodies shall have the right to demand that a shareholder of the Company provide information whether she/he is a party (entity) having the status of a parent or subsidiary company towards another shareholder in the understanding of § 10 of the Articles of Association. The entitlement mentioned in the preceding sentence shall also include the right to demand the revealing of the number of votes that the company's shareholder holds on its own or jointly with other shareholders of the Company.
• 10) A party (entity) that has failed to fulfill or has fulfilled the information obligation mentioned in clauses 8 and 9 above improperly, shall, until the failure to fulfill the information obligation has been remedied, be able to exercise its voting right with respect to one share only; exercising voting rights with respect to other shares by such party (entity) shall be null and void.

9.7. Restrictions on transfer of the ownership right to securities

As of December 31, 2018 and as of the day of drawing up this report TAURON's Articles of Association do not envisage restrictions on the transfer of the ownership right to the Company's securities.

However, in accordance with the act of July 24, 2015 on the control of some investments an entity intending to purchase or achieve a material shareholding or purchase the dominating control over TAURON, which is an entity subject to protection, shall, each time, be obligated to submit a notification to the control body – Minister of Energy of its intention to do so, unless such obligation rests on other entities. Furthermore, in accordance with the act of December 16, 2016 on the principles of managing state owned property, the State Treasury shall not dispose of its shares in TAURON.

9.8. Rules on appointing and dismissing managing and supervising persons and their powers

9.8.1. Management Board

Rules on appointing and dismissing members of the Management Board

Management Board of the company shall be composed of one to six persons, including the President and Vice Presidents. Members of the Management Board shall be appointed and dismissed by the Supervisory Board for a common term of office lasting 3 years, except for the 1st term that lasted 2 years. Each of the Management Board members can be dismissed or suspended in office by the Supervisory Board or the GM.

In order to recruit a person with whom an agreement on performing the management board level function at the Company, Supervisory Board announces the competition and conducts a qualification procedure for the position of the President or Vice President aimed at verifying and assessing the candidates' qualifications and selecting the best candidate. A candidate for a member of the Management Board must meet the requirements set forth in §16 clauses 3 and 4 of the Company's Articles of Association. The announcement of the qualification process is published on the Company's web site and in the Public Information Bulletin of the Ministry of Energy. The Company notifies the shareholders of the results of the qualification procedure.

Management Board's competence

Management Board shall conduct the Company's affairs and represent the Company in all court and out of court proceedings. Any matters related to conducting the Company's affairs, not assigned, based on the legal regulations or the provisions of the Articles of Association, to the scope of competence of the General Meeting of Shareholders or Supervisory Board, shall be within the scope of competence of the Management Board.

In accordance with the Articles of Association, all issues which go beyond the regular scope of the Company's activities shall require a resolution of the Management Board, in particular, the following issues listed in the below table:

Table no. 48. Management Board's competence

Matters that require a resolution of the Management Board

as of December 31, 2018 and as of the day of drawing up this report

• 1. Management Board bylaws,
• 1. Company's organizational regulations,
• 1. establishment and liquidation of branches,
• 1. appointment of a proxy,
• 1. taking on credits and loans,
• 1. approving annual material and financial plans of the Company and of the Capital Group as well as the Capital Group's Corporate Strategy,
• 1. assuming contingent liabilities in the understanding of the Act of September 29, 1994 on accounting, including granting guaranties and sureties by the Company as well as issuing bills of exchange, subject to § 20 clause 2 item 4 and 5 of the Company's Articles of Association,
• 1. making donations, cancelling interest or releasing from debt, subject to § 43 clause 3 items 1 and 2 of the Company's Articles of Association,
• 1. purchase of real estate, perpetual usufruct or shares in real estate or in perpetual usufruct, subject to § 20 clause 2 item 1 of the company's Articles of Association,
• 1. purchase of fixed assets excluding real estate, perpetual usufruct or share in real estate or perpetual usufruct with the value equal to or exceeding the PLN equivalent of EUR 10,000, subject to the provisions of § 20 clause 2 item 2 of the Company's Articles of Association,
• 1. disposal (control) of fixed assets including real estate, perpetual usufruct or share in real estate or perpetual usufruct with the value equal to or exceeding the PLN equivalent of EUR 10,000, subject to the provisions of § 20 clause 2 item 3 of the company's Articles of Association,

Matters that require a resolution of the Management Board

as of December 31, 2018 and as of the day of drawing up this report

• 1. defining the way the voting right will be exercised at the General Meeting of Shareholders or the Meeting of Shareholders of companies in which the company holds shares, on matters within the scope of competence of the General Meeting of Shareholders or the Meeting of Shareholders of such companies, subject to the provisions of § 20 clause 3 item 9 of the company's Articles of Association,
• 1. rules of conducting sponsoring activities,
• 1. adoption of the annual plan of sponsoring activities,
• 1. matters which the Management Board refers to the Supervisory Board or the General Meeting of Shareholders for review.

9.8.2. Supervisory Board

Rules on appointing and dismissing members of the Supervisory Board

Supervisory Board shall be composed of five to nine persons, appointed for a common term of office lasting three years, except for the first term that lasted 1 year. In accordance with the Company's Articles of Association members of the Supervisory Board shall be appointed and dismissed by the General Meeting of Shareholders, subject to the following:

• 1) during the time when the State Treasury, together with the State Treasury controlled entities in the understanding of § 10 clause 5 of the Articles of Association, hold a number of the company's shares that entitle them to exercise at least 25% of the total votes in the company, the State Treasury, represented by the minister competent to handle the State Treasury's affairs, shall be entitled to appoint and dismiss members of the Supervisory Board in the number equal to half of the maximum number of members of the Supervisory Board defined in the Articles of Association (in case such number is not integral it shall be rounded down to an integral number, for example 4.5 shall be rounded down to 4) and increased by 1, provided that the State Treasury:
  • a) shall be obliged to vote at the General Meeting of Shareholders on establishing the number of members in the Supervisory Board that would correspond to the maximum number of members of the Supervisory Board defined in the Articles of Association in case such a motion is submitted to the Management Board by a shareholder or shareholders who hold a number of votes that entitle them to exercise at least 5% of the total number of votes in the Company,
  • b) shall be excluded from the voting at the General Meeting of Shareholders on appointing and dismissing other members of the Supervisory Board, including independent members of the Supervisory Board; this shall not, however, apply to the case when the Supervisory Board cannot act due to its membership being smaller than required by the Articles of Association, and the shareholders present at the General Meeting of Shareholders, other than the State Treasury, do not supplement the membership of the Supervisory Board in accordance with the distribution of seats in the Supervisory Board defined in this section;
• 2) during the time when the State Treasury, together with the State Treasury controlled entities in the understanding of § 10 clause 5 of the Articles of Association, hold a number of the company's shares that entitle them to exercise less than 25% of the total number of votes in the company, the State Treasury, represented by the minister competent to handle the State Treasury's affairs, shall be entitled to appoint and dismiss one member of the Supervisory Board..
• 3) appointing and dismissing members of the Supervisory Board by the State Treasury pursuant to the above mentioned clause 1) or 2) shall take place by means of a statement submitted to the Company.

In accordance with the Best Practice 2016 at least two members of the Supervisory Board shall meet the criteria of independence. A phrase an "independent member of the Supervisory Board" shall denote an independent member of the Supervisory Board in the understanding of Appendix II to the European Commission's Recommendation of February 15, 2005 related to the role of non-executive directors or members of a supervisory board of publicly listed companies and a supervisory board's committee (2005/162/EC) and the additional criteria indicated in the Best Practice 2016 .

Members of the Supervisory Board shall submit to the Company, prior to their appointment as members of the Supervisory Board, a written statement on compliance with the independence criteria mentioned in the Best Practice 2016. In case a situation occurs where the independence criteria are not complied with a member of the Supervisory Board shall be obligated to forthwith inform the Company thereof. The Company shall provide information on the compliance of the members of its Supervisory Board on its website.

Supervisory Board's competence

Supervisory Board shall continuously oversee the Company's activities in all areas of its operations.

According to the Company's Articles of Association the Supervisory Board's tasks and competences shall include in particular the matters listed in the below table.

Table no. 49. Supervisory Board's competence

Matters that require a resolution of the Supervisory Board

as of December 31, 2018 and as of the day of drawing up this report

Competences related to providing opinions

• 1. evaluate the Management Board's report on the Company's operations (Directors' Report) as well as the financial statements for the last financial year with respect to their compliance with books, documents as well as with the actual status. This shall also apply to the Capital Group's consolidated financial statements, provided they are prepared,
• 1. evaluate the Management Board's recommendations on profit distribution or loss coverage,
• 1. submit a written report to the General Meeting of Shareholders on the outcome of activities covered in clauses 1 and 2,
• 1. prepare once a year and submit to the General Meeting:
  2. a) evaluation of the Company's situation, including the assessment of the internal control, risk management systems, compliance and internal audit functions, including all significant control mechanisms, in particular, those related to financial reporting and operations,
  3. b) report on activities of the Supervisory Board comprising at least information concerning:
     • composition of the Supervisory Board and its Committees,
     • compliance with the independence criteria by Members of the Supervisory Board,
     • number of meetings of the Supervisory Board and its committees,
     • self-assessment of the Supervisory Board,
  4. c) assessment of the method of fulfilment of information obligations by the Company, in relation to the application of corporate governance principles defined in the Regulations of the Exchange and provisions related to current and periodical information submitted by issuers of securities,
  5. d) assessment of rationality of sponsoring, charitable policy, or other similar policy pursued by the Company, or information concerning the lack of such policy,
• 1. prepare, along with the report on the results of the Company's annual financial statements' evaluation, the Supervisory Board's opinion on the financial viability of the Company's capital (equity) investments in other commercial law entities made in the given financial year,
• 1. provide opinions on the Capital Group's Corporate Strategy,
• 1. provide opinions on the rules of conducting sponsoring activities,
• 1. provide opinions on the annual plan of conducting sponsoring activities as well as on the annual report on its implementation,
• 1. provide opinions on the reports prepared, by the Management Board, on entertainment expenses, expenditures on legal services, marketing services, public relations and social communications service as well as advisory services related to management,
• 1. provide opinions on the changes of the rules of divesting fixed assets, defined in § 381 of the Company's Articles of Association.

Competences that include

Matters that require a resolution of the Supervisory Board

as of December 31, 2018 and as of the day of drawing up this report

• 1. selecting a certified auditor to carry out an audit of the Company's financial statements and the Capital Group's consolidated financial statements,
• 1. defining the scope and deadlines for submitting the company's and the Capital Group's annual material and financial plan by the Management Board,
• 1. adopting the consolidated text of the Company's Articles of Association, prepared by the company's Management Board,
• 1. approving the Management Board's bylaws,
• 1. approving the organizational regulations of the company's enterprise,
• 1. purchasing real estate, perpetual usufruct or shares in real estate or in perpetual usufruct with the value exceeding the PLN equivalent of EUR 5 million, except for real estate, perpetual usufruct or shares in real estate or in perpetual usufruct purchased from the Capital Group's subsidiaries,
• 1. purchasing fixed assets, excluding real estate, perpetual usufruct or share in real estate or perpetual usufruct, bonds issued by the Capital Group's subsidiaries and other fixed assets purchased from the Capital Group's subsidiaries of the value exceeding the PLN equivalent of EUR 5 million,
• 1. disposing of fixed assets, including real estate, perpetual usufruct or share in real estate or perpetual usufruct, of the value equal to or exceeding the PLN equivalent of EUR 5 million, except for real estate, perpetual usufruct or shares in real estate or in perpetual usufruct, and also other fixed assets that as a result of disposing will be sold or encumbered in favor of the Capital Group's subsidiaries,
• 1. assuming contingent liabilities, including granting guaranties and sureties by the company with the value exceeding the PLN equivalent of EUR 5 million,
• 1. issuing bills of exchange of the value exceeding the PLN equivalent of EUR 5 million,
• 1. making an advance payment on account of the expected dividend,
• 1. taking over or purchasing shares in other companies than the Capital Group's subsidiaries with the value exceeding the PLN equivalent of EUR 5 million, except for situations when taking over shares in such companies takes place in exchange for the company's liabilities as a part of composition or bankruptcy proceedings,
• 1. selling shares with the value exceeding the PLN equivalent of EUR 5 million along with defining the conditions and procedure to be applied in their sale, except for:
  2. 1) selling shares which are traded on the regulated market,
  3. 2) selling shares that the company holds in the amount not exceeding a 10% interest in the share capital of particular companies,
  4. 3) selling shares in favor of the Capital Group's subsidiaries,
• 1. concluding a material agreement with a shareholder holding at least 5% of the total number of votes in the Company or a related company, with a proviso, that this obligation shall not cover typical transactions and concluded at arm's length as part of the business operations conducted by the Company with entities that are members of TAURON Capital Group,
• 1. concluding an agreement on legal services, marketing services, public relations and social communications services as well as advisory services related to management, if the amount of total net compensation for the services provided exceeds PLN 500 000, on a yearly basis,
• 1. amending an agreement on legal services, marketing services, public relations and social communications services as well as advisory services related to management, increasing the compensation above the amount mentioned in the above clause j,
• 1. concluding an agreement on legal services, marketing services, public relations and social communications services as well as advisory services related to management, under which the maximum compensation amount is not envisaged,
• 1. concluding a donation agreement or another agreement with similar consequences of the value exceeding PLN 20 000 or 0.1% of the total assets in the understanding of the act of September 29, 1994 on accounting, determined on the basis of the last approved financial statements,
• 1. relieving from debt or from another agreement with similar consequences of the value exceeding PLN 50 000 or 0.1% of the total assets in the understanding of the act of September 29, 1994 on accounting, determined on the basis of the last approved financial statements,
• 1. granting a permission to establish the company's branches abroad,
• 1. defining the way of exercising the voting right at the General Meeting of Shareholders or at the Meeting of Shareholders of companies in which the company holds more than 50% of shares, with respect to the following matters:
  2. 1) selling and leasing out the company's enterprise or its organized part as well as establishing a limited proprietary right on them if their value exceeds the PLN equivalent of EUR 5 million,

Matters that require a resolution of the Supervisory Board

as of December 31, 2018 and as of the day of drawing up this report

• 2) dissolving and liquidating the company.
• 1. defining the manner of exercising the voting right by a representative of TAURON during the GMs of companies (subsidiaries) with respect to which the Company is a dominating entrepreneur in the understating of art. 4 section 3 of the act of February 16, 2007 on competition and consumer protection, with respect to the following issues:
  2. a) company setting up another company,
  3. b) change to the Articles of Association or the shareholders agreement and the subject of the company's operations,
  4. c) merging, transforming, splitting, dissolving and liquidating the company,
  5. d) increasing or decreasing the company's share capital,
  6. e) selling and leasing out the company's enterprises or its organized part and establishing a limited property right thereupon,
  7. f) redeeming (retiring) of shares,
  8. g) setting the compensation of members of Management Boards and Supervisory Boards,
  9. h) provision on claims for remedying damage inflicted when setting up the company or performing management or supervision,
  10. i) matters mentioned in art. 17 of the act of December 16, 2016 on the principles of managing state property, subject to § 15 clause 4 of the Company's Articles of Association,
• 1. approving compensation policy for the capital group.

Competences related to the Management Board

• 1. appoint and dismiss members of the Management Board,
• 1. establish the rules of compensation and the amounts of compensation for the members of the Management Board, subject to § 18 of the Company's Articles of Association,
• 1. suspend members of the Management Board from office for important reasons,
• 1. delegate members of the Supervisory Board to temporarily perform duties of the members of the Management Board who cannot perform their duties and establish their compensation subject to the provision that the total compensation of the delegated person as a Member of the Supervisory Board's as well as on account of being delegated to temporarily perform duties of a Member of the Management Board shall not exceed the compensation established for the Member of the Management Board to replace whom the Member of the Supervisory Board was delegated,
• 1. conduct a recruitment process for the position of a Member of the Management Board,
• 1. conduct a competition in order to select a person with whom an agreement to perform the management board functions in the Company shall be concluded and conclude such agreement to perform the management board functions in the Company,
• 1. grant a permission to Members of the Management Board to take positions in governing bodies of other companies.

Other competences of the Company's Supervisory Board

• 1. prepare reports on overseeing the implementation of investment projects by the Management Board, including fixed asset purchases, and in particular provide opinions on the correctness and effectiveness of expenditures related thereto,
• 1. approve the Management Board's annual report on the supervision over the implementation of investment projects,
• 1. pass regulations describing in detail the Supervisory Board's procedures.

9.9. Description of the procedure of amendment of the Company's Articles of Association

Amendments to the Company's Articles of Association in accordance with the provisions of the Code of Commercial Companies, in particular: amendments to the Company's Articles of Association take place by means of resolution of the GM, passed by the majority of three fourths of the votes, and then requires issuing a decision by a proper court on entering the change into the register of entrepreneurs. The consolidated text of the Company's Articles of Association, including amendments passed by the General Meeting, shall be adopted by the Supervisory Board by means of a resolution.

In accordance with the Company's Articles of Association, a material amendment to the subject of activities requires two thirds of the votes in the presence of persons representing at least half of the share capital.

9.10. Procedures of the General Meeting of Shareholders, its fundamental powers and description of shareholders' rights and the manner of exercising thereof

The Company's General Meeting of Shareholders' procedures and its empowerments are defined in the company's Articles of Association and in the Regulations of the General Meeting of Shareholders of TAURON Polska Energia S.A. which are available on the Company's website http://www.tauron.pl/.

General Meeting of Shareholders shall be convened by a notice published on the company's website and in a manner defined for providing current information by public companies. In case the General Meeting is convened by an entity or a body other than the Management Board on the basis of regulations of the Code of Commercial Companies, as convening a General Meeting of Shareholders requires the Management Board's cooperation, the Management Board shall be obligated to perform any activities required by law in order to convene, organize and conduct General Meetings of Shareholders that take place either at the Company's seat or in Warsaw.

General Meeting of Shareholders shall be opened by the Chairperson of the Supervisory Board, and in case he/she is absent the following persons shall be entitled to open the General Meeting of Shareholders in the given order: Vice Chairperson of the Supervisory Board, President of the Management Board, a person designated by the Management Board or the shareholder who registered at the General Meeting of Shareholders such number of shares that grant the right to exercise the highest number of votes. Then, the chairperson of the General Meeting of Shareholders shall be elected from among persons entitled to participate in the General Meeting of Shareholders.

General Meeting of Shareholders shall pass resolutions irrespective of the number of shares represented at the Meeting, unless the regulations of the Code of Commercial Companies, as well as the provisions of the company's Articles of Association state otherwise. General Meeting of Shareholders may order a break in the meeting by the majority of two thirds of votes. Breaks shall not exceed 30 days in total.

A break in the GM session may take place only in exceptional situations indicated on a case-by-case basis in the justification to the resolution, prepared based on reasons presented by a shareholder requesting the announcement of the break.

The GM resolution concerning a break shall clearly indicate the date of resumption of the session, however, such a date must not create a barrier for participation of the majority of shareholders in resumed meeting, including minority shareholders.

Competence of the General Meeting of Shareholders

In accordance with the Company's Articles of Association the matters listed in the below table shall require a resolution of the General Meeting of Shareholders.

Table no. 50. Competence of the General Meeting of Shareholders

Matters that require a resolution of the General Meeting of Shareholders

as of December 31, 2018 and as of the day of drawing up this report

• 1. reviewing and approving the financial statements of the Company and the consolidated financial statements of TAURON Capital Group for the previous financial year for the previous financial year as well as the Management Board's report on the Company's operations (Directors' Report) and the Management Board's report on the operations of TAURON Capital Group
• 1. granting the acknowledgement of the fulfillment of duties to the members of the Company's corporate bodies,
• 1. profit distribution and coverage of loss,
• 1. appointing and dismissing members of the Supervisory Board,
• 1. suspending members of the Management Board in performance of their duties,
• 1. establishing the amount of compensation for members of the Supervisory Board, subject to § 29 clause 4 of the company's Articles of Association,

Matters that require a resolution of the General Meeting of Shareholders

as of December 31, 2018 and as of the day of drawing up this report

• 1. establishing the principles of determining compensation and the amount of compensation of members of the Management Board taking into account the provisions of the act of June 9, 2016 on the principles of determining compensation of the management personnel of certain companies,
• 1. selling and leasing outthe company's enterprise or its organized part as well as establishing a limited proprietary right on them,
• 1. concluding a credit, loan, surety agreement or any other similar agreement by the company with a member of the Management Board, Supervisory Board, proxy, liquidator or for the benefit of any such person. Concluding a credit, loan, surety or any other similar agreement by a subsidiary with a member of the Management Board, Supervisory Board, proxy, liquidator or for the benefit of any such person,
• 1. increasing and decreasing the company's share capital,
• 1. issuing convertible bonds or senior bonds as well as registered securities or bearer securities entitling their holder to subscribe or acquire the shares,
• 1. purchasing of treasury shares in cases required by the regulations of the Code of Commercial Companies,
• 1. mandatory redemption of shares (squeeze-out) in accordance with the provisions of art. 418 of the Code of Commercial Companies,
• 1. setting up, using and liquidating reserve capitals,
• 1. using supplementary capital,
• 1. provisions related to claims to repair damage caused while establishing the company or serving on the management board or performing supervision,
• 1. merger, transformation and division of the company,
• 1. redemptions (retirements) of shares,
• 1. amendment to the Articles of Association and change of the subject of the Company's operations,
• 1. dissolving and liquidating the company.

In accordance with the provisions of the Code of Commercial Companies the decision on the issue and repurchase of shares shall be included within the competence of the General Meeting.

Description of the shareholders' rights and the manner of exercising thereof

The below table presents the description of the Company's shareholders' rights related to the General Meeting of Shareholders in accordance with the Company's Articles of Association, Code of Commercial Companies and the Regulations of the General Meeting of the Shareholders of TAURON Polska Energia S.A.

Table no. 51. Description of the Company's shareholders' rights related to the General Meeting of Shareholders

#	Shareholders' rights	Description of shareholders' rights
1.	Convene a General Meeting of Shareholders	Shareholders representing at least one twentieth of the share capital, may request convening of an Extraordinary General Meeting of Shareholders. Such request should include a concise justification. It may be submitted to the Management Board in writing or in an electronic form, to the company's e-mail address, provided by the company on its website under the "Investor Relations" tab. Shareholders representing at least a half of the share capital or at least a half of all votes in the company may convene an Extraordinary General Meeting of Shareholders and appoint a chairperson of such General Meeting.
2.	Include matters (items) in the agenda of the General Meeting of Shareholders	Shareholders representing at least one twentieth of the share capital, may request that certain matters (items) be included in the agenda of the forthcoming General Meeting of Shareholders. Such request, including a justification or a draft resolution related to the proposed item of the agenda, should be submitted to the Management Board not later than 21 days prior to the set date of the General Meeting of Shareholders in electronic form to the company's e-mail address or in writing to the Company's address.
3.	Become acquainted with the list of shareholders	Shareholders may become acquainted with the shareholders' list at the company's Management Board's seat for three weekdays preceding directly the General Meeting of

#	Shareholders' rights	Description of shareholders' rights
		Shareholders. Shareholders may also request that the list of shareholders be sent to them free of charge by electronic mail, providing the address to which the list should be sent.
4.	Participate in the General Meeting of Shareholders	Only persons who are Shareholders sixteen days before the date of the General Meeting of Shareholders (date of registering to participate in the General Meeting of Shareholders) shall have the right to take part in the General Meeting of Shareholders. In order to participate in the General Meeting shareholders should submit a request to issue a name bearing affidavit on the right to take part in the General Meeting of Shareholders to an investment (brokerage) company running their securities account. Such request should be submitted not earlier than following the announcement on convening of the General Meeting of Shareholders and not later than on the first weekday following the day of registering the participation in the General Meeting of Shareholders.
5.	Represent a shareholder by a proxy	Shareholders may take part in the General Meeting of Shareholders as well as exercise the voting right in person or through a proxy. Shares' co-owners may take part in the General Meeting of Shareholders and exercise the voting right only through a joint representative (proxy). A proxy may represent more than one shareholder and vote differently based on shares of each shareholder
6.	Elect the Chairperson of the General Meeting of Shareholders	Shareholders shall elect the Chairperson of the General Meeting of Shareholders from among the persons entitled to take part in the General Meeting of Shareholders. Each of the participants of the General Meeting of Shareholders shall have the right to propose one candidate for the post of the Chairperson. Chairperson shall be elected by a secret ballot, by an absolute majority of votes. In case there is just one candidate for the Chairperson, election can take place by acclamation.
7.	Elect the Returning Committee	Each shareholder may propose no more than three candidates for members of the Returning Committee to be elected by the General Meeting of Shareholders, and vote for three candidates maximum.
8.	Submit a draft resolution	During the General Meeting of Shareholders a shareholder shall have the right, until the discussion on a certain item of the agenda is closed, to submit a proposal of changes to the content of a draft resolution proposed for adoption by the General Meeting of Shareholders, as part of the given item of the agenda, or put forward his/her own draft of such resolution. Proposals of changes or draft resolutions, including justifications, may be submitted in writing to the Chairperson or verbally to be recorded in the minutes of the meeting.
9.	Raise an objection	Shareholders who voted against a resolution and, after the General Meeting of Shareholders has adopted it, want to raise their objection, should, immediately after the results of the voting have been announced, raise their objection and request it be included in the minutes of the meetings before proceeding to the next item of the agenda. In case such objection is raised later, which however shall not take place later than by the time the General Meeting of Shareholders is closed, the shareholders shall indicate against which resolution passed by the General Meeting they are raising their objection. Shareholders raising their objection against a resolution of the General Meeting may request their concise justification of the objection be recorded in the minutes of the meeting.

9.11. Composition of the Company's management and supervision bodies and their committees, its changes and the description of their operations

9.11.1. Management Board

The current, fifth term of office of the Management Board began its run on March 16, 2017. On March 15, 2017 the Supervisory Board dismissed, effective as of the end of the day, all members of the Management Board of the Company and appointed, as of March 16, 2017, members of the Management Board for the fifth common term of office. In accordance with the Company's Articles of Association the common term of office shall last 3 years.

Composition of the Management Board as of December 31, 2018 and as of the day of drawing up this report

• 1. Filip Grzegorczyk President of the Management Board,
• 1. Jarosław Broda Vice President of the Management Board for Asset Management and Development,
• 1. Kamil Kamiński Vice President of the Management Board for Customer and Corporate Support,
• 1. Marek Wadowski Vice President of the Management Board for Finance.

Changes to the Management Board's composition in 2018

There were no changes to the composition of the Management Board in 2018 and by the day of drawing up this report..

Experience and competences of members of the Management Board

Filip Grzegorczyk - President of the Management Board

A graduate of the Faculty of Law and Administration and the Faculty of International and Political Studies of the Jagiellonian University in Cracow where the obtained a PhD degree in the EU law, and then a post-PhD degree in the business law.

He also completed the Summer Advanced Course program in the European Law at the University of London, King's College, Centre of European Law as well as the International Business and Trade Summer School program at Catholic University of America – Columbus School of Law and the Ecole de droit français Université d'Orléans. He holds

the position of Professor at the University of Economics in Cracow, where he is a lecturer at the Faculties of Management and Economics and International Relations

He has broad professional experience in the energy and fuel sector. In 2011-2013 he was associated with Kompania Węglowa as a management board proxy for energy sector development at Kompania Węglowa S.A. In 2007-2008 he was a member of the Management Board of TAURON. From November 2015 he served as the Undersecretary of State at the Ministry of State Treasury. He speaks fluent English and French.

He has been holding the position of the President of the Management Board of TAURON Polska Energia S.A. since November 15, 2016. He is currently overseeing the following areas of the operations: strategic management and regulatory solutions, relationships with the environment (stakeholders), legal support and investor relations, risk management, legal and internal audit, security and compliance as well as human resources development and social dialogue policy.

Jarosław Broda - Vice President of the Management Board

A graduate of the Warsaw School of Economics, a holder of a postgraduate diploma in project management from the Kozmiński University.

He has experience in the area of energy sector's consolidation and operation, privatization of state-owned utility groups, developing processes associated with the restructuring and strategy building as well as energy entities' expansion projects.

Since the beginning of his professional career he has been associated with the energy

sector's entities, holding senior executive and managerial positions. He gained his professional experience working at the Ministry of State Treasury as well as at TAURON and GDF Suez Energia Polska. Recently associated with GDF Suez Energia Polska – Katowice and GDF Suez (Branch Energy Europe) where he was responsible for market analyses and developing the company's expansion strategy, regulatory management and M&A projects. He was also involved in developing the sales and marketing expansion strategy in Europe. Since mid-2015 he was responsible for developing the commercial strategy and the contract for difference related to the nuclear project in Great Britain.

He has been holding the position of the Vice President of the Management Board of TAURON Polska Energia S.A. since December 8, 2015. He is currently overseeing the following areas of the operations: asset management, research and innovation, investment projects and programs as well as work (occupational) health and safety (WHS).

Kamil Kamiński - Vice President of the Management Board

A graduate of the Faculty of Management and Social Communications of the Jagiellonian University. A holder of the MBA Executive diploma (Stockholm University School of Business/ Cracow University of Economics) and the Post-MBA Diploma in Strategic Financial Management (Rotterdam School of Management, Erasmus University/ GFKM).

He has experience in the area of building company value, mergers and acquisitions, business integration and strategy operationalization as well as management of comprehensive projects in the public and private sectors. He was involved in complex

transformation and restructuring processes of enterprises in the energy and fuel as well as transportation logistics sectors.

He gained his professional experience acting in the capacity of the President or Vice-President of the Management Board and holding senior managerial positions. From the beginning of 2014 he was associated with Węglokoks Capital Group where, within the structures of Węglokoks Energia, he participated in the consolidation of electricity and heat generation assets of Kompania Węglowa and Węglokoks. At that time he was the head of the Management Committee. Previous professional experience includes, among others, work at the Research and Development Centre of the Refining Industry (OBR) in Płock or Jan Paweł II International Cracow-Balice Airport. He also managed the operations of John Menzies PLC in Poland. For many years he cooperated with Lotos Group where he supported the development of the aviation fuel segment which resulted in the joint venture with Air BP Ltd. and the establishment of Lotos Air BP.

He has been holding the position of the Vice-President of the Management Board of TAURON Polska Energia S.A. since December 8, 2015. He is currently overseeing the following areas of the operations: corporate management, human resources, marketing strategy and customer relations, IT systems functioning and management, personal data protection as well as procurement and administration.

A graduate of the Faculty of Economics of the University of Economics in Katowice. He also completed post graduate studies at École Supérieure de Commerce Toulouse where he obtained Mastère Spécialisé en Banque et Ingéniere Financière diploma and the Executive MBA studies at the Kozminski University in Warsaw.

He has professional experience in the field of financial, controlling and accounting process management in industry (power sector, mining, steel industry), as well as in financing of investment projects and international commercial transactions. He was involved in the implementation of the due diligence projects and valuations of many enterprises (using income-based, equity and comparison valuation methods).

From the beginning of his professional career he was associated with the energy, mining and steel sector entities, acting in the capacity of the President or the Vice-President of the Management Board and holding senior managerial positions. He gained his professional experience working at BRE Corporate Finance S.A., Huta Cynku Miasteczko Śląskie S.A. and at Jastrzębska Spółka Węglowa S.A. Capital Group's subsidiaries. From 2008, acting in the capacity of the Vice-President of the Management Board in charge of the financial division at Jastrzębska Spółka Węglowa S.A. Capital Group's subsidiaries, he was responsible, inter alia, for structuring commercial transactions, implementing the foreign exchange risk hedging policy, financial costs reduction, liquidity management, acquiring funds from the consortium of banks in the form of a bond issue program. He was also involved in the IPO of JSW S.A. (implementation of the International Accounting Standards, modification of the management information system, preparing the IPO prospectus, talks with investors). He held the position of the President of the Management Board at Towarzystwo Finansowe Silesia where he was involved in the bond issue program for Kompania Węglowa and was dealing with the acquisition of debt financing from the consortium of banks.

