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Despite the numerous challenges we faced, 2016 ran its full course for the TAURON Group in accordance with our assumptions. By vigilantly observing financial discipline, we generated substantial cost savings and we maintained capital expenditures at an appropriate level.
FILIP GRZEGORCZYK

[G4-1] [G4-2] [G4-13]

Dear Investors, Dear Stakeholders,

As one of the largest power holding companies in Central and Eastern Europe whose business spans all of the links in the power value chain, we are aware of the impact we exert on our surroundings: the natural environment, our stakeholders (employees, customers, shareholders, local communities, suppliers, representatives of government authorities and institutions), the microeconomic and macroeconomic context and the industry in which we operate. Encouraged by the interest the publications regarding our operations have elicited in previous years, we can now convey to your our fifth annual report on the actions taken by the TAURON Group focused on sustainable development. However, for the very first time, non-financial data are being published in our fully integrated annual report. This publication presents material information about the Group’s strategy, performance, opportunities, risks and management portraying them in the context of its environment and in direct relationship with our non-business activities.

The power industry of tomorrow

2016 has brought us many changes. It was marked by actions to transform the TAURON Group into a leading, innovative and modern business whose foundation is rooted in the Strategy for 2016-2025 adopted in September. This document predicated on four major challenges: regulations, the market, customers and technologies is the company’s response to the challenges posed by the evolving business environment and growing customer expectations. Utility sector companies must be poised to meet the conditions inherent in the “power sector of tomorrow”. This signifies transforming the utility sector as a system in the direction of decentralized generation, the expanding role of cross-border connections, energy storage units and new energy services (such as “virtual power plants”, demand management, distributed generation). The new approach also alters the role of distribution, which has to face such challenges as smart technologies and distributed generation (including prosumer generation).

On many levels we continue to be a leader in the Polish power industry. Even so, we must constantly strive to improve and generate even better performance. In our current business strategy we have defined the direction in which the Group should go. That is why it goes beyond the current decade up to 2025.

In response to the market, financial and regulatory challenges facing the utility sector, in the past year we also implemented the TAURON Group’s new business model. Since for years we have embraced sustainable development and corporate social responsibility as the basis for our operation, we have also made efforts to update the TAURON Group’s Sustainable Development Strategy for 2016-2018 with an outlook to 2020. This document is consistent with the Business Strategy we published and the objectives we laid out there, it forms the basis for the Group’s decisions and it also defines the directions for its further development. Above all, this is manifested by our strategic approach incorporating sustainable development issues in every area of our operations. This strategy takes into account matters relating to the TAURON Group’s environment and the present and future challenges faced by the power sector in our rapidly changing world. It is also consistent with the Group’s mission and vision with energy security and customer centricism as their foundations.

With an awareness of the challenges we will face in upcoming years, we are consistent in running many innovative and research and development projects. We are striving to deliver modern solutions constantly, passionately and with commitment and to be able to achieve the Group’s vision we laid out precisely in 2016: to be the company that responds the best to customer needs in the Polish power sector. The most valuable capital we have is their trust. That is why we incessantly toil to roll out services and technologies to provide them with reliable comfort and security in their daily lives.

To make sure that the change in our approach to customers and modern assets produce the intended business benefits, we must also change. In 2016 we made a radical shift toward a “new organization”. The Group’s new business model switched the organization from being silo to process-oriented – with clearly defined powers and responsibility for the final product. Our organizational culture is founded on key values: Partnership, Development and Boldness (PRO) that are to support us in the execution of our Strategy; they will help us achieve our stated objectives and they will set new standards in relations with our associates – a critical stakeholder group consisting of nearly 25 thousand people. In a knowledge-based economy employees are the people who drive the success of a business. That is why we have elected to develop and engage our staff in cultivating a cohesive organizational culture. We also do our utmost to enhance occupational safety. This is especially important in the functioning of companies that mine coal, generate and distribute electrical and thermal energy.

Investment potential

Presently, we are integrating our Strategy, value chain, business model, Group structure, technological and market challenges with our organizational culture in order to deliver the best possible results in the future. We are achieving this through the unwavering implementation of the Efficiency Improvement Program, well thought-out strategic initiatives and the new process-oriented operational model.

