Energa S.A.

Legal Proceedings Report • Oct 24, 2018

19 September 2018

Energa SA al. Grunwaldzka 472 80 - 309 Gdańsk Poland

Attn: Members of the Management Board

Alicja Barbara Klimiuk Jacek Kościelniak Grzegorz Ksepko

Members of the Supervisory Board

Paula Ziemiecka-Księżak Zbigniew Wtulich Agnieszka Terlikowska-Kulesza Maciej Żółtkiewicz Marek Szczepaniec Andrzej Powałowski

Investor relations

Aleksander Korsak (aleksander.korsak@energa.pl, investor.relations@energa.pl)

Via registered mail and email

Dear Sir or Madam,

Re: OSTROŁĘKA C: BOARD MEMBERS' FIDUCIARY DUTIES TO THE COMPANY AND SHAREHOLDERS

• $1.$ We act for , a shareholder in Energa SA.

• $2.$ We write to put you on notice of the increasing legal risks of Energa's actions in relation to Ostrołęka C and to request assurances that the interests of Energa and its shareholders will be protected. The ongoing actions of Energa's Management Board and Supervisory Board risk breaching board members' fiduciary duties of due diligence and to act in the best interests of the company and its shareholders. In particular:

• Energa appears intent on pursuing the proposed new Ostrołęka C coal-fired power plant a. project despite compelling evidence from independent economic analysts, rating agencies and energy industry experts that the project is liable to be unprofitable and harmful to the interests of the company and its shareholders.

• . Recent media reports suggest Energa is considering issuing a notice to proceed ("NTP") prior to the capacity market auction on 21 December 2018. This would contradict Energa's previous assurances to the market that it would only move to an NTP following the successful completion of the auction. Such a precipitous move would risk a rating downgrade (in light of a specific indication to this effect from Fitch) and risk committing Energa to the project before, on any reasonable view, its profitability could be assured.
• 1. Accordingly, we seek your urgent confirmation that Energa's Supervisory Board will not consent to (and Energa will not) issue an NTP before the capacity market auction is held and won and until a determination is made that the contract secured is sufficient to ensure the project's profitability, in accordance with Energa's previous statements to the market.
• $\overline{4}$ . Whilst is an environmental organisation, it is also a shareholder of Energa and is entitled to the relevant rights of recourse that vest in any shareholder of the company. More broadly, the matters raised in this letter reflect:
• Broader concerns of Energa's minority shareholders, reflected in 37% of the minority $a_r$ shareholders present at Energa's extraordinary general meeting on 3 September 2018 having voted against the resolution consenting to moving to the construction phase (with a further 7% abstaining) with a formal objection lodged to that resolution.¹
• The increasing concerns of global institutional investors generally about the financial $\mathbf b$ . implications of investment in coal assets, given their high CO₂ content and the high risk of stranded assets. In this case, as demonstrated by the economic analysis referred to below, the fall in the price of renewable energy sources and rising carbon prices have continued to undermine the economics of Ostrołęka C.

Ostrołęka C's lack of profitability

$5.$ Ostrołęka C is a major investment for the company. Energa's 50% share of the €1.2 billion overnight capital cost of the project represents c. 70% of its market capitalisation.²

$\mathbf{1}$ Minority shareholders represented 64,106,208 shares at Energa's 3 September 2018 extraordinary general meeting (i.e. the total of 277,432,525 less the Polish State Treasury's 144,928,000 BB shares and 68,398,317 AA shares). There were 23,557,637 votes against and 4,600,000 abstentions. See Energa, Current Report No. 41/2018, 3 September 2018, https://ir.energa.pl/en/pr/401223/currentreport-no-41-2018 and Energa, Information about the total number of shares and votes, https://secure.sitebees.com/file/static/21154/49/information about the total number of shares an d votes.pdf.

$\overline{2}$ See Carbon Tracker, Burning more money than coal: The asset economics and financial implications of Energa's and Enea's proposed new Ostrołęka coal power plant C, August 2018, p9, https://www.carbontracker.org/reports/burning-more-money-than-coal/.

