Background

The state-controlled part of the Polish hard coal sector has faced structural and financial difficulties for years. Problems have been mounting in recent months and the Polish Government has decided to take radical steps to tackle them. On 7 January 2015 the Polish Government adopted a resolution on restructuring of the biggest Polish and European mining company Kompania Węglowa S.A. (Restructuring Plan) so as to resolve mounting problems.

Kompania Węglowa S.A. controls 15 mines and 5 other industrial and services facilities and employs approximately 49,000 employees, including approximately 47,000 employees directly engaged in mining activities.

Draft legislation implementing the Restructuring Plan was filed with the Lower Chamber of Parliament (Sejm) on 8 January 2015. Such legislation will need to be approved by the Higher Chamber of Parliament (Senat) and the President in order to become law.

Discussions as to the actual contents of the Restructuring Plan are pending between the Government, unions and local communities.

The state-controlled hard coal sector is in difficulty. The amount of exploited hard coal and profitability are constantly decreasing. Sixty-two million tonnes of hard coal were exploited in the first ten months of 2013; only fifty-eight million tonnes of hard coal were exploited in the same period in 2014.

Average net profitability amounted to minus 2.9%. The average loss on each tonne of exploited hard coal amounted to PLN42 (approximately €9.80) during the first 11 months of 2014 and PLN 66 (approximately €15.42) in November 2014 alone. The total losses on sales of hard coal incurred by Kompania Węglowa S.A. in the first 11 months of 2014 amounted to PLN1.14bn (approximately €266.35m).

According to the Polish Government Kompania Węglowa S.A. can no longer continue its activities in these circumstances, needs restructuring of a part of its assets and recapitalisation of the remaining assets. Otherwise, Kompania Węglowa S.A. may become bankrupt within weeks.

Outline of Kompania Węglowa Restructuring Plan dated January 7, 2014

The main aims of the Restructuring Plan are as follows: (a) to ensure proper level of hard coal exploitation and security of its supplies for the energy sector and to retail customers for the next 30 years; (b) establishment of a strong and financially viable Polish exploitation company able to compete on the European market; (c) proper restructuring of the staff and liabilities of Kompania Węglowa S.A.; and (d) implementation of efficient and prompt capital and structuring changes.

According to the Restructuring Plan, as the first step, the Bobrek-Centrum, Sośnica-Makoszowy, Brzeszcze and Pokój mines, which seem to be permanently not viable, will be transferred to a special vehicle - Spółka Restrukturyzacji Kopalń S.A. (Company for Mines Restructuring). One mine – Piekary – will be sold to a state controlled company - Węglokoks. These activities are planned for execution in February 2015.

The 5 mines mentioned above generate approximately 80% of Kompania Węglowa S.A. losses. There is an intention to extinguish exploitation activities in these mines in stages and/or implement other restructuring measures.

Spółka Restrukturyzacji Kopalń S.A. (Company for Mines Restructuring) will be tasked with attracting investors so as to sell or otherwise dispose assets of the four mines mentioned above.

Next, nine viable mines, or mines which have good commercial prospects will be transferred to a newly established SPV. Such transfer will be effected in 2 stages, i.e.: (a) Jankowice, Chwałowice, Rydułtowy-Anna and Marcel mines in the first step; and (b) Ziemowit, Piast, Bolesław Śmiały, Halemba-Wirek and Bielszowice in the second step. According to the Restructuring Plan the above transfers should be completed by the end of June 2015.

According to certain announcements made by representatives of the Polish Government it is anticipated that third party investors may be introduced to become shareholders of the SPV owning the nine mines by the same date.

The assets of Kompania Węglowa S.A. not connected with mining activities will be disposed of or otherwise liquidated.

The Restructuring Plan provides for a number of measures to assist and provide employees of Kompania Węglowa S.A. with certain protection tools during and, for a limited time, after restructuring.