In this Report you will find our report on the achievement of the objectives set forth in 2016. The past year, though full of changes, ran its full course for the TAURON Group in accordance with our assumptions. By vigilantly observing financial discipline, we generated substantial cost savings and we maintained capital expenditures at an appropriate level totaling PLN 3.8 billion. Nearly PLN 1.1 billion was earmarked for projects in the Distribution Segment, chiefly to expand and modernize the electrical power grid, for innovative technologies and network solutions. The outcome of these undertakings was improvement in the outage indices, and thus the enhanced reliability of electricity supply for our customers, one of the largest stakeholder groups with some 5.4 million persons to whom we sold a total of 32 TWh of electricity in 2016.

We are also steadily continuing investments: a new 910 MW unit in the Jaworzno Power Plant, a gas-fired unit in Stalowa Wola and heat grids. We attach great importance to optimizing energy consumption and consciously and responsibly managing our environmental impact. This latter aspect is very important to us. That is why we pursue it on a variety of levels, among others, by reducing the emission level of our generation units, enhancing the energy efficiency of our processes and substantially increasing the quantum of utilized waste generated by our Group companies. We are specially pleased by the fact that according to our targets, we completed the program of modernizing generation units in 2016 to adapt them to stringent environmental protection requirements; at present, all TAURON units meet the emission standards. Last year the Group’s total expenditures for environmental protection exceeded PLN 355 million.

We are aware that after 2020, the investment program, in addition to regulated areas will also include the “new energy sector”: electromobility, distributed generation of heat and energy, prosumer energy, Smart Home and Smart City solutions and energy-related services. Looking into the future, we are becoming increasingly more involved in research and development and innovation activity, including projects based on a dedicated Corporate Venture Capital fund. The execution of all these planned actions will enable us to pay a dividend after 2020 and will allow us to generate EBITDA in excess of PLN 5 billion in 2025.

Our goal in the upcoming years will be to continue to streamline without fail the Group’s operating efficiency, the quality of the services rendered, its market position and its capacity to carry out investments.

 

For the first time, having in mind the TAURON Group’s extraordinarily extensive and highly diverse environment, we have prepared our annual report in the form of an integrated report blending financial data and the non-financial aspects of our operations, whereby we can show you the potential we can achieve through the synergy between our core business and our non-business activity. This report confirms the Group’s strong market position and its capacity to generate stable financial results and pursue its ambitious investment program. At the same time, it illustrates how we are taking care of preserving the appropriate proportions between operations, ethics, ecology and the needs of all our stakeholders. I am confident that all of you will find a part of this Report associated with your area of interest, and reading this document will constitute another step along the path to cultivating long-lasting positive relations.

The findings presented in this document are the outcome of the arduous work and commitment of many people, namely our customers and business partners, as well as of the knowledge and experience of our employees. It is thanks to you that we may constantly improve while offering the best solutions in the industry. I would like to extend my thanks to all of the people who are working for the purpose of attaining our shared success.

 

