PGNiG: Agreement to launch operations of Polska Grupa Górnicza Sp. z o.o.

The Management Board of Polskie Górnictwo Naftowe i Gazownictwo S.A. (“PGNiG” or “Company”) announces that on April 26th 2016 PGNiG TERMIKA S.A., a subsidiary of PGNiG, signed an agreement concerning the launch of operations of Polska Grupa Górnicza Sp. z o.o. (“Agreement”).
The parties to the Agreement are Kompania Węglowa S.A., Polska Grupa Górnicza Sp. z o.o. (“PGG”), Węglokoks S.A., Towarzystwo Finansowe Silesia Sp. z o.o. (“TFS”), Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (“FIPP”), PGNiG TERMIKA S.A., Energa Kogeneracja Sp. z o.o., PGE Górnictwo i Energetyka Konwencjonalna S.A. (“PGE GiEK”) (TFS, FIPP, PGNiG Termika S.A., Energa Kogeneracja Sp. z o.o. and PGE GiEK are jointly referred to as the “Investors”), Alior Bank S.A., Bank BGŻ BNP Paribas S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Bank Zachodni WBK S.A., Bank Gospodarstwa Krajowego S.A. and trade unions operating at Kompania Węglowa S.A. (all jointly referred to as the “Parties”).
In the Agreement, the Parties confirmed the rationale for establishing PGG, whose operations will be based on selected mining assets to be acquired from Kompania Węglowa S.A. (11 mines, four plants, and mine and plant support functions).
The Investors have undertaken to purchase PGG shares for a total of PLN 2,417m, of which PLN 1,800m is to be contributed in cash and the balance in the form of conversion of TFS’s and Węglokoks S.A.’s claims.
PGNiG TERMIKA, as one of the Investors, has undertaken to purchase PGG shares for PLN 500m.
The investment amount is higher that declared in the initial offer reported on by the Company in Current Report No. 23/2016 of March 15th 2016. The increased investment will give PGNiG TERMIKA a larger share of total vote at the General Meeting of PGG, which will result in more power to supervise and control the process of improving the efficiency and profitability of PGG’s operations and will facilitate achieving the expected rate of return.
Financial creditors of PGG participated in negotiating the Agreement. As part of refinancing Kompania Węglowa’s current bond issue programme, the banks and Węglokoks S.A. have undertaken to acquire new bonds issued by PGG for PLN 1,037m, in three tranches to be redeemed in 2019−2026, with Węglokoks S.A.’s commitment to reach PLN 421.5m, and the banks’ commitment of PLN 615.5m.
PGG will operate based on a business plan designed to maintain strict control of coal production cost, improve the company’s operating efficiency, and achieve the assumed profitability ratios. The details of the business plan will be stipulated in the investment agreement whose execution has been scheduled for April 29th 2016.
Given the size of PGNiG’s interest in PGG’s share capital (below 20%) and lack of control over the company, in line with the definition contained in IFRS 10 “Consolidated financial statements”, PGG will not be PGNiG’s subsidiary and thus will not be fully consolidated.