PGNiG: Signing of the Investment Agreement on financial investment in Polska Grupa Górnicza Sp. z o.o.

Further to Current Report No. 39/2016 of April 26th 2016, the Management Board of Polskie Górnictwo Naftowe i Gazownictwo S.A. (“PGNiG”) announces that on April 28th 2016 PGNiG TERMIKA S.A., a subsidiary of PGNiG, signed an agreement determining the conditions of the financial investment in Polska Grupa Górnicza Sp. z o.o. (“PGG”), in particular conditions of acquisition of 5,000,000 shares in PGG with a total value of PLN 500m (the “Investment Agreement”).
The parties to the Investment Agreement are PGNiG TERMIKA S.A., Energa Kogeneracja Sp. z o.o., PGE Górnictwo i Energetyka Konwencjonalna S.A., Towarzystwo Finansowe Silesia Sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych, Węglokoks S.A. (jointly – the “Investors”) and PGG.
The Investment Agreement specifies that the shares will be acquired in following three stages:
1. the first stage will result in an acquisition of 15.7% of PGG’s share capital for PLN 361.1m, payable immediately, not later than within four business days following execution of the Investment Agreement;
2. the second stage will result in an increase of the interest in PGG’s share capital to 16.6% for PLN 83.3m payable by November 3rd 2016;
3. the third stage will result in an increase of the interest in PGG’s share capital to 17.1% for PLN 55.6m payable by February 1st 2017.
According to the Investment Agreement, the above mentioned second and third tranches will be launched, on the condition, among others, there is no default of the terms and conditions of the notes issued by PGG.
It is assumed that PGG’s proceeds under the Investment Agreement and the notes issued will be sufficient for PGG to carry on its operations in accordance with the business plan presented by PGG, approved by the Parties and attached as an appendix to the Investment Agreement, and that no further financing will be required.
PGG will operate based on a business plan designed to maintain strict control of coal production cost and achieve the assumed profitability ratios. The conducted analysis of the investment in PGG’s shares indicates that the cash flows will ensure a rate of return at a level above the cost of capital employed.
The Investment Agreement foresees several mechanisms allowing the Investors’ representatives for on-going monitoring of the financial standing of PGG, including execution of PGG’s business plan. The implementation of the business plan will be reviewed and monitored in reference to a number of ratios, including in particular those measuring PGG’s profitability, financial liquidity, debt, and operating efficiency, for which certain thresholds have been specified.
PGNiG TERMIKA expects to play an active part in improving PGG’s operating efficiency through the Investment Agreement and its corporate rights. Each shareholder may appoint, remove or suspend one member of PGG’s Supervisory Board.
Subject to the exceptions stipulated in the Investment Agreement, for 10 years from PGG’s first equity increase, and in the event of PGG’s transformation into a joint-stock company – for five years from registering the transformation, no shareholder may sell any shares without the consent of the other shareholders.
Given the 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.