Respectfully,

Filip Grzegorczyk

President of the Management Board
TAURON Polska Energia

White certificates white certificates "White" certificates "white" certificates Certificates confirming the saving of a specific quantum of energy as a result of completing investments to enhance energy efficiency.
Biomass biomass Denotes a biodegradable fraction of products, waste and residue from agricultural and forestry production and related branches of industry, including fishing and aquaculture, and biogas and a biodegradable fraction of industrial and communal waste.
Sub peak power generation units sub peak power generation units Power generation units used during a period when the power system has a higher demand for capacity. Power generation units in this class are used from 2000 to 4000 hours a year.
Peak power generation units peak power generation units Power generation units used only during a period when the power system has the highest demand for capacity. Power generation units in this class are used fewer than 2000 hours a year.
Blue certificates blue certificates "Blue" certificates "blue" certificates Certificates confirming the generation of energy from agricultural biomass.
CAPEX Capital expenditures.
Red certificates red certificates "Red" certificates "red" certificates Certificates confirming the generation of energy in highly-efficient coal co-generation.
Net debt net debt Liabilities for loans and borrowings less cash and cash equivalents.
Dividend dividend Portion of a company’s net earnings per share designated for payment to shareholders.
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization.
Electromobility electromobility Using electric vehicles, both individual vehicles such as an electric car, electric scooter, electric motorcycle and electric bicycle and public transport means: trams, trolleybuses and trains. The assumptions for the Electromobility Development Plan and the domestic framework for the policy of alternative fuel infrastructure development call for there being one million electric vehicles on Polish roads by 2025. TAURON is conducting research and analyses on developing, promoting and disseminating electromobility among Polish nationals, developing the electromobility industry in Poland and in particular collaborating in launching and implementing the findings of scientific and technical work in this area. Moreover, jointly with PGE, Energa and Enea, TAURON has submitted an application to the Office of Competition and Consumer Protection to receive a permit to establish a company called ElectroMobilityPoland to create grounds for developing electromobility.
EMAS EMAS Eco Management and Audit Scheme, an EU instrument to encourage all types of organizations to improve their environmental protection constantly. Functions on the basis of Regulation (EU) no. 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organizations in a Community eco-management and audit scheme (EMAS). The EMAS requirements constitute guidelines for organizations to structure their environmental protection duties, optimize costs and effectively manage energy and resources. EMAS is also a system for reporting an organization’s environmental impact making it easier to conduct dialogue in this area with stakeholders. Registration in the EMAS system means that an organization has satisfied the most rigorous environmental requirements.
Prosumer energy prosumer energy Generation of electricity, chiefly for one’s own needs and on a small-scale in installations harnessing renewable energy sources. Households and businesses that do this are called prosumers, meaning that they simultaneously play the role of energy producer and consumer.
Energy from distributed sources energy from distributed sources energii ze źródeł rozproszonych energetyka rozproszona rozproszone wytwarzanie generacja rozproszona energetyki rozproszonej generacji rozproszonej distributed energy Generation of energy by small generation units or facilities connected directly to distribution grids or located in the user’s electrical energy grid that usually generate electricity from renewable energy sources or non-conventional sources, frequently in cogeneration with the generation of thermal energy (distributed cogeneration). The following parties, for instance, may be part of a distributed generation grid: prosumers, energy cooperatives and municipal power plants.
Purple certificates purple certificates "Purple" certificates "purple" certificates Certificates confirming the generation of energy from methane captured in mines.
grid parity Grid parity Signifies the equivalence of the production costs of renewable energy with the energy generated in conventional power plants.
TGE’s FCM Indices Towarowa Giełda Energii (TGE) is the power exchange running the following markets: electricity (Forward Commodity Market - FCM), Day-Ahead Market - DAM, Intraday Market - IDM) and gas (FCMg, DAMg) and the Property Right Market.
smart metering Smart metering Comprehensive and integrated information system encompassing electrical energy smart meters for users of energy, telecommunication infrastructure, central database and management system. Smart metering systems support two-way communication in real time between information systems and electronic electricity meters installed in customers’ locations. Moreover, they may automate the entire billing process for energy users - from obtaining metering data to processing and aggregating them to issuing invoices.
Stakeholder stakeholder stakeholders Natural or legal entity (individual, community, institution, organization, office etc.) which may affect the company or remain under the influence of its actions.
IoT Internet of Things – concept according to which clearly identified objects may directly or indirectly collect, process or exchange data via computer network.
Emergency Cold Reserve IRZ Mechanism introduced by the transmission system operator in 2016. It involves the TSO paying the owners of generation sources which are planned to be withdrawn for keeping them ready to run in response to the operator’s instruction during the anticipated periods of capacity shortage.
ISO 14001 PN-EN ISO 14001:2005 standard PN-EN 14001 standard One of the ISO standards used in managing environmental protection. This standard designated for all organizations regardless of their type and size defines the requirements whose satisfaction supports the achievement of environmental (for instance preventing the emission of pollutants) and economic objectives.
