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14. Acquisition of a subsidiary

On 14 September 2015 ENEA S.A. delivered to Warsaw Stock Exchange S.A. subscription to a tender offer for 21 962 189 shares in Lubelski Węgiel “Bogdanka” S.A, located in Bogdanka (“LWB”) at PLN 67.39 per share, entitling to execute 64.57% voting rights at the General Meeting of the LWB (“Tender offer”). The tender was submitted through Dom Maklerski Banku Handlowego S.A.On 16 October 2015 ENEA S.A. received the information that within the tender offer announced on 14 September 2015 for the sale of Lubelski Węgiel “Bogdanka” S.A., until 15 October 2015 subscriptions were submitted in the number exceeding 21 962 189 shares of LWB. The indicated number of shares authorities to exercise 64.57% of the total number of votes at a General Meeting of LWB, which means that the condition of subscribing for a minimum number of LWB’s shares was satisfied.On 19 October 2015 ENEA S.A. received information on the issue on that day by the President of the Office of Competition and Consumer Protection of a decision regarding granting consent for the concentration , being the takeover by ENEA S.A. of a control over Lubelski Węgiel “Bogdanka” S.A. Thereby the legal condition to subscribe for the sale of shares of LWB is satisfied. On 26 October 2015 the purchase order for tender shares offer was made. The transaction was settled on 29 October 2015. ENEA S.A. and ENEA Wytwarzanie Sp. z o.o. holds 22 448 834 shares, which constitutes 65.99% share in share capital.

One of the main causes for the purchase of LWB includes the implementation of the ENEA Capital Group strategy, focusing on closing the full chain of value in the Group, which missed the mining segment before the transaction. One of the grounds for this decision was deteriorating situation in the conventional manufacture segment, and hence the need to guarantee permanent deliveries of fuel with excellent parameters and optimal price to the Kozienice power plant. The LWB purchase transaction is recognized by the ENEA Group as a forward transaction for the purchase of fuel with technological parameters matching the needs of the Kozienice Power Plant. In 2014, supplies from LWB constituted approx. 70% of the overall demand of the ENEA Group, but the forecast regarding long-term share of Bogdanka coal in ENEA demand was approx. 80%. The transaction therefore minimized the risk of LWB acquisition by another Investor, but also guaranteed impact on the shaping of electricity production costs at the Kozienice Power Plant.

It must be emphasized that the profitability of LWB is one of the highest ones in the mining industry, which has quantifiably increased the value of the ENEA Group, i.e. significantly improving the debt ratios. Despite the low quality of energy materials, LWB has been successfully building its profitability by recording exceptionally low unit extraction costs. Thanks to the beneficial geographical position of LWB in relation to the Kozienice Power Plant, coal transport uses the vast geographic rent recorded in the fuel transport costs. Thanks to the geological conditions which yielded the high productivity recorded, the mine is characterized by considerable geological advantage over other Polish mines.

The Transaction of 29 October 2015 allows for seeking additional operational synergies between companies of the Group, such as optimization of coal transport costs, purchase costs by obtaining the scale effect, elimination of doubled functions thanks to the use of entities from the support segment of the ENEA Group.

As a result of the allocation of the LWB purchase price, the goodwill was recognized at PLN 50 230 thousand, which was assigned to the potential possibility of obtaining mining license for new coal deposits by LWB. Considering the general situation on the coal market and the fact that the current operating resources of LWB (234 M tons) allows for maintaining the extraction of the current deposit until 2039, or even until 2042 (depending on the annual mining rates), the Management Board of ENEA S.A. decided not to recognize the entire goodwill of the company established as a result of the transaction. In the opinion of the Management Board, the decision to explore new deposits must be recognized as an uncertain event, particularly due to the remoteness of the decision in relation to the currently available deposit.

Settlement of the LWB purchase price has led to the settlement of pre - existing relationships, i.e. coal purchase agreement not at arm’s length concluded by and between ENEA Wytwarzanie and LWB. The agreement specifies a formula for calculating the price of coal if successive price negotiations do not lead to the final setting of the prices for the successive settlement period. The price calculated in accordance with the Agreement significantly differs from the current market conditions and the Group settled the agreement and recognized the result of the valuation in the amount of PLN 94 000 thousand separately within "Other operating expenses" in profit or loss.

In the period from 1 November till 31 December 2015 Lubelski Węgiel Bogdanka S.A. generated net sales revenue of PLN 362 580 thousand and realized a net profit in the amount of PLN 50 197 thousand.

The Management Board estimates that if the acquisition had occurred on 1 January 2015, the consolidated net sales revenue for 12-month period ended 31 December 2015 would have been PLN 10 711 717 thousand and the consolidated loss would have been PLN 341 995 thousand.

The following table summarizes fair values of the identifiable assets acquired and liabilities assumed as at the acquisition date:

Price paid for shares 1 480 032
Settlement of agreement not at arm’s length (94 000)
Liabilities of the Group towards LWB (84 794)
Adjusted purchase price 1 301 238
Value of LWB shares held by the ENEA Group before the acquisition 20 055
Non-controlling interests 699 239
Property, plant and equipment 2 886 596
Intagible assets 18 763
Deferred tax assets 130 553
Cash and cash equivalents 317 121
Trade and other receivables 191 938
Current income tax assets 293
Inventory 108 157
Non-current assets held for sale 3 916
Liabilities (1 687 035)
Net assets 1 970 302
Non-recognized goodwill 50 230

In connection with the transaction the Group incurred transaction costs amounting to PLN 5 684 thousand which were recognized in other external services.

There were no contingent liabilties that should be recignised as of the acquisition date.