• 1. Energa has repeatedly sought to assure its shareholders that Ostroleka C will be profitable. It has further assured shareholders that profitability is a condition of proceeding to the construction stage.
• On 30 November 2016, Energa stated in a stock exchange report that "[u]pon $a.$ completion of the Development Stage the Parties are obligated to participate in the Construction Stage provided that the Project is profitable and the Project funding does not breach the Parties' covenants."3
• b. On 7 July 2017, in response to shareholder questions at its annual general meeting. Energa stated in a stock exchange report without qualification that the project "will be profitable and will increase the Company's value for all the shareholders...".4
• c. On 30 August 2018, in response to questions from Bloomberg News, Energa spokesman Adam Kasprzyk was reported as stating the "project is profitable based on price forecasts prepared by an 'independent adviser'".⁵ Energa did not provide further details.⁶
• d. On 10 September 2018, S&P Global Platts reported that Energa said "ftihe business" rationale was being confirmed at every stage of the project, which would not enter construction unless it had a positive net present value".⁷
• $7.$ Energa's assertions about the profitability of Ostroleka C are contradicted by numerous independent economic analyses, rating agencies and energy industry experts.
• 1. First. has commissioned the enclosed economic analysis from financial think tank Carbon Tracker on the asset economics and financial implications of Ostrołeka C.8 Carbon Tracker's report finds that the plant will be "permanently unprofitable without out-of-market revenues in the form of capacity market payments", with a negative net present value of up to €1.7 billion.
• 1. Carbon Tracker's report also notes that capacity market payments are not guaranteed:

$\mathbf{a}$ Energa, Current Report No. 44/2016, 30 November 2016, https://ir.energa.pl/en/pr/336983/currentreport-no-44-2016. See also Enea, Current Report No. 37/2016, 30 November 2016, http://investors.enea.pl/en/pr/336975/approval-by-enea-s-a-s-supervisory-board-of-the-jointengagement-with-energa-s-a-in-the-preparation-for-construction-construction-and-exploitation-of-thenew-power-unit-in-ostroleka-power-plant.

⁴ Energa Current Report No. 32/2017, 7 July 2017, https://ir.energa.pl/en/pr/361192/current-report-no-32-2017.

s Bloomberg, Poland's Energa Says Ostroleka Power Plant Project is Profitable, 30 August 2018.

⁶ Bloomberg, Poland's Energa Says Ostroleka Power Plant Project Is Profitable, 30 August 2018.

$\overline{z}$ S&P Global Platts, Ostroleka C 'will be competitive': Energa, 10 September 2018.

s Carbon Tracker, Burning more money than coal: The asset economics and financial implications of Energa's and Enea's proposed new Ostrołęka coal power plant C, August 2018, https://www.carbontracker.org/reports/burning-more-money-than-coal/.

• $\mathbf{b}$ . The 15-year contract could be cut short, due to the European Commission's proposed prohibition of capacity market payments for new plants emitting more than 550 grams CO2/kWh (approximately one-third less than Ostrołęka C's potential carbon intensity). Energa expressly acknowledges this risk in its 2017 Management Board report, noting the potential need to implement new EU legislation in the Polish capacity market legislation and that there is "[n]o guarantee that the beneficiaries of the capacity auctions for 2018-2019 will retain acquired rights".⁹
• If Ostrołeka C's EBIT shortfall over its first 15 years of operation is met from capacity c. market payments, it would require c. €1.2 billion capacity market payments, which would likely generate significant resistance from other groups, particularly given references in the 2014 Supreme Audit Office's report on Ostrołęka C that the project was not necessary for Polish energy security.¹⁰
• $10.$ Carbon Tracker accordingly finds that Ostrołęka C "presents a clear and obvious financial risk for investors in Energa and Enea" and "risks destroying shareholder value unnecessarily".
• 1. Second, Carbon Tracker's analysis is supported by longstanding public criticism of the economic viability of Ostrołęka C from a variety of reputable sources, including:
• a. EuroRating, which on 18 July 2018 downgraded Energa following its entering into the construction contract for Ostrołęka C. EuroRating stated that Energa's plan to issue an NTP before the capacity market auction involved a "significant risk" of committing it to a project that may prove permanently unprofitable, particularly if the price of emission allowances continues to rise and the price of renewable energy continues to decline.¹¹
• Fitch, which on 27 September 2016 described Ostrołęka C as "credit-negative" and b. stated that "Fitch believes that it will be challenging for the investment in Ostroleka to

$\overline{9}$ Energa Management Board report for the year ended 31 December 2017, pp 91-92, https://secure.sitebees.com/file/attachment/1247045/6b/4. management board report on the acti vity of the energa capital group for the year ended 31 december 2017.pdf.

