Poland finally establishes vehicle to drive coal industry rescue

Poland finally establishes vehicle to drive coal industry rescue
Poland's state-controlled utilities appear to be signed up to continue their heavy reliance on coal
By bne IntelliNews April 26, 2016

Having finally clinched the agreement of state-controlled investors, the banks, and the unions, Poland established a new state-owned coal mining conglomerate, Polska Grupa Gornicza (PGG), on April 26.

The holding will replace the ailing Kompania Weglowa (KW) and is the central plank in a rescue of the industry that Poland has been trying to push through for over a year. Warsaw has pulled several of its listed state-controlled utilities, as well as a handful of banks, into investing nearly PLN3.5bn (€800mn) in PGG, as the coal industry faces huge losses on the back of weak markets and inefficiency.

In the face of the powerful unions, successive government's have failed to take a grip of the coal sector, which provides the fuel for close to 90% of Polish power production and employs around 100,000, since the country adopted a free market 25 years or so ago. That now leaves Poland's listed state-controlled companies to help support the ageing and loss-making industry. The country's utilties have seen their share prices hit hard by the plan over the past year or so.

The creation of PGG, which will take over KW's assets - including 11 coal mines - has required substantial engineering from the both the current and previous government. It was the Civic Platform (PO) administration that launched the effort to save the sector after a half-hearted attempt to restructure KW was rebuffed by unions in January 2015.

The new Law & Justice (PiS) government had blasted both the initial effort and resulting rescue plan, which was based on putting the unwilling utilities into harness. However, on taking power in November, the new government had little choice but to follow the same blueprint. Executives in state-controlled energy companies PGE, Energa, and PGNiG were promptly replaced, leaving the new nominees to agree to put a combined sum of PLN1.5bn into PGG. 

Another PLN917mn will come from state investment funds FIPP and TF Silesia, as well as state coal exporter Weglokoks. Five banks, including state-controlled lender PKO BP, will refinance KW’s debt of just over PLN1bn that has been inherited by PGG. It is not yet clear, however, whether an earlier plan for PKO and insurer PZU to buy KW's debt from the two private banks - the Polsih unit of BNP Paribas, and BZ WBK - will go through.

The best the government could do to win over the powerful mining unions was to agree a slight and temporary reduction in the bonus programme at PGG in 2016 and 2017. The latter year is when PGG is expected to become financially self-sufficient, according to the government’s earlier statements.

PGG is expected to produce 28mn tonnes of coal in 2016, a 2mn tonne rise from the previous year. KW made a loss of PLN930mn in 2015.

Salvaging Poland’s largest coal company also fits the government’s broader strategy of betting the country’s energy security on coal, reserves of which are likely to last decades. The ministry of environment has proposed recently that the country’s emissions be offset by increased forest plantation, suggesting burning coal for energy is hardly going to decrease. On top of that, Poland also wants to promote co-firing of coal with biomass at large power generation installations, while, on the other hand, work is under way to curb the development of wind power.