Polska Grupa Górnicza: investors and banks have reached a memorandum of agreement

A memorandum of agreement was concluded on 26 April 2016 on Polska Grupa Górnicza (PGG) commencing operations. The investors are taking a stake in PGG on an arm’s length basis and they will consistently oversee the execution of the company’s business plan. The analyses that have been conducted indicate that this investment will generate positive rates of return for its investors.

The parties to the Memorandum of Agreement are the Energa Group, the PGE Group, the PGNiG Group, Węglokoks, Towarzystwo Finansowe „Silesia” (TFS), Fundusz Inwestycji Polskich Przedsiębiorstw (PIPP) FIZAN [Polish Corporates Mutual Fund] and banks – bondholders of Kompania Węglowa – Alior Bank, BGK, BGŻ BNP Paribas, PKO BP, Bank Zachodni WBK and 13 trade union organizations of Kompania Węglowa.

PGG, poised to become the largest hard coal producer in Poland and Europe will consist of 11 mines, 4 establishments and part of the head office spun off from Kompania Węglowa.

Exposure to PGG will provide its power sector shareholders with access to opulent thermal coal resources whose parameters are aligned to the needs of existing and planned power generation units, which is well suited to the strategic objectives of energy groups. Furthermore, cooperation between the generation sector and the mining sector will provide the offtakers of energy services with the ability to secure stable partners ensuring continuous supplies of electricity and heat at a predictable price.

Investors have declared that they will subscribe for new shares in PGG for a total amount of PLN 2 billion 417 million, of which PLN 1 billion 800 million will be in the form of 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, belonging to the Energa Group will invest PLN 500 million in PGG, PGE Górnictwo i Energetyka Konwencjonalna, belonging to the PGE Group will invest PLN 500 million, PGNiG Termika of the PGNiG Group will invest PLN 500 million, 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 and Węglokoks have declared that they will subscribe for new bonds issued by PGG for PLN 1 billion 37 million in three 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.

Financial creditors took part in the work to reach this Memorandum of Agreement thereby demonstrating their readiness to participate on a long-term basis in the transformation of key sectors of Poland’s economy, with the outcome being the bondholders’ endorsement of the concluded memorandum of agreement calling for profitability to be attained and business efficiency to be enhanced.

PGG will operate on the basis of its business plan whose purpose is to keep coal production costs under strict control, enhance the company’s operational efficiency and achieve specific levels of profitability. The investment agreement whose signing is scheduled to take place on Friday, 29 April 2016 will regulate the specific details.

Power sector investors are aware of the changes transpiring on the energy market and they are actively diversifying their energy mix while domestic coal resources form a guarantee of the nation’s energy security and are the principal fuel used in Poland to generate electricity and heat. This state of affairs will continue to be true for many decades to come.

An important prerequisite for the formation of PGG and investors’ involvement was the memorandum of agreement of 19 April 2016 with trade union organizations pertaining to their rights. It contemplates the execution of PGG’s business plan and, as a result, streamlining the operations of the mines by combining some mines and temporarily suspending some employee benefits.