Covenant covenant Contractual clause, order or ban imposed on a borrower to minimize the risk of its invsolvency. Covenents most frequently constitute protection for sources of debt payment to creditors, e.g. by banning further borrowing or disposing of assets.
Aggregate aggregate Bulk organic or mineral material used mainly to produce construction mortar and concrete and build roads.
HV and MV Lines linii WN i SN sieci WN i SN HV - high voltage grid in which the voltage ranges from 110 kV. This grid is used to transmit electrical energy over large distances. MV - medium voltage grid, i.e. an electrical energy grid in which the electrical voltage ranges from 1 kV to 110 kV. Medium voltage is broadly used in electrical energy grids to transmit electrical energy over medium distances and switch energy. It is used as an intermediate voltage between high voltage and low voltage connected to end-users.
Customer loyalization customer loyalization Strategy to acquire and retain customers in this time of growing competition.
Micro-grid micro-grid Electrical energy micro-grid – set of generation equipment, electrical energy storage and receiver units connected in a joint network to ensure the reliable supply of electrical energy and minimize its cost.
Micro-cogeneration micro-cogeneration Technological process involving the cogeneration of thermal and electrical energy based on the utilization of small-scale equipment and medium capacities. Micro-cogeneration may be employed in all facilities in which there is a concurrent need for electrical and thermal energy. The greatest benefits from employing micro-generation are obtained in facilities in which the demand for these two types of energy does not oscillate much or is constant. That is why individual users, hospitals and educational centers, sports centers, hotels and public utilities are usually the most frequent users of cogeneration systems.
MSCI Emerging Markets Europe 10/40 Index Index comprising key companies listed on emerging markets in Europe.
MSCI Poland Index Index comprising more than 20 key companies listed on the Warsaw Stock Exchange.
Best Available Technology BAT The most efficient and sophisticated level of technology development and methods for conducting a given business. BAT are defined for various branches of industry. In the energy sector BAT forms the basis for determining borderline emission quantities, among others, to eliminate, or if that is not practicable, limit emissions and their overall environmental impact.
Sensitive user sensitive user According to the Act entitled Energy Law, a sensitive user is a person to whom a housing allowance has been awarded and who is a party to a comprehensive agreement or electricity sale agreement and who lives in the place where electrical energy is supplied.
Impairment losses impairment losses Losses because of the impairment of non-current assets taken in accordance with the regulations of international accounting IFRS (MSSF) standard.
Corporate Social Responsibility CSR Corporate Social Responsibility – business philosophy and management strategy calling for an organization to take responsibility for the impact exerted by its decisions and actions on society and the environment. Its foundations are rooted in ethical and transparent conduct, taking into consideration the expectations of stakeholders and cultivating good long-term relations with the overall environment. Corporate social responsibility is one of the key methods of achieving sustainable socio-economic development.
PV cells Photovoltaic cell (PV) – semi-conductor material in which the energy of solar radiation is converted into electrical energy.
omni-channel Omni-channel According to the omni-channel idea, the future of commerce is to conduct online sales while simultaneously encouraging customers to make traditional purchases. Online and offline sales during the digital revolution should fluidly penetrate one another.
Operating Capacity Reserve ORM Mechanism of providing operational reserves by the Centrally Discharged Units (JWCD), where they were able to deliver electricity to the system, but for market reasons were not used. It was implemented in Poland in 2014.
RES Renewable energy sources.
PM-RES Property rights to certificates of energy for electrical energy generated in RES.
Polygeneration polygeneration Parallel generation of energy and chemicals.
RESPECT Index Index consisting of companies listed on the Warsaw Stock Exchange to identify companies managed in a responsible and sustainable manner. It takes into account the quality of reporting, the level of investor relations, corporate governance and liquidity, among others, whereby it simultaneously constitutes a real point of reference to measure the attractiveness of companies as investments.
Balancing market balancing market The balancing market is what is referred to as a technical market. That means it is not a place to sell energy. Its purpose is the physical delivery of the energy purchase/sale agreements executed by participants and balancing the demand for electricity with its generation in real time in the national electrical energy system (KSE). The existence of the balancing market is indispensable for the energy market to function. Entities that buy energy have an obligation to participate in this market.
CATALYST Market Catalyst market Bond market. It is run on the transaction platforms of the Warsaw Stock Exchange and BondSpot.
SAIDI System average interruption duration index in the supply of electricity calculated in minutes per user. It is a reliability index whose value is the sum of the products of interruption duration in energy supply and the number of users affected by the consequences of such an interruption during a year divided by the total number of users connected to a grid.
SAIFI System average interruption frequency index of long interruptions in energy supply. It is a reliability index whose value is the number of users affected by the consequences of all such interruptions during a year divided by the total number of users.
Gangue gangue The rock that is extracted from a deposit of a given mineral that is considered to be unusable waste.
Smart City smart city Smart city is a project involving the implementation of specific solutions exerting a real impact on citizens. One example is supplying tools to urban residents to monitor energy consumption, among others. This is possible thanks to the special platform called eLicznik (eMeter). TAURON supplies smart meters, for instance, under the Smart City Wrocław project.