He has been holding the position of Vice President of the Management Board of TAURON Polska Energia S.A. since January 29, 2016. He is currently overseeing the following areas of the operations: finance and insurance policy, controlling and planning, analyses, accounting and tax policy.

Additionally, until the Vice President of the Management Board for Trading is appointed, he also oversees the following areas: electricity and property rights trading, fuel trading, portfolio management and electricity trading.

The description of the experience and competences of the members of the Management Board is published on the Company's website http://www.tauron.pl/.

Description of the operations

Management Board of the Company shall act on the basis of the Code of Commercial Companies and other legal regulations, the provisions of the company's Articles of Association and the provisions of the Bylaws of the Management Board of TAURON Polska Energia Spółka Akcyjna with its seat in Katowice which are available on the Company's website http://www.tauron.pl/. When performing their duties members of the Management Board shall be acting in accordance with the principles included in the Best Practice 2016.

2 members of the Management Board or one member of the Management Board together with a proxy shall be entitled to make valid statements on behalf of the Company. In case the Management Board includes one person, one member of the Management Board or a proxy shall be entitled to make valid statements on behalf of the Company.

Meetings of the Management Board shall be convened by the President of the Management Board or a Vice President of the Management Board designated thereby. Meetings of the Management Board shall also be convened on the motion of the majority of Vice Presidents of the Management Board as well as on the motion of the Chairperson of the Supervisory Board. The meetings shall be held at the company's seat on the date set by the person that convened the meeting. In justified cases the Management Board's meetings may be held outside the company's seat. The President of the Management Board or a Vice President of the Management Board designated thereby shall chair the meetings of the Management Board.

Management Board shall vote in an open ballot. The result of the ballot shall be recorded in the minutes of the meeting. President of the Management Board shall order a secret ballot at the request of any member of the Management Board.

Resolutions of the Management Board shall be passed by an absolute majority of votes in the presence of 3/5 of the members of the Management Board. In case of an equal number of votes the President of the Management Board shall have a casting vote. Management Board may pass resolutions by voting in writing or using means of direct remote communications. Voting in accordance with the above procedures shall be ordered by the President of the Management Board or a Vice President of the Management Board designated thereby, including setting the deadline for casting votes by members of the Management Board. Submission of a dissenting opinion shall be allowed. Such dissenting opinion shall be recorded in the minutes of the meeting, including the justification thereof. Decisions of the Management Board related to ongoing issues that do not require passing of a resolution shall be recorded solely in the minutes of the meeting.

In case there are fewer members of the Management Board than the foreseen number of divisions (areas of responsibility), members of the Management Board may combine performing duties related to managing two divisions or implement a different split of competences that would not be in conflict with the assignment of competences made by the Supervisory Board.

The internal division, among members of the Management Board, of the tasks and responsibilities for the individual areas of the Company's operations (Divisions) defined in the Organizational Regulations of TAURON Polska Energia S.A. and including the independent work positions (jobs) as well as organizational units reporting to the individual Members of the Management Board and supervised thereby, shall be defined by the above Organizational Regulations, while the diagram showing the above mentioned division is published on the Company's website.

The structure of the divisions reporting to the individual Members of the Management Board is defined on the diagram (flowchart) of the Company's organizational structure, described in section 11.1.5. of this report.

9.11.2. Supervisory Board

The current, fifth term of office of the Supervisory Board, began on May 29, 2017, i.e. on the day of holding the Ordinary GM of the Company approving the financial statements for the last full financial year of the tenure of the members of the Supervisory Board of the fourth term, i.e. for the financial year 2016. In accordance with the Company's Articles of Association it shall be a common term of office and it shall last for 3 years.

The composition of the Supervisory Board as of December 31, 2018 and as of the date of drawing up this report

• 1. Beata Chłodzińska Chair of the Supervisory Board,
• 1. Teresa Famulska Vice Chair of the Supervisory Board,
• 1. Jacek Szyke Secretary of the Supervisory Board,
• 1. Radosław Domagalski Łabędzki Member of the Supervisory Board,
• 1. Barbara Łasak- Jarszak Member of the Supervisory Board,
• 1. Paweł Pampuszko Member of the Supervisory Board,
• 1. Jan Płudowski Member of the Supervisory Board,
• 1. Marcin Szlenk Member of the Supervisory Board,
• 1. Agnieszka Woźniak Member of the Supervisory Board.

Changes to the composition of the Supervisory Board in 2018

As of January 1, 2018 the Supervisory Board was composed of the following members: Beata Chłodzińska (Chair of the Supervisory Board), Teresa Famulska (Vice Chair of the Supervisory Board), Jacek Szyke (Secretary of the Supervisory Board), Radosław Domagalski - Łabędzki (Member of the Supervisory Board), Barbara Łasak – Jarszak (Member of the Supervisory Board), Paweł Pampuszko (Member of the Supervisory Board), Jan Płudowski (Member of the Supervisory Board) and Agnieszka Woźniak (Member of the Supervisory Board).

On April 16, 2018 the Ordinary GM appointed Marcin Szlenk to be a member of the Company's Supervisory Board of the 5th common term of office.

There were no other changes to the composition of the Management Board in 2018 and by the day of drawing up this report.

Information on the independence of members of the Supervisory Board

The independence requirements defined in the Best Practice 2016 and Appendix II to the European Commission's Recommendation of February 15, 2005 related to the role of non-executive directors or members of a supervisory board of publicly listed companies and of a supervisory board's committee (2005/162/EC) are met by the following members of the Supervisory Board as of December 31, 2018 and as of the date of drawing up this report:

• 1. Beata Chłodzińska
• 1. Teresa Famulska,
• 1. Jacek Szyke.
• 1. Radosław Domagalski Łabędzki
• 1. Barbara Łasak Jarszak,
• 1. Paweł Pampuszko,
• 1. Jan Płudowski,
• 1. Marcin Szlenk

A member of the Supervisory Board, Agnieszka Woźniak, does not meet the independence requirements defined in the Best Practice 2016.

Experience and competences of the members of the Supervisory Board

Beata Chłodzińska - Chair of the Supervisory Board

A graduate of the Faculty of Law and Administration of the Warsaw University. She is a licensed legal counsel.

In 2001-2016 she was associated with the Ministry of State Treasury where she was providing legal services, most recently as the Deputy Director at the Legal and Litigation Department. She coordinated the work of the Team of Legal Counsels at the Legal Office of the Ministry of Energy. Currently Ms. Chłodzinska is working at PKN Orlen S.A. in the legal area.

She gained professional experience associated with supervising the operations of the State Treasury owned companies by, among others, holding seats on the supervisory boards of the following companies: Polska Agencja Prasowa S.A. with its seat in Warsaw, Centrum Techniki Okrętowej S.A. with its seat in Gdańsk, Chemia Polska sp. z o.o. with its seat in Warsaw, Międzynarodowa Korporacja Gwarancyjna sp. z o.o. with its seat in Warsaw.

She has been a member of the Supervisory Board of TAURON Polska Energia S.A. since August 12, 2015. In the Supervisory Board of the 5th common term of office she is the Chair of the Supervisory Board, the Head of the Nominations and Compensation Committee of the Supervisory Board, as well as a member of the Audit Committee of the Supervisory Board and a member of the Strategy Committee of the Supervisory Board.

Teresa Famulska - Vice Chair of the Supervisory Board

A graduate of the University of Economics in Katowice, a Professor of economics appointed by the President of the Republic of Poland at the request of the Board of the Faculty of Finance and Insurance of the University of Economics in Katowice.

She has been associated with the University of Economics in Katowice since 1981. She is currently the Head of the Public Finance Department holding the full Professor's position. In 1998-2013 she was working at the School of Banking and Finance, recently as a dean, holding the full Professor's position.

An author of approximately 150 domestic and foreign publications in the field of finance, mainly public finance (including taxes and tax systems) and corporate finance. Apart from academic work she is continuously involved in business practice, participating, among others, in several dozen science and research projects. She conducts numerous lectures and training courses for the finance and management personnel of enterprises and for the tax authorities staff as part of the postgraduate studies and in cooperation with, among others, the Polish Economic Society (Polskie Towarzystwo Ekonomiczne) and the Accountants Association in Poland (Stowarzyszenie Księgowych w Polsce). Since 2007 she has been working at the State Examination Commission on Tax Advisory Services, where she has been the Head of the Commission since 2010. Since 2007 a member of the Financial Education Committee of the Polish Academy of Science, where she was a member of the Board of the Committee in 2011-2015. Furthermore, she is a member of the Main Board of the Polish Finance and Banking Association (Zarząd Główny Polskiego Stowarzyszenia Finansów i Bankowości), International Fiscal Association, Center for Information and Organization of Public Finance and Tax Law Research of Central and Eastern European Countries (Centrum Informacji i Organizacji Badań Finansów Publicznych i Prawa Podatkowego Krajów Europy Środkowej i Wschodniej) and Polish Economic Society (Polskie Towarzystwo Ekonomiczne).

She was awarded the following orders and accolades: Silver Cross of Merit (Srebrny Krzyż Zasługi), Silver Medal for Longterm Service (Srebrny Medal za Długoletnią Służbę), Medal of the Commission of National Education (Medal Komisji Edukacji Narodowej), awards of the Minister of National Education and of the President of the University of Economics in Katowice.

She has been a member of the Supervisory Board of TAURON Polska Energia S.A. since May 29, 2015. In the Supervisory Board of the 5th common term of office she is the Vice-Chair of the Supervisory Board and the Head of the Audit Committee of the Supervisory Board.

Jacek Szyke - Secretary of the Supervisory Board

A graduate of the Faculty of Economics of Łódź University and of the Faculty of Electric Engineering of the Technical University in Poznań where he also obtained a PhD in technical science.

He has yearslong professional experience associated with the utility scale power industry where he climbed up all levels of the career ladder, starting with an intern, through foreman, Head of the Safety and Instrumentation and & Control Department (Zakład Energetyczny Kalisz and Łódź), Engineer On Duty Responsible for the Operation (Elektrociepłownia Łódź), up to the position of the Chief Engineer (Zakład Energetyczny Łódź and Płock) and General Manager (Zakład Energetyczny Płock and Elektrociepłownia Siekierki). He also worked as the Contract Manager in Libya. The owner and President of the JES ENERGY consulting company.

State orders awarded: Golden Cross of Merit (Złoty Krzyż Zasługi), Knight's Order (Krzyż Kawalerski). Industry orders awarded: Distinguished for the following sectors: Power, Construction, Communications, Firefighting, Culture and Heat industry.

The author of more than 100 articles, publications and books, including: "Wspomnienia o tradycji i zwyczajach pracy w energetyce" (Memories of traditions and customs related to working in the power utilities sector), "O energetyce z sentymentem" (About electric utilities sector with a sentiment), "Historia Polskiej Elektroenergetyki" (History of Poland's Power Industry), "Złota Księga Elektroenergetyki" (Golden Book of Power Industry), "Grupa TAURON - monografia" (TAURON Group – monograph).

He has been a member of the Supervisory Board of TAURON Polska Energia S.A. since September 14, 2010. In the Supervisory Board of the 5th common term of office he is the Secretary of the Supervisory Board and the Head of the Strategy Committee of the Supervisory Board as well as a member of the Audit Committee of the Supervisory Board.

Radosław Domagalski - Łabędzki – Member of the Supervisory Board

A graduate of Łódź University (master's degree in law). Completed Executive MBA studies at Rutgers University in New Jersey. Visiting fellow at the German Munster and Mannheim Universities.

A manager with a broad practical experience in managing complex international business projects. He prepared and effectively implemented an expansion strategy in Asia for one of Poland's largest capital groups.

In 2006-2013 the President of the Management Board of Magellan Trading Shanghai Co. Ltd in China. Prior to that he worked as a lawyer at GSP Group Sp. z o.o. in Łódź, and also at American Enterprise Institute in Washington – one of the largest American think-tanks.

Between December 2015 and October 2016 the Undersecretary of State at the Ministry of Development, responsible, among others, for promoting the Polish economy, a member of the Financial Supervision Commission (Komisja Nadzoru Finansowego).

Since October 2016 until March 10, 2018 he was the President of the Management Board of KGHM Polska Miedź S.A. He currently is a member of the Management Board of Polska Grupa Zbrojeniowa S.A.

Co-founder of the Polish-Chinese Chamber of Industry and Commerce in Shanghai. An author of many business publications.

He has been a member of the Supervisory Board of TAURON Polska Energia S.A. since May 29, 2017. In the Supervisory Board of the 5th common term of office he is a member of the Audit Committee of the Supervisory Board.

Barbara Łasak - Jarszak - Member of the Supervisory Board

A graduate of the Faculty of Law and Administration of the Warsaw University.

Between January 1997 and February 2017 she was working at the Legal Department of the Ministry of State Treasury. Between April 1998 and February 2017 she headed an organizational unit of the Legal Department providing legal services for the Ministry. Since March 1 2017 the Head of the State Property and Finance Division of the State Treasury Department of the Chancellery of the Prime Minister where she is dealing with. among others, with the issues related to the new principles of managing the state owned property.

In 1999-2001 a member of the Disciplinary Commission of the Ministry of State Treasury. In 1999-2005 deputy public finance auditor for the Minister of State Treasury.

He has yearslong professional experience of holding seats on supervisory boards of State Treasury owned companies, including: ZPP "Lenora" sp. z o.o., Koneckie Zakłady Odlewnicze S.A., Uzdrowisko Busko-Zdrój S.A., ŚWWG Polmos S.A., Stocznia Gdynia S.A., Archimedes S.A., PSO "Maskpol" S.A., ZG "Dom Słowa Polskiego" S.A. in liquidation, Fundusz Rozwoju Spółek S.A., Zakłady Mięsne Nisko S.A.

She has been a member of the Supervisory Board of TAURON Polska Energia S.A. since May 29, 2017. In the Supervisory Board of the 5th common term of office she is a member of the Nominations and Compensation Committee of the Supervisory Board.

Paweł Pampuszko - Member of the Supervisory Board

A graduate of the Faculty of Law and Administration of the University of Silesia in Katowice, a lawyer entered on the list of lawyers maintained by the Solicitors Regulation Authority (Izba Adwokacka) in Katowice.

During his yearslong professional career he gained significant experience with respect to negotiating contracts as part of major industrial and business undertakings, and also preparing and conducting significant court disputes where it was necessary to become familiar with non-legal specialist issues and close cooperation with specialists in other fields. He was also actively involved in identifying and eliminating deficiencies in the operations of the corporations' authorities.

He gained professional experience related to providing legal services for business entities by working in 2005-2009, among others, at Kancelaria Biura Prawne Babula i Wspólnicy sp. k., Kancelaria Adwokatów i Radców Prawnych Ślązak, Zapiór & Partnerzy, SILEGE S.C. and Woszym Technologies sp.j. In 2009-2011 he was running his own legal practice. Since 2011 till now he has been a founding partner at law firm Kuś-Zielińska, Pampuszko i Wspólnicy – Adwokaci i Radcy Prawni sp.j.

He was a member of supervisory authorities in the non-government organizations and corporations: CHK S.A. and Medicina Pro Humana Foundation.

He is an author of publications on medical law.

He has been a member of the Supervisory Board of TAURON Polska Energia S.A. since May 29, 2017. In the Supervisory Board of the 5th common term of office he is a member of the Strategy Committee of the Supervisory Board.

Jan Płudowski - Member of the Supervisory Board

A graduate of the Faculty of Electric Engineering of the Silesian University of Technology in Gliwice. He also completed postgraduate studies at the Faculty of Electric Engineering of the Gdańsk University of Technology, at the University of Economics (formerly K. Adamiecki Academy of Economics) in Katowice in the field of corporate finance management and at the Faculty of Management and Services Economics of the University of Szczecin in the field of marketing and corporate management.

Professionally associated with the power sector, he gained professional experience by climbing up all levels of the career ladder. He was working, among others, as the Regional Chief Power Engineer (PKP Śląska Dyrekcja Okręgowa Kolei Państwowych (Polish State Railways' Silesian Regional Board) in Katowice), Director of Zakład Energetyki Kolejowej (Railways' Power Unit) in Katowice and the Head of the Power Management Department (PKP Dyrekcja Energetyki Kolejowej (Polish State Railways' Power Unit Board) in Warsaw), Director of the Cash Flow Office ("PKP Energetyka" sp. z o.o. in Warsaw).

In 2007-2008 he was a member of the Supervisory Board of Spółka Energetyczna Jastrzębie S.A.

He has been a member of the Supervisory Board of TAURON Polska Energia S.A. since December 30, 2016. In the Supervisory Board of the 5th common term of office he is a member of the Audit Committee of the Supervisory Board and a member of the Strategy Committee of the Supervisory Board.

Marcin Szlenk - Member of the Supervisory Board

A graduate of the Warsaw School of Economics – a master's degree in economics, field of expertise: Management and Marketing, as well as Finance and Banking.

He completed the Executive MBA program of the University of Warsaw and University of Illinois, as well as the Post-graduate European Financial, Economic and Legal Relations Studies at the Warsaw School of Economics. Since 2007 he has been a member of the Chartered Institute of Management Accounting (CIMA). In 2016 he completed the Global Management Development Program organized by the Johnson Matthey Group.

He has a broad professional experience from many years of working as a financial controller and director in diverse business environments. In 1999-2002 a Senior Auditor at Arthur Andersen. In 2002-2010 a Financial Controller at Magneti Marelli Aftermarket Sp. z o.o., and then Automotive Lighting Polska Sp. z o.o. (both companies owned by the FIAT Group). In 2010- 2012 he worked as the European Financial Controller at Axeon. Since 2012 he has been the Financial Director and a Member of the Management Board of Johnson Matthey Battery Systems Sp. z o.o., and since 2017 a Member of the Management Board of Johnson Matthey Poland Sp. z o. o.

He has been a member of the Supervisory Board of TAURON Polska Energia S.A. since April 16, 2018. In the Supervisory Board of the 5th common term of office he is a member of the Audit Committee of the Supervisory Board.

Agnieszka Woźniak - Member of the Supervisory Board

A graduate of the Faculty of Law and Administration of the UMCS University in Lublin. A lawyer by education.

In 2001-2015 she worked at the Ministry of Economy where she climbed up all levels of the career ladder, starting from a referendary, through the positions of a specialist, chief specialist, head of division, deputy director and director. Since 2005 an appointed civil servant. She has been associated with the Ministry of Energy since it was formed, i.e. since November 2015, where she held the position of the Director and now Vice Director of the Minister's Office.

She has yearslong experience in personnel management. She was dealing with matters related to audits, organizational affairs of the office, public procurement, personnel issues. She was also holding the position of the Plenipotentiary of the General Director for the Integrated Management System.

She has experience related to supervising the operations of State Treasury owned companies. Between January 2009 and June 2014 a member of the Supervisory Board of Węglokoks S.A. with its seat in Katowice.

She has been a member of the Supervisory Board of TAURON Polska Energia S.A. since December 16, 2016. In the Supervisory Board of the 5th common term of office she is a member of the Nominations and Compensation Committee of the Supervisory Board and a member of the Strategy Committee of the Supervisory Board.

The detailed description of the experience and competences of the members of the Supervisory Board is published on the Company's website http://www.tauron.pl/.

Description of the operations

The detailed description of the Supervisory Board's operations is provided in the Code of Commercial Companies, the Company's Articles of Association and in the Regulations of the Supervisory Board of TAURON Polska Energia S.A. with its seat in Katowice (which are available on the Company's website http://www.tauron.pl/).

The main form of the Supervisory Board overseeing the Company's operations shall be the meetings of the Supervisory Board. The Supervisory Board shall perform its obligations collectively. Meetings of the Supervisory Board shall be convened by the Chairperson of the Supervisory Board or Vice Chairperson of the Supervisory Board by presenting a detailed agenda:

• 1. in accordance with the decisions taken by the Supervisory Board,
• 1. of his/her own initiative
• 1. at a written request of each member of the Supervisory Board,

• at a written request of the Management Board.

Meetings of the Supervisory Board shall be held at the Company's seat. In justified cases a meeting may be convened at a different venue.

In order to convene a meeting all members of the Supervisory Board must be invited in writing at least 7 days before the date of the Supervisory Board's meeting. For important reasons the Chairperson of the Supervisory Board may shorten this period to 2 days, defining the way the invitations should be distributed. Notifications of the Supervisory Board's meeting shall be sent by fax or electronic mail and confirmed by phone. In the notification of the Supervisory Board's meeting the Chairperson shall define the date of the meeting, venue of the meeting and the detailed draft agenda. Supervisory Board shall meet on as needed basis, however not less frequently than once every 2 months. Supervisory Board may hold meetings without convening a formal meeting if all members of the Supervisory Board are present and nobody objects against the fact of holding the meeting or against the agenda.

A change of the proposed agenda may occur when all members of the Supervisory Board are present at the meeting and no one raises an objection against the agenda. An issue not included in the agenda should be included in the agenda of the next meeting.

Participation in a meeting of the Supervisory Board shall be a Supervisory Board member's duty. A member of the Supervisory Board shall provide information on the reason for his/her absence in writing. Excusing an absence of a member of the Supervisory Board shall require a resolution of the Supervisory Board. Members of the company's Management Board may take part in the Supervisory Board's meetings unless the Supervisory Board raises an objection. Participation of the Management Board's members in the Supervisory Board meetings shall be mandatory if they have been invited by the Chairperson of the Supervisory Board. Other persons may also take part in the meetings if they have been invited in the above mentioned way.

Supervisory Board may seek opinions of legal counsels who provide regular legal advice for the company, as well as, in justified cases, it may appoint and invite to meetings of the Supervisory Board appropriate experts in order to seek their opinion and make the right decision. In the above mentioned cases the Supervisory Board shall pass a resolution on commissioning the selected expert (auditing, consulting company) to carry out the work, obligating the Company's Management Board to conclude an applicable agreement.

Meetings of the Supervisory Board shall be chaired by the Chairperson of the Supervisory Board, and in case of his/her absence by the Vice Chairperson. For important reasons, with the consent of the majority of members of the Supervisory Board present at the meeting, the chairperson chairing the meeting shall be obligated to subject to a vote a motion to interrupt the meeting and set the date of resuming the meeting of the Supervisory Board. Supervisory Board shall make decisions in the form of resolutions. Supervisory Board's resolutions shall be passed mainly at its meetings. Supervisory Board shall pass resolutions if at least half of its members are present at the meeting and all its members have been invited in the appropriate way defined in the Regulations. Subject to the mandatory legal regulations in force, including the Code of Commercial Companies and the provisions of the company's Articles of Association, the Supervisory Board shall pass resolutions by an absolute majority of votes of the persons present at the meeting where the absolute majority of votes shall be understood as more votes cast "for" than "against" and "abstain". Resolutions shall not be passed on matters not included in the agenda unless all members of the Supervisory Board are present and nobody raises an objection. This shall not apply to resolutions on excusing a Supervisory Board's member's absence at the meeting. Resolutions shall be voted on in an open ballot. A secret ballot shall be ordered:

• 1. at the request of at least one member of the Supervisory Board,
• 1. in personnel related matters.

In accordance with the company's Articles of Association the Supervisory Board may pass resolutions in writing or using means of direct remote communications. Passing a resolution in such way shall require a prior notification of all members of the Supervisory Board of the content of the draft resolution. Passing resolutions this way shall not apply to appointing the Chairperson, the Vice Chairperson and the Secretary of the Supervisory Board, appointing or suspending from office a member of the Management Board and dismissing these persons, as well as other matters that require a secret ballot vote. When voting on a resolution in the aforementioned way a member of the Supervisory Board shall indicate his/her vote, i.e. "for", "against" or "abstain". In case a member of the Supervisory Board fails to indicate his/her vote by the time defined by the Chairperson the resolution shall not be passed. A resolution with a note that it has been passed in writing or by voting using means of direct remote communications shall be signed by the Chairperson of the Supervisory Board. Resolutions passed this way shall be presented at the forthcoming meeting of the Supervisory Board along with the result of the voting.

Members of the Supervisory Board shall be allowed to take part in the meeting and vote on resolutions during such meeting using means of direct remote communications, i.e. a conference call or a video conference, subject to a proviso that at least half of its members are present at the meeting's venue indicated in the notification of the meeting and a secure communications link is technically possible.

Members of the Supervisory Board shall take part in meetings and exercise their rights and responsibilities in person, and while performing their duties they shall be obliged to act with due diligence. Members of the Supervisory Board shall be obliged to keep confidential information related to the company's activities that they have acquired in connection with holding their seat or on another occasion. Supervisory Board shall perform its activities collectively.

Supervisory Board may, for important reasons, delegate its individual members to perform certain supervision actions on their own for a defined period of time. Supervisory Board may delegate its members, for a period not longer than three months, to temporarily perform duties of members of the Management Board who have been dismissed, submitted their resignation or if for other reasons they cannot perform their functions. The above mentioned delegation shall require obtaining a consent of the member of the Supervisory Board who is to be delegated.

The detailed description of the activities of the Supervisory Board in the last financial year is provided in the Report on the Activities of the Supervisory Board, submitted on annual basis to the General Meeting of Shareholders and published on the Company's website http://www.tauron.pl/.

Supervisory Board may appoint from among its members permanent or temporary (ad-hoc) working groups, committees to perform specific actions. Supervisory Board's standing committees shall be:

• 1. Audit Committee of the Supervisory Board of TAURON Polska Energia S.A. (Audit Committee),
• 1. Nominations and Compensation Committee of the Supervisory Board of TAURON Polska Energia S.A. (Nominations and Compensation Committee),
• 1. Strategy Committee of the Supervisory Board of TAURON Polska Energia S.A. (Strategy Committee).

Composition, tasks and rules of operation of the above mentioned committees shall be defined in the regulations thereof passed by the Supervisory Board.

9.11.3. Audit Committee

Members of the Audit Committee for the current term were appointed on June 20, 2017 by the Supervisory Board from among its members. In 2018 the Audit Committee included five members.

Due to the change to the membership of the Supervisory Board of the Company for the 5th term, introduced in 2018, the Supervisory Board also made changes to the membership of the Audit Committee.

Members of the Audit Committee as of December 31, 2018 and as of the day of drawing up this report

• 1. Teresa Famulska Head of the Audit Committee,
• 1. Radosław Domagalski-Łabędzki Member of the Audit Committee,
• 1. Jan Płudowski Member of the Audit Committee,
• 1. Marcin Szlenk Member of the Audit Committee,
• 1. Jacek Szyke Member of the Audit Committee.

Changes to the Audit Committee's membership in 2018

As of January 1, 2018 the Audit Committee was composed of the following members: Teresa Famulska (Head of the Audit Committee), Beata Chłodzińska, Radosław Domagalski – Łabędzki, Jan Płudowski and Jacek Szyke

On April 25, 2018 Beata Chłodzińska submitted a statement on the resignation from the function of a member of the Audit Committee of the Company's Supervisory Board.

On April 25, 2018 the Company's Supervisory Board appointed Marcin Szlenk to be a member of the Audit Committee.

There were no other changes to the composition of the Audit Committee in 2018 and by the day of drawing up this report.

Information on the independence of members of the Audit Committee as of December 31, 2018

The membership (composition) of the Audit Committee is in compliance with the requirements defined in the act of May 11, 2017 on certified auditors, audit companies and public supervision. The evaluation of independence and the statutory requirements with respect to the knowledge and skills of the individual members of the Audit Committee was made by the Supervisory Board based on the relevant statements submitted by the members of the Audit Committee. All of the members of the Audit Committee comply with the statutory requirements related to independence.

The Head of the Audit Committee Teresa Famulska, as well as Marcin Szlenk have knowledge and skills in the field of accounting and auditing financial statements. Two members of the Audit Committee: Jacek Szyke and Jan Płudowski, have knowledge and skills in the field of energy, i.e. the Company's industry.

The way the members of the Audit Committee have gained the knowledge and skills in the above mentioned fields is indicated in section 9.11.2. of this report, as part of the description of the experience and competences of the Supervisory Board.

Tasks and competence of the Audit Committee

In 2018 the Audit Committee was performing the tasks and competence that due to the coming into force on June 21, 2017 of the act of May 11, 2017 on certified auditors, audit companies and public supervision, were revised and aligned with the current legal regulations in force and adopted by the Supervisory Board at the motion of the Audit Committee in the form of the new Regulations of the Audit Committee of the Supervisory Board of TAURON Polska Energia S.A.

The Audit Committee held 8 meetings in total during the period covered by this report.

The tasks and competences of the Audit Committee as of the day of drawing up this report are presented in the below table.

Table no. 52. Competence of the Audit Committee

Competence of the Audit Committee

as of December 31, 2018 and as of the day of drawing up this report

• 1. monitoring:
  2. a) the Company's financial reporting process,
  3. b) the effectiveness of internal control, risk management, compliance and internal audit systems, including with respect to the financial reporting,
  4. c) monitoring of performing of financial revisions, in particular performing of an audit by an audit company, taking into account any conclusions (motions) and arrangements of the Audit Supervision Committee stemming from an audit (inspection) performed at an audit company,

Competence of the Audit Committee

as of December 31, 2018 and as of the day of drawing up this report

• 1. controlling and monitoring of independence and impartiality of the chartered accountant (certified auditor) and the audit firm, in particular in case other services than an audit are provided for the benefit of the Company,
• 1. performing the evaluation of independence of the certified auditor and expressing consent for performing by him of permitted services not constituting the audit within the Company,
• 1. developing the policy for selecting the audit company to perform the audit,
• 1. developing a policy for performing by the auditing company conducting the audit, entities related to the auditing company and members of the auditing company's corporate network of permitted services not constituting the audit,
• 1. defining the procedure for selecting the auditing company by the Company,
• 1. presenting to the Supervisory Board of the recommendation for selection of the auditing company responsible for performing the statutory audit or review of financial statements, as required under Art. 130, clauses 2 and 3 of the Act of May 11, 2017 on certified auditors, auditing companies and public oversight and in Art. 16, clause 2 of the Regulation (EU) No 537/2014 of the European Parliament and of the Council of April 16, 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, in line with policies referred to above in items 4 and 5,
• 1. informing the Supervisory Board of audit results and explaining as to who did the audit contribute to trustworthiness (accuracy) of financial reporting in the Company, and also what was the role of the Audit Committee in course of the audit,
• 1. presenting recommendations aimed at ensuring reliability of the financial reporting process within the Company,
• 1. performing other activities vested with audit committees pursuant to Act of May 11, 2017 on certified auditors, auditing companies and public oversight, Regulation (EU) No 537/2014 of the European Parliament and of the Council of April 16, 2014 on specific requirements regarding statutory audit of public-interest entities, repealing the Commission Decision 2005/909/EC and the Act of September 29, 1994 on accounting.

Allowed non-audit services provided by an audit firm

The following allowed non-audit services were provided for TAURON and TAURON Capital Group's subsidiaries by an audit firm auditing the financial statements in 2018:

• 1. confirmed in writing verification of the annual and interim standalone reporting packages of selected TAURON Capital Group's subsidiaries required to prepare the annual consolidated financial statements,
• 1. completing the agreed procedures for the verification of the report of the TAURON Dystrybucja subsidiary in connection with the requirement to estimate the RAB and RAB AMI for the needs of determining the justified return on the capital employed by the President of ERO.

