On April 28, 2016, PGE Górnictwo i Energetyka Konwencjonalna S.A. signed the Investment Agreement determining the conditions of the financial investment (“Investment”) in Polska Grupa Górnicza sp. z o.o. („Agreement”). The parties of the Agreement are: PGE Górnictwo i Energetyka Konwencjonalna S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A., Węglokoks S.A., Towarzystwo Finansowe „Silesia” Sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw FIZAN (jointly referred later to as the „Investors”) and Polska Grupa Górnicza Sp. z o.o. („PGG”). PGG operates on the basis of selected mining assets, acquired from Kompania Węglowa S.A. (“KW”) (including 11 hard coal mines, 4 operational units and support, managing and supervisory functions of KW headquarters transferred therewith).

The Agreement specifies the Investment conditions, including inter alia, conditions of PGG recapitalisation by the Investors, operating rules of PGG and corporate governance rules, including method of Investors’ supervision over PGG.

Recapitalisation of PGG in total amount of PLN 2,417 million, was divided into 3 tranches, within which PGE GiEK S.A. will pay a total of PLN 500 million, including:

  • PLN 361 million within the first tranche. The result was acquisition of 15.7% in the share capital of PGG by PGE GiEK S.A. on April 29, 2016;
  • PLN 83 million within the second tranche. The result was acquisition of further shares increasing the share of PGE GiEK S.A. in the share capital up to 16.6% on November 3, 2016;
  • PLN 56 million within the third tranche. As a result of the third payment, PGE GiEK’s share in the share capital of PGG increased up to 17.1% on February 1, 2017).

The particular tranches were released, on the condition, inter alia, that terms of PGG bonds issue are not breached.

PGG operates on the basis of the business plan, which aims at optimisation of coal production costs and achieving defined profitability levels. The business plan assumes that in 2017 PGG will generate positive cash flows for the Investors. The Agreement foresees several mechanisms allowing for on-going monitoring of the financial standing of PGG, including execution of the business plan and taking further optimization measures, among others, in case of adverse changes in market conditions. The Agreement assumes that each shareholder of PGG is entitled to appoint, recall and suspend one member of the Supervisory Board (individual rights). Moreover, key decisions of the General Sheraholeders’ Meeting of PGG regarding the capital management and restructuring require the Investors’ approval.

Moreover, on June 17, 2016 PGE Górnictwo i Energetyka Konwencjonalna S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A. and Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych (jointly referred to as „New Investors”) signed an agreement concerning PGG. The purpose of this agreement is to provide increased control over PGG leading to higher probability of investment success in PGG, as well as increased impact on potential modifications to PGG’s business plan that would meet the expectations of New Investors and new market challenges.

On June 29, 2016 the Office of Competition and Consumer Protection issued consent for concentration that involves taking of joint control over PGG by the New Investors.

Taking into account rights entitled to PGE Górnictwo i Energetyka Konwencjonalna S.A. mentioned above, the investment in PGG is treated as a jointly controlled entity and accounted for using the equity method in these consolidated financial statements.