Management Board report on the activity of ENEA S.A. and the ENEA Group in 2022

Poznań, 23 March 2023

Letter from President of the Management Board and CEO

Dear Stakeholders,

I have the pleasure to present to you the ENEA Group’s latest annual report containing a recap of our activities and financial and operational performance in 2022. For the power sector, the year was marked by rapid changes in the market and regulatory environment, triggered by events of groundbreaking significance for energy security in Poland and across Europe. Russia’s aggression against Ukraine and the outbreak of a full-scale war beyond Poland’s eastern border sparked a global energy crisis that directly affected the social, political and economic situation. In this difficult and volatile environment, the ENEA Group generated good financial and operational results, having implemented a strategy of transformation towards a climate-neutral company and having invested additional resources in the development of renewable energy sources.

Global developments with the power sector in the foreground

The Russian Federation’s armed assault against Ukraine and the subsequent sanctions imposed on the aggressor exposed certain imperfections of the energy systems of those European countries which were overly dependent on the supplies of cheap commodities from Russia. For more than a year now we have been dealing with an energy crisis, price increases on the energy market and problems with the availability of energy carriers, including natural gas, coal and biomass, previously imported from the east. The current international situation affects many aspects of energy policy and forces changes in the approach to ensuring energy security by pursuing greater diversification and independence. Accordingly, it became necessary to modify the provisions of “Poland’s Energy Policy until 2040.” Poland will be involved in negotiations aimed at reforming the mechanisms of the European Union’s climate policy to ensure that the pursuit of a low-emission and ambitious transformation contributing to the achievement of EU goals is possible, but that it also takes into account the transitional spike in demand for conventional generation capacity, without incurring excessive costs resulting from climate policy. All changes occurring in the ENEA Group’s environment exert a major impact on the pursuit of our Development Strategy and the strategic goals and development directions laid down therein.

Secure financing of the ENEA Group’s transformation and investments in RES

In 2022, ENEA successfully completed a recapitalization process, having raised over PLN 750 million to finance the Group’s capital expenditure program. The issue of shares will enable the ENEA Group to pursue one of the key directions of the Development Strategy. The newly obtained funds will be spent on investments in the area of distribution, including on the development of RES capacities and smart power grids. In 2022, the Group spent PLN 2.6 billion on investments. Most capital expenditures are dedicated to the distribution area and are aimed at ensuring the security of energy supplies, in particular in the context of the rapid growth of distributed energy production.

At the beginning of 2022, the Group launched a new cogeneration source in Piła, worth nearly PLN 50 million, based on three gas engines and solar collectors the operation of which resulted in a reduction of coal consumption in the heating system. The new source increased the share of heat produced in high-efficiency cogeneration from 32% to 51.4%. As a result, the city of Piła’s heating system became truly energy efficient. In 2022, the Group’s first photovoltaic power plants were also put into operation: in Jastrowie (Wielkopolskie voivodship), Lików (Zachodniopomorskie voivodship) and Lubno (Lubuskie voivodship). Additional PV projects reached the stage of readiness for the launch of investment work earlier this year.

As part of its preparation endeavors to completely abandon the generation of electricity from coal, the Group is executing a project to spin off its coal assets to the National Energy Security Agency. The project work is in progress in accordance with the adopted schedule. In June 2022, ENEA and the Ministry of State Assets signed a letter of intent on the sale of an equity stake in LW Bogdanka. The sale is an element of the pursuit of the Group’s strategic objectives calling for the disposal of coal assets. In accordance with the provisions of the letter of intent, the parties cooperate in the preparation and execution of the acquisition of shares in Bogdanka by the State Treasury. This action will improve the chances for obtaining funds for the ENEA Group’s energy transformation.

Work is also underway on the construction of CCGT power units at the Kozienice Power Plant, aimed at restoring the capacity of 200 MW-class units. ENEA Elkogaz, the special purpose vehicle in charge of the project, announced a competitive dialogue procedure for the construction of the CCGT units. The new low emission sources will stabilize RES as they develop in the initial phase of the ENEA Group’s efforts to achieve climate neutrality and will provide for the security of the electric power system and our customers.

Group’s transformation supported by research and development endeavors and innovations

The energy transformation process in Poland must assume the inclusion of nuclear sources in our energy mix. The operation of baseload nuclear power plants may be supplemented by the capacities of small and micro reactors built in SMR technology. The ENEA Group keeps reviewing available market solutions, looking for opportunities to cooperate with entities capable of deploying such technologies.