In connection with the provision of the above services the Audit Committee performed an evaluation of the independence of the Ernst & Young Audyt Polska audit firm and expressed its consent for the provision of the above services.

Main assumptions of the policy for appointing the audit firm to conduct the audit and of the policy of providing the allowed non-audit services by entities related to such audit firm and by a member of the audit firm's network

In connection with the coming into force of the act of 11 May 2017 on certified auditors, auditing companies and public oversight, on October 16, 2017 the Audit Committee adopted the following regulations:

• 1. Policy for the appointment of the audit firm to conduct the audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A.,
• 1. Procedure for the appointment of the audit firm to conduct the audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A. and

• Policy for the provision of the allowed non-audit services at TAURON Group by the audit firm conducting the audit of the annual financial statements and consolidated financial statements of TAURON Polska Energia S.A., entities related to such audit firm and by a member of the audit firm's network.

Policy for the appointment of the audit firm to conduct the audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A. is aimed at ensuring the compliance of the selection of the audit firm to conduct the Audit and Review of the Company's financial statements with the legal regulations. The policy defines, in a clear manner, the principles and rules of the process for the appointment of the audit firm to audit the reports of TAURON as a public interest unit, principles of the procedure for the appointment of the audit firm, principles of preparing the recommendations of the Audit Committee related to the appointment of the audit firm, as well as the principles of the rotation of the audit firm conducting the audit and review of the financial statements and consolidated financial statements of TAURON. The key assumptions adopted in the policy include the fact that the process for the appointment of the auditor shall be based on the applicable legal regulations, ensuring the transparency and objectivity of the process for the appointment of the auditor and including in the process of the requirements necessary for the timely and correct performance of the audit services for the Company.

Procedure for the appointment of the audit firm to conduct the audit and review of the financial statements and consolidated financial statements of TAURON Polska Energia S.A. is aimed at ensuring the compliance of the process for the appointment of the audit firm to conduct the Audit and Review of the Company's financial statements with the legal regulations, as well as ensuring that the audit and review of the financial statements are conducted at a high quality level, within a specified time frame, while ensuring independence, objectivity, transparency and credibility of the audit firm and certified auditors. The procedure defines in detail and accurately the individual stages of the appointment of the audit firm, including indicating the authorities and organizational units responsible for such stages. Furthermore, the procedure defines the general conditions for the participation in the proceedings and the criteria for the selection of the audit firm as well as the time frame of the auditor selection process. The most important assumptions assumed in the procedure include adopting a clear and transparent, based on the legal regulations, split of the responsibilities in the process for the appointment of the auditor, as well as defining transparent and non-discriminatory conditions for the participation in the tender procedure and criteria for the appointment of the audit firm that the company may apply.

Policy for the provision of the allowed non-audit services at TAURON Group by the audit firm conducting the audit of the annual financial statements and consolidated financial statements of TAURON Polska Energia S.A., entities related to such audit firm and by a member of the audit firm's network is aimed at defining clear rules aimed at meeting the requirement of the independence of the audit firm conducting the audit of the Company, in case such firm or entities that are members of its network are providing non-audit services. This policy defines the principles related to the provision for the benefit of TAURON Capital Group's entities, by the audit firm conducting the audit at TAURON, entities related to the audit firm and a member of the audit firm's network, of additional non-audit services or non-review services, in particular the conditions for the admissibility of the provision of allowed services, the principles of the Audit Committee conducting an assessment of the threats and safeguards of the independence of the audit firm, as well as control mechanisms with respect to observing the principles of the independence of the certified auditor at TAURON Capital Group. The most important assumptions adopted in the policy include defining clear rules for the Audit Committee to conduct an assessment of threats and safeguards of the independence of the audit firm and expressing consent for the provision of non-audit services, based on the compliance with the legal regulations and the purposefulness of the provision of such services.

Recommendations of the Audit Committee related to the appointment of the audit firm

In 2018 the Audit Committee recommended two times the appointment of the audit firm to the Supervisory Board of TAURON:

1. to audit the financial statements for the financial year 2018, in connection with the need to adapt the existing agreement with the audit firm for the audit of the financial statements for the financial year 2017 to the requirements of the provisions of art. 66, clause 5 of the act of September 29, 1994 on accounting in the wording given thereto by the act of 11 May 2017 on certified auditors, auditing companies and public oversight, by way of concluding an amendment to the above mentioned agreement,

2. to audit and review the financial statements and consolidated financial statements of TAURON for the financial years 2019 – 2021, as a consequence of the completed public procurement procedure, in accordance with the applicable criteria, at the same time indicating the other alternative entity to carry out such actions and presenting the justification of the preferences for the appointment of the recommended audit firm.

The detailed description of the activities of the Audit Committee in the last financial year is provided in the Report on the activities of the Supervisory Board submitted on annual basis to the General Meeting of Shareholders and published on the Company's website http://www.tauron.pl/.

9.11.4. Nominations and Compensation Committee

Members of the Nominations and Compensation Committee for the current term were appointed on June 20, 2017 by the Supervisory Board from among its members. In 2018 the Audit Committee included three members.

Members of the Nominations and Compensation Committee as of December 31, 2018 and as of the day of drawing up this report

• 1. Beata Chłodzińska Head of the Nominations and Compensation Committee,
• 1. Barbara Łasak Jarszak Member of the Nominations and Compensation Committee,
• 1. Agnieszka Woźniak Member of the Nominations and Compensation Committee.

There were no other changes to the composition of the Nominations and Compensation Committee in 2018 and by the day of drawing up this report.

Tasks and competence of the Nominations and Compensation Committee

The tasks and competence of the Nominations and Compensation Committee did not change in 2018.

The tasks and competence of the Nominations and Compensation Committee as of December 31, 2018 and as of the day of drawing up this report are presented in the below table.

Table no. 53. Competence of the Nominations and Compensation Committee

Competence of the Nominations and Compensation Committee

as of December 31, 2018 and as of the day of drawing up this report

• 1. recommending to the Supervisory Board a recruitment procedure for the positions of members of the company's Management Board,
• 1. evaluating candidates for members of the Management Board and providing the Supervisory Board with opinions in this respect,
• 1. recommending to the Supervisory Board a form and content of agreements to be concluded with members of the Management Board,
• 1. recommending to the Supervisory Board a compensation and bonus system for members of the Management Board,
• 1. recommending to the Supervisory Board the need to suspend a member of the Management Board for important reasons,
• 1. recommending to the Supervisory Board the need to delegate a member of the Supervisory Board to temporarily perform the duties of members of the Management Board who cannot perform their duties, along with a compensation proposal

The detailed description of the activities of the Nominations and Compensation Committee in the last financial year is provided in the Report on the activities of the Supervisory Board submitted on annual basis to the General Meeting of Shareholders and published on the Company's website http://www.tauron.pl/.

9.11.5. Strategy Committee

Members of the Strategy Committee for the current term were appointed on June 30, 2017 by the Supervisory Board from among its members. In 2018 the Strategy Committee included five members

Members of the Strategy Committee as of December 31, 2018 and as of the day of drawing up this report

• 1. Jacek Szyke Head of the Strategy Committee,
• 1. Beata Chłodzińska Member of the Strategy Committee,
• 1. Paweł Pampuszko Member of the Strategy Committee,
• 1. Jan Płudowski Member of the Strategy Committee,
• 1. Agnieszka Woźniak Member of the Strategy Committee.

There were no other changes to the composition of the Strategy Committee in 2018 and by the day of drawing up this report.

Tasks and competence of the Strategy Committee

The tasks and competence of the Strategy Committee did not change in 2018. The tasks and competence of the Strategy Committee as of December 31, 2018 and as of the day of drawing up this report are presented in the below table.

Table no. 54. Competence of the Strategy Committee

Competence of the Strategy Committee

as of December 31, 2018 and as of the day of drawing up this report

• 1. evaluating the Company's and TAURON Capital Group's Strategy and presenting the results of such evaluation to the Supervisory Board,
• 1. recommending to the Supervisory Board the scope and deadlines for submitting the long term strategic plans by the Management Board,
• 1. evaluating the impact of planned and currently undertaken strategic investment projects on the Company's assets,
• 1. monitoring the implementation of strategic investment tasks,
• 1. evaluating activities related to the use of material Company's assets,
• 1. providing opinions on strategic documents submitted to the Supervisory Board by the Management Board.

The detailed description of the activities of the Strategy Committee in the last financial year is provided in the report on the activities of the Supervisory Board submitted on annual basis to the General Meeting of Shareholders and published on the Company's website http://www.tauron.pl/.

9.11.6. Description of the activities of the Committees of the Supervisory Board

The detailed description of the activities of the Committees of the Supervisory Board is provided in the Regulations of individual Committees of the Supervisory Board of TAURON Polska Energia S.A.

The Committees of the Supervisory Board are advisory and opinion-making bodies acting collectively as a part of the Supervisory Board and perform support and advisory functions towards the Supervisory Board. The tasks of the Committees of the Supervisory Board are carried out by submitting motions, recommendations, opinions and statements on the scope of their tasks to the Supervisory Board, by means of resolutions. The Committees of the Supervisory Board are independent of the Management Board of the Company.

The Audit Committee and the Nominations and Compensation Committee of the Supervisory Board are composed of three to five members, while the Strategy Committee is composed of three to seven members. The activities of the individual Committees are managed by their Chairpersons (Heads).

Meetings of the Committees are convened by the Chairperson (Head) of the specific Committee on his/her own initiative or upon the motion of a member of the Committee or Chairperson of the Supervisory Board and they are held on as needed basis. In case of the Audit Committee the meetings are convened at least on a quarterly basis. The Chairpersons of the Committees may invite members of the Supervisory Board, who are not members of the specific Committee, members of the Management Board and employees of the Company as well as other persons working or cooperating with the Company to the meetings of the Committees. The Chairperson of the specific Committee or a person appointed by him/her submits motions, recommendations and reports to the Supervisory Board .

The Committees of the Supervisory Board pass resolutions if at least a half of their members were present at the meeting and all their members have been duly invited. The resolutions of the Committees of the Supervisory Board are adopted by an absolute majority of votes present at the meeting, where the absolute majority of votes is understood as more votes given "for" than "against" and "abstain". The Committees of the Supervisory Board may pass resolutions in writing or by using means of direct remote communication.

Members of the Committees of the Supervisory Board may also participate in meetings and vote of the adopted resolutions by using means of direct remote communication, i.e. tele- or videoconferences.

The Company's Management Board shall be informed about recommendations and assessments submitted to the Supervisory Board by the given Committee of the Supervisory Board. Every year, the Committees of the Supervisory Board provide public record information, through the Company, on their memberships, the number of meetings held and participation in the meetings during the year, as well as on their main activities.

The Company's Management Board provides the possibility to use the services of external advisers by the Committees to the extent required for performing the obligations of the Committees.

9.12. Description of the policy of diversity applied to the governing bodies of the Company

In 2018 TAURON Group's Diversity Policy, implemented in 2017, was in force at the Company and TAURON Capital Group with its goal to reinforce the awareness and organizational culture open to diversity.

Diversity and openness are an integral part of TAURON Capital Group's business operations in accordance with its adopted Diversity Policy. The Group applies the policy of equal treatment and seeks to ensure diversity in terms of gender, educational background, age and professional experience in relation to all employees, and in particular to the management bodies and its key managers. The diversity policy is also applied in the cooperation with the external partners of TAURON Capital Group, i.e. companies, universities, schools or other business entities.

Also, actions have been undertaken to prevent any discrimination by structuring the appropriate atmosphere and culture at the workplace based on key PRO corporate values - Partnership, Development and Courage, as confirmed through the Policy of Countering Mobbing and Discrimination at TAURON Group.

With respect to the members of the corporate bodies of TAURON, i.e. the Management Board and the Supervisory Board, persons acting as Members of the Management Board are appointed by the Supervisory Board, while Members of the Supervisory Board are appointed by the Minister of Energy acting within the statutory powers of the State Treasury.

Members of the Management Board are appointed by the Supervisory Board after conducting a qualification procedure designed for verifying and assessing their qualifications and selecting the best candidates. Announcement of the qualification process is published on the Company's web page and in the Public Information Bulletin of the Ministry of Energy. The competition is open for any person meeting the requirements set forth in the Company's Articles of Association and formal requirements specified in the announcement. Candidates are required to hold a university degree, at least five years of employment and minimum three years of experience as managers, and have to meet requirements set forth in other legislation. Due to no special requirements placed on features such as gender, type of education, age and professional expertise, the Supervisory Board is able to ensure comprehensive and diverse approach when assessing and selecting candidates to the Management Board.

Information on the qualifications and professional experience of persons appointed as members of the Management Board and the Supervisory Board is published in applicable securities filings (current reports) and on the Company's website.

The description of TAURON Group's Diversity Policy as well as the detailed data and indicators related to diversity in terms of age, gender, seniority (professional experience) is presented in section 11 of this report.

10.COMPENSATION POLICY WITH RESPECT TO THE MANAGEMENT AND SUPERVISORY PERSONNEL

10.1. Compensation system for members of the Management Board and key managers

10.1.1. General information on the adopted compensation system for members of the Management Board

Compensation system for members of TAURON's Management Board

In 2018 the principles of compensation of members of the Company's Management Board defined in the Resolution of the Extraordinary GM of TAURON of December 15, 2016 on the principles for determining compensation of members of the Management Board (Principles for determining compensation) were in force at the Company, as subsequently amended and detailed by the Supervisory Board of the Company pursuant to the resolution of December 19, 2016 on determining compensation of members of the Management Board TAURON Polska Energia S.A. as subsequently amended. The above principles for determining compensation are in line with the provisions of the Act of June 9, 2016 on the principles for determining compensation of the management personnel of certain companies. Taking into account the above principles of determining compensation the Supervisory Board, on October 23, 2017, adopted for application the updated Policy for compensation of members of the supervision and management bodies including the description of the principles for establishing it at TAURON Polska Energia S.A.

The adopted principles for determining compensation define the compensation system for members of the Management Board in connection with the outstanding tasks aimed at the implementation of the adopted Strategy, directions of expansion and financial plans. The overriding objective of the adopted compensation system is to ensure an incentive-based compensation of the most senior management staff and to create basis for their development.

The overall objectives of the compensation policy are:

• 1. ensuring a consistent and motivational compensation system for members of the Management Board,
• 1. linking the compensation rules with monitoring of the implementation of adopted strategic plans and implementation of the financial plans,
• 1. setting the level of compensation for the Management Board members in connection with the implementation of the management tasks set,
• 1. increasing the Company's value through the development of the most senior management staff,
• 1. improving the compensation systems leading to the implementation of the Company's strategy and expansion directions.

Model of compensation for members of the Management Board is based on a two-component system for determining compensation, where the total compensation is composed of a fixed part constituting the monthly base wage and a variable part constituting the supplementary compensation for the Company's financial year, dependent on achieving specific management objectives (KPI).

System of compensation for members of the Management Board assumes linking the variable part of the compensation with the outstanding management goals stemming from the provisions of the Act of June 9, 2016 on the principles for determining compensation of the managements personnel of certain companies and set, based upon these provisions, by the GM and the Supervisory Board of the Company. The goal of adopting, in the system of compensation, of the dependence of the compensation's variable part on achieving the management goals set is, in particular, to implement the adopted Strategy, the directions of the Company's expansion and financial plans, it also shapes a new organizational culture of the Company.

Taking into account the applicable regulations, the level of compensation for members of the Management Board is defined by the Supervisory Board within the range determined by the Company's GM.

The variable compensation of members of the Management Board of TAURON constitutes up to 60% of the fixed compensation for the financial year, assuming the management goals set by the GM and detailed by the Supervisory Board for the given financial year have been achieved.

The overall management objectives set by the GM include:

• 1. achieving EBITDA at the level approved in the Material and Financial Plan for the given financial year,
• 1. achieving the Net debt/EBITDA ratio at the level approved in the Material and Financial Plan for the given financial year,
• 1. maintaining the rating of TAURON Polska Energia S.A. at an investment grade level,
• 1. implementation of the "2016 2018 Efficiency Improvement Program" and achieving the total effect at the level approved in the Material and Financial Plan for the given financial year,
• 1. aligning to the essence of the sector's structural changes (introduction of the process and task based structure, a corresponding technical support system),
• 1. gaining the position of the leading supplier of electricity on the market by building a homogenous organization in the supply and customer service areas in line with the trends – efficient customer experience management, maintaining the

leadership position among 4 largest electricity suppliers in Poland in terms of the number of customers at the set market share and profitability level (excluding a case of acquisition in this segment) and a continuous growth of sales of new products (sales of products that include electricity and products with synergy with electricity and gas),

• 1. construction of the 910 MWe unit at Jaworzno in line with the optimal, from the point of view of the project's profitability and the Group's condition, approved schedule,
• 1. developing a structural approach to the marketing, product and process innovations, financing of the research and development works, pilot projects and implementations as well as creating an ecosystem for innovations at TAURON Group, taking into account efficient utilization of the funds allocated for that purpose,
• 1. developing a structural approach to building the brand, product marketing, sponsoring of culture, sports and social activities.

Members of the Management Board of the Company are neither covered by the bonus program based on the capital (equity) of the Company, nor do they receive any compensation or awards due to the performance of their functions in the governing bodies (authorities) of TAURON Capital Group's subsidiaries.

In 2018 no changes to the principles of compensation of members of the Company's Management Board were made.

System of compensation for members of the Management Board of the Capital Group's subsidiaries

In all of TAURON Capital Group's subsidiaries for which TAURON is a parent company in the understanding of art. 4 clause 3 of the act of February 16, 2017 on the protection of competition and consumers, the principles of compensation of the members of the management authorities were implemented in accordance with the act of June 9, 2016 on the principles of determining compensation of the management personnel of certain companies. The above was defined in the Policy for determining the compensation of the members of the authorities of the Subsidiaries and the Principles of determining compensation of the members of the corporate authorities of the Subsidiaries.

Model of compensation for members of the management bodies (authorities) of the subsidiaries is, similar as in TAURON, based on a two-component system for determining compensation, where the total compensation is composed of a fixed part and a variable part dependent on fulfilling specific results related criteria, i.e. achieving the management objectives. Linking of the compensation's variable part to achieving the management objectives set is of major importance in TAURON Group's management process and its objective is to prioritize the directions for expansion of the individual subsidiaries.

Management objectives that the variable compensation is linked to can, in particular, include:

• 1. increase of net profit or EBITDA or a positive change of the growth rate of one of those figures;
• 1. achieving or changing the production or sales value;
• 1. value of the revenue, in particular revenue from sales, from the operating activities, from the other operating or financing activities;
• 1. reducing losses, reducing the overhead costs or costs of the operations conducted;
• 1. implementation of the strategy or restructuring plan;
• 1. achieving or changing certain indicators, in particular profitability, financial liquidity, management efficiency or solvency;
• 1. implementing investment projects, taking into account in particular the scale, rate of return, innovations, on-time implementation;
• 1. change of the company's market position, calculated as market share or according to other criteria or relationships with the counterparties (business partners, contractors) designated as the key counterparties (business partners, contractors) according to the defined criteria;
• 1. implementation of the conducted personnel policy and an increase of the workforce commitment.

10.1.2. General information on the adopted compensation system for key managers

The rules concerning compensation and bonus system for key managers and other employees are defined in the Regulations on Compensation of Employees of TAURON Polska Energia S.A., adopted for application by the Management Board of the Company.

In 2018 the Principles of Compensation at TAURON Group were developed, representing the guidelines for TAURON Capital Group's subsidiaries with respect to the personnel compensation systems, particularly taking into account the bonus system for key managers based on the management by objectives system consistent throughout TAURON Capital Group, representing a combination of the planning process, efficiency measurement process and evaluation process.

The compensation and bonus system for key managers in force stipulates that the level of compensation should be tied to the financial situation of TAURON Capital Group over a year, in connection with the implementation of strategic goals.

The overriding assumption of the compensation system in force is to ensure the optimum and motivating compensation level, depending on the value and type of work in a given position as well as the quality of work and effects achieved by employees.

The structure of the compensation consists of the following elements:

fixed part - constituting the base salary determined in accordance with the table of grade categories applicable in the Company and monthly rates of personal grade. The allocated level of basic salary reflects the value and type of work as well as the quality of employee's work, defined through the assessment of employee's competence level,

variable part - which depends on performance results, defined through the level of accomplishment of targets and tasks within the MBO bonus system,

benefits - which are defined in the internal regulations of the Company.

The MBO bonusing system based on market principles of awarding bonuses ensures focusing activities of key management staff on attaining objectives defined within the Strategy, as well as individual strategic objectives and development directions of individual companies within the TAURON Capital Group. This system also ensures cascading of objectives defined by the Company's Management Board at the TAURON Capital Group level and at the Company level, down to concrete, parametric tasks vested with employees of lower structural levels. The MBO bonusing system has been tied with the management by process style of operations at the TAURON Capital Group, inter alia by aligning the objectives with Megaprocesses defined within the TAURON Capital Group. Therefore, the introduced culture of Management by Objectives reflects the specific features of each function implemented in the Company and allows use of dialogue mechanisms between the superior and subordinate during the process of setting and assessing objectives, leading to attaining overall efficiency throughout the entire organization.

At the same time, this tool enables precise correlating of KPIs defined for members of the Management Board with objectives defined for the given year for key managers of the Company. Initial assessment of accomplished objectives takes place after end of the first 6 months and after end of the year, members of the Management Board conduct final assessment of KPI performance by key managers.

Moreover, the bonus system for the trading area is in place, aimed at motivating to generate higher revenue for TAURON Capital Group. The trading bonus covered key managers in the trading area, however the bonus system sets an additional bonus for them only once they have topped annual trade plans.

Employees of the Company do not receive any compensation or awards on account of functions performed in governing bodies (authorities) of TAURON Capital Group's subsidiaries.

Rules, terms and conditions as well as the level of compensation of members of the Management Board of the Company and the Capital Group's units

Compensation of members of the Management Board of the Company

The total amount of compensation understood as the value of salaries, awards and benefits received in cash, in kind or in any other form, due or paid by the Company to the members of the Management Board members in 2018 reached the gross amount of PLN 4 730 000.

The compensation of members of the Company's Management Board in 2018, broken down into components, is presented in the below table.

#	First and last name	Period of holding the position in 2018	Compensation1 (PLN '000)	Variable compensation1 (PLN '000)	Other benefits1 (PLN '000)	Total (PLN '000)
1.	Filip Grzegorczyk	01.01.2018 - 31.12.2018	793	407	0	1 200
2.	Jarosław Broda	01.01.2018 - 31.12.2018	740	426	16	1 182
3.	Kamil Kamiński	01.01.2018 - 31.12.2018	740	426	15	1 181
4.	Marek Wadowski	01.01.2018 - 31.12.2018	740	427	0	1 167
	Total		3 013	1 686	31	4 730

Table no. 55. Compensation of members of the Company's Management Board in 2018, broken down into components (in PLN '000)

¹excluding markups (surcharges) Period

The Company does not have any obligations towards the former members of the Management Board due to pensions or benefits of similar nature.

At the same time it is indicated that due to the Company's obligations towards former members of TAURON's Management Board in 2018 the total amount of PLN 793 000 PLN was paid out due to, among others, payment of the variable compensation part for achieving KPIs in 2017 and compensation for refraining from performing competing activities.

Members of TAURON's Management Board did not receive compensation or bonuses for performing functions in the corporate bodies (authorities) of TAURON Capital Group's subsidiaries in 2018.

Compensation of members of the Management Boards of the Capital Group's subsidiaries

Compensation of members of the management authorities of the Subsidiaries is determined taking into account the scale of the given subsidiary's operations, in particular:

• 1. average annual headcount,
• 1. annual net turnover from the sales of goods, products and services as well as financial operations,
• 1. total assets on the balance sheet at the end of the year.

Based on the above criteria categories of companies are defined which determine the fixed compensation of members of the subsidiaries' management authorities expressed in the form of the ranges of the multiples of the average monthly compensation in in the enterprise sector, excluding payment of bonuses due to profit distribution in the fourth quarter of the preceding year, announced by the President of the Central Statistics Office. Assigning of a company to the given category takes place based on the financial data for the last two financial years, coming from approved financial statements.

Members of Management Boards of TAURON Capital Group's subsidiaries did not receive compensation or bonuses for performing functions in the corporate bodies (authorities) of TAURON Capital Group's subsidiaries in 2018.

The principles of compensation for members of the Management Boards of TAURON Capital Group's subsidiaries are published on the website http://www.tauron.pl/.

10.1.3. Agreements concluded with management personnel that envisage compensation in case of their resignation or dismissal from the position held, without a material reason, or if their dismissal or resignation takes place as a result of the merger of the Company through takeover

According to the agreements on the provision of management services concluded both with the members of TAURON's Management Board, as well as with the members of the Management Boards of the individual TAURON Capital Group's subsidiaries envisage, in case of termination or dissolution of the agreement by the Company for reasons other than defined therein, a payout of the severance payment in the amount of three times the fixed part of the compensation, on the condition they performed their function over a period of at least 12 months prior to the termination of the agreement.

Furthermore, due to the members of TAURON's Management Board, as well as the members of the Management Boards of the individual TAURON Capital Group's subsidiaries having access to confidential information the disclosure of which could expose the Company and TAURON Capital Group's subsidiaries to losses, the agreements on the provision of management services include non-competition provisions applicable after the expiry of the term of office. Under the above mentioned agreements members of the Management Board undertook to refrain from conducting competitive activities for a specified period in return for compensation.

Members of the Company's Management Board did not hold positions of members of Management Boards of TAURON Capital Group's subsidiaries prior to being appointed as members of the Company's Management Board.

10.1.4. Non-financial components of compensation due to members of the Management Board and key managers

Non-financial components of the compensation of members of the Management Board

Members of the Management Board, in accordance with the agreements on the provision of management services, are entitled to reimbursement by the Company of the cost of training up to the net amount of PLN 15 000 in a calendar year,

Non-financial components of the compensation of key managers

Staff members employed at key positions by the Company are entitled to use the following benefits and non-financial components of the compensation offered by the Company:

• 1. participate in the Employee Pension Scheme operated by the employer (under the condition of being employed by the Company or one of TAURON Capital Group's subsidiaries over a period of at least one year),
• 1. use the medical package financed with the Company funds,
• 1. use a company car allocated for their sole use,
• 1. use company accommodation in case the availability of the employee is required due to the nature of his/her work and scope of responsibilities.

10.1.5. Assessment of the functioning of the compensation policy in terms of the fulfilment of its objectives, in particular the long-term growth in shareholders' value and stability of the company's performance

The applied compensation system for members of the Management Board is compliant with the Act of June 9, 2016 on the principles for determining compensation of the management personnel of certain companies. The incentive-based and consistent system is provided, linked with the monitoring of annual financial plans and the adopted Strategy and development (expansion) directions. Policy of compensation for members of the supervisory (oversight) and management authorities including the description of the principles for its definition at TAURON Polska Energia S.A. in force at the Company is in line with the Best Practice 2016 principles and defines, in particular, the form, structure and the manner of determining the compensation of members of the Management Board.

The form, structure and level of compensation correspond to market conditions and are oriented towards enabling the recruitment and retaining individuals fulfilling the criteria required for running the Company in a manner taking into account shareholders' interests (building the Company's value for shareholders), as well as prevent conflicts of interest from arising among members of the Management Board and shareholders. At the same time, they are constructed in a manner which is transparent for investors, so as to build their confidence in the Company and enable them to express their opinions using the applicable procedures.

The disbursement of the variable components of compensation is linked to the pre-defined, measurable management objectives. The management objectives set should foster long-term stability of the Company.

The criteria the fulfilment of which determines obtaining of the variable components of the compensation and the level thereof are defined in accordance with the SMART methodology, i.e. they display such features as: precision, measurability, achievability, materiality and time definition.

The compensation and bonus system for both Members of the Management Board of the Company as well as the key managers in force at TAURON supports the implementation of strategic goals and determines the compensation depending on the financial situation of the Company and TAURON Capital Group over one year period.

10.2. Compensation system for members of the Supervisory Board

In 2018 the system of compensation for members of the Supervisory Board of the Company defined in the Resolution of the Extraordinary GM of TAURON of December 15, 2016 on determining compensation for members of the Supervisory Board was in force, adopted as the implementation of the provisions of the Act of 9 June 2016 concerning principles for determining compensation of the management personnel of certain companies (Journal of Laws of 2016, item 1202).

In accordance with the above mentioned Resolution of the Extraordinary GM the monthly compensation of members of the Supervisory Board is determined as a product of the average monthly compensation in the enterprise sector, excluding payment of bonuses due to profit distribution in the fourth quarter of the preceding year, announced by the President of the Central Statistics Office and the multiplier:

• 1. for the chairperson of the Supervisory Board 1.7
• 1. for the other members of the Supervisory Board 1.5

Members of the Supervisory Board are entitled to receive the compensation irrespective of the frequency of the formally convened meetings.

The compensation is not due for a month in which a member of the Supervisory Board was not present at any of the formally convened meetings, for unjustified reasons. The decision on excusing or a failure to excuse the absence of a member of the Supervisory Board at its meeting is taken by the Supervisory Board by way of a resolution.

The compensation is calculated on a pro rata basis, in relation to the number of days when the function was performed in case the appointment or dismissal occurred during the calendar month.

The Company covers the costs incurred in connection with the performance of the functions assigned to the members of the Supervisory Board, in particular: the costs of return transfer between the place of residence and the venue of the Supervisory Board's meeting or a meeting of the Supervisory Board Committee, the costs of individual supervision and the costs of accommodation and board.

Compensation of the oversight personnel

The compensation of members of the Company's Supervisory Board in 2018 is presented in the below table (in PLN '000)

Table no. 56. Compensation of members of the Company's Supervisory Board in 2018

#	First and last name	Period of holding the position in 2018	Compensation (PLN '000)
1.	Beata Chłodzińska	1.01.2018 - 31.12.2018	97
2.	Teresa Famulska	1.01.2018 - 31.12.2018	85
3.	Jacek Szyke	1.01.2018 - 31.12.2018	85
4.	Radosław Domagalski - Łabędzki	1.01.2018 - 31.12.2018	85
5.	Barbara Łasak - Jarszak	1.01.2018 - 31.12.2018	85
6.	Paweł Pampuszko	1.01.2018 - 31.12.2018	85
7.	Jan Płudowski	1.01.2018 - 31.12.2018	85
8.	Marcin Szlenk	16.04.2018 - 31.12.2018	60
9.	Agnieszka Woźniak	1.01.2018 - 31.12.2018	85
	TOTAL		752

The Company does not have any obligations towards the former members of the Supervisory Board due to pensions or benefits of similar nature.

11.STATEMENT ON NON-FINANCIAL INFORMATION

This statement on non-financial information (hereinafter called the Statement) contains descriptive information and the numerical data confirming it, related to the parent company - TAURON and TAURON Capital Group for 2018. It was prepared in accordance with the guidelines of the Directive of the European Parliament and of the Council (2014/95/UE i 2013/34/UE), and the act on the amendment to the act on accounting of 15.12.2016 (Journal of Laws of 2017, item 61; consolidated text: Journal of Laws of 2017, item 2342).

This statement on non-financial information constitutes an integral part of the Report of the Management Board on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018. Furthermore, in accordance with the current practice TAURON Capital Group will publish the Integrated Report for 2018.

As part of the process of preparing the Statement the documents, policies, due diligence procedures, risk management rules and other available materials related to TAURON Capital Group's operations as well as to the energy sector were reviewed.