${\bf 10}$ See Supreme Audit Office, Report KGP - 4101-001-06/2014, P/14/018, June 2014, p 10, https://www.nik.gov.pl/kontrole/wyniki-kontrollnik/pobierz, kgp~p 14 018 201404300758141398844694~id5~01, typ, ki.pdf. See also CIRE, Myślecki: budowa bloku 1000 MW w Ostrołęce nieuzasadniona i nieopłacalna, 28 January 2018, https://www.cire.pl/item.157776.1.0.0.0.0.0.myslecki-budowa-bloku-1000-mw-w-ostrolecenieuzasadniona-i-nieoplacalna.html and WysokieNapiecie.pl, The last coal power plant in Poland may be only wishful thinking, 27 August 2018, https://wysokienapiecie.pl/12645-last-coal-power-plantpoland-may-wishful-thinking/. $11$

EuroRating, Obniżenie ratingu kredytowego spółki Energa S.A. z BBB do BBB-, 18 July 2018, p 2, http://www.eurorating.com/files/91740803/file/2018-07-18 obnizenie ratingu Energa SA do BBB-.pdf.

achieve a reasonable return...".¹² On 21 March 2018, Fitch noted that construction of Ostrołęka C "without secured capacity payments for the project and without the involvement of financial investors" may lead to negative rating action.¹³

• c. Former Energa Group company director Dr Wojciech Myślecki, who on 28 January 2018 stated that "in my opinion the construction of the new unit is economically unprofitable. and from the point of view of the electric-energy system it is unjustified".¹⁴
• đ. Energy portal WysokieNapiecie.pl, which on 3 January 2018 described Ostrołeka C as "completely unrealistic" and referred to the "colossal problems" Energa and Enea will face financing the project.¹⁵
• Michał Hetmański of Instrat Foundation, who in a report dated August 2018 described e. Ostrołęka C as "fundamentally unviable" with a negative NPV of $\epsilon$ 0.5 billion.¹⁶
• $f_{\star}$ Energa's four own economic analyses commissioned in January, July and August 2012 from Ernst & Young, finding in each case that the project did not meet applicable NPV or IRR thresholds, which led to the original abandonment of the project.¹⁷
• $12.$ Contrary to Energa's statement that Ostrołęka C "will be profitable and will increase the Company's value for all the shareholders",¹⁸ the project is projected to be permanently unprofitable and diminish shareholder value as a result. That Energa appears intent on proceeding with Ostrołęka C despite the above evidence raises questions whether members of Energa's Management Board and Supervisory Board are acting with the necessary due diligence and in the best interests of Energa and its shareholders in doing so.
• $13.$ Please explain the basis of Energa's current assessment that the project will be profitable, the sensitivity analysis applied to that assessment, any independent advice upon which it rests and whether (and the extent to which) it relies upon capacity market payments and/or assumptions about a financing model which will not be in place until after December 2018.

$12$ Fitch Ratings, Fitch: Potential Investments Credit-Negative for Energa and ENEA, 27 September 2016, https://www.fitchratings.com/site/pr/1012224.

¹³ Fitch Ratings, Fitch Affirms Poland's Energa at 'BBB'; Outlook Stable, 21 March 2018, https://www.fitchratings.com/site/pr/10024448.

${\bf 14}$ CIRE, Myślecki: budowa bloku 1000 MW w Ostrołęce nieuzasadniona i nieopłacalna, 28 January 2018, https://www.cire.pl/item.157776.1.0.0.0.0.0.myslecki-budowa-bloku-1000-mw-w-ostrolecenieuzasadniona-i-nieoplacalna.html.

$15$ WysokieNapiecie.pl, Nowa elektrownia w Ostrołęce wystrzelona w kosmos, 3 January 2018, https://wysokienapiecie.pl/7143-nowa-elektrownia-w-ostrolece-wystrzelona-w-kosmos/.

