Energa has signed the investment agreement with PGG

Today (28 April 2016) Energa Kogeneracja, a member of the Energa Group signed an agreement specifying the terms and conditions for a financial investment in Polska Grupa Górnicza. This agreement is based on the arm’s length principles for executing this project and aims to procure the expected rate of return on this investment, among others, by enhancing the efficiency of the mines belonging to PGG - and consequently - for this investment to achieve the specified levels of profitability.

On top of Energa Kogeneracja, the parties to the signed investment agreement are as follows: PGE Górnictwo i Energetyka Konwencjonalna, PGNiG Termika, Węglokoks, Towarzystwo Finansowe Silesia, Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych [Polish Corporates Mutual Fund, Private Asset Closed-end Mutual Fund] and Polska Grupa Górnicza. 

As a result of signing this agreement, the investors will subscribe for shares in PGG. Energa Kogeneracja will subscribe for a 15.7% equity stake while including the next tranches its target stake will edge up to 17.1%.

The investment agreement assumes that PGG will operate on the basis of its business plan whose purpose is to optimize mining costs, enhance the company’s operational efficiency and achieve specific levels of profitability. PGG’s business plan assumes that starting in 2017 the company will generate positive cash flow for investors. The cash flow generated will make it possible to achieve a rate of return higher than the cost of the capital employed. The agreement puts in place multiple rules for monitoring the execution of the business plan spread over 10 years. In particular, they pertain to profitability, liquidity, the debt level and PGG’s operating efficiency. The PGG Management Board will be obligated to provide regular information to the Investors’ representatives on the levels of the various ratios. Moreover, investors will nominate their representatives to PGG’s Supervisory Board, making it possible to oversee the company.

“I would like to emphasize that Energa is taking a stake in PGG on arm’s length conditions and it will fastidiously supervise the execution of the company’s business plan, making it possible to achieve the expected rates of return for investors”, says Dariusz Kaśków, CEO of Energa SA. “Under the assumption that Poland’s power sector is largely based on coal and this will continue to be the case in upcoming decades, this investment offers enormous opportunities - with an outlook of several years - to turn out to be favorable to energy concerns, especially when coal prices on the markets are higher than at present. Investments, strategic ones too, are undertaken at times when interesting assets are attractively valued and may be acquired at a favorable price.”

According to the investment agreement, the new investors’ funds will be injected in three agreed upon tranches with the final tranche being payable no later than 1 February 2017. According to the business plan the investors do not anticipate further recapitalization of PGG, while the mechanisms laid down in the agreement aim to ensure the investment’s success.

One of the conditions for the investment agreement is the implementation of the memorandum of agreement with the trade unions calling for withdrawing from what is known as the “fourteenth salary” and running a voluntary redundancy program encompassing 4 thousand of the company’s employees.

The investment agreement is the next step following the memorandum of agreement signed in Katowice on 26 April 2016 for Polska Grupa Górnicza to commence operations. It consists of 11 mines, 4 establishments and part of the head office spun off from Kompania Węglowa. In addition to the investors, banks – bondholders of Kompania Węglowa – Alior Bank, BGK, BGŻ BNP Paribas, PKO BP, Bank Zachodni WBK and 13 trade union organizations of Kompania Węglowa signed the memorandum of agreement.

Ultimately, the investors will recapitalize PGG for a total amount of PLN 2 billion 417 million, of which PLN 1 billion 800 million will be a cash contribution while the remaining amount of PLN 617 million will be in the form of a debt to equity conversion by TFS and Węglokoks.

Energa Kogeneracja, PGE Górnictwo i Energetyka Konwencjonalna and PGNiG Termika will ultimately invest PLN 500 million each in PGG, FIPP FIZAN will invest PLN 300 million, TFS will invest PLN 400 million and Węglokoks will invest PLN 217 million (the total exposure taken by Węglokoks in PGG along with its previous capital expenditures of PLN 500 million will be PLN 717 million). The investors do not intend to use the full method to consolidate PGG’s result.

To refinance the current bond issue program in Kompania Węglowa, banks, Węglokoks and TFS will subscribe for new bonds issued by PGG for PLN 1 billion 148 million in four tranches to be repaid in 2019-2026. The exposure taken by Węglokoks will be PLN 421.5 million while the exposure taken by banks will be PLN 615.5 million and by TFS it will be PLN 111.1 million.