Preparation of the content of the Statement included five stages:

Stage 1. Confirming the material business and sustainable development issues and the weight thereof, adequate for TAURON Capital Group in order to prepare the description of the Business Model.

Stage 2. Confirming the Business Model, and the type and within it the level of relationships with the environment.

Stage 3. Collecting the data illustrating the implementation of the policies, strategies and the objectives of the sustainable development, and also the principles of due diligence and management of risk of conducting them at TAURON Capital Group in 2018. Stage 4. Preparing the Statement on TAURON Capital Group's non-financial information for 2018 based on the data collected in accordance with the act on the amendment to the act on accounting of 15.12.2016 (Journal of Laws of 2017, item 61; consolidated text: Journal of Laws of 2017, item 2342).

Stage 5. Conducting of the audit by an external entity with respect to the accuracy of the data and content of the Statement.

11.1. TAURON Group's Business and Operational Model

TAURON Capital Group is a fully integrated energy group with its business model covering all elements of the value chain, from mining, through generation, distribution and supply to the final consumers, supplemented with the innovations ecosystem and the development of new businesses, closely integrated with the operations in the energy sector.

TAURON Capital Group comprises selected companies managed jointly as a uniform economic body (organization) consisting of independent commercial law companies, led by TAURON as the parent entity.

TAURON Group's Business and Operational Model adopted by the Management Board of the Company on January 23, 2018 was in force in 2018.

TAURON Group's Business and Operational Model defines TAURON Capital Group's management model, defines the high-level architecture of processes and contains guidelines concerning key performance indicators of units constituting TAURON Capital Group.

11.1.1. TAURON Group's Business and Operational Model's assumptions

The key assumptions of the Business Model include building of TAURON Capital Group value, focusing on customers, transparent distribution of duties and responsibilities, effective information exchange, use of employees' knowledge, volatility of the Business Model, organizational integrity of TAURON Capital Group.

11.1.2. Company management principles

In accordance with the provisions of the By-laws of the Management Board of TAURON Polska Energia Spółka Akcyjna with its seat in Katowice, the Management Board conducts the affairs of the Company and represents it in all judicial and extra-judicial proceedings. All issues connected with managing the Company, which are not restricted by legal regulations and provisions of the Company's Articles of Association to the competence of the General Meeting or the Supervisory Board lie within the competence of the Company's Management Board. Cooperation of two members of the Management Board or one member of the Management Board together with a proxy is required for submitting statements on behalf of the Company.

Issues lying within the competence of the Management Board acting as a collective body are described in detail in section 9.8.1. of this report.

In accordance with the Organizational Regulations of TAURON Polska Energia S.A. (Organizational Regulations), the Company is managed directly by the Management Board of the Company as well as through proxies, Executive Directors, Managing Directors or power of attorneys.

The Company implements its tasks through:

• 1. separate organizational units (business units):
  2. Divisions comprising independent positions and organizational units (business units) reporting to the individual members of the Management Board and supervised thereby,
  3. Teams, constituting organizational units (business units) reporting directly to Executive Directors or Managing Directors. The activities of the team are managed by the Team Leader (Manager),
• 1. independent positions:
  2. Managing Director manages and leads the work of subordinate Executive Directors and Teams,
  3. Executive Director manages and leads the work of subordinate Teams,
  4. Other independent positions that may be entrusted to Power of Attorneys, Coordinators, Consultants or Specialists,
• 1. temporary organizations Project Teams established with the goal to implement tasks and projects of the Company.

11.1.3. TAURON Capital Group management principles

The core regulatory act of TAURON Group is the Code of TAURON Group adopted by the Management Board of the Company which regulates its operations, ensuring the implementation of the goals through tailored solutions in the area of management of TAURON Capital Group's entities, including, in particular, setting the operating objectives of companies, enabling achieving of the effects assumed in the Strategy.

Regulations implemented in 2016, along with the Business Model, updated in 2018, introduced the management by processes within TAURON Capital Group, consisting in establishing the process subordination running horizontally within TAURON Capital Group's subsidiaries. Members of the Management Board are responsible for the management of the process streams allocated thereto, which are subsequently divided into mega-processes. The owners of the mega-processes are TAURON's indicated managing and executive directors. The process documentation (maps, diagrams and process sheets) defines and describes decision making powers (competences) and actions to be undertaken by the individual organizational units within TAURON Capital Group's various companies. The owners of the mega-processes decompose these into lower level processes and appoint their owners. Each process has its owner and process metrics defined by the higher level process owner. The process documentation defines the decision interdependencies and competences for the repeatable processes.

Process based management model has been implemented to benefit from the operating synergies among TAURON Capital Group's various companies, share and use best practices, standardize and automate processes, and also to ensure coherence of actions taken within TAURON Capital Group's companies to support the implementation of the Strategy.

The essence of the management by processes lies in the continuous search for and implementation of efficiencies along with the clear and transparent division of competences and responsibilities. Processes are modified to improve their efficiencies. The process documentation is published in the intranet and available to all employees.

The competences and process interdependencies described in the process documentation supplement the competences stemming from the organizational structure of the individual companies and support the operations of TAURON Capital Group's companies as a single entity.

Standing Committees of TAURON Capital Group are operating within TAURON Capital Group, including:

• 1. Investment Committee,
• 1. Risk Committee,
• 1. New Businesses Committee.

The above mentioned Committees were established in order to enable performing the operations in accordance with the principles of operating consistency, in compliance with the law and interests of TAURON Capital Group and its stakeholders.

The below figure presents process streams cutting across TAURON Capital Group's Lines of Business.

Figure no. 74. Process streams cutting across TAURON Capital Group's Lines of Business

Business Model identifies 23 mega-processes cutting across all units of TAURON Capital Group.

The below figure presents the structure of TAURON Capital Group's processes (mega-processes).

Figure no. 75. Structure of TAURON Capital Group's processes (mega-processes)

11.1.4. TAURON Capital Group's Lines of Business

In accordance with the Business Model in force the split of roles and responsibilities was implemented, based on assigning the process competences to:

superior business unit responsible for the management of TAURON Capital Group's operations and taking the most important decisions affecting TAURON Capital Group, Lines of Business, Shared Services Centers and TAURON Capital Group's subsidiaries.

seven lines of TAURON Capital Group's core business operations, defined in accordance with the links of the electricity and heat production value chain: Mining, Generation, Heat, Renewable Energy Sources (RES), Trading, Distribution and Supply.

units responsible for the provision of specific support services (e.g. Accounting, IT, HR and payroll, insurance, customer service, security) in favor of the other units of TAURON Capital Group.

The below figure presents the structure of TAURON Capital Group's Lines of Business.

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

178

TAURON Capital Group's Shared Services Centers (CUW)

Centralizing of the support services is aimed at relieving the Corporate Centre and the Lines of Business from performing the processes that are not directly associated with their core business operations (the so-called support processes) as well as at reducing the costs of the implementation of such processes due to the economy of scale and increased operational efficiency. Within the formal structure of TAURON Capital Group CUWs are placed in TAURON Obsługa Klienta, TAURON Ubezpieczenia sp. z o.o. and Wsparcie Grupa TAURON subsidiaries.

11.1.5. Changes to the principles of the Company's and TAURON Capital Group's management

Changes to the principles of the Company's management

Two amendments were introduced to the Organizational Regulations in 2018 in order to optimize TAURON's management processes, including.

• 1. as of May 22, 2018 the Vice President of the Management Board for Customer and Corporate Support was vested with oversight over the functioning of the Company's personal data protection solutions, by making the independent position: Chief Data Protection Officer, report thereto,
• 1. as of December 20, 2018 the President of the Management Board was vested with oversight over the functioning of the internal audit area, with its scope managed by the Executive Director for Internal Audit. The name of the above area was changed to: Executive Director for Internal Audit and Internal Inspection.

The below figure presents the split of responsibilities of members of the Management Board.

Figure no. 77. Split of responsibilities of members of the Management Board

By introducing the above changes to the Organizational Regulations the required modifications of the scope of the individual business units' functions in the Company's structure were made.

In the general part of the Organizational Regulations provisions related to internal audit were modified. Furthermore, the power to issue intra corporate regulatory acts was also granted to the Vice President of the Management Board empowered by the Management Board.

Furthermore, the independent position of the "Chief Data Protection Officer" was added, and also the scope of the main and partial functions was defined.

Changes to the organizational structure of the Company were aimed at optimizing the operations of the Company and TAURON Capital Group. Areas assigned to the individual divisions managed by members of the Management Board of the Company were revised.

The below figure presents the divisions assigned to the individual members of the Company's Management Board, down to the level of business units and independent work positions reporting directly to members of the Management Board, as of the date of drawing up this report.

Figure no. 78. TAURON's organizational diagram (flowchart) as of the date of drawing up this report

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

Changes to the principles of TAURON Capital Group's management

Activities undertaken in 2018 to implement the management by processes resulted in the updating of the Business Model. The scope of competences and functions attributed to the individual mega-processes was specified in further detail and supplemented to fully reflect the activities performed in the documentation and to ensure the highest possible efficiency thereof. The most important changes include the allocation of activities in the area of work (occupational) health and safety and environmental protection to the asset management mega-process, the transfer of activities related to market forecasting from the trading megaprocess to the controlling mega-process and the inclusion of the public aid activities in the controlling mega-process. Besides the above mentioned modifications some other minor changes were made in line with the detailed Business Model provisions.

As part of the works related to the implementation of the Business Model in 2018 the maps and diagrams, as well as interface points for the processes performed by TAURON and the key companies of TAURON Capital Group, i.e. TAURON Wydobycie, TAURON Wytwarzanie, TAURON EKOENERGIA, TAURON Ciepło, TAURON Dystrybucja, TAURON Sprzedaż and TAURON Obsługa Klienta, were agreed.

Activities aimed at designing and implementing the key processes performed by TAURON Capital Group's other subsidiaries carrying out the business operations, i.e. TAURON Dystrybucja Serwis, TAURON Dystrybucja Pomiary, TAURON Serwis, TAURON Ekoserwis, TAURON Sprzedaż GZE, TAURON Ubezpieczenia sp. z o.o., Wsparcie Grupa TAURON, Bioeko Grupa TAURON, SCE Jaworzno III and Spółka Usług Górniczych sp. z o.o., were also continued. Process maps and data sheets were developed and the owners of key processes were appointed. Some process diagrams were drawn up and handed over. The works on reaching the final agreement on the products and interface points mentioned in the processes are underway. The verification is conducted by TAURON in order to ensure high quality and integrity (coherence) of the processes developed throughout TAURON Capital Group.

As part of the process design works the identification and elimination of the detected inefficiencies and products of processes not generating added value continue. Processes continue to be supplemented with actions needed and necessary for effective implementation of the objectives and assumptions stemming from the Strategy. These activities are supported through workshops and training courses for employees participating in the process modeling and in creating the process documentation.

As a result of implementing the Business Model, including the process component, all repeatable processes were redefined, redesigned and described in the issued and implemented process documentation. The implemented process documentation and the process tools as well as the competences in process based management and process optimization acquired within TAURON Capital Group's subsidiaries are a starting point for seeking further improvements and raising the operating efficiency.

Development and implementation of the process maturity assessment model is planned in 2019. It will provide support for the activities related to ensuring the continuous works on optimizing (streamlining) the processes implemented.

11.2. TAURON Group's 2017-2025 Sustainable Development Strategy

TAURON Capital Group's success as a socially committed and responsible company will, in a long run, be determined by the activities and actions undertaken with respect to corporate social responsibility (CSR).

The directions for the CSR activities are defined by TAURON Group's 2017-2025 Sustainable Development Strategy adopted by TAURON's Management Board in 2017. The document includes a broader outline of the CSR issues in accordance with the assumptions and objectives of TAURON Group's 2017-2025 Sustainable Development Strategy, and also takes into account feedback of the stakeholders as well as the global trends affecting the energy sector. As part of preparing the above document TAURON Capital Group identified challenges, specified risks, defined opportunities, activities and actions, allowing for its development in accordance with the expectations of both the internal as well as external stakeholders.

TAURON Group's 2017-2025 Sustainable Development Strategy is based on five directions with two of them of leading nature as they are related to the operations on the market - "Reliability and quality of the supply of products and services for customers" and "Orientation towards the customer and his/her needs". The other three are the supporting directions and they include: "Labor safety, ethical culture and employee engagement (commitment)", "Environment protection" and "Social and business partnership". For each of the above mentioned directions the obligations (commitments) that TAURON is intending to fulfill by the end of 2025 were defined. For each obligation (commitment) key initiatives were formulated that support their implementation and they were assigned to the individual organizational units (business units) of TAURON Capital Group.

The below figure presents the directions of TAURON Capital Group's Sustainable Development Strategy for 2017-2025.

Very good relationships with the stakeholders, based on mutual understanding and trust, are of key importance for TAURON Capital Group which, due to the scale of its operations, magnitude of its turnover, as well as profile, has a significant impact on its environment (stakeholders). TAURON Capital Group is fully aware of that and takes full responsibility for it.

Cooperation is the foundation of TAURON's success, both in terms of its business operations, as well as social activities. The Group is building its relationships with the stakeholders based on a partnership model, in a fully transparent manner, being aware of their importance for the long term strategy and sustainable approach to business operations. The fundamental element of this process is a dialogue, aimed at getting to know mutual expectations and opportunities as well as implementing the agreed solutions.

For this reason the process of identifying and mapping TAURON Capital Group's stakeholders was completed in 2017, as a part of which the stage of initially separating groups of stakeholders was performed and then the stage of evaluating the degree of interest – orientation: of the stakeholders towards the organization and of the organization towards the stakeholders, that led to the ultimate adoption of the stakeholder groups. The process described above began the development of TAURON Group's 2017-2025 Sustainable Development Strategy. During its implementation and the reporting process the stakeholder map is annually confirmed. As part of the works conducted in 2018 it was determined that the stakeholder map, and also the strength of interest and impact, defined during the mapping in 2017, continue to be valid.

The below figure presents TAURON Capital Group's current stakeholder map.

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

11.3. Key non-financial performance (efficiency) indicators related to TAURON Capital Group's operations

The key non-financial performance (efficiency) metrics (indicators) related to TAURON Capital Group's operations are metrics outlined in TAURON Group's 2017-2025 Sustainable Development Strategy, and they include, among others:

• operating efficiency metrics,
• efficiency indicators in TAURON's and TAURON Capital Group's employee related issues area,
• Customer Satisfaction Index (CSI) metrics,
• customer loyalty indicator,
• participation of the personnel in the customer communications training,
• indicators related to the environmental activities,
• indicators related to the Work and Health Safety (WHS) area.

Operating efficiency metrics

The below table presents the values of operating efficiency metrics for TAURON Capital Group and the levels thereof in 2017-2018.

Table no. 57. Operating efficiency metrics in 2017-2018

Operating efficiency metrics	Unit	2017	2018
Installed generation capacity, including:
Electric capacity	[GWe]	5.0	5.0
Heat capacity	[GWt]	2.4	2.4
Volume of energy produced, including:
Electricity	[TWh]	18.4	16.2
Heat	[PJ]	12.2	11.3
Length of transmission and distribution lines, including:
Transmission lines	[km]	44	44
Distribution lines	[km]	185 113	187 423
Interruptions of energy supply, including:
Frequency of interruptions (planned and unplanned including disaster related) - SAIFI1	[pcs]	3.50	2.50
Average duration of interruptions (planned and unplanned including disaster related) - SAIDI2	[minutes]	263.03	136.44
Commercial coal production	[Mg m]	6.4	5.0
Commercial coal sales to external customers	[Mg m]	1.8	1.5
Number of customers, including:
Distribution segment	[m]	5.5	5.6
Supply segment	[m]	5.4	5.5
Retail electricity supply by the supply segment	[TWh]	34.9	34.5
Electricity distribution	[TWh]	51.4	52.0

¹SAIFI is calculated according to the formula: number of interruptions at consumers / number of consumers served / year.

²SAIDI is calculated according to the formula: total time of durations of interruptions of all consumers in a group / number of all consumers / year.

Efficiency indicators in the employee related issues area

The below table presents the efficiency indicators in TAURON's and TAURON Capital Group's employee related issues area and the levels thereof in 2017-2018 as of December 31, 2017 and December 31, 2018

Table no. 58. Efficiency indicators in TAURON's and TAURON Capital Group's employee related issues area and the levels thereof as of December 31, 2017 and December 31, 2018

Efficiency indicators in the employee related issues area		TAURON		TAURON Group
	unit	2017	2018	2017	2018
Headcount by segments, including:	[persons]			24 381	25 365
Mining Segment	[persons]	-	-	6 539	6 651
Generation Segment	[persons]	-	-	5 002	4 890
Distribution Segment	[persons]	-	-	9 289	9 372
Supply Segment	[persons]	454	464	303	324
Other Operations	[persons]	-	-	3 248	4 128
Headcount by education, including:
University degree	[%]	97.6	96.8	33.0	33.2
Secondary education	[%]	2.2	3.2	42.8	43.1
Vocational education	[%]	0.2	0.0	22.1	21.6
Elementary school	[%]	0.0	0.0	2.1	2.1
Headcount by age, including:
Up to 30 years	[%]	13.7	11.6	7.8	8.4
30 – 40 years	[%]	44.3	43.3	22.6	22.4
40 – 50 years	[%]	32.8	34.5	33.3	31.0
50 – 60 years	[%]	7.7	9.1	32.0	32.5
Above 60 years	[%]	1.5	1.5	4.3	5.7
Headcount by gender, including:
Women	[%]	43.4	44.4	20.8	21.5
Men	[%]	56.6	55.6	79.2	78.5
Average number of training hours per employee by position groups, including:
Management Board and Directors	[number]	-	85	-	63
Management positions	[number]	-	53	-	33
Administration personnel	[number]	-	30	-	12
Blue collar positions	[number]	-	9	-	17
Number of training hours per employee by gender, including:	[number]
Women	[number]	-	6 961	-	77 305
Men	[number]	-	9 810	-	378 874

Customer Satisfaction Index metrics

Customer satisfaction surveys are conducted periodically, once a year, by an independent market research agency Kantar TNS S.A. A randomly selected group of TAURON's customers and a group of customers of other electric utilities are taking part in such surveys. They include nationwide statistically representative groups of customers of electric utilities from the household segment, business customers segment, as well as the small and medium size enterprises segment. In 2018 the CSI survey was conducted in the August – September time frame.

Customer satisfaction indicator for the household segment

The below figure presents the results of the customer satisfaction survey conducted in the household customers segment with respect to TAURON Capital Group's products and services in 2011-2018.

Figure no. 81. Results of the customer satisfaction survey conducted in the household customers segment with respect to TAURON Capital Group's products and services in 2011-2018

A stable level of the customer satisfaction indicator can be observed among households, while the loyalty indicator is getting lower in this segment. The highest rated area of cooperation (interaction) are the settlements (billing) and payments, while the prices and tariffs get the lowest grades (a decline versus last year). Also an increase of the grades in the customer service area can be observed. The level of satisfaction with the cooperation (interaction) with TAURON Capital Group is driven mainly by the failures and outages area, followed by the prices and tariffs.

Customer satisfaction indicator for the business segment

The below figure presents the results of the customer satisfaction survey conducted in the business customers segment with respect to TAURON Capital Group's products and services in 2014-2018.

Figure no. 82. Results of the customer satisfaction survey conducted in the business customers segment with respect to TAURON Capital Group's products and services in 2014-2018

A weakening of ties to TAURON Capital Group can be observed among the business customers. This is reflected in the customer loyalty indicator for TAURON which is significantly lower than in 2017. On the other hand, the satisfaction level is stable. A very high level of satisfaction with the invoices and payments, with the quality of contacts with TAURON, is noteworthy again. It is also visible that the decline of loyalty towards TAURON is not related to a significant drop of the satisfaction factor level as it continues to be relatively stable. Therefore, it should be tied to the market factors, and among them, to the growing competition and a further market liberalization, which means a greater and easier opportunity for a customer to switch an electricity and heat supplier.

Customer satisfaction surveys among the business customers were conducted by the market research agency Kantar TNS S.A. also prior to 2014, however due to the use of a different research method it is not possible to compare the results of that research with the results of the surveys conducted after 2014.

Customer satisfaction indicator for the small and medium size enterprises segment

The below figure presents the results of the customer satisfaction survey conducted in the small and medium size enterprises segment with respect to TAURON Capital Group's products and services in 2011-2018.

Figure no. 83. Results of the customer satisfaction survey conducted in the small and medium size enterprises segment with respect to TAURON Capital Group's products and services in 2011-2018

									10 IDEAL RESULTS
	2018	2017	2016	2015	2014	2013	2012	2011	90- VERY
Settlements and payments	86	89	88	86	86	76	74	71	GOOD 80 RESULTS GOOD
Failures and outages	78	80	74	71	77	71	67	64	RESULTS 70- RESULTS NOT
Loyalty indicator	74	75	76	73	76	67	୧୧	60	QUITE 60- SATISFACTOR®
CSI indicator	73	71	73	70	72	65	63	57	50 Rathe
Customer service	70	ea	76	76	76	70	69	ട്ട	40- LOW
Image	67	69	71	67	ਦਰ	63	ਦਰੇ	51	RESULTS 30-
Prices and tariffs	62	70	ед	60	62	ટેટ	53	45	much 20- er

A slight increase of the level of satisfaction with the cooperation (interaction) with TAURON can be observed among the small and medium size enterprises segment customers, while the loyalty level declined slightly. The level of customer satisfaction is driven, first of all, by the customer service, and, to a slightly lesser degree, by the other areas (image, prices and tariffs, failures and outages, and settlements and payments).

Customer loyalty indicator

Apart from the above customer satisfaction surveys TAURON Capital Group is also independently testing the level of customer loyalty indicator (NPS). As part of this research the evaluated customer loyalty level is composed of several areas of business contacts between customers and TAURON Capital Group.

The below table presents NPS metric levels for TAURON Capital Group in its individual business contacts areas per quarter in 2018.

Table no. 59. NPS¹ metric levels for TAURON Capital Group in individual areas per quarter in 2018

Area surveyed	Q1 2018	Q2 2018	Q3 2018
Connections	43	40	50
Agreements	45	42	50

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

<-- PDF CHUNK SEPARATOR -->

Area surveyed	Q1 2018	Q2 2018	Q3 2018
Settlements (billing)	-	48	62
Complaints	-	- 6	2
Collection	32	19	39
In person	-	79	59
By phone	-	20	24
On-line (e-mail)	-	25	24

¹NPS (Net Promoter Score) metric is a tool used to measure customer loyalty level. The maximum point score of the NPS metric is 100, while the minimal value -100. The higher the value the higher degree of loyalty.

Participation of the personnel in the customer communications training

The below table presents the level of participation of the personnel of TAURON, TAURON Sprzedaż, TAURON Obsługa Klienta and TAURON Ciepło in the e-learning training, related to the products and services offered, conducted in 2018.

Table no. 60. Level of participation of the personnel of TAURON, TAURON Sprzedaż, TAURON Obsługa Klienta and TAURON Ciepło in the e-learning training, related to the products and services offered, conducted in 2018

Subsidiary name	Number of employees who completed training	Percentage of employees who completed training	Number of employee who did not begin training
TAURON	387	74.20%	134
TAURON Sprzedaż	245	75.15%	81
TAURON Obsługa Klienta	1917	68.17%	895
TAURON Ciepło	523	63.78%	297

The review of the results presented in the above table indicates that the percentage of persons who completed this training is much higher than it would seem necessary based on the purely process needs, related to the training for the commercial services personnel. This indicates a high level of TAURON Capital Group's responsibility for the product knowledge and competence of all of its personnel.

Indicators related to TAURON Capital Group's environmental activities

Indicators related to the reduction of emission of pollutants to the atmosphere

TAURON Capital Group is achieving higher reduction of emission of pollutants to the atmosphere than required by the legal standards.

The below table presents the estimated levels of NOX, SO2, dust and CO2 emissions from fuel combustion for electricity generation purpose for selected TAURON Capital Group's subsidiaries in 2017.

The below table presents the level of emission of pollutants to the atmosphere as a percentage versus the standards in force.

Table no. 61. Level of emissions to the atmosphere in percentage, generated by TAURON Capital Group as compared to the standards in force in 2018

Subsidiary name	Emission of SO2	Emission of NOX	Emission of dust
TAURON Wytwarzanie (conventional power plants)	36.6% less	12.7% less	71.9% less
TAURON Ciepło (conventional combined heat and power plants)	28.1% less	46.4% less	61.9% less

In order to maintain and further improve the values provided in the above table TAURON Capital Group is taking actions aimed at improving energy efficiency by reducing or not increasing the degree of fuel and energy consumption as well as by monitoring impact on climate. This will be described in detail in TAURON Group's 2018 Integrated Report.

Indicator related to minimizing the negative impacts on the environment

TAURON Capital Group is monitoring on an ongoing basis the main aspects of the direct and indirect impact of its operations on the natural environment.

The below table presents the levels of emissions of NOX, SO2, dust and CO² for 2018 from thermal combustion of fuels for selected TAURON Capital Group's subsidiaries.

Table no. 62. Annual emissions of NOX, SO2, dust and CO² for 2018 from thermal combustion of fuels for selected TAURON Capital Group's subsidiaries

#	Subsidiary name	Emission of SO2 (Mg)	Emission of NOX (Mg)	Emission of dust (Mg)	Emission of CO2 (Mg)
1.	TAURON Wytwarzanie including:	9 584	10 948	477	12 665 705
	Oddział Jaworzno III	2 837	4 197	108	5 461 358
	Oddział Łaziska	2 328	2 327	123	3 154 175
	Oddział Łagisza	1 503	2 197	76	2 268 234
	Oddział Siersza	1 819	1 303	104	1 373 302
	Oddział Stalowa Wola	1 097	924	66	408 636
2.	TAURON Ciepło, including:	3 288	1 579	240	1 944 422
	ZW Bielsko-Biała	947	300	39	494 612
	ZW Kamienna Góra	40	18	5	15 542
	ZW Katowice	1 476	644	129	921 915
	ZW Tychy	521	509	16	426 764
	CC Olkusz	155	42	7	37 113
	CC Zawiercie	111	39	10	33 543
	Other (local heating facilities)	38	27	34	14 933
3.	KW Czatkowice	3.14	5.2	11.7	5 002
	Total	12 875	12 532	729	14 615 129

The below table presents the forecast charges for the business use of the environment due for 2018 at selected TAURON Capital Group's subsidiaries. The values provided may be subject to minor changes due to the ongoing, at the time of drawing up this report, process of filing the reports on the use of the environment to the competent authorities.

Table no. 63. Forecast charges for the business use of the environment by TAURON Capital Group's subsidiaries due for 2018

#	Subsidiary name	Charges for the business use of the environment due for 2018 (PLN '000)
1.	TAURON Wytwarzanie	18 474
2.	TAURON Wydobycie	14 706
3	TAURON Ciepło	3 986
4.	TAURON Dystrybucja	158
5.	KW Czatkowice	51
6.	TAURON Obsługa Klienta	2,7
7.	TAURON EKOENERGIA	403
8.	TAURON Sprzedaż	< 0,8
	Total	37 781

Indicators related to the Work and Health Safety (WHS) area

As part of its steadfast drive to reduce the number of accidents TAURON Capital Group is intensifying its activities aimed at promoting safe behavior at work place, and TAURON Capital Group's individual subsidiaries are conducting numerous information and education campaigns.

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

The below table presents TAURON Capital Group's personnel accident rates in 2018.

Table no. 64. Personnel accident rates (accident frequency) at TAURON Capital Group by gender (Injury rate - IR) in 2018

Injury rates in persons	Women	Men
Employee accidents:	14	199
Fatal accidents at work	-	1
Minor accidents at work	13	189
Severe accidents at work	-	3
Collective (group) accidents	1	6
Frequency of accidents1	0.5	7.7
Severity of accidents2	55.0	70.2

¹Accident frequency rate = (number of accidents at work x 1000) / average headcount in 2018

²Accident severity rate = Total number of days of inability to work by persons injured in accidents at work / Number of persons injured in accidents at work (excluding casualties in fatal accidents)

The below table presents a percentage of employees of the external companies who completed the WHS training at TAURON Capital Group's selected subsidiaries.

Table no. 65. Percentage of employees of the contractors and subcontractors who completed the WHS training at TAURON Capital Group's individual subsidiaries

TAURON Group's subsidiary:
KW Czatkowice1	100%
TAURON Wydobycie1	100%
TAURON Wytwarzanie2	16%
TAURON Dystrybucja Serwis	67%
TAURON Dystrybucja Pomiary	84%
TAURON Serwis	38%

¹ At KW Czatkowice and TAURON Wydobycie due to the nature of their operations each employee of an external company, prior to commencing work, takes part in the training with respect to the safety regulations as well as work health and safety principles, including safety of performing the activities entrusted thereto.

² At TAURON Wytwarzanie (similar as at TAURON Ciepło) based on internal regulations training of external companies' security personnel with respect to threats to safety and health at a work place and internal regulations (other staff of external companies take part in indirect training that the subcontractors are obligated to organize).

11.4. Description of TAURON Capital Group's key policies applied in 2018 and the results of the application thereof

To unify the activities conducted and also to precisely define the objectives and periodically monitor the degree (progress) of the implementation thereof the Management Board of TAURON in 2017 adopted for use throughout TAURON Capital Group the following Policies:

• TAURON Group's Customer Oriented (PRO-customer) Social Policy (PRO-customer Social Policy),
• TAURON Group's Diversity Policy (Diversity Policy),
• TAURON Group's Environmental Policy (Environmental Policy),
• TAURON Group's Human Rights Respect Policy (Human Rights Respect Policy),
• TAURON Group's Anticorruption Policy (Anticorruption Policy),
• TAURON Group's 5) Work Health and Safety (WHS) (WHS Policy).

At the same time TAURON Capital Group is implementing the Code of Conduct of TAURON Group's Business Partners (Counterparties), setting the directions for conduct within a responsible supply chain. The document meets the requirements of the supply chain management policy.

The documents ensure the compliance of TAURON Capital Group's operations with the requirements defined in art. 49 b, clauses 2 and 3 of the act on accounting. They also represent an important element in conducting transparent communications policy with numerous stakeholders of TAURON Capital Group that may study the reports on the implementation thereof that are published annually.

Furthermore, TAURON Capital Group is implementing TAURON Group's 2017-2025 Sustainable Development Strategy, adopted by the Company's Management Board on August 1, 2017 that had been developed based on the Strategy.

Each of the above documents contains an exhaustive description of the activities undertaken by TAURON Capital Group's subsidiaries in order to accomplish the intended goals in the given area. The following subsections present the main principles, methods and tools implemented by TAURON Capital Group as part of the individual policies and the results of the application thereof in 2018.

PRO-customer Social Policy

PRO-customer Social Policy was developed based on the assumptions of TAURON Group's 2017-2025 Sustainable Development Strategy. One of the leading directions of the above document is orientation towards the customer and his/her needs.

TAURON Group's Customer Oriented (PRO-customer) Social Policy is aimed at developing appropriate organizational and business conditions required for achievement of the strategic goals of TAURON Capital Group concerning its customer and market environment relations.

The above policy is a collection of main assumptions applied in the customer sales and service process. It defines measures taken by TAURON as part of a customer dialogue, stresses the importance of building long lasting relations both with the customers as well as with the market environment, and it also defines the responsibilities lying on the company's side with respect to its customers.