That is why ENEA is committed to research and development projects and keeps expanding its collaboration with the world of science and business. An example of this approach is the establishment of collaboration with Poznańskie Centrum Superkomputerowo-Sieciowe (Poznań Supercomputing and Networking Center), which is expected to contribute to the broader deployment of digital technologies in the power sector.

Good financial and operational performance in a challenging market environment

In 2022, the ENEA Group generated PLN 2.2 billion in EBITDA and over PLN 30.1 billion in sales revenue.

In 2022, the net debt/EBITDA ratio stood at a safe level of 1.73.

Last year, the ENEA Group generated a total of 26.2 TWh of energy. The total volume was 0.7% lower than the production in 2021 and resulted from a 0.5 TWh lower generation of energy from renewable sources, which stood at 1.9 TWh. The main reason for the reduced RES generation was the planned upgrade of the Green Unit at the Połaniec Power Plant after 10 years of efficient operation. In 2022, over 41,000 renewable sources along with micro-installations were connected to ENEA Operator’s distribution grid, and the total number of RES connected to the company’s distribution grid surpassed 150,000 at the end of 2022.

In 2022, total revenue from sales increased by nearly PLN 9 billion compared to 2021 to over PLN 30.1 billion. At the same time, the ENEA Group posted a much lower net profit, a reflection of the tough and volatile situation on the energy market, of nearly PLN 119 million compared to PLN 1.8 billion in 2021.

We deploy socially responsible solutions to protect Polish citizens

ENEA, as a socially responsible company, has deployed the Government Solidarity Shield the most significant purpose of which is to protect Polish citizens against the effects of a dramatic increase in electricity prices. All these efforts have been made in order for Tariff Group G customers to be spared the effects of the energy crisis. Special protection has been extended to families with many children and people with disabilities. Entities that are exempt from the duty to have their tariffs submitted for approval, namely local governments, public institutions and micro, small and medium-sized enterprises, also benefit from the Government Solidarity Shield and electricity purchase guarantees at a price not greater than PLN 785 per MWh. The implemented mechanisms that freeze electricity prices for households and establish a cap on the electricity price for local governments and small and medium-sized enterprises provide Polish buyers with effective protection.

Path towards zero emissions

In 2022, the ENEA Group published its second ESG report, in which we summed up our efforts and their outcomes in the three key areas of our responsibility: environmental, social and governance issues. The ESG Report confirms the Group’s responsible and comprehensive approach to protecting the climate and sustainable transition as a credible partner striving to achieve climate neutrality. It also provides an overview of initiatives taken in 2021 and presents information on planned strategic projects and adopted short, medium and long-term goals. The report presents long-term schedules: for reducing CO 2 emissions and for changing the energy generation mix. The section devoted to managing the risks associated with climate change is expanded considerably and analyses of climate opportunities are presented. ENEA also started to report data on indirect greenhouse gas emissions (referred to as Scope 2). The Company supports education aimed at achieving the Sustainable Development Goals in Poland.

Support for local communities

ENEA and the ENEA Foundation are fully committed to supporting local communities wherever the Group conducts its business, by executing projects in the fields of education, safety, health promotion, physical activity, ecology and environmental protection.

In 2022, ENEA was actively involved in supporting general and competitive sports, providing its support as the title sponsor of volleyball and basketball teams and co-funding various sporting events, including the Enea Bydgoszcz Triathlon and the ENEA IRONMAN Gdynia. Sports education of the youngest children was promoted within the framework of the ENEA Academy of Sport project, with support provided to the football academies of Warta Poznań and Lech Poznań, among others. The Company is also a sponsor of the Polish Federation of Rowing Societies and the Polish Table Tennis Association. ENEA’s brand ambassador in this community is Natalia Partyka, a prominent table tennis player and participant in multiple Olympic Games and medalist of Paralympic Games. By supporting various sports disciplines, we intend to care not only for the continuous improvement in the level of athletic achievement, but also to constantly contribute to encouraging Poles to take care of their own and their families’ health by improving their physical fitness. Of major significance in this context are ENEA’s endeavors in the promotion of youth sports, which we have been investing in continuously for many years, based on the premise that healthy habits and consistency in action are qualities that are worth pursuing since the earliest stages of life.

The ENEA Group has also been consistently supporting Polish culture. As a patron of the arts, we not only continued our cooperation with the Grand Theater in Poznań, the Musical Theater in Poznań and the Pomeranian Philharmonic in Bydgoszcz, but we also supported the acquisition of works of art for the Royal Castle in Warsaw, which in the past were part of King Stanisław II August’s collection. The primary purpose of our involvement in activities related to cultural achievements of past eras is their preservation for future generations of Poles and the protection of Poland’s national heritage as one of the foundations of our identity.

