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Current Report No. 25/2011

28.04.2011 00:00

Update of the Corporate Strategy

The Management Board of TAURON Polska Energia S. A. informs, that on 28 April 2011 has adopted a resolution on updating the Corporate Strategy adopting the document titled: „TAURON Group’s Corporate Strategy for years 2011-2015 with the prospect of 2020”. The strategy was accepted the same day by the Supervisory Board in accordance with § 20 sec. 1 Item 8 of Articles of Association. The adopted document is an update of "Corporate Strategy for the Capital Group TAURON Polska Energia S.A. for years 2008-2012 with the prospect of 2020”, adopted by Resolution of the Board No. 659/I/2008 on 21 October 2008, which assumptions have been presented by the Corporation in the Prospectus approved by the Financial Supervision Authority on 27 May 2010 (page 168), and in the entity’s activity report of Capital Group TAURON Polska Energia S.A. for the financial year 2010 published in the annual report of the Corporation on 15 March 2011.

After two years of implementation of the Corporate Strategy for the TAURON Group, its current activities, assessment of their implementation as well as verification of the assumptions adopted in contemporary economic conditions have been reviewed. An important group of factors that were analysed and included in the update of Corporate Strategy, were new market realities and trends in electrical power engineering as well as legal prerequisites (energy and climate package, an amendment to the Energy Law, Polish Energy Policy until 2030, nuclear energy program). As a result of the analysis an update of TAURON Group’s Corporate Strategy has emerged. It corresponds to the major market challenges, and clearly defines the strategic priorities that in the form of objectives and tasks were transferred to various areas in business.
TAURON Group’s mission as well as the vision did not change. The Group’s mission is still "Providing energy to our customers based on the best practices ensuring increased goodwill” and vision: "To belong to the group of leading energy companies in the region".

The revised Corporate Strategy is based on the pre-defined strategic priorities, the overarching strategic objective is continuous growth of values ensuring return on invested capital for shareholders. The value will be measured based on value construction indicators: growth of levels EBITDA and ROIC. A key direction of the Strategy has become the concentration on the growth in areas of activities where there is the greatest potential for achieving high rates of return on investments and manufacturing portfolio diversification. In addition the objective to continuous improvement of efficiency and building an effective organisation had been upheld. The new strategic goal for the Group is to manage the exposure to market risk and regulatory management.

As a result the TAURON Group’s Corporate Strategy focuses on four major objectives, that together enable the growth of the Group’s value:
1. Growth in the most attractive areas of activity
2. Operational and investment effectiveness at the level of best practices
3. Managing the exposure to market risks and regulatory management
4. Building an effective organisation.

Below is the basic information on each of these objectives.
1. Growth in the most attractive areas of activity
a) Construction of new production capacity
b) Profitable acquisitions (business opportunities) of the assets in core business.
The growth will be concentrated on areas where there is greatest potential for achieving high rates of return on investments such as renewable energy sources and Manufacturing. Because of the need to rebuild production capacity and the associated high investment costs, the priority for the Group will be investments in generation assets (and potential acquisitions in this area) in the domestic market. TAURON Group's total capital expenditures in the years 2011-2020 will reach approx. 44-45 billion PLN.

Within the manufacturing portfolio it is assumed to launch new production capacity in various technologies by 2020. The revised strategy confirmed the validity of ongoing investment projects. Within the planned investments the objective is to launch with a production capacity of 2400 MW, including in particular:
- 1010 MW in the technology based on coal (910 MW at Power Plant Jaworzno III, the capacity in cogeneration: 50 MW at CHP Tychy, 50 MW at CHP Bielsko-Biala)
- 735 MW in the technology based on gaseous fuel, including 335 MW in cogeneration (50% share in the gas-steam block, 400 MW at CHP Stalowa Wola, which was built with a strategic partner - PGNiG S.A. and 135 MW at CHP Katowice) and the participation of 50 % in a block of 800 MW class at Power Plant Blachownia, built with a strategic partner - KGHM Polska Miedź S.A.
- 240 MW in biomass (including the block of 50 MW at Power Plant Jaworzno III, 40 MW at Power Plant Tychy, 50 MW at Power Plant Stalowa Wola).