By implementing the assumptions of the Customer Oriented (PRO-customer) Social Policy TAURON Capital Group is responding in the best possible manner to customer needs, focusing its efforts on the following principal issues:

• making sure the highest standards are met in the relationships with the customers, based on transparency, mutual respect and trust,
• surveying customer opinions (feedback), experiences and expectations,
• continuous bi-directional communications, based on a dialogue,
• responding to customer needs through a clear offering, satisfying their needs and meeting expectations.

TAURON Capital Group is trying to understand customer needs, deriving knowledge from the consumer surveys conducted. Periodical actions are taken through which TAURON is testing its customers' expectations and experiences. Such an approach constitutes a foundation for developing long lasting relationships, based on respect and trust. Such actions are supported by simplifying the communications and training dedicated to the personnel that communicates with the customers every day.

Procedures and internal regulations

Making sure that the communications with the customers is clear and transparent takes the key place as part of the due diligence procedures functioning as part of the PRO-customer Social Policy.

In order to implement the procedure the formal and legal documents, messages and letters addressed to the customers were substantially simplified. The cooperation with the Simple Polish Language Practice (Pracownia Prostej Polszczyzny), that provided training for the personnel dealing directly with customer service with respect to simplifying the official language, was launched. Language consultants that perform the role of simple communications ambassadors at TAURON Capital Group were selected.

The following action were taken as part of implementing the PRO-customer Social Policy:

• a) in April 2018 the Policy was published in 400 copies in the form of a brochure available both in a hard copy as well as in an electronic version available over the internet,
• b) knowledge base under the name "Customer Voice"("Głos Klienta") was launched in the intranet, available for all of the employees of TAURON Capital Group, containing the information on the current PRO-customer actions, content expanding

the personnel's knowledge and awareness with respect to customer orientation, best practices in relations with customers and building positive experiences in contacts with the TAURON brand,

c) e-learning training on products and services offered was conducted for the personnel of TAURON, TAURON Sprzedaż, TAURON Obsługa Klienta and TAURON Ciepło.

Actions taken and results obtained

The below table presents the survey carried out at TAURON Capital Group in 2018 as part of the due diligence procedures.

Table no. 66. Survey carried out by TAURON Capital Group in 2018 as part of the due diligence procedures

Subject of the survey	Time when the survey was conducted
Customer expectations towards products, including:
"Turn on the light" ("Włącz prąd")	March 2018
Photovoltaics	June and August 2018
Smart heating control	June and August 2018
Smart Professional Smart Home	June and August 2018
Air cleaner	August 2018
Customer satisfaction with the services provided by TAURON Capital Group's partners with respect to selling a heating devices offering	March 2018
Evaluation of the new service of playing music using a web application	June 2018
Customer awareness with respect to:
Smart Home smart devices, offered by TAURON	May 2018
TAURON Capital Group's products	April 2018
Monitoring of integrity (coherence) and transparency of the marketing communications, including in particular the communications related to the new products and offerings, including:
Surveys to check effectiveness of campaigns and campaign spots "Smart 500" and the "Mój TAURON""My TAURON" campaign	November 2018
Surveys to check familiarity with the offering	1st stage December 2017, 2nd stage December 2018
Survey to check awareness of product possession by a customer (quantitative surveys)	April 2018

As part of the due diligence procedures also educational activities addressed to the disadvantaged groups, first of all customers sensitive to energy pricing and seniors, were conducted.

The below table presents educational activities carried out by TAURON Capital Group in 2018 as part of the due diligence procedures.

Table no. 67. Educational activities carried out by TAURON Capital Group in 2018 as part of the due diligence procedures

Information campaigns	Activities conducted as part of the campaign
"A senior means respect" ("Senior znaczy szacunek") – touching upon such issues as dishonest electricity salespersons and customer rights, consumer awareness, modern technology awareness, physical activity, health, comparing of offerings	10 episodes of the radio theater on Polish Radio One
	competition promoting radio theater "Złote lata"("Golden years")
	6 events "Miasteczko Seniora"("Senior's Little City")
	10 lectures at the Third Age Universities (Uniwersytety Trzeciego Wieku)
"Action – reaction" ("Akcja – reakcja") – involving warning actions, conducted in a specific area. Campaign based on information materials "If you do not know	approx. 400 posters
	16 mobile billboards at 32 parishes

Information campaigns	Activities conducted as part of the campaign
– do not open" ("Nie znasz – nie otwieraj") and "TAURON does not make house calls" ("TAURON nie chodzi po domach")
Campaign "Make smart choices" ("Wybieraj mądrze"), carried out in cooperation with Poland's largest utilities by the Electricity Trading Association (Towarzystwo Obrotu Energią), aimed at promoting knowledge of the electricity market and raising awareness of the activities of companies that employ dishonest market practices	Commercial spots on 60 nationwide and regional radio stations
	Press advertisements in 18 nationwide and regional papers
	Advertisements in the city transportation company, social media and on YouTube
"If you do not know – do not open" ("Nie znasz – nie otwieraj") – the	6 press advertisements in 6 papers
campaigns warns against dishonest electricity salespersons, encouraging to contact the hot line	Messages in radio spots at 16 radio stations, on posters and in social media

Diversity Policy

Diversity and openness, defined in TAURON Group's Code of Responsible Business Conduct, are an integral part of TAURON Capital Group's business operations. TAURON Capital Group. TAURON Capital Group takes note of the differences among the people within the organization and outside, and it is consciously implementing and developing policies and programs that create conditions for respecting and taking advantages of such differences. The Group applies equal treatment policy and seeks to ensure diversity in terms of gender, education type, age and professional experience with respect to all employees, and in particular the management authorities and its key managers. The diversity policy is also applied in TAURON Capital Group's relationships with external partners, i.e. companies, universities, schools or other entities.

The key assumptions and principal premises applied within the Diversity Policy are:

• developing the work environment based on respect, openness, accuracy and fairness (justice),
• ensuring versatility and diversity, in particular with respect to gender, education, age and professional experience,
• building organizational culture open to diversity, based on the corporate values: Partnership, Development and Courage,
• preventing discrimination by fostering appropriate work atmosphere as well as building and strengthening positive relationships among the personnel.

Procedures and internal regulations

As part of employee related issues supporting the implementation of the directions set by the Diversity Policy, TAURON Capital Group introduced for use the following regulations and training programs:

• 1. Policy of combating Mobbing and Discrimination at TAURON Group, supported by e-learning training, aimed at building and strengthening positive relationships among the Employees and preventing mobbing or discrimination. Additionally, TAURON Capital Group's subsidiaries appointed Ethics Committees with a goal, among others, to enforce observing of ethical principles,
• 1. Training and competence development programs, fostering and supporting creating of the atmosphere for the development of each employee, including, among others:
  2. Talent Management Program, aimed at supporting the process for developing personnel and taking advantage of their potential,
  3. Internal Coaches Program and Internal Coach Academy Program, providing broad access to knowledge for all employees, and also developing the culture of sharing knowledge and experience.
• 1. Regulations ensuring fairness and objectivity with respect to work organization and compensation, including, among others:
  2. TAURON Group's Compensation Principles,
  3. Policy for Human Resource Management at TAURON Group,
  4. regulations with respect to benefits (entitlements), including, among others, programs dedicated to pregnant women, persons at an age close to retirement or working mothers,
  5. flexible forms of work time and possibility to work remotely.
• 1. Programs and regulations dedicated to women, ensuring equal opportunities for them and support in combining professional life with private life,
• 1. TAURON Capital Group's Subsidiaries Personnel Recruitment, Selection and Adaptation Policy,
• 1. TAURON Group's Competence Model.

Actions taken and results obtained

By implementing the Diversity Policy TAURON Capital Group provide the work environment based on respect and fairness (justice), within which each employee may fully realize his/her individual potential. The initiatives undertaken promote corporate values: Partnership, Development and Courage among the personnel and provide the tools for effective management of diverse teams in order to gain synergy stemming from actions taken by such teams.

One of the priorities in 2018 was to develop inter-generational dialogue and promote the age management and knowledge management idea.

The following initiatives were implemented in 2018 as part of implementing the Diversity Policy:

• "Audit of the generation gap" ("Badanie luki pokoleniowej") project

The generation gap is a lack of significant and key from TAURON Capital Group's competences, with the main reason being the age of employees and the prospect of their retirement, as well as the situation on the labor market in Poland, related to the demographics factors and changes with respect to vocational education. To be able to identify a potential threat of the generation gap, at the end of 2017 and at the beginning of 2018 the first audit of the generation gap at TAURON Capital Group was conducted. The audit indicates that the generation gap at TAURON Capital Group will, first of all, be applicable to the Distribution, Mining and Generation lines of business.

The consequence of the completed audit is the undertaking of a number of initiatives by TAURON Capital Group with their goal to eliminate or mitigate the risk related to a lack of professionals needed to ensure the continuity of the main production processes. Such activities are aimed, first of all, at replacing the key positions in the area of TAURON Capital Group's key operational and management processes and preventing long lasting recruitment and adaption (induction) as a result of a lack of availability of competences on the labor market.

• Patronage classes

The identified lack of availability of employees with the required professional qualifications on the labor market is one of the reasons for which TAURON Capital Group is actively extending cooperation with vocational schools and is getting engaged in the activities supporting preparation of well qualified professionals. One of the dimensions of the cooperation with vocational schools is the creation of the so-called patronage classes with the goal to provide support for vocational education in the professions that are key for the organization and to promote hiring by TAURON Capital Group's subsidiaries after completing the education. In 2018 TAURON signed agreements for the launch of further 21 patronage classes, covering already 47 classes in total with its patronage. Creating patronage classes is in line with TAURON Capital Group's cooperation with the Ministry of National Education related to providing support for vocational education and adapting it to the development challenges and the labor market needs.

• Implementation of the EU funded project with respect to the dual education

In September 2018 TAURON and the Ministry of National Education signed an agreement for the implementation of the project under the name: "Developing a model of the vocational and practical education program in the electric and power sector" within the scope of the Operational Program Knowledge Education Development (Program Operacyjny Wiedza Edukacja Rozwój - PO WER) as part of activity 2.15 Vocational education and training adapted to the needs of the changing economy. The project constitutes a form of actively joining the sustainable development strategy with respect to the dual education. 100 vocational or practical education schools and centers, providing education in the electric and power sector professions nationwide, are engaged in the project.

Participation in the project "Katowice the City of Professionals" ("Katowice Miasto Fachowców")

Katowice the City of Professionals is a local project to which TAURON was invited to actively support the development of modern vocational training. The goal of the project was, among others, to encourage young people facing the decision to choose a further education path to undertake education at the 1st degree technical and sector schools, making them aware of professional prospects related to vocational and technical education as well as raising the level of knowledge and social awareness with respect to the dual education system. The project recipients included 150 persons.

• Apprenticeships and internships

TAURON Capital Group is systematically building its position and brand among students and graduates of secondary schools and universities and thus it is making young people active and encourages them to cooperate under the program of apprenticeships and internships. As a result of participating in the program of apprenticeships and internships, students and graduates may better get to know the TAURON brand, specifics of work in the selected area and gain the first professional experience. 748 persons took part in the program of apprenticeships and internships at TAURON Capital Group in 2018. The apprenticeships and internships organized by TAURON meet both the current personnel needs, as well as take into account the long term employment plans for TAURON Capital Group's individual business units. Furthermore, in response to the needs and expectations of the students and graduates in 2018 another edition of the "Join us" ("Przyłącz się") internship program was launched with the goal to prepare the most gifted students of the domestic universities to enter the job market.

• TAURON Group's Ambassador Program

In November 2018 the 2nd edition of TAURON Group's Ambassador program was launched with its goal to engage students in the process of building a positive image of TAURON Capital Group in the academic community and to get top students and graduates interested in the internship, apprenticeship and job offering. In the 2018/2019 academic year - 9 Ambassadors from partner universities are performing their own promotional activities at their universities. 16 Ambassadors took part in the 1st edition of the program.

• Satisfaction survey – implementing improvement initiatives

The results of the satisfaction survey of TAURON Capital Group's personnel, conducted in 2017 became a starting point for developing action plans with the goal to increase job satisfaction. The improvement plans were developed by TAURON Capital Group's individual subsidiaries and focused on improving those indicators that the employees of the given subsidiary were least satisfied with and maintaining a high level of the other indicators. The key initiatives undertaken in 2018 by the subsidiaries were related to improving the communications area within teams that cooperate with one another every day, as well as enhancing the communications process on significant initiatives or changes occurring in the given subsidiary or in TAURON Capital Group. As part of the key initiatives several dozen actions were performed in total in the individual subsidiaries.

• Development actions dedicated to the management personnel

In 2018 a number of development programs dedicated to the management personnel were carried out with the goal to strengthen management competences. In September workshops for TAURON Capital Group's management personnel and members of the Social Council were held during which the participants were enhancing their competences with respect to management and communications as well as developing commitment using the existing resources (tools, processes and teams). As part of developing management competences 28 managers, representing TAURON Capital Group's subsidiaries, began Master of Business Administration in Corporate Management studies, with their curriculum adapted to the specifics of the power sector and including a number of topics related to legal, financial, economic aspects and subjects related to ethics, communications and personal development.

Furthermore, an in-house PRoM training program was launched at TAURON Ciepło with the idea to select Internal Coaches from among the directors and engaging them in conducting a series of training courses with respect to strategy, communications, management styles and change management for the N-2 and N-3 level personnel. More than 100 employees took part in the training courses in total.

• POWER of the Generations (MOC Pokoleń) Conference

In November 2018 the POWER of the Generations (MOC Pokoleń) Conference was held, with the main goal to draw the attention of TAURON Capital Group's management personnel to the challenges related to managing multi-generation teams and to provide tools and inspiration on how to use the enormous capabilities of such teams. During the conference, with 545 participants, awareness among the leaders and members of the multi-generation teams was developed with respect to the essence of the clear principles of efficient

cooperation within a team, proper and precise delegating of tasks, patience in learning one another, expressing appreciation for the tasks completed, taking advantage of the teams' diversity to develop the best ideas, building a conviction within a team that everyone is looking at the world differently, which allows for reducing the risk of errors and increasing the chances of success as well as mutual respect, in accordance with the idea that every generation has something strong to offer.

• TAURON Group Open University

TAURON Group Open University is a cycle of lectures conducted since 2014 by the most outstanding experts specializing in various disciplines of science, politics, business, culture and personal development. Through participation in the lectures employees have access to the current knowledge and information. In addition, this initiative allows to create a platform for the exchange of ideas and experience among employees from various companies

In 2018 the 20th anniversary lecture of TAURON Group Open University was held with its topic related to the generation gap at TAURON Capital Group and the cooperation within inter-generation teams. The speech was related to efficient "Inter-generation Communications". In 2018 three more lectures were given with their topics related to cybersecurity, rationality of the decisions made and safety in the mountains.

• Promotion of health and healthy lifestyle

Taking care of its personnel TAURON Capital Group invests in medical care, implements pro-health programs aligned to the needs of its personnel and promotes healthy lifestyle. The idea behind these activities is the "work-life balance" as an active attempt to support the personnel by providing them with tools and services to help balance, handle and manage stress, arising in a demanding professional environment and permeating into private life.

• Mother is working (Mama pracuje)

In 2018 an in-house motherhood support program "Mother is working" ("Mama pracuje!" was launched by TAURON Dystrybucja, TAURON Dystrybucja Serwis and TAURON Dystrybucja Pomiary. The program is addressed to the women raising kids up to six years of age and pregnant women employed by the Distribution Segment's subsidiaries, and its main goal is to provide support for combining motherhood with professional work, raising the work comfort for future mothers, increasing the number of women returning to work after giving birth to a child and enabling women during a maternity leave and a child care leave an ongoing contact with the work place.

The implemented program also responds to the challenges related to seeking to attain gender equality and strengthening the position of women in professional life.

TAURON Group's environmental policy

The Environmental Policy defines TAURON Capital Group's approach to the management of the issues related to the impact made by its operations on the natural environment, including the direction of its environmental activities and the principles it will follow in environment related matters. The environmental policy is the benchmark for assessing all of the activities of TAURON Capital Group's subsidiaries in the area of environment protection and environmental management.

The Environmental Policy documents the values and the vision followed by TAURON Capital Group with respect to making an impact on the natural environment.

The main principle of the Environmental Policy is to limit both the direct, as well as the indirect impact on the environment and to conduct responsible communications, ensuring the understanding of the operations of TAURON Capital Group that may impact the environment.

TAURON Capital Group, in accordance with the regulations and administrative practices in force on the territory of its operations, takes into account the needs related to environmental protection and acts in way that contributes to accomplishing a broader objective, which is sustainable development, and in particular the implementation of the closed circuit economy (the so-called circular economy).

Procedures and internal regulations

Due to diverse production and service profiles of TAURON Capital Group's subsidiaries, the individual subsidiaries have a diversified impact on the environment. Therefore the principles of TAURON Group's Environmental Policy are passed in the individual internal documents of the individual subsidiaries in a way corresponding to their role in the group's value system.

The Environmental Policy adopted on July 17, 2017 constitutes a document related to the Asset Management Mega-process, as part of TAURON Capital Group's process based management.

Documents related to the scope of the Environmental Policy are available to all the participants of the process:

• 1) Asset Management Policy,
• 2) Documents functioning under the names "environmental policy" or other applicable compilations in the individual Lines of Business in which the values / visions that the given TAURON Capital Group's subsidiary is guided by with respect to its impact on the environment are documented.

Tools that support the implementation of the Environmental Policy are:

• established short and long term environmental goals,
• ensuring the information flow and integration of the method of TAURON Capital Group's internal and external communications,
• ongoing operational oversight,
• motivational system,
• information activities,
• supporting initiatives reaching outside TAURON Capital Group (indirect impact),
• supporting the works in the area of research and development aimed at reducing the negative impact on the environment,
• internal and intra-corporate regulations.

Each of the Group's lines of business feature different specifics that is reflected in the internal regulations. Examples of such documents are:

• procedures within the Integrated Management System ISO,
• waste handling manual,
• plans of reactions to environmental risk,
• hazardous substances and mixtures handling principles,
• Coal Mines'' operation plans.

Actions taken and results obtained

In 2018 the existing system for monitoring data that enables evaluating adequate and up to date information on the impact of TAURON Capital Group's subsidiaries on natural environment. The ongoing monitoring of the key environmental indicators enables setting measurable project goals and improving actions taken for the benefit of the environment.

The mutual exchange of good environmental practices within TAURON Capital Group's subsidiaries was implemented and as a result the verification of the progress with respect achieving environment related goals is performed.

In case of significant impact of the process applied or investment projects implemented on the environment, in order to reduce the effects of such impact relevant assessments of such impact on the environment are prepared at TAURON Capital Group.

TAURON Capital Group's subsidiaries have emergency action plans aimed at preventing, reducing and auditing the serious effects of environmental impact related to its operations, including also accidents and extraordinary situations, and also mechanisms for the forthwith reporting of such situations to the applicable institutions.

TAURON Capital Group is taking actions in order to improve energy efficiency.

The general direction of TAURON Capital Group's environmental actions includes minimizing the negative impact on the environment taking into account the environmental impact taking into account the sector's specifics, technical advancements and access to environmentally friendly technologies.

As part of asset management TAURON Capital Group maintains appropriate technical condition of the environment protection installations, implemented thereby in the previous years, and optimizes the operation thereof.

In 2018 measures taken by TAURON Capital Group aimed at limiting the environmental impact included, among others:

• implementation of the protective strip (buffer zone) at Brzeszcze Coal Mine (TAURON Wydobycie),
• modernization of the water and sewage management system at ZW Tychy (TAURON Ciepło),
• partial replacement of the overhead lines with cable lines (TAURON Dystrybucja),
• continued modernization of assets and infrastructure aimed at protecting the soil and ground water environment:
  • equipping the transformer stations with oil pans or replacing transformers with the "dry" transformers that do not pose a threat to the environment (TAURON Dystrybucja, TAURON Wytwarzanie),
  • auxiliary systems: modernization of the chemicals unloading station, sealing the residual fuel oil (mazut) tanks spillage bunds with geomembrane (TAURON Wytwarzanie).
• continuing the "Our Stork" ("Nasz Bocian") campaign from the previous years, i.e. the construction of successive stork nest poles (platforms) and performing necessary maintenance of existing nest poles (TAURON Dystrybucja
• completing the alteration of the dumping station including the new dust removal system (KW Czatkowice),
• modernization of the heating system including liquidating the transmission heating network along with the boiler room fired with coal dust and installing a gas network infrastructure and local gas-fired boiler rooms with capacity adjusted individually to the heat demand of the heated facilities (KW Czatkowice),
• "Cleaning the Pilchowice Pond" ("Sprzątanie Zalewu Pilchowickiego") campaign,
• numerous thermal modernizations and modernizations of the ventilation and air conditioning installations in the existing facilities.

The majority of TAURON Capital Group's production comes from the traditional power generation based on solid fossil fuels, however TAURON Capital Group includes in its main production volume the high efficiency electricity and heat generation through cogeneration and supplements its offering with electricity generated from renewable sources (hydroelectric power plants and wind farms, as well as biomass-fired sources) or in gas-fired generation. This is reflected in the structure of obtained property rights related to the certificates of origin of electricity produced.

The below figure present the structure of property rights related to the certificates of origin obtained by TAURON Capital Group in 2018.

Figure no. 84. Structure of property rights related to the certificates of origin at TAURON Capital Group in 2018

Figure no. 85. Certificates of origin (MWh) at TAURON Capital Group in 2018

Management of by-products

In order to take care of the natural environment TAURON Capital Group minimizes the quantity of waste deposited in the environment by bringing it to the market to be used as substitutes for natural materials.

4.4 million Mg of the process by-products, coming from thermal combustion and mining of coal, was generated in 2018, with as much as 46% of that quantity brought to the market as full value products to be used, among others, in the construction, road building, mining or agricultural sector. The balance of the waste was handed over to further authorized recipients with whom TAURON Capital Group's subsidiaries have agreements in place that guarantee its further economic utilization.

In 2019 TAURON Capital Group did not deposit a single ton of waste at the dumping sites.

Waste generated is used primarily in such sectors as: construction, road building and mining. It is also broadly used by cement and concrete plants. It was also used as the material for reclamation of unfavorably transformed areas.

The below figure presents the structure of bringing to the market ashes, sludge, gypsum and aggregates generated by TAURON Capital Group in 2018.

Figure no. 86. Structure of bringing to the market ashes, sludge, gypsum and aggregates generated by TAURON Capital Group in 2018

TAURON Capital Group is seeking to implement the model of closed circuit (circular) economy. It is planned that the maximum of generated process waste is used within TAURON Capital Group, consequently reducing the consumption of natural resources and the product's carbon footprint.

This way in 2018 more than 180 000 Mg of the process by-products, coming from thermal combustion and mining of coal, was used within TAURON Capital Group for its own needs .

The below figure presents the sample interdependencies as part of implementing the principles of the circular economy within TAURON Capital group in 2018.

Figure no. 87. Sample interdependencies as part of implementing the principles of the circular economy within TAURON Capital group in 2018

TAURON Group's Human Respect Policy

TAURON Group's Code of Responsible Business Conduct indicates that TAURON Capital Group is guided by the principle of equal treatment of employees and does not tolerate discrimination on any basis, in particular due to age, gender, race, nationality, religion, sexual orientation, appearance, fitness or different views. The aim of the Policy of Respect for Human Rights is to present the principles of TAURON Capital Group regarding respect for human rights and actions taken to prevent their violation and to support the atmosphere of dignity and mutual respect in the workplace

The policy defines the principles of TAURON Capital Group dedicated to respecting and protecting human rights, including, among others:

• prohibition of mobbing and discrimination,
• prohibition of slavery and forced labor,
• ban on employing children and minors,
• freedom of association,
• observing employment and remuneration conditions,
• work health and safety (WHS),
• employee engagement (commitment),
• countering cases that involve violations of human rights

Furthermore, the regulation also defines TAURON Capital Group's rules dedicated to the human rights respect and protection with respect to interacting with the stakeholders, in particular counterparties (business partners, contractors) and business partners, as well as with respect to local communities

Procedures and internal regulations

The basic regulations related to the Policy of Respect for Human Rights at TAURON Capital Group are TAURON Group's Code of Responsible Business Conduct and Policy for Countering Mobbing and Discrimination at TAURON Group. In accordance with the provisions of the Policy of Respect for Human Rights, every employee, counterparty (business partner, contractor) and an external entity / business partner is required to:

• respect and promote respect for human rights and ensure their protection,
• refuse to participate in any situations that may involve a violation of human rights, mobbing and discrimination, and unequal treatment.

Each employee should pay attention to signals and circumstances that may potentially suggest the possibility of unequal treatment. If such doubts arise, employees should report them via communications channels defined in TAURON Capital Group's procedures, in particular in the above mentioned TAURON Group's Code of Responsible Business Conduct and Policy for Countering Mobbing and Discrimination at TAURON Group.

The communications channel enabling employees to provide information in a confidential and anonymous way is the Abuse Reporting Form, available on the website https://www.tauron.pl/tauron/o-tauronie/formularz-zgloszenia-naduzycia.

Actions taken and results obtained

In order to comply with ethical principles, the Ethics Committees established at TAURON Capital Group's 15 subsidiaries are appointed to review any potential violations of the rules. The new employees of TAURON Capital Group are informed of the human rights respect issues and of the possibility of reporting violations in this area.

Several dozen trade union organizations that associate about 70% of employees are operating within TAURON Capital Group. Additionally, in order to ensure proper dialogue and exchange of experience, the Social Council of TAURON Polska Energia SA Capital Group was established, which represents several dozen trade union organizations.

The introduction of the Policy of Respect for Human Rights at TAURON Capital Group contributes to raising awareness of respect for human rights and promoting their protection.

TAURON Group's anticorruption policy

One of the main principles of TAURON Group's Code of Responsible Business Conduct is the implementation of a zero tolerance policy towards abuse, including corruption, fraud and other illegal activities. These issues are regulated in detail by the Anticorruption Policy. The document defines acts of corruption and other practices contrary to the legal regulations in force, internal regulations and corporate regulations of TAURON Capital Group as well as ethics. The document also defines the obligations relating to countering corruption, potential areas of corruption risk as well as the warning signals the employees should be paying attention to in their daily work.

The main objective of the Anti-Corruption Policy introduced is::

• countering and mitigating the risk of corruption actions as well as other abuses at TAURON Capital Group,
• transparency of actions towards external entities,
• informing of possible ways of reporting abuse.

Procedures and internal regulations

In accordance with the provisions of the Anti-Corruption Policy, every employee and external entity are required to:

• promote integrity and transparent conduct in the course of performing current duties,
• not to promise, not to offer, not to hand over any benefits,
• not to accept any benefits,
• refuse to participate in any situations / projects that may involve tender collusion or requesting benefits.

Each employee should pay attention to signals that indicate that someone may commit corruption or other abuses, and in the event of their occurrence, report via the communications channels specified in the Anti-Corruption Policy

In order to ensure efficient and safe reporting of any irregularities by employees, associates, counterparties (contractors), business partners and stakeholders, an Abuse Reporting (Notification) Form has been created at TAURON Capital Group that enables information to be provided in a confidential manner and ensuring complete anonymity, available at https://www.tauron.pl/tauron/otauronie/formularz-zgloszenia-naduzycia.

The provided information on incorrect behavior allows to identify incorrect events and take necessary corrective actions to exclude the possibility of similar events occurring in the future.

Actions taken and results obtained

In 2018 an anti-corruption campaign was conducted at TAURON Capital Group under the slogan "We play fair play!" ("Gramy fair play!"). The goal of the campaign was to provide information on the policy of zero tolerance towards corruption and other abuses. As part of the campaign, through the Coordinators of Compliance at TAURON Group, approximately 500 posters, 1 300 brochures and about 2 000 gadgets related to the activities carried out were distributed. The information on the activities carried out was published on the intranet site of TAURON Capital Group, as well as sent to employees via e-mail correspondence. As part of preventive measures, TAURON Group's Compliance Coordinators took part in practical workshops simulating audits at the Company. In 2018, the Compliance Team started a series of direct training courses at the offices of TAURON Capital Group's subsidiaries. By the end of 2019 such training course are planned for the entire Group. The issues of countering corruption at TAURON Capital Group are also introduced to the new employees of TAURON.

The introduction of the Anti-Corruption Policy at TAURON Capital Group contributes to raising awareness with respect to identifying cases of corruption activities and promoting integrity and transparent conduct.

TAURON Group's WHS Policy

The employees of TAURON Capital Group are a key group of stakeholders. The important aspects in this area are issues related to ensuring their safety at the work place. This is reflected in TAURON Group's 2017-2025 Sustainable Development Strategy, as well as in the Work Health and Safety (WHS) Policy established on the basis of that document.

The Work Health and Safety (WHS) Policy is a set of regulations aimed at continued improvement of work (occupational) health and safety standards. By applying the provisions provided therein TAURON Capital Group steadfastly seeks to eliminate work related accidents as well as minimize the occurrence of occupational diseases and the number of potentially accident prone incidents.

The safety of employees, customers, contractors, guests and the other stakeholders is an absolute priority that has a significant impact on the decisions and actions taken by TAURON Capital Group's subsidiaries.

The policy defines the principles of operation, as well as the rules of conduct that serve the implementation of four basic goals with respect to work health and safety (WHS), i.e.:

• eliminating accidents at work of all employees and employees working for the benefit of TAURON Capital Group's subsidiaries and any other persons in the area where the subsidiaries are conducting their operations,
• ensuring optimal working conditions for all employees and those working for TAURON Capital Group
• improving the qualifications of employees of TAURON Capital Group aimed at increasing competences with respect to improving their safety and the safety of employees and people who are in the area of their work,
• improving an effective work health and safety (WHS) management system.

Procedures and internal regulations

Work Health and Safety (WHS) Policy is the overarching document describing the uniform system of occupational health and safety at TAURON Capital Group.

As part of the Group's Work Health and Safety (WHS) Policy, each of the subsidiaries, due to the specifics of its operations, has its own regulations in this area, which are fully compliant with the requirements and applicable laws. In addition, the work health and safety (WHS) regulations are adapted to the nature of the work and tasks performed. At companies whose operations profile involves production and distribution, i.e. TAURON Wydobycie, TAURON Wytwarzanie, TAURON Ciepło, KW Czatkowice, TAURON EKOENERGIA and TAURON Dystrybucja – the issues related to the protection of the health and life of employees have a special meaning, which is expressed in extended safety systems, as well as inspections of working conditions, compliance with the work health and safety regulations and rules at individual work stations

In accordance with the Work Health and Safety (WHS) Policy the WHS rules are valid for all persons staying at TAURON Capital Group's sites. External entities that carry out work at the Group's subsidiaries are obliged to comply with the applicable procedures, including with respect to health and safety of employees. Employees of external companies (contractors and subcontractors) are also required to have up-to-date medical examinations (clearances) and appropriate qualifications and authorizations for the works performed. Some of TAURON Capital Group's subsidiaries (especially those where work conditions are particularly dangerous) also introduce additional requirements and training for external entities.

The most important documents regulating health and safety at work are the Integrated Work (Occupational) Safety and Health Management System at TAURON Wydobycie, Work (Occupational) Health and Safety Management Procedures at TAURON Ciepło or the Quality, Environmental Protection and Work Safety Policy at TAURON Wytwarzanie

Actions taken and results obtained

An important element in promoting work health and safety (WHS) rules is continued raising of the awareness of employees and subcontractors with respect to occupational safety, mainly through dedicated training courses, which are conducted in the form of meetings and workshops, and in an interactive form by ways of e-learning platform training. Due to the fact that the best promoters of safe behavior at the work place are employees themselves, subsidiaries organize internal training courses, information campaigns, as well as work health and safety knowledge contests.