¹⁶ Michał Hetmański, OSTROŁEKA C - Next steps for Europe's last coal power plant, August 2018, http://elektrowniaostroleka.com/upload/filemanager/StopEOC/Dokumenty/raport_ostroleka3_www_e n.pdf.

$\bf 17$ See Supreme Audit Office, Report KGP - 4101-001-06/2014, P/14/018, June 2014, p 7, https://www.nlk.gov.pl/kontrole/wyniki-kontrolinik/pobierz.kgp~p_14_018_201404300758141398844694~id5~01.typ.ki.pdf.

¹⁸ Energa, Current Report No. 32/2017, 7 July 2017, https://ir.energa.pl/en/pr/361192/current-report-no-32-2017.

Energa's apparent reversal of its position that it would only issue an NTP after the capacity market auction is held and won

• $14.$ Energa has previously stated to the market without qualification that it would only issue an NTP after the capacity market action (since scheduled for 21 December 2018) has been held and won. In particular:
• Energa's Eurobond prospectus dated 16 February 2017 stated that: "The Group aims to a. be ready to commence construction of a new coal-fired unit (Ostrołęka C) in 2018 and to commission the unit by the end of 2023. The strategy is to ensure the project's profitability through participation in the expected capacity market mechanism and a favourable coal supply agreement. The fuel supply agreement has been signed in 2016. Therefore, once the capacity auction has been won, the general contractor of the plant may be formally selected and given a Notice to Proceed to the construction stage."¹⁹
• $\mathbf{h}$ . Fitch's rating action commentary of 21 March 2018 similarly stated that: "We understand from Energa that notice to proceed with the project will only be issued if Ostroleka C wins a capacity market auction scheduled for late 2018, which would enhance the project's cash flows."20
• S&P Global Platts reported on 10 September 2018 that "[a] notice to proceed has yet to c. be issued to the contractors, with Energa saying construction is dependent on capacity market payments."21
• $15.$ Despite Energa's unqualified statements in this regard, Michael Keroulle of GE Power was reported as stating in July 2018 that the consortium expects to receive an NTP "in three months" (i.e. in October 2018).²² Enea's CEO was also recently reported as stating that an NTP could be issued before the capacity market auction in December 2018.²³
• 1. In our view, it is inconceivable that Energa would issue an NTP before the results of the capacity market auction. This would:

¹⁹ Energa Finance AB (publ), Prospectus dated 16 February 2017 81, https://www.bourse.lu/security/XS1575640054/248345.

²⁰ Fitch Ratings, Fitch Affirms Poland's Energa at 'BBB'; Outlook Stable, 21 March 2018, https://www.fitchratings.com/site/pr/10024448.

$21$ S&P Global Platts, Ostroleka C 'will be competitive': Energa, 10 September 2018.

$\bf 22$ PAP, Konsorcjum GE spodziewa się otrzymać polecenia rozpoczęcia prac dla Ostrołęki C za trzy miesiące, 12 July 2018, http://biznes.pap.pl/en/news/pap/info/2577281.konsorcium-ge-spodziewa-sie-otrzymacpolecenia-rozpoczecia-prac-dla-ostroleki-c-za-trzy-miesiace.

²³ BiznesAlert, Stępiński: Ostrołęka jak Waterloo, 31 August 2018, https://biznesalert.pl/elektrowniaostroleka-koszty-carbon-tracker-instrat/.

• Directly contradict Energa's previous statements to the market and to Fitch as recently $a.$ as March 2018. Fitch has specifically stated that issuing an NTP without secured capacity market payments may lead to negative rating action.²⁴
• . Risk committing Energa to a project before, on any view, its profitability could be assured. Until the NTP is issued, Energa has stated that it can withdraw from the project should it not be profitable (e.g. if capacity market payments are less than assumed).²⁵
• 1. Please confirm that Energa's Supervisory Board will not consent to (and Energa will not) issue an NTP before the capacity market auction is held and won and until a determination is made that the contract secured is sufficient to ensure the project's profitability.