Smart Home smart home System to control a smart home. SMART HOME technologies control burglar alarms, temperature control and electricity supply systems. This is a real-time power consumption monitoring solution that TAURON offers via a platform to check readings from the smart power meter.
Smart grid smart grid Smart electrical energy grids to facilitate communication between participants on the energy market to supply energy services while cutting costs and enhancing efficiency and integrating distributed sources of energy, including renewable energy.
smart metering Smart metering Smart metering system – electronic system used to measure energy consumption obtaining more information than from a conventional meter, and to send and receive data through electronic communication.
small carbonate sorbent Small carbonate sorbent Fine carbonate sorbent (limestone powder) – is a product derived from the process of dehydrating and profound milling of limestone whose active ingredient is calcium carbonate, CaCO3. Fine carbonate sorbent is used in processes to desulfurize flue gas – to remove SOx.
Enterprise Risk Management System ERM Set of rules, standards and tools to accomplish the fundamental objective of risk management i.e. ensuring the security of the TAURON Group’s operations. This system is regulated by the document entitled Enterprise Risk Management System in the TAURON Group, defining the TAURON Group’s enterprise risk management framework and rules.
Tauronet tauronet TAURON Group’s corporate intranet portal, one of the most important tools of communicating with employees. One of the largest platforms of its type in Poland at the time of publishing this report.
CCS Carbon dioxide capture, transport and geological storage technology.
CCU Capture and use (management) of carbon dioxide, eg. in the the chemical industry.
Smart Technology smart technology Control system in a smart home, among others - it is responsible for the safety and living comfort of residents.
Towarowa Giełda Energii S.A. Polish Power Exchange TGE Towarowa Giełda Energii (TGE) (Polish Power Exchange) is the only licensed power exchange in Poland. Presently, TGE runs the following markets: Day-Ahead Market (DAM), Commodity Forward Market with physical delivery (CFM), Property Rights Market for RES and Cogeneration. TGE also keeps a register of the Certificates of Origin for electrical energy produced in RES and in highly efficient cogeneration sources and the CO2 Emission Allowance Market.
Energy Regulatory Office ERO Government authority regulating the Polish energy market (electricity and gas, among others).
Coal winnings coal winnings The rock material taken from the mine face. It includes the mineral and gangue.
WACC Financial ratio - weighted average cost of capital.
WIBOR Warsaw Inter Bank Offered Rate Warsaw Inter Bank Offered Rate - interest rate used on the Polish interbank market for interbank loans.
WIG Index comprising all the companies listed on the Main Market of the Warsaw Stock Exchange that fulfill the basic criteria for inclusion in its indices.
WIG20 Index comprising the 20 largest and most liquid companies listed on the Main Market of the Warsaw Stock Exchange.
WIG30 Index comprising the 30 largest and most liquid companies listed on the Main Market of the Warsaw Stock Exchange.
WIG-Energy Sectoral index comprising companies participating in the WIG index and simultaneously classified in the energy generation sector.
WIG-Poland National index comprising only the domestic companies listed on the Main Market of the Warsaw Stock Exchange that fulfill the basic criteria for inclusion in its indices.
Underground mining pit underground mining pit Space created as a result of mining works.
Highly-efficient cogeneration high-efficiency cogeneration Generating electrical or mechanical energy and usable thermal energy in cogeneration to save the original energy used in the cogeneration unit in an amount no lower than 10% compared to the generation of electrical energy and thermal energy in separate systems or in a cogeneration unit with an installed electricity capacity under 1 MW compared to the generation of electrical energy and thermal energy in separate systems.
Green certificates green certificates "Green" certificates "green" certificates Certificates of origin, i.e. a document that confirms the generation of electricity with renewable energy sources. The green certificate system has been in force in Poland since 1 October 2005 (and has changed in the new RES Act).
Yellow certificates yellow certificates "Yellow" certificates "yellow" certificates Certificate certifying the origin of energy. Operators of cogeneration units fired with gaseous fuels or with a total installed power source of less than 1 MW may be compensated with yellow certificates.
TPA Third Party Access - TPA is one of the most important principles (besides unbundling) on which the deregulated energy market is founded. TPA gives an energy user the right to buy it from any energy seller of its choosing.
EUA CO2 emission unit.
IFRS International Financial Reporting Standards – standards and their interpretations approved by the International Accounting Standards Board (IASB).
RFX Request for proposal.
Global Reporting Index GRI Independent international organization whose mission is to create a joint global framework for communicating responsibility and sustainable development. The GRI guidelines are an international reporting standard for organizations regardless of size, business sector and venue. Their application gives a guarantee of consistency in terminology and indicators.
International Integrated Reporting Council IIRC The International Integrated Reporting Council is an organization whose purpose is to create globally accepted integrated reporting guidelines based on combining financial, environmental, social and corporate governance reporting in a clear, succinct, coherent and comparable format. It consists of global leaders such as the International Federation of Accountants (IFAC), the International Accounting Standards Board, the United Nations Environmental Program (UNEP), the International Organization of Securities Commissions, the World Business Council for Sustainable Development and the Global Reporting Initiative (GRI).
integrated reporting non-financial reporting standard International integrated reporting standard encompassing financial and non-financial data devised by IIRC.

GRI indicators