PGE and EDF have signed the Conditional Share Sale Agreement regarding sale of EDF assets in Poland

With reference to current report no. 26/2017 dated May 11, 2017, the Management Board of PGE Polska Grupa Energetyczna S.A. (“PGE”, the “Company”) discloses that on May 19, 2017 PGE has signed the Conditional Share Sale Agreement (the “CSSA”) regarding sale of EDF assets in Poland with EDF International SAS and EDF Investment II B.V. (jointly “EDF”).

The CSSA includes in particular (the “Transaction”):

- acquisition of 99.51% of shares of EDF Polska S.A.,

- acquisition of 100% of shares of EDF Investment III B.V.,

- indirect acquisition of 50% of shares + 1 share of ZEW Kogeneracja S.A. (shares held by EDF Polska S.A. and EDF Investment III B.V.), and

- acquisition of shares in supporting subsidiaries of EDF Polska S.A.

By execution of the CSSA, PGE will acquire number of conventional generating assets, including:

- 4 CHPs i.e. Kraków, Gdańsk, Gdynia and Toruń, district heating network in Toruń and Rybnik power plant (currently controlled by EDF Polska S.A.),

- 4 CHPs i.e. Wrocław, Zielona Góra, Czechnica and Zawidawie and district heating network in Zielona Góra, Siechnica and Zawidawie (currently controlled by EDF Polska S.A. and EDF Investment III B.V.).

The Transaction value (Enterprise Value) for all assets acquired from EDF, has been established in the Locked Box formula as of December 31, 2016 (“Locked Box Date”) and amounts to approximately PLN 4.51 billion, of which approximately 2.45 billion PLN accounts for equity value and approximately PLN 2.06 billion accounts for net debt.

Total cash considerations to be paid by PGE with respect to the Transaction will consist of:

- equity value of approximately 2.45 billion PLN (“Equity Value”),

- interest on the Equity Value settled pro rata from January 1, 2017 until the closing of the Transaction amounting to no more than approximately PLN 107 million as a result of economic benefits from operations of acquired assets vesting with the Company following the Locked Box Date,

- intra-company debt balance as of the closing of the Transaction in the maximum amount of approximately PLN 1.68 billion and USD 40 million (“Intra-company Debt”),

- outstanding interest as of the closing of the Transaction related to the Intra-company Debt.

After the closing of the Transaction, pursuant to the Polish regulations regarding capital market, as a consequence of acquisition of shares of ZEW Kogeneracja S.A. PGE Group will be obliged to announce a subscription tender for shares of ZEW Kogeneracja S.A. in number sufficient to reach 66% threshold of voting rights in ZEW Kogeneracja S.A. Cost of the tender is not included in the Transaction value.

The closing of the Transaction is planned no later than January 2, 2018. The payment for the assets shall take place at the closing of the Transaction.

The closing of the Transaction is conditional upon satisfaction of all of the following conditions:

- obtaining by PGE the antitrust authority clearance (UOKiK),

- obtaining by PGE the Minister of Energy clearance pursuant to the Act of July 24, 2015 on the Control of Certain Investments,

- obtaining by PGE a waiver from the President of the Agricultural Properties Agency (ANR) on pre-emption right,

- obtaining by EDF a clearance on the transaction from the relevant governmental authorities in France regarding the governance of and transactions on the capital of state owned companies (the French Regulatory Condition).

The EDF assets acquired by PGE have installed capacity of 3.3 GWe and 4.4 GWt (including Toruń gas-fired CHP commissioned in 2017) and produced 12.4 TWh of electricity (net) and 32.8 PJ of heat in 2016.

According to the best knowledge of the Company, the consolidated EBITDA generated by those assets amounted to approximately PLN 1.1 billion in 2016.

For comparison, PGE generating assets had installed capacity of 12.75 GWe (including 10.61 GWe in Conventional Generation segment) and 3.55 GWt as at December 31, 2016 and produced 53.67 TWh of electricity (including 51.70 TWh in Conventional Generation segment) and 18.57 PJ of heat in 2016. PGE’s consolidated EBITDA amounted to approximately PLN 7.38 billion in 2016.

In the opinion of the Management Board of PGE, the Transaction fits in updated PGE Group Strategy and drives PGE to become the leader in heat generation in Poland. Acquired district heating assets perfectly match PGE’s business profile increasing the share of stable regulated revenues and - through multilateral diversification - limiting the overall risk of the Company. Moreover, the heating assets possessed and taken over are the sound foundation for further expansion of the activity, with focus on cogeneration units, underdeveloped and undercapitalised heating installations as well as district heating networks.

The Company will inform in a separate current report about further steps in the Transaction.