In 2022, the Enea Foundation executed socially beneficial projects and supported hundreds of actions initiated by public institutions, implementing key initiatives for our local stakeholders. Such involvement is extremely important to us in the context of corporate social responsibility, which has been one of the pillars of the ENEA Group’s existence for years.

Provision of assistance to Ukrainians

In this difficult period of the ongoing war in Ukraine, the role and importance of utility companies in Poland must not be underestimated, as their key job is to ensure the stable and safe generation and supply of electricity to all people living in our country. The events of late February 2022 mobilized most of our society to act for the benefit of those who were forced to leave their homes. The ENEA Group was also deeply involved in these humanitarian activities. The value of financial and material support provided by the ENEA Foundation has surpassed PLN 5.5 million. Over PLN 4 million has been allocated to the upkeep of refugees

On behalf of the ENEA S.A. Management Board, I extend words of gratitude and appreciation to all ENEA Group employees, members of the Supervisory Board, management boards of the Group’s subsidiaries and the Trade Unions for their commitment to and active involvement in the Group’s growth in this demanding period.

Respectfully,

Paweł Majewski

President of the ENEA S.A. Management Board

ENEA Group in numbers

ENEA has 17.6 thousand employees

In 2022, the ENEA Group generated EBITDA of PLN 2,220.0 million (down by PLN 1,322.9 million y/y).

The Generation area posted EBITDA of PLN 310.2 million (down by PLN 1,292.3 million y/y). The lower EBITDA resulted predominantly from the poorer performance in the System Power Plants Segment, down by PLN 1,030.3 million y/y (lower generation margin, increase in fixed costs, a decline in margins on the Balancing Market) and in the RES Segment, a decrease of PLN 243.4 million y/y (which was caused mainly by the increase in the costs of biomass consumption).

The Mining area generated EBITDA of PLN 610.6 million (down by PLN 210.8 million y/y). The lower EBITDA was largely caused by a decrease in the volume of coal mined, which was offset by a higher sales price. The value of revenue from sales of coal was at a level similar to last year’s. At the same time, operating expenses went up.

The Distribution area posted EBITDA of PLN 1,328.7 million (down by PLN 64.2 million y/y). The decline in EBITDA was caused by an increase in operating expenses along with a concurrent greater realized margin on licensed activities and a better result on other operating activities.

The Trading area posted EBITDA of PLN -76.0 million (up by PLN 165.5 million y/y). The increase in EBITDA was driven by a higher realized margin on the retail market. In parallel, provisions related to onerous contracts grew and the result on revaluation of CO ₂ contracts deteriorated.

• The ENEA Group incurred CAPEX of PLN 2,590 million

• Production of commercial coal was 8.4 million tons

• Sales of commercial coal were 8.4 million tons

• The Group generated 26.2 TWh of electricity

• Sales of heat in the Generation segment totaled 7.1 PJ

• Sales of distribution services to end users were 20.3 TWh

• The volume of sales of electricity and gaseous fuel to retail customers was 23.7 TWh

First quarter

• On 19 January 2022, the ENEA S.A. Management Board adopted a resolution to initiate the process of increasing the Company’s share capital by an amount of no less than PLN 1.00 and no more than PLN 88,288,515, i.e. up to the amount no greater than PLN 529,731,093, through the issue of no less than 1 and no more than 88,288,515 series D ordinary bearer shares with a par value of PLN 1.00 each (“Series D Shares”), which was addressed to investors satisfying the criteria defined in the resolution to increase the share capital through the issue of the Series D Shares, excluding entirely the preemptive rights to all the Series D Shares for the Company’s current shareholders. The purpose of the issue of the Series D Shares was to raise funds for the execution of investment projects in the Distribution Area of the ENEA Group (including the extension and modernization of high and medium voltage networks, the installation of remote reading meters and the connection of new customers to the network), to be executed by ENEA Operator, without the possibility of funding any coal-fired assets. The execution of such investment projects is consistent with the assumptions of the ENEA Group Strategy and aims to ensure energy security and the continuous and reliable electricity supply in the territory covered by the operation of ENEA Operator.