Within the verification of assets of the manufacturing portfolio and reduction of the risk associated with exposure to CO2, TAURON decided there was the need to increase the participation of owned power in low-carbon technologies. This represents an increase of aspirations and the importance of renewable energy sources area for the Group. The Group in 2020 will have up to 800 MW in wind and biogas energy. TAURON will carry out activities in preparation for the process of building a nuclear power plant.

The planned development of Heat Area is related to the further integration of the heating sector entities and development of small cogeneration. Eventually Heat Area is to integrate the heat distributors and manufacturers in one entity. The process of creating Heat Area will be conducted in stages: until 2011 the completion of integration process of PEC Katowice and PEC in Dąbrowa Górnicza is planned, and total completion of integration of entities in the area in accordance with Group’s target model has been planned for 2013.

2. Operational and investment effectiveness at the level of best practices
a) Finalisation of the integration and realisation of benefits from synergy
b) Improvement of the cost-effectiveness by restructuring operating activity and the integration of support function
c) Implementation of the program to improve investment efficiency.

The TAURON Group's strategy provides further implementation of synergies from the integration of the Group’s companies. The next stage of restructuring by improving the management processes and the integration of support function will begin. This will include the centralisation and, where appropriate, outsourcing of areas not directly related to the main activity of the Group.
TAURON will continue the priority attitude to cost discipline in every area of the business for capital expenditures and operating costs. Activities related to improve the investment and operational efficiency will also prepare the Group for a negative scenario of price path expansion.

3. Managing the exposure to market risks and regulatory management
a) Diversification of the structure of productive assets
b) Active participation in forming the regulatory policy reducing the risk and creating beneficial conditions for development
c) Effective security strategy
d) The maintenance of low-cost fuel sources.

In the face of many market and regulatory parameters, an important element of the strategy is to actively manage market risks. In order to optimise these risks and maximise returns, the Group will diversify the manufacturing portfolio appropriately choosing various types of technology (reduction of risks resulting from long-term investment decisions) and work out effective security policies, including security of energy supply (reduction of the medium-and short-term risk resulting from commercial activity). This policy will reduce the variability of the result in the Group by managing a portfolio of assets and control of risk limits.

In 2010 98% of installed capacity in the Group was accounted for coal technologies. In 2020 their share dropped to about 70%, including 15-20% from the new blocks. The participation of low carbon technologies, such as gas, wind, hydro, biomass and biogas will be about 30%. Such diversification of the portfolio corresponds to increase in production from 23,8 TWh in 2010 to 36,7 TWh in 2020, which represents an increase of approximately 54%.

An effective security strategy will cover all the activities in the value chain of the Group, from the security of the assumed volume of fuel supplies from sources owned and moving to covering a specific volume of electricity sold to end customers from own generating units. The policy will ensure safe operation of the assets held in Manufacturing Area by providing fuel supply and maintenance of its prices at an acceptable level. New commercial objectives shall apply to: effective use of Group's assets, active management of market risk in the Group and expansion of activities in areas that generate additional mass margin.

4. Building an effective organisation.
a) Improving the organisation of sales and customer service
b) Increasing the competence of RES Area
c) The implementation of human resources management and management by objectives program.
In sales, due to the numerous changes made in the years 2008-2010 (completed process of establishing separate companies TAURON Sales and TAURON Customer Service, the tasks resulting from Group’s new business model), primarily targets with maximisation of mass margin will be implemented. For Customer Service Area the objectives of improving service quality, unifying processes and cost optimisation have been created.

The effective implementation of strategies in the full value chain will improve the position of the TAURON Group among the leading energy companies in the region.

Art. 56 sec. 1 item 1) of the Act on Public Offering and the conditions for introducing financial instruments to organised trading systems and on public limited companies – price-sensitive information.

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