TAURON Capital Group's subsidiaries implement a number of initiatives aimed at improving the work health and safety (WHS) rules. In 2018, they included, among others:

• preventive activities with respect to safe organization of work at devices (TAURON Dystrybucja), including: meetings with field electricians and representatives of the contractors,
• involving people holding managerial positions (all levels and areas) in developing the culture of work safety, building engagement and raising employee awareness with respect to labor protection,
• promoting the idea of "Zero accidents at work",
• organizing meetings with the security personnel of external companies cooperating with TAURON Capital Group's subsidiaries,
• systematic work health and safety (WHS) checks at all levels of the organization,
• seeking and implementing new technologies and working methods in terms of work health and safety (WHS),
• information boards on the number of accidents and the number of days without an accident,
• carrying out periodic analyses of the condition of the work health and safety and undertaking corrective actions in the areas with the highest accident rates,
• implementation of the Work Health and Safety (WHS) Improvement Plans,
• a system of additional, periodic training course away from work for selected positions and work places, taking into account the correctness of risk perception, general work health and safety (WHS) rules, the magnitude of occupational risk and the consequences of non-compliance with the work health and safety (WHS) rules and supported by examples of actual accident events,
• professional adaptation program for the newly hired employees, ending with the assessment of the employee's suitability to work at a given work place,
• informing employees with respect to work (occupational) health and safety (WHS) with the use of available forms of communications (boards and information and warning signs), including by means of multimedia messages using available monitors and large screens,
• introducing modern forms of employee training and popularizing knowledge with respect to work (occupational) health and safety (WHS) with the use of multimedia materials,
• conducting Voluntary (Social) Work Conditions Reviews at all TAURON Capital Group's subsidiaries
• organizing at all Branches of TAURON Wytwarzanie the WHS Knowledge Competition for employees,
• organizing Sports and Fire Protection Competition in TAURON Wytwarzanie,
• additional training in first aid for all the newly hired employees,
• reviewing roads and passageways with respect to safe movement.

The above actions significantly influence the employee accident rates at TAURON Capital Group. Their results also include the percentage of employees of external companies trained with respect to the work (occupational) health and safety (WHS) at selected TAURON Capital Group's subsidiaries.

Code of Conduct for the Counterparties (Business Partners) of TAURON Group's Subsidiaries

An important initiative implemented at TAURON Capital Group within the framework of a responsible supply chain is the inclusion of the sustainable development criteria in the procurement management standard.

TAURON promotes the idea of social responsibility among its suppliers, wants to cooperate with counterparties (contractors) who respect human rights and act in accordance with legal regulations, ensure safe and dignified working conditions and apply not only the highest ethical standards, but also care for the natural environment. The CSR criteria are defined and collected in a single document, i.e. the Code of Conduct for Counterparties (Business Partners, Contractors) of TAURON Group's Subsidiaries. From December 2017, it is a mandatory criterion used in the process of Counterparties' (Business Partners', Contractors') qualifications. The Code is a binding standard within the Capital Group, promoting responsibility among stakeholders and encouraging the implementation of responsible practices among suppliers.

Procedures and internal regulations

The purpose of the Code of Conduct for Counterparties (Business Partners, Contractors) of TAURON Group's Subsidiaries is to define uniform standards and transparent rules of conduct within the framework of business conducted by the Subsidiaries, in particular with respect to the relations with Counterparties (Business Partners, Contractors).

The Code is used in the relations with Counterparties (Business Partners, Contractors) of TAURON Capital Group's subsidiaries and it is applicable to all employees, members of the management board and oversight authorities of subsidiaries, as well as proxies and power of attorneys.

The document covers the principles with respect to the employee related area (including safety and health of work, discrimination, personnel policy, forced labor, employment of children and minors), natural environment (environment protection, responsible resource management), contacts with the environment (stakeholders) (among others fair competition, countering fraud, information security and protection, investor relations).

In connection with the above the documents related to the Code are:

• TAURON Group's Code of Responsible Business Conduct ,
• Policy of Respect for Human Rights at TAURON Group,
• TAURON Group's Anti-Corruption Policy,
• Procedure for assessing the credibility of Counterparties (Business Partners, Contractors) of TAURON Polska Energia SA,
• rules for organizing projects in cooperation with external entities at TAURON Capital Group,
• Regulations for the award of orders (contracts) at TAURON Group.

Actions taken and results obtained

A counterparty (business partner, contractor) that participates in the proceedings organized by TAURON Capital Group's subsidiaries is obliged to submit a declaration confirming that it has studied TAURON Group's Code of Responsible Business Conduct and complies with its provisions. The above statement is posted on the Company's website at

http://swoz.tauron.pl/platform/HomeServlet?MP\_module=main&MP\_action=publicFilesList.

11.5. Key CSR projects implemented at TAURON Capital Group in 2018

In 2018, TAURON Capital Group implemented initiatives addressing issues important from the point of view of the inhabitants of the south of Poland (Upper Silesia, Lower Silesia, Opole region, Małopolska). The Company's original project under the name of TAURON Energetyczny Junior Cup was carried out as part of the celebrations of the 100th anniversary of Poland regaining independence. It was a series of tournaments in which one hundred children's football clubs took part. TAURON Energetyczny Junior Cup was held under the patronage of the Minister of Sports and Tourism, the Minister of Energy and the governors of Małopolska and Silesia.

In 2018, the campaign under the name of "Energy of good words" ("Energia dobrych słów") was also carried out. As part of the project the employees of the organization recorded fairy tales for children at the radio station's studio. The audiobook was released on a CD in three thousand copies, and then distributed to hospitals and children's hospices operating in the south of Poland.

The activities undertaken by TAURON Capital Group's individual subsidiaries are also noteworthy.

TAURON Dystrybucja has been running an educational program for children and youth under the name "TAURON fuses. Turn it on for the good of the kid"("Bezpieczniki TAURONA. Włącz dla dobra dziecka"), whose main goal is to educate the youngest with respect to learning the principles of safe use of electricity. From 2017, the program has been implemented based on a modern multimedia educational platform. Teachers can take advantage of 10 lesson scenarios for all primary school grades free of charge, students can watch interesting films about electricity, solve quizzes or play a game with a power sector employee in the lead role. Educational films are adapted to the needs of students with disabilities. The program also includes educational activities with the participation of scientists.

In the area of corporate social responsibility, TAURON also cooperates with external partners. A large part of TAURON Capital Group's area of business operations covers mountains (highlands), so a cooperation with the Foundation of the Mountain Volunteer Rescue Service allows for better identifying of the challenges facing customers living in these areas, and at the same time it enables education with respect to improving safety in the mountains. TAURON Capital Group also cooperates with the SIEMACHA Association, one of the leading non-government organizations in Poland, focused on implementing projects in such areas as upbringing, sports and therapy that provides systemic help to children and youth. As part of the cooperation TAURON Capital Group took patronage over the sports activities of the association, acquiring the title of "TAURON - a sports partner of SIEMACHA" ("TAURON sport partner SIEMACHY"). In 2018, such projects as "Football Children's Day with TAURON" ("Piłkarski Dzień Dziecka z TAURONEM") and "Juliada" were supported.

One of the directions of CSR is a social-business partnership. Since 2017, projects related to employee volunteering have been implemented within its framework.

The operations of TAURON Foundation are an important element of TAURON Group's CSR strategy . In 2018, the Foundation pursued its goals - in particular by supporting natural persons and legal entities, institutions and organizations in their activities that are in line with the Foundation's objectives - by donating PLN 3 933 777.79.

TAURON Foundation also carries out charitable projects. In 2018, together with TAURON and TAURON Dystrybucja, it carried out the fourteenth edition of the campaign under the name "Positive Energy Houses" ("Domy Pozytywnej Energii"). The campaign is addressed to the 24-hour care and education centers operating in the following regions: Lower Silesia, Opole, Silesia, Lesser Poland and Podkarpacie. The main objective of the campaign is to improve the living conditions of children from orphanages by supporting their education, opening perspectives and development in the environment. Since the refreshment of the campaign's formula, i.e. from 2011 to 2018, 566 orphanages took part in the campaign (in 2018, 43 outlets).

TAURON Capital Group is a signatory of the Responsible Energy Declaration, containing the principles of sustainable development in the energy sector in Poland. In 2013, the Company also joined the group of entities that signed the business declaration for sustainable development, thus committing itself to the implementation of the strategic goals of the "Vision for sustainable development for the Polish business 2050".

11.6. Sponsoring activities

In 2018, TAURON Capital Group's sponsoring activities were conducted based on the Plan of conducting the sponsoring activities by TAURON Group in 2018, adopted by the Management Board and granted a positive opinion by the Supervisory Board.

The main objective of TAURON Capital Group's sponsoring activities is to support its business goals defined in TAURON Group's 2016-2025 Strategy.

The sponsoring activity was carried out based on negotiated agreements, containing standardized provisions. In 2018, the introduction of bonuses for the achieved promotional result was started in the sponsorship agreements, making the payment of significant parts of the remuneration dependent on the measurable effectiveness of the contracts performed

Moreover, this activity was monitored, analyzed and reported on an on-going basis, through detailed reports on the implementation of sponsoring agreements, surveys and analyses conducted in quarterly, 6-month and annual cycles by specialized external entities and the oversight performed by TAURON Capital Group's subsidiaries that carry out sponsoring activities (in 2018: TAURON Sprzedaż and TAURON)..

In accordance with the implemented procedures, the effectiveness of the conducted activities was assessed by means of opinion polls, measuring the size and value of the brand's exposure in the media in the context of conducted activities, as well as measuring the impact on pro-sales attitudes with reporting of the results achieved.

An independent research entity initially estimated the resulting advertising equivalent in relation to the activities completed in 2018 as a result of the measurement of promotional effectiveness. Comparing the summarized value obtained in this way to the sum of all expenditure arising from sponsoring agreements the ROI ratio at a level of approximately PLN 6. was obtained. It means that each zloty (PLN) spent for that purpose generated promotional benefits to TAURON Capital Group whose preliminary value is independently estimated at approximately PLN 6.

The confirmation of the financial effectiveness of the activities conducted is the high positioning of TAURON brand in an independent research report, Sponsoring Monitor 2018. According to this report, TAURON is ranked eighth in the TOP 10 list of sponsors overall. Several hundred brands were classified in the ranking, which is the result of opinion polls. TAURON achieved a very good result, taking the highest position in the ranking among competitors. Due to the relatively low level of sponsorship spending by TAURON Capital Group, the position in this ranking can be seen as high.

In 2018, the sponsorship activity covered a total of 24 projects with 20 counterparties (business partners, contractors). Preliminary data on the advertising equivalents achieved regarding the activities completed in 2018 indicate that the best results were achieved by such activities as Tour de Pologne, Polish Ski Association and TAURON Speedway Euro Championship. Among the projects with their status in progress, which is understood as contracts that were concluded but not completed, activities such as the sponsoring of TAURON Arena Kraków were characterized by a strong potential.

11.7. Description of material risks related to TAURON Capital Group's operations that may have an adverse impact on the policies applied by TAURON Capital Group, as well as the description of the management of such risks

As part of the risk management process employed by TAURON Capital Group, risks related to the operations of its subsidiaries that could have an adverse impact on the social, employee related, natural environment, respect for human rights and anticorruption issues, as well as on the policies employed by TAURON Capital Group, were identified.

In accordance with the regulations in force, that are presented in detail in section 3 of this report, for every identified risk its Risk Owner is appointed and made responsible for this risk management, risk records (data sheets) are developed containing descriptions of the mitigation measures undertaken, risk measurement parameters and early warning indicators are defined and in particular cases separate risk response and backup plans are developed. These risks are included in the risk model that defines the categories of risks present in TAURON Capital Group's operations.

The most significant risks faced by TAURON Capital Group include: social risk, human capital management risk, WHS risk, internal communication risk, environmental risk, procurement process risk, legal risk and compliance risk.

The below table presents the description of risks related to TAURON Capital Group's operations that could have an adverse impact on the policies employed by TAURON Capital Group and the description of reactions applied with respect to such risks.

Table no. 68. Risks related to TAURON Capital Group's operations that could have an adverse impact on the policies employed by TAURON Capital Group and the description of reactions applied with respect to such risks

#	Risk name	Risk description	Reaction to risk
1.	Social risk	The risk includes a failure to meet customer service standards, to deliver on sales agreements, external communications and marketing activities and the personal	• Adoption and execution of Customer Oriented Social Policy.

#	Risk name	Risk description	Reaction to risk
		data protection related risk. Risk materialization could result in loss of reputation and customer trust, customer disputes, non-achievement of goals including sales targets and possible penalties for legal noncompliance concerning personal data protection.	• Conducting a dialogue with customers, including customer satisfaction surveys, tailoring the product offering to their needs, looking after high customer service levels. • Building relations with the customers and market environment. • Responsibility for the product including quality and security of supply, tailoring the product offering to customer needs. • Customer personal data privacy and security protection. • Implementing tools supporting execution of customer focused social policy. • Standardization of customer agreement templates and their adaptation to legislation changes and optimization of sales and service processes. • Delivery of promotional activities in line with the adopted TAURON brand strategy and TAURON Group sponsoring strategy for 2018-2025, taking into account respect for human rights and conducting responsible marketing
2.	Human capital management risk	Risk relating to employee issues including diversity, inclusion, employment conditions and respect of right of association, capital management, career paths and recruitment management, training system, work health and safety management. Risk materialization results in employee complaints, collective disputes, strikes, loss of specialized staff and problems with its restoration.	• Adoption and execution of the Employee Recruitment, Selection and Adaptation Policy. • Adoption and execution of the Counter Mobbing and Counter Discrimination Policy. • Looking after development of employee competences, including through participation in trainings. • Holding consultations with social organizations within TAURON Capital Group. • Execution of the staffing policy based on the Competence Model and Rules of Compensation, and Rules of Work. • Adoption and implementation of the Diversity Policy. • Adoption and implementation the Human Rights Respect Policy.
3.	Work Health and Safety (WHS) risk	Risk relating to ensuring health and safety at work. Risk materialization result is employee injury, health loss or excessive employee exposure to hazards.	• Prioritization of employee, customer, contractor and stakeholder safety in the business activities performed. • Adoption and execution of the Work Health and Safety Policy of the TAURON Group. • Ensuring optimal working conditions. • Raising employee qualifications with respect to work safety improvements. • Conducting trainings, implementation and improvement of WHS management system. • Popularizing (spreading, promoting) the culture of safety among the workforce based on the published materials on specific subjects.
4.	Internal communication risk	Risk relating to assuring optimal and effective communication within TAURON Group and transmission of honest information to employees of TAURON Capital Group while observing confidentiality of sensitive information. Risk materialization result is a loss of trust in the employer, increased social unrests, loss of reputation and negative impact on the TAURON brand.	• Building relations with the social side at the TAURON Capital Group and close cooperation with the Social Dialogue Spokesperson. • Use and development of available communications tools to provide significant information to the employees of the TAURON Capital Group. • When providing significant information – organization of fact to face meetings of the management staff with the employees. • Ongoing monitoring of situation and events at companies of the TAURON Capital Group that could result in social unrests. • Regular meetings with the representatives of companies dealing with internal communication to exchange information. • Developing the Communication Strategy for the TAURON Group.
5.	Environmental risk	Risk relating to impact of business operations on natural environment and the use of its resources, pollution control and prevention, protection of water sources and waste management. Risk materialization result is a degradation of natural environment and penalties for failing to meet environmental requirements, the need to remedy them, to limit production, possibility of benefiting from subsidy programs and loss of image of the TAURON Capital Group.	• Adoption and implementation of Environmental Policy of the TAURON Group. • Conducting business operations impacting the natural environment according to sustainable development principles. • Identification of areas of environmental impact and assuring the operation of the TAURON Capital Group in compliance with the environment protection laws. • Continuing development of knowledge and environmental responsibility culture among the employees, customers and business partners of the TAURON Capital Group.

#	Risk name	Risk description	Reaction to risk
			• Seeking solutions aimed at implementing circular economy principles at the TAURON Capital Group and actively seeking technical and organizational solutions that minimize the negative impact of operations on the environment. • Improvement of energy efficiency and efficient water management. • Offering products / services that take into account the aspect of limiting the negative environmental impact. • Promoting conservation of nature and relevant collaboration with local government and central government administration bodies.
6.	Procurement process risk	Risk relating to the exercised procurement procedures, taking into account prevention of violation of human rights by business partners, countering corruption and fraud in procurement processes and observing ethical and moral standards in their progress. Risk materialization result are non-optimal purchase contracts, need to annul tendering procedures, loss of image of the TAURON Capital Group and credibility to stakeholders	• Adoption and implementation of the Code of Conduct of Counterparties (Business Partners) of the TAURON Group. • Adoption and execution of the Anticorruption Policy of the TAURON Group. • Adoption and execution of the Human Rights Respect Policy. • Standardization of the principles of conducting procurement processes and their transparency. • Building lasting business partner relationships based on trust and mutual respect. • Expecting the business partners to observe the legal regulations, ethics standards and fair trading practices, including work health and safety, prevention of discrimination and unequal treatment, respecting employee human rights and dignity, transparent HR policy, environment protection, fair competition, fraud prevention and combating, as well as information security and protection. • Use of standard template agreements and standard clauses in contracts providing for respect for human rights by the business partners of the TAURON Capital Group.
7.	Legal risk	Risk relating to non-observance of legal regulations, misinterpretation of new rules and regulations, requirements imposed by the regulator and the supervisory (oversight) bodies	• Ongoing monitoring of the legal environment and amendments to legal regulations, including in scope of social issues, respect for human rights, countering corruption, environment protection and employee issues • Implementation of the required amendments to the in-house regulations. • Appointing working parties tasked with developing and implementing the required changes resulting from the legal environment. • Ongoing cooperation with the bodies supervising the energy market and the capital market. • Consultations with the organizational units (business units) with respect to the projected key regulations for the compliance area. • Training the employees in legal regulations and in-house regulations.
8.	Compliance risk	Compliance risk includes the risk of internal fraud, external fraud and non-ethical conduct. Risk relating to misappropriation or improper use of Company assets, their devastation, abuse of official position for personal gains, acts by third parties aimed at theft, burglary, counterfeiting and related to occurrence of conduct violating generally accepted social coexistence standards, moral standards and mobbing.	• Adoption and implementation of Code of Conduct of Business Partners of the TAURON Group. • Adoption and execution of the Anticorruption Policy of the TAURON Group. • Adoption and execution of the Human Rights Respect Policy. • Adoption and execution of the Counter Mobbing and Counter Discrimination Policy. • Adoption and implementation of the Diversity Policy. • Efficient use within the organization of the system for reporting abuse cases (whistleblowing system), enabling reporting potential abuse cases, the system also enables reporting of abuse cases by external entities via the abuse reporting form on the website http://www.tauron.pl/. • Monitoring of the cooperation with business partners (counterparties) and examining their credibility in cooperation with external entities at TAURON Group. • Promoting best practices, improvement of procedures, conducting trainings and observing the Code of Business Ethics of the TAURON Group and operation of a fraud reporting system. • Building an organizational culture based on values and principles of the TAURON Group

12.OTHER MATERIAL INFORMATION AND EVENTS

12.1. Material proceedings pending before the court, competent arbitration authority or public administration authority

The below table presents material proceedings pending before the court, competent arbitration authority or public administration authority in 2018.

Table no. 69. Summary of material proceedings pending before the court, competent arbitration authority or public administration authority in 2018

Proceedings involving TAURON

#	Parties to the proceeding	Description of the proceedings including the value of the object of litigation and the Company's position
1.	Huta Łaziska S.A. (powód) TAURON (as a legal	Object of litigation: a lawsuit for the payment of compensation for alleged damage caused by non performance by GZE of the decision of the President of ERO of October 12, 2001 related to the resumption of electricity supply to the plaintiff
	successor to Górnośląski Zakład Elektroenergetyczny S.A. and the State Treasury represented by the President of ERO (defendants)	Value of the object of litigation: PLN 182 060 000.00
		Initiation of the proceeding: the lawsuit of March 12, 2007
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
2.		Object of litigation: a lawsuit for the payment due to the Company's alleged unjust enrichment in connection with the settlements related to the non-balancing of the Balancing Market with Polskie Sieci Elektroenergetyczne S.A. between January and December 2012.
	ENEA (plaintiff) TAURON (defendant)	Value of the object of litigation: PLN 17 085 846.49
		Initiation of the proceeding: the lawsuit of December 10, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
3.		Object of litigation: examining the accuracy of the tax base amounts declared by TAURON and the correctness of calculations and payments of the VAT tax for the period from October 2013 until September 2014. The main subject of the three investigations carried out by the Head of the Mazovian Customs and Tax Office are TAURON's deductions of the VAT assessed due to the purchase of electricity by TAURON on the German and Austrian electricity market from the following entities: Castor Energy sp. z o.o. and Virtuse Energy sp. z o.o.
	Head of the Mazovian Customs and Tax Office (authority conducting the investigation) TAURON (party)	Value of the object of litigation (deducted VAT amount): PLN 54 371 306.92, out of which: Castor Energy sp. z o.o. – PLN 52 494 671.92, Virtuse Energy sp. z o.o. – PLN 1 876 635.00
		Date of initiating the proceeding: Castor Energy sp. z o.o. – October 2014 and December 2016, Virtuse Energy sp. z o.o. – December 2016
		Company's position: in the Company's opinion, taking into account all the circumstances of the matter and the rulings of the Court of Justice of the European Union (CJEU), as well as the rulings, positive for the taxpayers, of WSA and NSA, surfacing since the end of 2016, in cases related to the right to deduct VAT in the event of unwitting participation in the missing trader fraud if, during the verification of both

counterparties (business partners, contractors), due diligence was adhered to, the Company acted in good faith and should have the right to deduct the tax assessed on the invoices documenting the electricity purchase from the counterparties (business partners, contractors) Castor and Virtuse.

	arising from the certificates of origin	Lawsuits pertaining to the termination, by the PE-PKH subsidiary, of the agreements related to the sale of electricity and property rights
#	Parties to the proceeding	Description of the proceedings including the value of the object of litigation and the Company's position
4.		Object of litigation: lawsuit for payment of damages and determination of liability for the future.
	Dobiesław Wind Invest sp. z o.o. (plaintiff) TAURON (pozwana)	Value of the object of litigation: PLN 34 746 692.31
		Initiation of the proceeding: the lawsuit of June 30, 2017
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
		Object of litigation: lawsuit for submitting a security (collateral) by establishing an escrow deposit (set aside for a separate consideration outside the proceeding under section 4)
5	Dobiesław Wind Invest sp. z o.o. (plaintiff)	Value of the object of litigation: PLN 183 391 495.00
	TAURON (defendant)	Date of initiating the proceeding: June 30, 2017
		Company's position: the Company considers the claims as being without merit.
		Object of litigation: lawsuit for payment of damages and determination of TAURON's liability for the losses that may arise in the future due to tort, including acts of unfair competition.
6.	Gorzyca Wind Invest sp. z o.o. (plaintiff) TAURON (defendant)	Value of the object of litigation: PLN 39 718 323.00
		Initiation of the proceeding: the lawsuit of June 29, 2017
		Company's position:the Company considers the claims covered by the lawsuit as being without merit.
	Pękanino Wind Invest sp. z o.o. (plaintiff) TAURON (defendant)	Object of litigation: lawsuit for payment of damages and determination of TAURON's liability for the losses that may arise in the future due to tort, including acts of unfair competition.
7.		Value of the object of litigation: PLN 28 469 073.00
		Initiation of the proceeding: the lawsuit of June 29, 2017
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
	Nowy Jarosław Wind Invest sp. z o.o. (plaintiff) TAURON (defendant)	Object of litigation: lawsuit for payment of damages and determination of TAURON's liability for the losses that may arise in the future due to tort, including acts of unfair competition.
8.		Value of the object of litigation: PLN 27 008 100.00
		Initiation of the proceeding: the lawsuit of June 29, 2017
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
	in.ventus sp. z o.o.	Object of litigation: lawsuit for payment of damages and determination of TAURON's liability for the losses that may arise in the future due to tort, including acts of unfair competition.
9.	Mogilno I sp. k. (plaintiff) TAURON (defendant)	Value of the object of litigation: EUR 12 286 229.70 (i.e. PLN 53 587 619.46 at NBP's average exchange rate of June 29, 2018)

Initiation of the proceeding: the lawsuit of June 29, 2018

Company's position: the Company considers the claims covered by the lawsuit as being without merit.

Object of litigation: lawsuit for payment of damages and determination of TAURON's liability for the losses that may arise in the future due to tort, including acts of unfair competition.

Amon sp. z o.o. and Talia sp. z o.o. (formal co-

10.

participation on the	Value of the object of litigation: Amon – PLN 47 556 025.51; Talia – PLN 31 299 182.52
plaintiff's side) TAURON (defendant)	Initiation of the proceeding: the lawsuit of April 30, 2018

Company's position: the Company considers the claims covered by the lawsuit as being without merit.

Proceedings involving TAURON Capital Group's subsidiaries
#	Parties to the proceeding	Description of the proceedings including the value of the object of litigation and the Company's position
1.	Gorzyca Wind Invest sp. z o.o.	Object of litigation: plea to declare the termination, by PE-PKH, of the agreements related to the sale of electricity and property rights arising from the certificates of origin null and void, and to award damages.
	Pękanino Wind Invest sp. z o.o. Dobiesław Wind Invest sp. z o.o. (plaintiff) PEPKH (defendant)	Value of the object of litigation: Gorzyca – PLN 1 141 991.61; Pękanino PLN 39 266 111.02
		Date of initiating the proceeding: Gorzyca – May 18, 2015, Pękanino – May 20, 2018, DWI – May 18, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
		Object of litigation: plea to award damages
	Dobiesław Wind	Value of the object of litigation: PLN 42 095 462.00
2.	Invest sp. z o.o. (plaintiff) PEPKH (defendant)	Initiation of the proceeding: the lawsuit of June 14, 2017
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
3.	Nowy Jarosław Wind Invest sp. z o.o. (plaintiff) PEPKH (defendant)	Object of litigation: plea to declare the termination, by PE-PKH, of the agreements related to the sale of electricity and property rights arising from the certificates of origin null and void, and to award damages.
		Value of the object of litigation: PLN 42 499 627.97
		Initiation of the proceeding: the lawsuit of June 3, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
4.	Amon sp. z o.o. (plaintiff) PEPKH (defendant)	Object of litigation: plea to declare the termination, by PE-PKH, of the agreements related to the sale of electricity and property rights arising from the certificates of origin null and void, and to award damages.
		Value of the object of litigation: PLN 40 478 983.22
		Initiation of the proceeding: the lawsuit of May 22, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.

		Object of litigation: plea to declare the termination, by PE-PKH, of the agreements related to the sale of electricity and property rights arising from the certificates of origin null and void, and to award damages.
5.	Talia sp. z o.o. (plaintiff) PEPKH (defendant)	Value of the object of litigation: PLN 26 769 159.48
		Initiation of the proceeding: the lawsuit of May 21, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
		Object of litigation: plea to declare the termination, by PE-PKH, of the agreements related to the sale of electricity null and void, and to award damages.
6.	Mogilno III Mogilno IV Mogilno V Mogilno VI	Value of the object of litigation: Mogilno III – equivalent of EUR 835 763.25; Mogilno IV – equivalent of EUR 930 395.46; Mogilno V – equivalent of EUR 777 607.28; Mogilno VI – equivalent of EUR 677 738.23 EUR
	(plaintiff) PEPKH (defendant)	Initiation of the proceeding: the lawsuit of May 25, 2015
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.
		Object of litigation: lawsuit for payment of damages
7.	Mogilno I Mogilno II (plaintiff)	Value of the object of litigation: Mogilno I – equivalent of EUR 712 000.75; Mogilno II – equivalent of EUR 753 462.78
	PEPKH (defendant)	Initiation of the proceeding: the lawsuits of November 7, 2018
		Company's position: the Company considers the claims covered by the lawsuit as being without merit.

12.2. Information on agreements concluded by TAURON Capital Group's subsidiaries

12.2.1. Agreements significant for TAURON Capital Group's operations

Conclusion of the coal purchase agreement with Polska Grupa Górnicza S.A.

On January 18, 2018 a coal purchase agreement was signed between the Company and Polska Grupa Górnicza S.A. The subject of the Agreement is the purchase of thermal coal for the production needs of TAURON Capital Group's power generating units. The Agreement was concluded for an indefinite period of time. The estimated value of coal supplies in the 2018-2021 time frame, based on the coal price agreed for 2018, will reach the net amount of approximately PLN 2.15bn.

The coal price was agreed for the first year of the Agreement's term, while in the subsequent years the coal price will be indexed based on the formula included in the Agreement, taking into account changes of the market conditions.

The Agreement provides for liquidated damages in the amount of 10 percent of the value of unrealized deliveries in the given year.

The information on the above event was disclosed by the Company in the regulatory filing (current report) no. 1/2018 of January 18, 2018.

Financing for Elektrociepłownia Stalowa Wola S.A.

On March 8, 2018 r. EC Stalowa Wola signed a loan agreement with BGK and Polskie Górnictwo Naftowe i Gazownictwo S.A.

Under the above mentioned agreement BGK and PGNiG granted EC Stalowa Wola a loan in the amount of PLN 450 million each, to be used to refinance EC Stalowa Wola's debt towards TAURON and PGNiG (PLN 600 million) and to cover new capital expenditures to complete EC Stalowa Wola's project (PLN 300 million). The final loan repayment date is June 14, 2030. The collateral of EC Stalowa Wola's debt towards BGK is, among others, a bank guarantee issued at the Issuer's instruction. The bank guarantee will be renewed annually, and its value will not exceed PLN 517.5 million.

On April 26, 2018 TAURON received from BGK information that all the suspending conditions, specified in the loan agreement concluded between EC Stalowa Wola and BGK and PGNiG had been fulfilled, which enabled the disbursement of the funds under the loan in favor of EC Stalowa Wola.

The above events were described in detail in the regulatory filing (current report) no. 5/2018 of March 8, 2018 and in the regulatory filing (current report) no. 20/2018 of April 26, 2018.

Extension of the bond issue program

On March 9, 2018 the amendment to the agreements related to the bond issue program (Program), i.e. the agency and custody agreement as well as the underwriting agreement, the information on the concluding of which had been disclosed by the Company in regulatory filing (current report) no. 49/2015 of November 24, 2015, was signed. Pursuant to the amendment some banks extended the period of availability of the funds under the Program, and thus the maximum value of the Program:

a) is PLN 6 070 000 000 until December 31, 2020,

b) is PLN 5 820 000 000 until December 31, 2022..

Until December 31, 2020 the Program's amount will not change and it will reach the maximum value of PLN 6 270 000 000. The financing margin under the Program did not change due to the extension completed.

The amendment was signed with the following banks taking part in the Program: Bank Handlowy in Warsaw S.A., BGŻ BNP Paribas S.A., Santander Bank Polska S.A., CaixaBank S.A. (Joint Stock Company) Branch in Poland, Industrial and Commercial Bank of China (Europe) S.A. Branch in Poland, ING Bank Śląski S.A., mBank S.A., MUFG Bank (Europe) N.V., MUFG Bank (Europe) N.V. S.A. Branch in Poland and Powszechna Kasa Oszczędności Bank Polski S.A.

The information on the above event was disclosed by the Company in the regulatory filing (current report) no. 6/2018 of March 9, 2018.

