Current Report No. 10/2016

Submission of a non-binding conditional proposal and expression of will for the Company to enter into negotiations concerning equity exposure to Polska Grupa Górnicza Sp. z o.o.

Current Report no. 10/2016

Legal basis: Article 56 Section 1 Item 1 of the Act on Offerings – confidential information

In connection with the process for Polska Grupa Górnicza Sp. z o.o. with its registered office in Katowice (“PGG”) to find investors for a total investment of no less than PLN 1,500,000,000.00 (“Investment”), the ENERGA SA Management Board (“Energa”, “Company”) reports that today it submitted a non-binding conditional proposal to participate in the Investment in an amount up to PLN 600,000,000.00 (say: six hundred million zloty and 00/100).

The business of PGG currently consisting of 11 Hard Coal Mines (HCM) and accompanying branches is to be conducted on the basis of the enterprise to be acquired from Kompania Węglowa S.A. in Katowice. The submitted proposal is an expression of will for the Company to enter into good faith negotiations concerning the Investment and to strive to complete the investment process smoothly giving consideration to the conditions presented in the proposal.

The key conditions precedent include among others:

- execution of investment agreements with other investors making it possible to recapitalize PGG in a minimum amount of PLN 1.5 billion and restructuring the debt of Kompania Węglowa S.A. (KW) in Katowice to be taken over by PGG, including the negotiation of terms and conditions satisfactory to the Company of restructuring KW’s debt and signing the pertinent agreements procuring the stability of PGG’s long-term operation,

- development of a structure to fund PGG, at the level of its shareholders and bondholders, that will eliminate or mitigate the risk of deeming the Investment to be illegal public aid,

- conducting and obtaining on the basis of current data due diligence results that are acceptable to the Company and other new investors (among others technical, environmental, legal, financial and tax due diligence) confirming that doing the deal will enable PGG to become permanently profitable and liquid,

- obtaining the required corporate consents and all consents from the competent antitrust authorities and other consents from the administrative authorities as required by law,

The key threshold conditions include among others:

- the Management Board of Kompania Węglowa S.A. approves financial projections acceptable to all interested stakeholders, including the trade unions, along with the detailed schedule of restructuring actions that will lead to all the hard coal mines forming part of PGG becoming permanently profitable and liquid,

- PGG will incur capital expenditures solely for investment undertakings with a documented rate of return whose amount corresponds at least to PGG’s cost of capital and solely in the profitable areas of PGG’s business,

- Investors do not anticipate the possibility of providing additional capital injections to PGG until at least 2026,

- the funds from the Company will be transferred to PGG in tranches defined by a detailed schedule and aligned to PGG’s current warranted need while the transfer of the various tranches will hinge on the achievement of specific Business Plan assumptions.