• On 21 January 2022, the ENEA S.A. Management Board submitted an application to the Prime Minister for the State Treasury to subscribe for the Series D Shares for a total amount not higher than PLN 899,659,967.85, in exchange for a cash contribution from the reprivatization fund referred to in Article 56 sec. 1 of the Act of 30 August 1996 on Commercialization and Certain Employee Rights. The Investment Agreement with the State Treasury was entered into on 8 April 2022. Under the Investment Agreement, the State Treasury expressed the intention to subscribe for no more than 88,288,515 New Issue Shares for a cash payment of no more than PLN 899,659,967.85. On the other hand, the Company has undertaken in respect of the State Treasury to allocate all the above funds entirely to the execution, by the Company and its subsidiary (ENEA Operator), of the following projects: (a) expansion and modernization of the grid in the area of high and medium voltage stations; (b) expansion and modernization of the grid in the area of high voltage lines; (c) expansion and modernization of the grid in the area of the medium voltage network; (d) remote-reading meters; and (e) connections to the grid.

• On 31 January 2022, the ENEA S.A. Management Board obtained information from Elektrownia Ostrołęka sp. z o.o. about the Company’s termination of the contract implementing the capacity obligation contracted by the Company as a result of the outcome of the Capacity Market auction for 2023. The capacity contract was terminated upon indication to the operator – Polskie Sieci Elektroenergetyczne S.A. – of capacity contracts fulfilling the criteria provided for in the Capacity Market Act. The indication of the said capacity contracts has triggered the release of the financial security provided by the Elektrownia Ostrołęka sp. z o.o. in the amount of PLN 36.6 million and the annulment of contractual penalties if they become due. The termination of the aforementioned capacity contract is a consequence of changing the plant fuel from coal to gas in the project aimed at the construction and operation of a new power plant in Ostrołęka.

• On 3 February 2022, the need to increase the provision for onerous contracts in the trading segment up to PLN 250.1 million was identified. The increase in the provision is aimed at reflecting the impact of anticipated future losses to be incurred by the Issuer in connection with the performance of comprehensive contracts entered into with prosumers who, in compliance with the amendment to the Act on Renewable Energy Sources, have acquired the right to financial settlements, over a 15-year period, based on a discount support system (so-called ‘net-metering’), on the condition that their micro-installations are connected to the grid by 31 March 2022. The amount of the provision is subject to quarterly updates.

• On 10 March 2022, the Extraordinary General Meeting of ENEA S.A. adopted a under which Mr. Radosław Kwaśnicki was appointed to the ENEA S.A. Supervisory Board as of the same day.

• On 11 March 2022, ENEA S.A. signed a surety agreement with Powszechna Kasa Oszczędności Bank Polski S.A. to secure obligations of its subsidiary ENEA Trading up to the amount of PLN 2,400 million. The liabilities include amounts due to the Bank from the Subsidiary under the master agreement on cooperation in the financial market signed by the Bank and the Subsidiary, including under foreign exchange hedging transactions and commodity price hedging transactions, in particular forward transactions related to CO ₂ emission allowances concluded by the Subsidiary. The surety is due to expire on 31 December 2024 or on the date when the Subsidiary ceases to be a member of the Issuer’s Group as a result of a spin-off of the Group’s selected assets.

• The financial settlement of the Coal-Fired Project implemented under the contract for the construction of the Ostrołęka C Power Plant, with the EPC Contractor – a consortium established between GE Power sp. z o.o. with its registered office in Warsaw and GE Steam Power Systems S.A.S. with its registered office in Boulogne-Billancourt, France – was completed on 31 March 2022. The final net value of receivables arising from the settlement was PLN 958 million and, accordingly, the total amount due the EPC Contractor, calculated as the difference between the above value and the amounts already covered, has already been paid in full by Elektrownia Ostrołęka sp. z o.o.

• On 8 April 2022, the Company received Mr. Paweł Szczeszek’s resignation from the position of President of the ENEA S.A. Management Board, effective after 10 April 2022. The reason for the resignation was not specified.

• On 8 April 2022 – the Extraordinary General Meeting of ENEA S.A. adopted a resolution in the matter of increasing the Company’s share capital by issuing Series D ordinary bearer shares, waiving all preemptive rights of all existing shareholders to all Series D Shares, amending the Company’s Statute, applying for admission and introduction to trading of Series D Shares and/or rights to Series D Shares on the regulated market operated by the Warsaw Stock Exchange (“WSE”) and dematerialization of Series D Shares and/or rights to Series D Shares.

• On 8 April 2022, a share placement agreement was executed with Bank Polska Kasa Opieki S.A. and the private subscription bookbuilding process has been launched for up to 88,288,515 Series D ordinary bearer shares.

• On 8 April 2022, the ENEA S.A. Supervisory Board adopted the resolution to appoint Mr. Rafał Mucha, the Company’s Management Board Member, as acting President of the Management Board as of 11 April 2022.