Signing of the transaction documentation related to the investment of the Closed-end Investment Funds managed by Polski Fundusz Rozwoju S.A. (Polish Development Fund) in the Nowe Jaworzno Grupa TAURON subsidiary

On March 28, 2018 the Company, Nowe Jaworzno GT and Fundusz Inwestycji Infrastrukturalnych – Kapitałowy Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (Infrastructure Investments Fund – Non-public Assets Closed-end Equity Investment Fund) and Fundusz Inwestycji Infrastrukturalnych – Dłużny Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (Infrastructure Investments Fund - Non-public Assets Closed-end Debt (Fixed Income) Investment Fund), a part of whose investment portfolio is managed by PFR (Polish Development Fund), signed the transaction documentation defining the terms of the Funds' equity investment in Nowe Jaworzno GT. The transaction documentation includes the Investment Agreement and the Shareholders Agreement, along with appendices thereto, including the drafts of a multi-year Electricity Sale Agreement and a multi-year Coal Sale Agreement that were concluded by the Company and the Nowe Jaworzno GT subsidiary.

Shareholders Agreement defines the principles of corporate governance in the Nowe Jaworzno GT subsidiary. This agreement grants the Funds, among others, a personal entitlement to appoint, suspend in their duties and dismiss one member of the Management Board and one member of the Supervisory Board of the Nowe Jaworzno GT subsidiary. It also defines a catalogue of matters for the completion of which by the Nowe Jaworzno GT subsidiary a unanimous resolution of the Management Board, the Supervisory Board or the General Meeting of Shareholders of the company will be required.

Investment Agreement defines the terms and conditions of the Funds' equity investment in the Nowe Jaworzno GT subsidiary. This investment assumes the Funds joining the Special Purpose Vehicle and their participation in the subsequent recapitalizations (financing rounds) of the Nowe Jaworzno GT subsidiary, by taking up the newly created shares in exchange for financial contributions up to the total maximum amount (cap) of PLN 880 000 000, i.e. PLN 440 000 000 by each of the Funds. The Funds' stake in the Nowe Jaworzno GT subsidiary's share capital, as of the day the 910 MW power generating unit in Jaworzno is commissioned, should reach approx. 14%, while the Company's stake shall in no case drop below 50% + 1 share. The Company will be obligated to ensure the Nowe Jaworzno GT subsidiary's recapitalization to the extent required to complete the 910 MW power generating unit's construction project in Jaworzo after the Funds have achieved the equity exposure in the amount equal to the above mentioned maximum level (cap).

The Funds joining the Nowe Jaworzno GT subsidiary was contingent on the fulfillment of specific suspending conditions which were fulfilled by the agreed deadlines.

The information on the above events was disclosed by the Company in the regulatory filings (current reports) no. 25/2017 of June 1, 2017, no. 43/2017 of December 29, 2017 and no. 4/2018 of February 28, 2018.

After all the suspending conditions and formal activities required for the Funds joining had been fulfilled on December 21, 2018 Fundusz Inwestycji Infrastrukturalnych – Kapitałowy Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (Infrastructure Investments Fund – Non-public Assets Closed-end Equity Investment Fund) paid the first tranche of the capital in the amount of PLN 100 000 000.

Concluding of the hard coal sale agreement and electricity sale agreement with Nowe Jaworzno GT

On July 18, 2018 a multi-year hard coal sale agreement was concluded between TAURON and Nowe Jaworzno GT. In accordance with the provisions of the agreement TAURON will be the supplier of hard coal for the needs of electricity production by Nowe Jaworzno GT, including for the needs of the electricity sale agreement mentioned below. The term of the agreement is 30 years, and the base coal shipments size is approx. 1 155 100 Mg/year. TAURON Wydobycie will be the primary supplier of hard coal, while PPG will be a supplementary supplier of hard coal.

At the same time as the above agreement on July 18, 2018 the electricity sale agreement was concluded. In accordance with the provisions of the agreement TAURON will be the primary recipient of electricity. The agreement was concluded for the same period as the hard coal sale agreement.

Concluding of the multi-year hard coal sale agreement and the electricity sale agreement was the precondition for the Funds joining the Nowe Jaworzno GT subsidiary.

The information on the concluding of the above agreements was disclosed by the Company in the regulatory filing (current report) no. 24/2018 of July 26, 2018.

Hybrid bond issue

On December 11 and 13, 2018 the Company and the European Investment Bank (EIB) signed the hybrid bond (subordinated) issue agreements with the total value of PLN 750 000 000.

The detailed information related to the above agreements is provided in section 7.1. of this report.

The information on the above event was disclosed by TAURON in the regulatory filing (current report) no. 36/2018 of December 11, 2018 and in the regulatory filing (current report) no. 37/2018 of December 13, 2018.

Signing of the loan agreement with Bank Gospodarstwa Krajowego

On December 19, 2018 TAURON provided information on signing with BGK of a loan agreement for the amount of PLN 1 000 000 000, the proceeds from which will be used to:

1.refinance the Company's bonds underwritten by BGK in 2014-2015 with maturity dates falling in 2019-2020 (in the total amount of PLN 270 000 000),

1. finance TAURON Capital Group's capital expenditures.

In accordance with the Loan Agreement the funds will be made available by December 31, 2020, and they will be repaid in equal principal installments from 2024 to 2033. The interest rate will be set based on a floating interest rate (WIBOR 6M) increased by BGK's margin.

The signing of the Loan Agreement contributes to strengthening of the Company's financial stability as a result of obtaining a new source of financing and extending the debt maturity date.

The information on the above event was disclosed by the Company in the regulatory filing (current report) no. 38/2018 of December 19, 2018.

12.2.2. Transactions with related entities on terms other than at arm's length

All transactions with related entities are concluded at arm's length.

The detailed information on the transactions with related entities is provided in note 49 of the consolidated financial statements for the year ended on December 31, 2018.

12.2.3. Signed and terminated credit and loan agreements

Working capital credits and short term loans

In accordance with the financing model adopted by TAURON Capital Group, only TAURON may act as a party to working capital credits and short-term loans raised with external institutions.

TAURON Capital Group is using a true cash pooling structure, implemented under the cash management agreement concluded with PKO BP (of December 18, 2017 with the validity term until December 17, 2020). The cash pooling structure is based on daily limits granted to individual participants by the agent managing the service, i.e. TAURON. As a result of implementing the cash pooling mechanism, cash transfers are performed between accounts of participants of the service and the agent's account.

Within the cash pooling structure TAURON uses the following services offered by PKO BP:

• 1. overdraft limit in the amount of PLN 300 000 000, based on the overdraft agreement concluded with the bank in October 2017, with the repayment date falling on December 29, 2020, and
• 1. intraday limit in the amount of PLN 500 000 000, effective until December 17, 2020. The intraday limit is a daily limit which must be fully repaid by the end of each day on which it was used.

As part of financing its ongoing operations the following agreements were also in force in 2018:

• 1. overdraft agreement with BGK, up to the amount of EUR 45 000 000, concluded with BGK in 2016, as subsequently amended, with the repayment date of December 31, 2019. The overdrawn amount is used for financing of the transactions of purchase/ sale/ exchange of CO² emission allowances, trading in electricity and gas made on the European exchanges,
• 1. overdraft agreement concluded with mBank on March 30, 2018 for the amount not exceeding of USD 500 000, to be used for financing the ongoing operations, in particular, for financing the collateral margin and commodity products transactions. The repayment deadline of the loan falls on March 28, 2019.

The purpose of above described foreign currency loans is to mitigate the FX risk related to the trade transactions concluded.

The below table presents a detailed summary of TAURON Capital Group's working capital loan and credit agreements effective as of December 31, 2018, listed according to the repayment date.

Table no. 70. Summary of TAURON Capital Group's working capital loan and credit agreements effective as of December 31, 2018 (listed according to the repayment date)

#	Parties to the agreement	Type of agreement	Interest rate	Amount of credit/loan ('000)	Date of agreement	Repayment date	As of December 31, 2018 ('000)
1.	TAURON – mBank	Overdraft	LIBOR 1M + fixed margin	500 USD	27.03.2018	28.03.2019	204 USD
2.	TAURON – BGK	Overdraft	EURIBOR 1M + fixed margin	45 000 EUR	30.12.2015	31.12.2019	0 EUR
3.	TAURON – PKO BP	Intraday limit	None	500 000 PLN	09.10.2017	17.12.2020	0 PLN
4.	TAURON – PKO BP	Overdraft	WIBOR O/N + fixed margin	300 000 PLN	09.10.2017	29.12.2020	0 PLN

Investment credits and loans

In 2018 TAURON signed with BGK a loan agreement for PLN 1 000 000 000.

The detailed information related to the above agreement is provided in section 12.2.1 of this report.

The below table presents a detailed summary of TAURON Capital Group's investment credit and loan agreements effective in 2018, listed according to the repayment date.

Table no. 71. Summary of TAURON Capital Group's investment credit and loan agreements effective in 2018, (listed according to the repayment date)

#	Parties to the agreement	Interest rate	Amount of credit/loan ('000)	Date of agreement	Repayment date	Balance as of December 31, 2018 ('000)
1.	KW Czatkowice – WFOŚiGW	Floating rate	914 PLN	12.05.2016	31.05.2021	443 PLN
2.	TAURON – EIB	Fixed rate	210 000 PLN	24.10.2011	15.12.2021	63 000 PLN
3.	TAURON – EIB	Fixed rate	300 000 PLN	24.10.2011	15.12.2021	90 000 PLN
4.	TAURON Wytwarzanie – WFOŚiGW	Base rate + fixed margin	40 000 PLN	25.10.2010	15.12.2022	16 000 PLN
5.	TAURON Ciepło - WFOŚiGW	Base rate + fixed margin	30 000 PLN	29.03.2011	30.04.2019	800 PLN
6.	KW Czatkowice - WFOŚiGW	Floating rate	293 PLN	05.11.2018	30.11.2023	288 PLN
7.			900 000 PLN	03.07.2012	15.06.2024	225 000 PLN
8.	TAURON – EIB	Fixed rate	200 000 PLN	03.07.2012	15.09.2024	109 090 PLN
9.			250 000 PLN	03.07.2012	15.09.2024	136 363 PLN
10.	TAURON – EIB	Fixed rate	295 000 PLN	18.07.2014	15.03.2027	250 750 PLN
11.	TAURON – BGK	WIBOR 6M + fixed margin	1 000 000 PLN	19.12.2018	20.12.2033	0 PLN

TAURON Capital Group's subsidiaries did not terminate any credit and loan agreements in 2018.

After the balance sheet date, in January and in February 2019, TAURON drew tranches of BGK loan with total value amounting to PLN 730 000 000.

12.2.4. Loans and sureties granted as well as sureties and guarantees received

Loans granted

In 2018 TAURON granted financing to its co-subsidiary, EC Stalowa Wola, in the form of loans to be used for funding the current operations of EC Stalowa Wola, financing the VAT settlements and financing the agreements with the subcontractors. Furthermore, the agreement consolidating ECSW's debt due to the loans granted to the company before was signed in 2018.

On March 2, 2018 the Company concluded with PGE EJ 1 an agreement on a PLN 4 800 000 loan for the period of 3 years from the date of concluding the agreement, i.e. until March 2, 2021.

The below table presents a summary of Tauron Capital Group's loans granted and effective in 2018, listed according to the repayment date.

#	Parties to the agreement	Interest rate	Date of agreement	Repayment date	Loan amount ('000)
1.	EC Stalowa Wola – TAURON	WIBOR 1M + fixed margin	12.01.2018	28.02.2018.	27 000 PLN
2.	EC Stalowa Wola – TAURON	WIBOR 1M + fixed margin	11.04.2018	30.09.2020	2 650 PLN
3.	PGE EJ 1 – TAURON	Fixed rate	08.11.2017	06.11.2020	2 940 PLN
4.	PGE EJ 1 – TAURON	Fixed rate	02.03.2018	02.03.2021	4 800 PLN
5.	EC Stalowa Wola – TAURON	Fixed rate	28.02.2018	30.06.2033	310 851 PLN
6.	EC Stalowa Wola – TAURON	Fixed rate	30.03.2018	30.06.2033	7 000 PLN
7.	EC Stalowa Wola – TAURON	Fixed rate	19.12.2018	30.06.2033	8 535 PLN

Table no. 72. Summary of Tauron Capital Group's loans granted and effective in 2018, (listed according to the repayment date)

After the balance sheet date, on March 12, 2019 the Company garnted funds to EC Stalowa Wola in the amount of PLN 5 175 000 with repayment date falling on June 30, 2033.

Sureties and guarantees granted

Principles of granting collaterals by TAURON and its subsidiaries are based on the corporate internal regulations in force.

The below table presents a summary of sureties and guarantees granted by TAURON effective in 2018, listed according to the validity date.

#	Beneficiary	Agreement / collateral	Entity whose liabilities constitute the subject of collateral	Liability amount under agreement ('000)	Date of agreement	Validity date
1.	PSG	Guarantee agreement	TAURON Sprzedaż	20 000 PLN	30.03.2016	30.11.2019
2.	GAZ-SYSTEM	Guarantee agreement	EC Stalowa Wola	1 667 PLN	05.12.2017	30.07.2020
3.			Nowe Jaworzno GT	33 024 PLN	29.10.2018	31.12.2020
4.	PSE	Guarantee agreement		33 024 PLN	29.10.2018	31.12.20211
5.				33 024 PLN	29.10.2018	31.12.20221
6.		Guarantee	EC Stalowa Wola	9 959 PLN	08.11. 2018	30.01.2021
7.	BGK	agreement	EC Stalowa Wola	9 959 PLN	08.11. 2018	30.01.20222

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

#	Beneficiary	Agreement / collateral	Entity whose liabilities constitute the subject of collateral	Liability amount under agreement ('000)	Date of agreement	Validity date
8.			EC Stalowa Wola	9 959 PLN	08.11. 2018	30.01.20232
9.	WFOŚiGW	Guarantee agreement	KW Czatkowice	914 PLN	01.06.2016	15.06.2021
10.	WFOŚiGW	Guarantee agreement	KW Czatkowice	293 PLN	05.11.2018	31.12.2023
11.	Funds advisors	Guarantee agreement	Nowe Jaworzno GT	2 500 PLN	29.12.2017	28.09.2025
12.	Bondholders	Corporate guarantee	TAURON Sweden Energy	168 000 EUR	03.12.2014	03.12.2029
13.	Businesses and consumers that concluded an agreement with TAURON Ekoenergia based on the electricity trading license granted by the President of ERO	Corporate guarantee	TAURON EKOENERGIA	16 400 PLN	09.11.2017	31.12.2030
14.	PSE	Guarantee agreement	TAURON Wytwarzanie	5 000 PLN	04.08.2014	indefinitely

¹ Guarantee agreements were released by PSE on 30.11.2018,

²Guarantee agreements were released by BGK on December 7 and December 17, 2018

Besides TAURON the other subsidiaries of TAURON Capital Group did not grant any sureties.

Additionally in 2018 the collaterals granted by TAURON in the form of blank promissory notes (bills of exchange) were valid, as summarized in the following table, listed according to the validity date.

Table no. 74. Summary of blank promissory notes (bills of exchange) granted by TAURON as of December 31, 2018 (listed according to the validity date)

#	Beneficiary	Entity whose liabilities constitute the subject of collateral	Liability amount under agreement ('000)	Validity date
1.	MEN	TAURON	742 PLN	31.03.2020
2.	WFOŚiGW	TAURON Wytwarzanie	40 000 PLN	15.12.2022
3.	WFOŚiGW	TAURON Ciepło	30 000 PLN	15.12.2022
4.	NCBR	TAURON	2 375 PLN	31.07.2024
5.	NCBR	TAURON	1 869 PLN	31.03.2026

After the balance sheet date, i.e. on February 6, 2019, TAURON granted a collateral in the form of a blank promissory note (bill of exchange) for the amount of PLN 2 574 000 to the agreement on a funding to a project under the National Research and Development Center (Narodowe Centrum Badań i Rozwoju).

The following framework (master) agreements concluded by TAURON, under which bank guarantees were issued, were in force in 2018:

1. Framework (master) agreement of June 8, 2015 on a limit on bank guarantees, concluded with Santander Bank Polska S.A., including an amendment extending the effective term of the agreement until June 7, 2019 and an extension option by another 12 months. The limit amount of PLN 150 000 000 to be used by TAURON and its subsidiaries in favor of the beneficiary - Izba Rozliczeniowa Giełd Towarowych S.A. (IRGIT).

2. 1. Framework (master) Agreement of July 12, 2016 on a limit on bank guarantees, concluded with CaixaBank S.A. (Joint Stock Company) Branch in Poland (CaixaBank), under which a limit was granted for the period of 36 months, i.e. until July 11, 2019 . The maximum effective term of the bank guarantees issued within the limit shall not exceed July 11, 2020. The limit to be used by TAURON and its subsidiaries in conjunction with their operations.
3. 1. Agreement of April 4, 2018 on a limit on bank guarantees, concluded with MUFG Bank Ltd, under which a limit was granted for the amount not higher than PLN 517 500 000, to be used to grant a bank guarantee as a collateral for the claims of BGK towards EC Stalowa Wola with the effective term of up to 12 months from the guarantee issue date.

Furthermore, on February 5, 2019 TAURON concluded a new agreement on a limit on bank guarantees with MUFG Bank Ltd, under which an amendment to the bank guarantee in favor of BGK was issued, as a result of which the guarantee amount was raised to PLN 517 500 000 and its effective term was extended until April 11, 2020.

The below table presents a summary of bank guarantees granted under TAURON's framework (master) agreements, effective in 2018, listed according to the validity date.

Table no. 75. Summary of bank guarantees granted under TAURON's framework (master) agreements, effective in 2018 (listed according to the validity date)

#	Bank	Company	Beneficiary	Type of guarantee	Amount ('000)	Validity term
1.	CaixaBank	KW Czatkowice	EDF Fuels	performance bond	187 PLN	12.01.2017 – 30.01.2018
2.	CaixaBank	KW Czatkowice	PGE	performance bond	147 PLN	09.09.2016 – 31.01.2018
3.	CaixaBank	TAURON	PSE	performance bond	4 040 PLN	01.01.2017 – 11.02.2018
4.	Santander Bank	TAURON	IRGiT	accounts payable	20 000 PLN	14.12.2016 – 31.03.2018
5.	Santander Bank	TAURON	IRGiT	accounts payable	30 000 PLN	11.08.2016 – 30.06.2018
6.	CaixaBank	TAURON	PSE	bid bond	12 890 PLN	20.08.2018 – 17.09.2018
7.	CaixaBank	TAURON Dystrybucja	Sosnowiec Municipality	performance bond	53 PLN	06.10.2017 – 06.10.2018
8.	CaixaBank	KW Czatkowice	CEZ Chorzów	bid bond	100 PLN	30.11.2018 – 29.10.2018
9.	CaixaBank	TAURON Dystrybucja Serwis	Serveone Poland	performance bond	229 PLN	22.05.2018 – 31.10.2018
10	CaixaBank	TAURON	GAZ-SYSTEM	performance bond	4 500 PLN	01.12. 2017 – 30.11.2018
11.	CaixaBank	TAURON Wydobycie	PKP	performance bond	103 PLN1	01.01.2017 – 31.12.20181
12.	CaixaBank	TAURON Ciepło	Elektrobudowa	payment	12 300 PLN	02.01.2017 – 31.01.2019
13.	CaixaBank	KW Czatkowice	EDF Paliwa	performance bond	761 PLN	01.07.2017 – 31.01.2019
14.	MUFG Bank Ltd	TAURON	BGK	payment	444 000 PLN	11.04.2018 – 11.04.20192
15.	CaixaBank	TAURON Dystrybucja Serwis	Strabag Infrastruktura Południe	performance bond	116 PLN	09.09.2016 – 15.06.2019
16.	CaixaBank	TAURON Wytwarzanie	Jaworzno Municipality	advance payment refund	36 PLN	30.09.2018 – 31.10.2019

Report of the Management Board on the operations of TAURON Polska Energia S.A. Capital Group for the financial year 2018 This is a translation of the document originally issued and signed in Polish

#	Bank	Company	Beneficiary	Type of guarantee	Amount ('000)	Validity term
17.	CaixaBank	TAURON	GAZ-SYSTEM	performance bond	6 100 PLN	01.12.2018 – 30.11.2019
18.	CaixaBank	KW Czatkowice	PGE GiEK	performance bond	515 PLN	24.10.2017 – 30.01.2020
19.	CaixaBank	Nowe Jaworzno GT	PSE	performance bond	363 PLN	21.11.2018 – 15.02.2020

¹Since January 1, 2019 the agreement performance bond in favor of Polskie Koleje Państwowe S.A. has been in force in the amount of PLN 105 000, validity until December 31, 2019

²Since April 12, 2019 the increased guarantee amount of up to PLN 517 500 000 has been in force, valid until April 11, 2020

Additionally, under TAURON's framework (master) agreements 3 bank performance bonds were issued, effective as of January 1, 2019, as a collateral for the accounts payable of KW Czatkowice for the total amount of PLN 413 000.

Apart from the guarantees issued under TAURON's framework (master) agreements, at the instruction of TAURON Czech Energy banks issued 5 guarantees as collaterals for accounts payable, as summarized in the below table.

Table no. 76. Summary of bank guarantees granted in 2018 at the instruction of TAURON Czech Energy (listed according to the validity date)

#	Bank	Company	Beneficiary	Type of collateral	Amount ('000)	Validity term
1.	PKO BP Czech Branch	TAURON Czech Energy	OTE, a. s.	accounts payable	15 000 CZK	01.06.2018 - 31.05.2019
2.	UniCredit Bank Czech Republic and Slovakia	TAURON Czech Energy	OKTE a.s.	accounts payable	200 EUR	23.11.2018 - 30.06.2019
3.	UniCredit Bank Czech Republic and Slovakia	TAURON Czech Energy	OKTE a.s.	accounts payable	500 EUR	23.11.2018 - 30.06.2019
4.	PKO BP Czech Branch	TAURON Czech Energy	ČEZ, a. s.	accounts payable	30 000 CZK	07.06.2018 - 31.01.2020
5.	PKO BP Czech Branch	TAURON Czech Energy	ČEZ, a. s.	accounts payable	50 000 CZK	10.08.2018 - 31.01.2021

After the balance sheet date, on March 27, 2019 at the request of the Company the bank issued bank guarantee as a collateral for liabilities towards Commodity Clearing House (Izba Rozliczeniowa Giełd Towarowych S.A.) in the amount of PLN 20 000 000 with validity term falling on May 31, 2019.

Additionally, at the request of TAURON Czech Energy the bank issued a guarantee as a collateral for agreements signed with market operator for the amount of up to EUR 500 000 valid in the period from March 21, 2019 to January 31, 2020.

Sureties and guarantees received

The below table presents a summary of collaterals received by TAURON effective as of December 31, 2018.

Table no. 77. Summary of collaterals received by TAURON effective as of December 31, 2018

#	Entity whose liabilities constitute the subject of collateral	Entity issuing collateral	Type of collateral	Amount in currency ('000)	Validity term
1.	Consortium: 1) DGP Clean Partner sp. z o.o., 2) Przedsiębiorstwo Usługowe GOS-ZEC sp. z o.o., 3) Seban sp. z o.o., 4) 7 MG sp. z o.o.,	ING Bank Śląski S.A.	guarantee	29 PLN	01.08.2018- 01.08.2019

#	Entity whose liabilities constitute the subject of collateral	Entity issuing collateral	Type of collateral	Amount in currency ('000)	Validity term
	5) DGP Provider sp. z o.o.
2.	Consortium: 1) DGP Clean Partner sp. z o.o., 2) Przedsiębiorstwo Usługowe GOS-ZEC sp. z o.o., 3) Seban sp. z o.o., 4) 7 MG sp. z o.o., 5) DGP Provider sp. z o.o.	ING Bank Śląski S.A.	guarantee	14 PLN	01.08.2018- 01.08.2019
3.	Consortium: 1) DGP Clean Partner sp. z o.o., 2) Przedsiębiorstwo Usługowe GOS-ZEC sp. z o.o., 3) Seban sp. z o.o., 4) 7 MG sp. z o.o., 5) DGP Provider sp. z o.o.	ING Bank Śląski S.A.	guarantee	15 PLN	01.08.2018- 01.08.2019
4.	Interenergia S.A.	NDI S.A.	corporate guarantee	10 000 PLN	12.10.2009- 06.11.2019
5.	Ernst & Young Audyt Polska sp. z o.o. sp. k.	HSBC Bank Polska S.A.	guarantee	50 PLN	23.10.2018- 15.01.2019
6.	PKP CARGO S.A.	Credit Agricole Bank Polska S.A.	guarantee	2 270 PLN	01.01.2018- 30.01.2020
7.	Consortium: 1) DB Cargo Polska S.A. 2) CTL Logistics sp. z o.o. 3) Rail Polska sp. z o.o.	mBank	guarantee	201 PLN	19.12.2018- 30.01.2020
8.	Consortium: 1) DB Cargo Polska S.A. 2) CTL Logistics sp. z o.o. 3) Rail Polska sp. z o.o.	mBank	guarantee	423 PLN	19.12.2018- 30.01.2020
9.	Rail Polska sp. z o.o.	UNIQA TU S.A.	guarantee	100 PLN	01.01.2018- 30.01.2020
10.	Rail Polska sp. z o.o.	UNIQA TU S.A.	guarantee	212 PLN	26.01.2018- 30.01.2020
11.	Consortium: 1) DB Cargo Polska S.A. 2) CTL Logistics Sp. z o.o. 3) Rail Polska sp. z o.o.	SOPOCKIE TOWARZYSTWO UBEZPIECZEŃ ERGO HESTIA S.A.	guarantee	201 PLN	01.01.2018- 31.01.2020
12.	Consortium: 1) DB Cargo Polska S.A. 2) CTL Logistics sp. z o.o. 3) Rail Polska sp. z o.o.	SOPOCKIE TOWARZYSTWO UBEZPIECZEŃ ERGO HESTIA S.A.	guarantee	423 PLN	01.01.2018- 31.01.2020
13.	Polenergia Obrót S.A.	Bank Polska Kasa Opieki Spółka Akcyjna	guarantee	750 EUR	23.10.2015- 31.03.2021

Management Board of the Company

Katowice, March 29, 2019

Filip Grzegorczyk - President of the Management Board	…………………………………
Jarosław Broda - Vice President of the Management Board	………………………………….
Kamil Kamiński - Vice President of the Management Board	………………………………….
Marek Wadowski - Vice President of the Management Board …………………………………

Appendix A: GLOSSARY OF TERMS AND LIST OF ABBREVIATIONS

The glossary of trade terms and the list of abbreviations and acronyms most commonly used in this report is presented below.

Table no. 78. Explanation of abbreviations and acronyms as well as trade terms used in the report

#	Abbreviation and trade term	Full name / explanation
1	ARE	Agencja Rynku Energii S.A. with its seat in Warsaw
2	BGK	Bank Gospodarstwa Krajowego with its seat in Warsaw
3	Biomasa Grupa TAURON	Biomasa Grupa TAURON sp. z o.o. with its seat in Stalowa Wola
4	Bioeko Grupa TAURON	Bioeko Grupa TAURON Sp. z o.o. with its seat in Stalowa Wola
5	B2B	B2B (business-to-business) an acronym denoting transactions between two or more business entities
6	CC	Central heating plant (Centralna Ciepłownia) in Olkusz or Zawiercie
7	Cash pooling	Cash pooling used by the Company – the consolidation of balances of bank accounts through physical transferring of cash from the accounts of TAURON Capital Group's subsidiaries in the bank in which cash pooling is operated to the bank account of the Pool Leader whose function is performed by the Company. At the end of each working day, cash is transferred from the bank accounts of TAURON Capital Group's subsidiaries which show positive balance to the bank account of the pool leader. At the beginning of each working day the bank accounts of TAURON Capital Group's subsidiaries are credited from the bank account of the pool leader with the amount required to maintain the financial liquidity of the TAURON Capital Group's subsidiary on the given working day.
8	Color certificates	Property rights resulting from the certificates of origin of electricity generated in the way subject to support, the so-called colored certificates: green - certificates of origin of electricity from RES, violet - certificates of origin of electricity generated in co-generation fired using methane released and captured during underground mining works in active, in liquidation or liquidated hard coal mines, or using gas obtained from biomass processing, red - certificates of origin of electricity from co-generation (CHP certificates - Combined Heat and Power), yellow - certificates of origin of electricity generated in co-generation from gas-fired sources or with the total installed capacity below 1 MW, blue - certificates of origin of electricity generated from agricultural biogas. White - energy efficiency certificates (mechanism stimulating and forcing pro-savings behaviors)
9	CIRS	Transaction involving a swap between counterparties (business partners, contractors) of interest payments assessed on amounts denominated in various currencies and determined according to various interest rates
10	CSI	Customer Satisfaction Index – index used in marketing to determine the level of customer satisfaction with the products or services offered by a company
11	CSR	Corporate Social Responsibility
12	CUW	Shared Services Center (Centrum Usług Wspólnych - CUW), e.g. CUW R – accounting services, CUW HR – human resources services
13	DM	Brokerage House (Dom Maklerski)
14	Best Practices 2016	Best Practices of WSE Listed Companies 2016, in force as of January 1, 2016
15	EBI	European Investment Bank with its seat in Luxembourg
16	EBIT	Earnings Before Interest and Taxes
17	EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization

#	Abbreviation and trade term	Full name / explanation
18	EC Stalowa Wola/ECSW	Elektrociepłownia (Combined Heat and Power Plant – CHP) Stalowa Wola S.A. with its seat in Stalowa Wola
19	EEC Magenta ASI	EEC Magenta limited liability company ASI limited joint stock partnership with its seat in Warsaw
20	EEC Magenta 2 ASI	EEC Magenta limited liability company 2 ASI limited joint stock partnership with its seat in Warsaw
21	ENEA	ENEA S.A. with its seat in Poznań
22	ENERGA	ENERGA S.A. with its seat in Gdańsk
23	Ericsson	Ericsson sp. z o.o. with its seat in Warsaw
24	EU ETS	European Union CO2 Emission Trading System
25	EUA	European Union Allowance - an allowance to introduce the carbon dioxide (CO2) equivalent to the air, within the meaning of Article 2 section 4 of the Act of July 17, 2009 on the management system of emissions of greenhouse gases and other substances, which is used for settlements of emission level within the system and which can be managed under the rules provided in the Act of April 28, 2011 on the system of greenhouse gases emission allowances trading (Journal of Laws No. 122, item 695)
26	EUR	Euro - a common European currency introduced in some EU member states
27	GAZ-SYSTEM	Transmission Pipelines Operator GAZ-SYSTEM S.A. with its seat in Warsaw
28	GPW (WSE)	Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.) with its seat in Warsaw
29	TAURON Capital Group	TAURON Polska Energia S.A. Capital Group
30	GZE	Górnośląski Zakład Elektroenergetyczny S.A. with its seat in Gliwice
31	IRGIT	Izba Rozliczeniowa Giełd Towarowych S.A. with its seat in Warsaw
32	IRS	Interest Rate Swap, one of basic derivatives that is the subject of trading on the interbank market
33	KGHM	KGHM Polska Miedź S.A. with its seat in Lubin
34	KIC InnoEnergy	Knowledge and Innovations Community KIC InnoEnergy with its seat in Cracow
35	Audit Committee	Audit Committee of the Supervisory Board of TAURON Polska Energia S.A.
36	Nominations and Compensation Committee	Nominations and Compensation Committee of the Supervisory Board of TAURON Polska Energia S.A.
37	Strategy Committee	Strategy Committee of the Supervisory Board of TAURON Polska Energia S.A.
38	BAT conclusions	Best Available Techniques with respect to large combustion plants (LCP), introduced by way of the Executive Decision of the European Commission (EU) no. 2017/1442of July 31, 2017
39	KPI	Key Performance Indicators, financial and non-financial indicators used as ways to measure progress of achieving goals of an organization
40	KSE	National Power System (Krajowy System Elektroenergetyczny)
41	Ksh	Code of Commercial Companies
42	KW Czatkowice	Kopalnia Wapienia (Limestone Mine) "Czatkowice" sp. z o.o. with its seat in Krzeszowice
43	Business Model	Document entitled TAURON Group's Business and Operational Model (which is an update of TAURON Group's Business Model adopted by the Management Board on May 4, 2016)
44	mBank	mBank S.A. with its seat in Warsaw
45	Mg	Mega gram – million grams (1 000 000 g) i.e. a ton
46	MSR	CO2 Emission Allowances Market Stability Reserve
47	IFRS	International Financial Reporting Standards
48	Nowe Jaworzno GT	Nowe Jaworzno Grupa TAURON sp. z o.o. with its seat in Jaworzno
49	NCBR	National Research and Development Center (Narodowe Centrum Badań i Rozwoju) with its seat in Warsaw