Financing concerns

• On 9 August 2017, Energa's CFO "told reporters that the financing model for Ostroleka should 18. be ready within a month".²⁶ On 4 September 2018, more than a year later, Energa announced a memorandum of understanding concerning potential engagement, limited to "a commitment to negotiate in good faith" and "subject to and depends on a number of legal, corporate and financial conditions, including on the market situation."27 The memorandum of understanding is effective until 30 November 2018. The preliminary financing structure announced would see Energa contribute PLN 1 billion, with Enea and the fund contributing a further PLN 1 billion each. This would result in a shortfall of over PLN 2 billion, which is said to be "contributed by other forms of financing".²⁸
• 1. The present position raises a number of concerns.
• Issuing an NTP before Energa has confirmed third-party financing would be premature. a. Even the existing limited memorandum of understanding would leave a PLN 2 billion shortfall.²⁹ The financing terms will inform whether the project has even a chance of being profitable – which is expressed to be a condition of issuing an NTP.³⁰
• $\mathbf{b}$ . Commencing construction without involving financial investors would risk a rating downgrade, as Fitch specifically stated in March 2018.31

²⁴ Fitch Ratings, Fitch Affirms Poland's Energa at 'BBB'; Outlook Stable, 21 March 2018, https://www.fitchratings.com/site/pr/10024448.

²⁵ See para 6.a above.

²⁶ Reuters, Poland's Energa plans new coal-fuelled unit Irrespective of power capacity scheme, 9 August 2017, https://www.reuters.com/article/energa-poland-idUSL5N1KV2IS.

²⁷ Energa, Current Report No. 42/2018, 4 September 2018, https://ir.energa.pl/en/pr/401224/currentreport-no-42-2018. 28

ibid. 29

Ibid.

³⁰ See footnote 3 above.

$\bf{31}$ See para 11.b above.

• c. The extent of Energa's proposed balance sheet financing will also need to be considered in light of the restrictions on Energa's Eurobond proceeds being used for Ostrołęka C. The final terms of the €300m Eurobonds issued on 7 March 2017 state that "[t]his facility will not be used for new power generation projects"³² (or, as it was expressed in Energa's 2017 management report, the application of the funds raised would "excludle] investments in coal assets").³³ It will be important that these terms are observed.
• $20.$ Please confirm that Energa's Supervisory Board will not consent to (and Energa will not) issue an NTP before third-party financing is secured and upon confirmation that the terms of such financing ensure the project's profitability to Energa (not simply the profitability of the project at the SPV level).
• $21.$ Please also confirm the measures in place to avoid the proceeds of the Eurobonds being applied to Ostrołęka C.

Legal risks

• $22.$ Given the history of this project, it is troubling that Energa will have spent an estimated $\epsilon$ 52 million on the development stage alone.³⁴ In our view, proceeding to the construction stage would involve significant and unacceptable risks to Energa, the members of its Management Board and Supervisory Board, and its shareholders.
• $23.$ We note the duties of Energa's Management Board and Supervisory Board to:
• a, Discharge their duties with the diligence proper for the professional nature of their activities.
• b. Act in the best interests of the company and its shareholders taken as a whole.

Assurances and information sought

• 1. Please confirm, as stated above:
• the basis of Energa's assessment that the project will be profitable, the sensitivity $a_r$ analysis applied to that assessment, any independent advice upon which it rests and whether (and the extent to which) it relies upon capacity market payments and/or assumptions about a financing model that will not be in place until after December 2018;

$32$ Final Terms dated 3 March 2017, p 5, https://www.bourse.lu/security/XS1575640054/248345.

$33$ Energa Management Board report for the year ended 31 December 2017, p 36, https://secure.sitebees.com/file/attachment/1247045/6b/4. management board report on the acti vity of the energa capital group for the year ended 31 december 2017.pdf.

³⁴ See Energa, Current Report No. 12/2018, 26 March 2018, https://ir.energa.pl/en/pr/387434/currentreport-no-12-2018.

• $\mathbf{b}$ . that Energa's Supervisory Board will not consent to (and Energa will not) issue an NTP before:
• i. the capacity market auction is held and won and until a determination is made that the contract secured is sufficient to ensure the project's profitability;
• ii. third-party financing is secured and upon confirmation that the terms of such financing ensure the project's profitability to Energa (not simply the profitability of the project at the SPV level); and
• $\mathsf{c}$ . the measures in place to avoid the proceeds of the Eurobonds being applied to Ostrołęka C.
• $25.$ Given the urgency of the concerns expressed above, please provide your response by 3 October 2018.
• 1. reserves all of its rights and remedies.