• On 12 April 2022, the ENEA S.A. Management Board adopted a resolution on the proposed distribution of the Issuer’s net profit for the financial year 2021. According to the resolution, the Company’s Management Board proposed to allocate the Issuer’s net profit for the financial year covering the period from 1 January 2021 to 31 December 2021, in the amount of PLN 460,408,613.85 as follows: PLN 442,110,040.96 to increase the reserve capital to perform planned investment projects; PLN 18,298,572.89 to decrease the negative amount of the remaining capitals. The Supervisory Board issued a positive opinion on the Management Board’s proposal.

• On 14 April 2022, the Company’s Management Board set the issue price of Series D Shares at PLN 8.50 per Series D Share. The Company’s Management Board also decided to offer selected investors, on the terms set forth in the Issue Resolution and in accordance with the rules of the subscription arranged thereunder, to subscribe for a total of 88,288,515 Series D Shares.

• On 20 April 2022, the Issuer’s Supervisory Board adopted a resolution to appoint Mr. Paweł Majewski, effective as of 25 April 2022, to the position of President of the ENEA S.A. Management Board for the joint term of office commenced on the date of holding the Ordinary General Meeting of ENEA S.A. which approved the financial statements for 2018.

• On 28 April 2022, the Company’s Management Board adopted a resolution to allocate 88,288,515 Series D Shares. The cash contributions to cover the Series D Shares were injected in their entirety. The issue price of the Series D Shares was PLN 8.50 per share. The Series D Shares and the rights to the Series D Shares were the subject of the Company’s application for admitting and introducing them to be traded on the regulated market operated by Warsaw Stock Exchange SA.

• On 6 May 2022, ENEA S.A. received Statement no. 400/2022 from the Central Securities Depository of Poland (“KDPW”) in the matter of entering into an agreement to register 88,288,515 rights to the Company’s series D ordinary bearer shares with a par value of PLN 1.00 each. Rights to Shares have been designated with ISIN code PLENEA000104. On the same day, the Management Board of the WSE adopted resolution no. 427/2022 on admission and introduction into stock exchange trading on WSE’s main market of 88,288,515 rights to the Company’s series D ordinary bearer shares with a par value of PLN 1.00 each, as of the date of registration of these rights to shares by the KDPW.

• On 9 May 2022, the KDPW issued communication on registration of 88,288,515 rights to the Company’s series D ordinary bearer shares with a par value of PLN 1.00 each.

• On 12 May 2022, in Current Report No. 31/2022, the Company published a summary of the completed subscription for series D ordinary bearer shares (supplementary information was published in Current Report No. 55/2022). The value of the subscription was PLN 750,452,377.50.

• On 31 May 2022, the District Court Poznań – Nowe Miasto and Wilda in Poznań, 8th Commercial Division of the National Court Register, registered the amendment to the Company’s Statute made pursuant to Resolution No. 5 of the Company’s Extraordinary General Meeting of 8 April 2022 in the matter of increasing the Company’s share capital by issuing series D ordinary bearer shares, waiving all preemptive rights of all existing shareholders to all the Series D Shares, amending the Company’s Statute, applying for admission and introduction to trading of the Series D Shares and/or rights to the Series D Shares on the regulated market operated by the WSE and dematerialization of the series D shares and/or rights to the series D shares. After the registration, the Company’s share capital is PLN 529,731,093. The total number of votes resulting from all outstanding shares is 529,731,093.

• On 8 June 2022, ENEA S.A. received Statement No. 505/2022 of the KDPW in the matter of entering into an agreement with the Company to register 88,288,515 series D ordinary bearer shares with a par value of PLN 1.00 each in the central securities depository and assigning them code ISIN PLENEA000013 on the condition that these shares are listed on the same regulated market as that on which the Company’s other shares marked with code ISIN PLENEA000013 are also listed.

• On 8 June 2022, the management board of the WSE adopted Resolution No. 534/2022 on the designation of the last day of listing on the WSE Main Market of the rights to series D ordinary bearer shares (“Rights to Series D Shares”), whereby the WSE Management Board designated for 9 June 2022 the last day of listing of 88,288,515 Rights to Series D Shares, marked by the KDPW with the code PLENEA000104; and Resolution No. 535/2022 on the admission and listing on the WSE Main Market of the Company’s 88,288,515 series D ordinary bearer shares with a par value of PLN 1.00 each

(“Series D Shares”), whereby the WSE Management Board stated that the Series D Shares are admitted to stock exchange trading on the main market and decided to list them on the main market as of 10 June 2022 by applying the ordinary procedure, on the condition that these shares are registered by the Central Securities Depository (KDPW) by 10 June 2022 and marked with the code PLENEA000013.