#	Abbreviation and trade term	Full name / explanation
51	OPEC	Organization of the Petroleum Exporting Countries with its seat in Vienna
52	DSO (OSD)	Distribution System Operator (Operator Systemu Dystrybucyjnego)
53	TSO (OSP)	Transmission System Operator (Operator Systemu Przesyłowego)
54	OTC (OTC market)	Over The Counter Market
55	RES (OZE)	Renewable Energy Sources (Odnawialne Źródła Energii)
56	OZEX_A	Green certificates price index
57	Efficiency Improvement Program	TAURON Group's 2016-2018 Efficiency Improvement Program
58	PEPKH	Polska Energia - Pierwsza Kompania Handlowa sp. z o.o. with its seat in Warsaw
59	PFR	Polski Fundusz Rozwoju S.A. (Polish Development Fund) with its seat in Warsaw
60	PGE	PGE Polska Grupa Energetyczna S.A. with its seat in Warsaw
61	PGE EJ 1	PGE EJ 1 sp. z o.o. with its seat in Warsaw
62	PGNiG	Polskie Górnictwo Naftowe i Gazownictwo S.A. with its seat in Warsaw
63	GDP (PKB)	Gross Domestic Product (Produkt Krajowy Brutto)
64	PKO BP	Powszechna Kasa Oszczędności Bank Polski S.A. with its seat in Warsaw
65	PLN	Polish zloty currency symbol - zł
66	PMEC	Property rights for certificates of origin confirming generation of electricity in the other co-generation sources
67	PMEF	Property rights for energy efficiency certificates
68	PMGM	Property rights for certificates of origin confirming generation of electricity in co-generation, from gas-fired sources or sources with the total installed capacity below 1 MW
69	PMMET	Property rights for certificates of origin confirming generation of electricity in co-generation fired using methane released and captured during underground mining works in active, in liquidation or liquidated hard coal mines, or using gas obtained from biomass processing
70	PMOZE	Property rights for certificates of origin confirming generation of electricity in RES before March 1, 2009
71	PMOZE_A	Property rights for certificates of origin confirming generation of electricity in RES after March 1, 2009
72	PMOZE-BIO	Property rights for certificates of origin confirming generation of electricity from agricultural biogas from July 1, 2016
73	PSE	Polskie Sieci Elektroenergetyczne S.A. with its seat in Konstancin-Jeziorna
74	PSG	Polska Spółka Gazownictwa sp. z o.o. with its seat in Warsaw
75	RB	Balancing Market (Rynek Bilansujący)
76	RDBg	Current Day Market for Gas (Rynek Dnia Bieżącego Gazu)
77	RDN	Day Ahead Market (Rynek Dnia Następnego)
78	RDNg	Day Ahead Market for Gas (Rynek Dnia Następnego Gazu)
79	RESPECT Index	Stock market index grouping stock market companies operating in accordance with the sustainable growth principles
80	GDPR (RODO)	Regulation (EU) of the European Parliament and of the Council 2016/679 of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation)
81	RTT	Futures Commodity Market (Rynek Terminowy Towarowy)
82	SCE Jaworzno III	Spółka Ciepłowniczo Energetyczna Jaworzno III sp. z o.o. with its seat in Jaworzno

#	Abbreviation and trade term	Full name / explanation
83	Segment, Segments of operations	TAURON Capital Group's segments of operations used in the statutory reporting process. TAURON Capital Group's results from operations are allocated to the following five Segments (also called Line of Business or Areas in this report): Mining, Generation, Distribution, Supply and Other.
84	SPOT (SPOT market)	With respect to electricity, it is the place where trade transactions for electricity are concluded for which the period of delivery falls, at the latest, three days after the date of the transaction's conclusion (usually it is one day before the date of delivery). Operation of the SPOT market for electricity is strongly tied to the operation of the balancing market run by the TSO
85	Company / TAURON	TAURON Polska Energia S.A. with its seat in Katowice
86	Strategy	Document entitled TAURON Group's 2016 – 2025 Strategy adopted by the Management Board on September 2, 2016
87	Sustainable development strategy	Document entitled TAURON Group's 2017 – 2025 Sustainable development strategy adopted by the Management Board on August 1, 2017, which is an update of the document entitled TAURON Group's 2016 – 2018 Sustainable development strategy with an outlook until 2020.
88	ERM System	Enterprise Risk Management System
89	TAURON / Company	TAURON Polska Energia S.A. with its seat in Katowice
90	TAURON Ciepło	TAURON Ciepło sp. z o.o. with its seat in Katowice
91	TAURON Czech Energy	TAURON Czech Energy s.r.o. with its seat in Ostrava, Czech Republic
92	TAURON Dystrybucja	TAURON Dystrybucja S.A. with its seat in Cracow
93	TAURON Dystrybucja Pomiary	TAURON Dystrybucja Pomiary sp. z o.o. with its seat in Tarnów
94	TAURON Dystrybucja Serwis	TAURON Dystrybucja Serwis S.A. with its seat in Wrocław
95	TAURON EKOENERGIA	TAURON EKOENERGIA sp. z o.o. with its seat in Jelenia Góra
96	TAURON Obsługa Klienta	TAURON Obsługa Klienta sp. z o.o. with its seat in Wrocław
97	TAURON Serwis	TAURON Serwis sp. z o.o. with its seat in Katowice
98	TAURON Sprzedaż	TAURON Sprzedaż sp. z o.o. with its seat in Cracow
99	TAURON Sprzedaż GZE	TAURON Sprzedaż GZE sp. z o.o. with its seat in Gliwice
100	TAURON Sweden Energy	TAURON Sweden Energy AB (publ) with its seat in Stockholm, Sweden
101	TAURON Wydobycie	TAURON Wydobycie S.A. with its seat in Jaworzno
102	TAURON Wytwarzanie	TAURON Wytwarzanie S.A. with its seat in Jaworzno
103	TGE	Towarowa Giełda Energii S.A. (Polish Power Exchange) with its seat in Warsaw
104	EU (UE)	European Union (Unia Europejska)
105	UOKiK	Office of Competition and Consumer Protection (Urząd Ochrony Konkurencji i Konsumentów)
106	USD	United States Dolar - US dollar's international acronym
107	ERO (URE)	Energy Regulatory Office (Urząd Regulacji Energetyki)
108	WFOŚiGW	Regional Environment Protection and Water Management Fund (Wojewódzki Fundusz Ochrony Środowiska i Gospodarki Wodnej) in Katowice or in Cracow
109	Wsparcie Grupa TAURON	Wsparcie Grupa TAURON sp. z o.o. with its seat in Tarnów (formerly KOMFORT-ZET sp. z o.o.)
110	GM (WZ/ZW)	General Meeting (GM) / Shareholders' (Partners') Meeting (Walne Zgromadzenie – WZ / Zgromadzenie Wspólników - ZW)
111	ZG	Coal Mine (Zakład Górniczy = ZG) (Sobieski, Janina or Brzeszcze)
112	ZW	Generation Plants (Zakłady Wytwarzania - ZW) in Bielsko-Biała, Kamienna Góra, Katowice or Tychy

.

Table no. 1. List of material co-subsidiaries subject to consolidation as of December 31, 201811
Table no. 2. Summary of share capital increases in TAURON Capital Group subsidiaries11
Table no. 3. Summary of share capital increases in the other companies in which TAURON holds an equity stake12
Table no. 4. Strategy, strategic priorities and growth prospects in the individual Lines of Business 16
Table no. 5. Opportunities and threats for TAURON Capital Group's operations, taking into account the sector's situation as of the end of 201820
Table no. 6. TAURON Capital Group's strategic goals realized in 201824
Table no. 7. Key strategic investment projects' work progress26
Table no. 8. Capital expenditures, the highest outlays by value, incurred by TAURON Capital Group's Lines of Business in 201831
Table no. 9. Research and development projects implemented in 2018 by TAURON Capital Group's subsidiaries, co-financed from external sources 33
Table no. 10. Installed capacity and electricity generation by energy groups in 201751
Table no. 11. Electricity distribution to final consumers by energy groups52
Table no. 12. Electricity supply to final consumers by energy groups53
Table no. 13. Sources of competitiveness 54
Table no. 14. 2018-2016 production and sales volumes 57
Table no. 15. Categories of TAURON Capital Group's final customers 61
Table no. 16. Volume of retail electricity sold by the Supply Segment and the number of customers in 201862
Table no. 17. Links between individual roles in the context of the ERM Strategy and the documents regulating TAURON Capital Group's ERM system76
Table no. 18. Description of the ERM system participants' roles and responsibilities 77
Table no. 19. Most significant risks identified for TAURON Capital Group83
Table no. 20. Annual standalone statement of comprehensive income in 2018-2016 87
Table no. 21. Company's sales revenue in 2018-201688
Table no. 22. Level and structure of the costs incurred by the Company in 2018-2016 89
Table no. 23. Annual standalone statement of financial position (material items)90
Table no. 24. Statement of cash flows (material items) 91
Table no. 25. Key financial ratios of TAURON92
Table no. 26. TAURON Capital Group's 2018-2016 EBITDA broken down into individual lines of business (segments) 94
Table no. 27. Mining Segment's 2018-2016 results95
Table no. 28. Generation Segment's 2018-2016 results 97
Table no. 29. Distribution Segment's 2018-2016 results99
Table no. 30. Supply Segment's 2018 – 2016 results100
Table no. 31. Other Operations Segment's 2018-2016 results 102
Table no. 32. Structure of the annual consolidated statement of financial position103
Table no. 33. Annual consolidated statement of financial position - assets (material items)1 105
Table no. 34. Annual consolidated statement of financial position - liabilities (material items)1 106
Table no. 35. Annual statement of comprehensive income for 2018-20161 108
Table no. 36. Statement of cash flows (material items) in 2016-20181 111
Table no. 37. Key financial ratios of TAURON Capital Group1 116
Table no. 38. Financial and operating data for 2018-20141 117
Table no. 39. TAURON Capital Group's EBITDA, broken down into Segments (Lines of Business)1 118
Table no. 40. Compensation of the audit firm for the services provided for TAURON Capital Group's subsidiaries124
Table no. 41. Summary of TAURON Capital Group's issued and non-redeemed bonds in 2018 underwritten by entities other than TAURON Capital Group's subsidiaries (listed
according to maturity) 126
Table no. 42. Information on futures transactions and derivatives as of December 31, 2018127
Table no. 43. Dividends paid out in 2010-2014 130
Table no. 44. Key data on the Company's shares in 2011-2018131
Table no. 45. Recommendations issued in 2018. 134
Table no. 46. Timeline of investor relations highlights and activities that took place in 2018 135
Table no. 47. Shareholders holding, directly or indirectly, substantial blocks of shares 140
Table no. 48. Management Board's competence143
Table no. 49. Supervisory Board's competence145
Table no. 50. Competence of the General Meeting of Shareholders148
Table no. 51. Description of the Company's shareholders' rights related to the General Meeting of Shareholders149
Table no. 52. Competence of the Audit Committee161
Table no. 53. Competence of the Nominations and Compensation Committee164
Table no. 54. Competence of the Strategy Committee 165
Table no. 55. Compensation of members of the Company's Management Board in 2018, broken down into components (in PLN '000)171

Table no. 56. Compensation of members of the Company's Supervisory Board in 2018174
Table no. 57. Operating efficiency metrics in 2017-2018183
Table no. 58. Efficiency indicators in TAURON's and TAURON Capital Group's employee related issues area and the levels thereof as of December 31, 2017 and December 31,
2018184
Table no. 59. NPS1 metric levels for TAURON Capital Group in individual areas per quarter in 2018186
Table no. 60. Level of participation of the personnel of TAURON, TAURON Sprzedaż, TAURON Obsługa Klienta and TAURON Ciepło in the e-learning training, related to the products
and services offered, conducted in 2018187
Table no. 61. Level of emissions to the atmosphere in percentage, generated by TAURON Capital Group as compared to the standards in force in 2018187
Table no. 62. Annual emissions of NOX, SO2, dust and CO2 for 2018 from thermal combustion of fuels for selected TAURON Capital Group's subsidiaries188
Table no. 63. Forecast charges for the business use of the environment by TAURON Capital Group's subsidiaries due for 2018 188
Table no. 64. Personnel accident rates (accident frequency) at TAURON Capital Group by gender (Injury rate - IR) in 2018189
Table no. 65. Percentage of employees of the contractors and subcontractors who completed the WHS training at TAURON Capital Group's individual subsidiaries 189
Table no. 66. Survey carried out by TAURON Capital Group in 2018 as part of the due diligence procedures 191
Table no. 67. Educational activities carried out by TAURON Capital Group in 2018 as part of the due diligence procedures 191
Table no. 68. Risks related to TAURON Capital Group's operations that could have an adverse impact on the policies employed by TAURON Capital Group and the description of
reactions applied with respect to such risks205
Table no. 69. Summary of material proceedings pending before the court, competent arbitration authority or public administration authority in 2018 208
Table no. 70. Summary of TAURON Capital Group's working capital loan and credit agreements effective as of December 31, 2018 (listed according to the repayment date)215
Table no. 71. Summary of TAURON Capital Group's investment credit and loan agreements effective in 2018, (listed according to the repayment date) 215
Table no. 72. Summary of Tauron Capital Group's loans granted and effective in 2018, (listed according to the repayment date)216
Table no. 73. Summary of sureties and guarantees granted by TAURON effective in 2018 (listed according to the validity date) 216
Table no. 74. Summary of blank promissory notes (bills of exchange) granted by TAURON as of December 31, 2018 (listed according to the validity date) 217
Table no. 75. Summary of bank guarantees granted under TAURON's framework (master) agreements, effective in 2018 (listed according to the validity date) 218
Table no. 76. Summary of bank guarantees granted in 2018 at the instruction of TAURON Czech Energy (listed according to the validity date)219
Table no. 77. Summary of collaterals received by TAURON effective as of December 31, 2018219
Table no. 78. Explanation of abbreviations and acronyms as well as trade terms used in the report 221

Index of figures

Figure no. 1. TAURON Capital Group 6
Figure no. 2. Location of TAURON Capital Group's key assets 8
Figure no. 3. TAURON Capital Group's structure, including the subsidiaries subject to consolidation, as of December 31, 2018 9
Figure no. 4. Prospects of TAURON Capital Group's individual segments14
Figure no. 5. Implementation of the priorities based on the pillars of TAURON Capital Group's Strategy 15
Figure no. 6. Capital expenditures by segments in 2016-202015
Figure no. 7. Forecast transformation of the sector 19
Figure no. 8. 2025 EBITDA outlook taking into account the risks and the implementation of the Strategy as well as the effects of the implementation of the Strategy21
Figure no. 9. TAURON Capital Group's 2025 vision22
Figure no. 10. Assumptions of the 2016-2018 Efficiency Improvement Program23
Figure no. 11. Assumptions of the Strategic Initiatives and the CAPEX rationalization in 2017-202023
Figure no. 12. Outlook for the CAPEX directions beyond 202026
Figure no. 13. Priority directions of innovations as well as research and development related activities32
Figure no. 14. Average monthly electricity prices on the SPOT and RB markets, as well as average temperatures 39
Figure no. 15. BASE Y-19 contracts performance39
Figure no. 16. Average monthly SPOT and Y-19 contract prices on TGE in 201842
Figure no. 17. Impact of political actions and the environment on the EUA SPOT product price in 201843
Figure no. 18. Property rights indices44
Figure no. 19. TAURON Capital Group's competitive environment (landscape) (2017 data) 49
Figure no. 20. EBITDA - estimated structure by the main segments in 20171 50
Figure no. 21. Gross electricity production – estimated market shares in 2017 52
Figure no. 22. Installed capacity – estimated market shares in 201752
Figure no. 23. Electricity distribution - estimated market shares in 201752
Figure no. 24. Electricity supply to final consumers - estimated market shares in 2017 53
Figure no. 25. Summary of the Company's 2018 coal sales (Mg m)58
Figure no. 26. Structure of the Generation Segment's installed capacity as of December 31, 201858
Figure no. 27. Electricity distribution by tariff groups in 2018 r. (MWh) 60
Figure no. 28. Coal purchases in 2018 (in Mg m) 63
Figure no. 29. Timeline64
Figure no. 30. Prizes and accolades (honorable mentions) 71
Figure no. 31. TAURON's average headcount in 2017 and in 2018 (FTEs) 72
Figure no. 32. TAURON Capital Group's average headcount per Segment in 2017 and in 2018 1 (FTEs) 72
Figure no. 33. Basic classification of the enterprise risk 74
Figure no. 34. Architecture of the ERM System at TAURON Capital Group 74
Figure no. 35. Risk management process 75
Figure no. 36. Diagram of the management risk communication75
Figure no. 37. Number of risks monitored, broken down into categories78

Figure no. 38. Breakdown of TAURON Group's trading operations80
Figure no. 39. Credit exposure components81
Figure no. 40. Risk management system tools 82
Figure no. 41. Project risk management model83
Figure no. 42. TAURON Capital Group's EBITDA in 2011-201894
Figure no. 43. TAURON Capital Group's 2016-2018 EBITDA structure (composition)94
Figure no. 44. Change in TAURON Capital Group's EBITDA in 2016-201895
Figure no. 45. Mining Segment's 2016 - 2018 financial data96
Figure no. 46. Mining Segment's EBITDA96
Figure no. 47. Generation Segment's 2016-2018 financial data 98
Figure no. 48. Generation Segment's EBITDA 98
Figure no. 49. Distribution Segment's 2016-2018 financial data 99
Figure no. 50. Distribution Segment's EBITDA100
Figure no. 51. Supply Segment's 2016 – 2018 financial data 101
Figure no. 52. Supply Segment's EBITDA102
Figure no. 53. Other Operations Segment companies' 2016-2018 financial data103
Figure no. 54. Structure of assets, and equity and liabilities 104
Figure no. 55. Current liquidity ratio and the net debt to EBITDA ratio in 2018-2016104
Figure no. 56. Change in the level of assets and current assets 105
Figure no. 57. Change in the level of liabilities and equity 107
Figure no. 58. Change in the level of liabilities107
Figure no. 59. TAURON Capital Group's 2016-2018 financial results 109
Figure no. 60. Structure of TAURON Capital Group's revenue in 2016-20181 110
Figure no. 61. TAURON Capital Group's financial results and the level of margins realized in 2016-20181 110
Figure no. 62. 2018-2016 cash flows 112
Figure no. 63. TAURON Capital Group's 2018 cash flows 113
Figure no. 64. Structure of TAURON Capital Group's EBITDA in 2018-2014119
Figure no. 65. Data of the Mining Segment for 2014-2018119
Figure no. 66. Data of the Generation Segment for 2018-2014119
Figure no. 67. Data of the Distribution Segment for 2018-2014120
Figure no. 68. Data of the Supply Segment for 2018-2014120
Figure no. 69. Data of the Other Operations for 2018-2014120
Figure no. 70. Shareholding structure as of December 31, 2018 and as of the day of drawing up this report129
Figure no. 71. TAURON share price(in PLN) and trading volumes in 2018 (in PLN '000)132
Figure no. 72. TAURON share price (in PLN) and trading volumes since the market debut until December 31, 2018 (in PLN '000)133
Figure no. 73. TAURON share price (in PLN) versus WIG20 and WIG-Energia indices since the market debut until December 31, 2018 (in PLN '000) 133
Figure no. 74. Process streams cutting across TAURON Capital Group's Lines of Business177
Figure no. 75. Structure of TAURON Capital Group's processes (mega-processes)178
Figure no. 76. Structure of TAURON Capital Group's Lines of Business178
Figure no. 77. Split of responsibilities of members of the Management Board 179
Figure no. 78. TAURON's organizational diagram (flowchart) as of the date of drawing up this report180
Figure no. 79. Directions of TAURON Capital Group's Sustainable Development Strategy for 2017-2025. 182
Figure no. 80. TAURON Capital Group's current stakeholder map182
Figure no. 81. Results of the customer satisfaction survey conducted in the household customers segment with respect to TAURON Capital Group's products and services in
2011-2018185
Figure no. 82. Results of the customer satisfaction survey conducted in the business customers segment with respect to TAURON Capital Group's products and services in 2014-
2018185
Figure no. 83. Results of the customer satisfaction survey conducted in the small and medium size enterprises segment with respect to TAURON Capital Group's products and
services in 2011-2018186
Figure no. 84. Structure of property rights related to the certificates of origin at TAURON Capital Group in 2018 198
Figure no. 85. Certificates of origin (MWh) at TAURON Capital Group in 2018 198
Figure no. 86. Structure of bringing to the market ashes, sludge, gypsum and aggregates generated by TAURON Capital Group in 2018198
Figure no. 87. Sample interdependencies as part of implementing the principles of the circular economy within TAURON Capital group in 2018199

of

REPRESENTATIONS of the MANAGEMENT BOARD

of TAURON Polska Energia S.A.

TAURON.PL

REPRESENTATION

of the Management Board of TAURON Polska Energia S.A. on the accuracy of the annual financial statements of TAURON Polska Energia S.A. and of the Management Board's report on the operations of TAURON Polska Energia S.A. and TAURON Capital Group

Management Board of TAURON Polska Energia S.A. represents that, to the best of its knowledge, the annual financial statements of TAURON Polska Energia S.A. and comparable figures were prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of TAURON Polska Energia S.A.

Management Board of TAURON Polska Energia S.A. also certifies that the Management Board's annual report on the operations of TAURON Polska Energia S.A and TAURON Capital Group includes a fair review of the development and performance of the business and the position of TAURON Polska Energia S.A and TAURON Capital Group, together with a description of the principal risks and uncertainties that TAURON Polska Energia S.A and TAURON Capital Group face.

Members of the Management Board:

• 1. Filip Grzegorczyk President of the Management Board (CEO)
• 1. Jaros³aw Broda Vice President of the Management Board
• 1. Kamil Kamiñski Vice President of the Management Board
• 1. Marek Wadowski Vice President of the Management Board

29 March 2019 date

INFORMATION

of the Management Board of TAURON Polska Energia S.A. on the appointment of the audit firm to conduct the audit of the annual financial statements of TAURON Polska Energia S.A. in accordance with the applicable regulations

Management Board of TAURON Polska Energia S.A., pursuant to the representation of the Supervisory Board, informs of the appointment of the audit firm to conduct the audit of the annual financial statements of TAURON Polska Energia S.A. in accordance with the applicable regulations, including the regulations related to the appointment and the procedure for appointment of auditor and indicates that:

• a) the audit firm and members of the team performing the audit met the conditions for preparing an impartial and independent report (opinion) on the audit of the annual financial statements of TAURON Polska Energia S.A. in accordance with the applicable regulations, professional standards and professional code of ethics,
• b) applicable regulations related to the rotation of the audit firm and the key certified auditor as well as the mandatory rotation periods (engagement term limits) are complied with,
• c) TAURON Polska Energia S.A. has a policy in place with respect to the appointment of auditor and a policy with respect to the provision, for the benefit of TAURON Polska Energia S.A., by the audit firm, an entity related to the audit firm or a member of its network, of additional non-audit services, including services that are conditionally exempt from the ban on the provision of non-audit services by the audit firm.

Members of the Management Board:

1.	Filip Grzegorczyk	– President of the Management Board (CEO)
2.	Jaros³aw Broda	– Vice President of the Management Board
3.	Kamil Kamiñski	– Vice President of the Management Board
4.	Marek Wadowski	– Vice President of the Management Board

29 March 2019 date

of

of the SUPERVISORY BOARD

of TAURON Polska Energia S.A.

TAURON.PL

REPRESENTATION

of the Supervisory Board of TAURON Polska Energia S.A. on the Audit Committee

Supervisory Board of TAURON Polska Energia S.A. represents that the regulations related to the appointment, composition and operations of the Audit Committee are complied with, including the regulations related to the fulfillment by the members thereof of the independence criteria and of the requirements with respect to the knowledge and skills (qualifications) related to the industry TAURON Polska Energia S.A. is operating in, as well as in the field of accounting or auditing financial statements.

Supervisory Board of TAURON Polska Energia S.A. also certifies that the Audit Committee performed the tasks of an audit committee as set forth in the applicable regulations.

Members of the Supervisory Board:

1.	Beata Ch³odziñska	– Chair of the Supervisory Board
2.	Teresa Famulska	– Vice Chair of the Supervisory Board
3.	Jacek Szyke	– Secretary of the Supervisory Board
4.	Rados³aw Domagalski-£abêdzki	– Member of the Supervisory Board
5.	Barbara £asak-Jarszak	– Member of the Supervisory Board
6.	Pawe³ Pampuszko	– Member of the Supervisory Board
7.	Jan P³udowski	– Member of the Supervisory Board
8.	Marcin Szlenk	– Member of the Supervisory Board
9.	Agnieszka WoŸniak	– Member of the Supervisory Board

2 April 2019 date

ASSESMENT by the NADZORCZEJ SUPERVISORY BOARD of

TAURON Polska Energia S.A.

TAURON.PL

Assessment by the Supervisory Board of TAURON Polska Energia S.A., including the justification thereof, of the financial statements and the Management Board's report on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018

The Supervisory Board of TAURON Polska Energia S.A., pursuant to the requirement of art. 382 § 3 of the Code of Commercial Companies and § 70, clause 1, sub-clause 14 and § 71, clause 1, sub-clause 12 of the Ordinance of the Minister of Finance of March 29, 2018 on the current and periodic information to be disclosed by security issuers and the conditions of recognizing as equivalent the information required by the legal regulations of a non-member state, issued a positive assessment of the following documents presented by the Company's Management Board and determined that they were in compliance with the books, documents and the actual status of:

• 1) Financial statements of TAURON Polska Energia S.A. for the year ended on December 31, 2018, prepared in accordance with the International Financial Reporting Standards approved by the European Union,
• 2) Consolidated financial statements of TAURON Polska Energia S.A. Capital Group for the year ended on December 31, 2018, prepared in accordance with the International Financial Reporting Standards approved by the European Union,
• 3) Management Board's report on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018.

The Supervisory Board of TAURON Polska Energia S.A. made an assessment of the financial statements of TAURON Polska Energia S.A. for the year ended on December 31, 2018, including: the statement of comprehensive income, the statement of financial position, the statement of the changes in equity, the statement of cash flows and the principles (policies) of accounting and the additional explanatory notes.

The Supervisory Board of TAURON Polska Energia S.A. made an assessment of the consolidated financial statements of TAURON Capital Group for the year ended on December 31, 2018, including: the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of the changes in equity, the consolidated statement of cash flows and the principles (policies) of accounting and the additional explanatory notes.

The Supervisory Board of TAURON Polska Energia S.A. made an assessment of the Management Board's report on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018, that was prepared in accordance with the applicable regulations of the act of September 29, 1994 on accounting and of the Ordinance of the Minister of Finance of March 29, 2018 on the current and periodic information disclosed by security issuers and the conditions of recognizing as equivalent the information required by the legal regulations of a non-member state.

The above statements were the subject of verification, analysis and evaluation by the Audit Committee of the Company's Supervisory Board that recommended to the Supervisory Board issuing of a positive assessment (opinion).

The Audit Committee, performing its statutory obligations defined in the act of May 11, 2017, on certified auditors, audit companies and public oversight, oversaw the process of financial reporting, of the effectiveness of the internal control systems and the risk management systems as well as of the internal audit, including performing tasks aimed at ensuring the accuracy of the financial reporting process.

As part of the process related to auditing the financial statements the Audit Committee was attending regular meetings with the representatives of the audit firm conducting the audit of the financial statements of the Company and TAURON Capital Group, monitoring and discussing the course of the audit processes. Furthermore, the Audit Committee studied the reports (opinions) presented by the audit firm on the audits of the financial statements and the supplementary report (additional information) for the financial year 2018 prepared for the Audit Committee and the Company's management, in accordance with the regulations of Ordinance 537/2014, and also of the Act of May 11, 2017 on certified auditors.

The basis for the issuing by the Supervisory Board of a positive assessment (opinion) of the Financial statements of TAURON Polska Energia S.A. and the Consolidated financial statements of TAURON Polska Energia S.A. Capital Group for the financial year 2018 were the reports (opinions) of the independent certified auditor on the audit of the above statements according to which:

• 1) Financial statements give a true and fair view of the assets, liabilities and the financial position of TAURON Polska Energia S.A. and TAURON Polska Energia S.A. Capital Group as of December 31, 2018, and their financial results for the financial year from January 1, 2018 until December 31, 2018, in accordance with the International Accounting Standards, International Financial Reporting Standards and the interpretations related thereto, published in the form of the regulations of the European Commission and the adopted principles (policy) of accounting,
• 2) Financial statements of TAURON Polska Energia S.A. for the year ended on December 31, 2018, were prepared based on the properly kept accounting records (ledgers),
• 3) Financial statements are in compliance, with respect to their form and content, with the legal regulations applicable to TAURON Polska Energia S.A. and TAURON Polska Energia S.A. Capital Group, as well as with the articles of association of TAURON Polska Energia S.A.

Furthermore, in the opinion of the certified auditor the Management Board's Report on the operations of TAURON Polska Energia S.A. and TAURON Capital Group for the financial year 2018 was prepared in accordance with the applicable legal regulations and is in compliance with the financial statements of TAURON Polska Energia S.A. for the year ended on December 31, 2018, and with the consolidated financial statements of TAURON Polska Energia S.A. Capital Group for the year ended on December 31, 2018.

The above mentioned financial statements were prepared by the deadline specified in the regulations and they are in line with the International Financial Reporting Standards that were approved by the European Union. The accuracy of the said financial statements, with respect to their compliance with the accounting records (ledgers), documents and the actual status, does not give rise to any objections and is confirmed by the information included in the Report of the independent certified auditor on the audit of the above statements.

Members of the Supervisory Board:

1.	Beata Ch³odziñska	– Chair of the Supervisory Board
2.	Teresa Famulska	– Vice Chair of the Supervisory Board
3.	Jacek Szyke	– Secretary of the Supervisory Board
4.	Rados³aw Domagalski-£abêdzki	– Member of the Supervisory Board
5.	Barbara £asak-Jarszak	– Member of the Supervisory Board
6.	Pawe³ Pampuszko	– Member of the Supervisory Board
7.	Jan P³udowski	– Member of the Supervisory Board
8.	Marcin Szlenk	– Member of the Supervisory Board
9.	Agnieszka WoŸniak	– Member of the Supervisory Board

2 April 2019 date