MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. CAPITAL GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
CONTENTS
1. KEY INFORMATION ABOUT THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP ...... 4 1.1. GROUP’S BUSINESS MODEL ...... 5 1.2. ORGANIZATION OF THE GROUP ...... 7 1.3. FUNDAMENTAL PRINCIPLES OF MANAGEMENT IN JSW AND ITS GROUP ...... 12 2. ACTIVITY OF THE GROUP AND ITS CONDITIONS ...... 16 2.1. MAJOR EVENTS IN 2014 ...... 16 2.2. MAJOR EVENTS WITH MATERIAL EFFECT ON ACTIVITY AND FINANCIAL RESULTS IN THE PERIOD OR WHOSE EFFECT IS POSSIBLE IN SUBSEQUENT YEARS ...... 20 2.3. DESCRIPTION OF THE INDUSTRY AND COMPETITION ...... 23 2.4. KEY PRODUCTS, GOODS AND SERVICES ...... 26 2.5. SELLING MARKETS ...... 30 2.6. FINANCIAL RESULTS BY OPERATING SEGMENTS ...... 32 2.7. SOURCES OF SUPPLIES ...... 35 2.8. SIGNIFICANT CONTRACTS ...... 35 2.9. BOND ISSUE PROGRAM ...... 37 2.10. DESCRIPTION OF THE GROUP’S DEVELOPMENT POLICY ...... 39 2.11. CAPITAL EXPENDITURES AND EQUITY INVESTMENTS ...... 44 2.12. RISK FACTORS AND THREATS ...... 49 3. FINANCIAL AND PROPERTY STANDING OF THE GROUP ...... 58 3.1. DISCUSSION OF ECONOMIC AND FINANCIAL FIGURES...... 60 3.2. EXTRAORDINARY FACTORS AND EVENTS INFLUENCING THE RESULT ...... 71 3.3. DIFFERENCES BETWEEN FINANCIAL RESULTS IN THE ANNUAL REPORT AND PREVIOUSLY PUBLISHED FORECASTS FOR 2014 ...... 74 3.4. RATIO ANALYSIS ...... 75 3.5. PROCEEDS FROM SECURITIES ISSUES ...... 79 3.6. TRANSACTIONS WITH RELATED PARTIES ...... 79 3.7. INFORMATION ON LOANS AND BORROWINGS CONTRACTED AND TERMINATED ...... 79 3.8. INFORMATION ON LOANS AND SURETIES GRANTED AND SURETIES AND GUARANTEES RECEIVED ...... 80 3.9. FINANCIAL INSTRUMENTS ...... 81 3.10. GROUP’S CURRENT AND ANTICIPATED FINANCIAL STANDING ...... 83 3.11. PRINCIPLES GOVERNING PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS AND THE MANAGEMENT BOARD ACTIVITY REPORT ...... 84 3.12. INFORMATION ABOUT THE AUDIT FIRM AUDITING THE FINANCIAL STATEMENTS ...... 84 4. JSW’S OWNERSHIP STRUCTURE AND SHARE QUOTATIONS ...... 85 4.1. PARENT COMPANY’S CAPITAL AND OWNERSHIP STRUCTURE ...... 85 4.2. JSW’S SHARE QUOTATIONS ON THE CAPITAL MARKET...... 87 4.3. DIVIDEND ...... 88 4.4. INFORMATION ON THE CONTROL SYSTEM FOR EMPLOYEE SHARE PLANS ...... 88 5. ADDITIONAL INFORMATION ...... 91 5.1. MORE IMPORTANT ACHIEVEMENTS IN RESEARCH AND DEVELOPMENT ...... 91 5.2. ISSUES RELATED TO THE NATURAL ENVIRONMENT ...... 92 5.3. CORPORATE SOCIAL RESPONSIBILITY POLICY ...... 94 5.4. HEADCOUNT AND PAYROLL ...... 95 5.5. RELATIONS WITH TRADE UNIONS ...... 98 5.6. DISPUTES ...... 105 5.7. PRIZES AND DISTINCTIONS ...... 107 6. REPRESENTATION ON THE APPLICATION OF CORPORATE GOVERNANCE ...... 108 6.1. IDENTIFICATION OF CORPORATE GOVERNANCE RULES BEING APPLIED...... 108 6.2. IDENTIFICATION OF CORPORATE GOVERNANCE RULES NOT APPLIED ...... 109 6.3. PRIMARY ATTRIBUTES OF INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN REFERENCE TO THE PREPARATION OF FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS ...... 110 6.4. SHAREHOLDERS WITH MAJOR BLOCKS OF SHARES ...... 111 6.5. HOLDERS OF SECURITIES WITH SPECIAL RIGHTS OF CONTROL ...... 112 6.6. RESTRICTIONS REGARDING THE EXERCISE OF VOTING RIGHTS ...... 112 6.7. RESTRICTIONS ON THE TRANSFER OF OWNERSHIP TITLE TO SECURITIES ...... 113 6.8. PRINCIPLES OF APPOINTMENT AND DISMISSAL OF MANAGEMENT AND SUPERVISORY TEAM AND THEIR POWERS ...... 113 6.9. RULES FOR AMENDING JSW’S ARTICLES OF ASSOCIATION ...... 117
2 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. CAPITAL GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
6.10. OPERATION OF THE SHAREHOLDER MEETING, ITS PRINCIPAL POWERS AND DESCRIPTION OF SHAREHOLDERS' RIGHTS AND HOW THEY ARE EXERCISED ...... 117 6.11. COMPOSITION OF MANAGEMENT AND SUPERVISORY BODIES, CHANGES IN COMPOSITION, DESCRIPTION OF ACTIVITIES OF THE BODIES AND THEIR COMMITTEES ...... 119 6.12. REMUNERATION FOR PERSONS DISCHARGING EXECUTIVE AND SUPERVISORY FUNCTIONS IN JSW ...... 127 6.13. INFORMATION POLICY AND COMMUNICATION WITH THE CAPITAL MARKET ...... 132
3 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. CAPITAL GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
1. KEY INFORMATION ABOUT THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP
The Jastrzębska Spółka Węglowa S.A. Group ("Group", "Capital Group") is the largest producer of hard coking coal and a significant producer of coke in the European Union. For years, it has held the key position on the Polish and European market for coking coal and coke, due to the high quality coal it produces and due to its location in proximity to its main customers. The main line of the Group's business is also the mining and sales of steam coal.
The Group’s mining area is located in the Upper Silesian Coal Basin.
Chart 1. Group’s mining area
4 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. CAPITAL GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
In Q3 2014, the mining area of JSW increased in connection with the acquisition of KWK Knurów-Szczygłowice. Since the coal resources held by the Group are significant, it has solid grounds for retaining the leading position on the coking coal market.
The Group’s mines have a total of approx. 3.67 billion tons of resources of coal, including approx. 0.99 billion tons of recoverable coal reserves (including KWK Knurów-Szczygłowice, according to JORC classification, based on the Mineral Expert Report prepared by the Polish Academy of Sciences).
The Group’s coking activity is conducted in Dąbrowa Górnicza, Zabrze, Radlin, Czerwionka-Leszczyna and Wałbrzych. About 50% of the coking coal produced by the Group is processed by the Group's coking plants into coke which, next to iron ore, is the key raw material used in steel production in steel mills, in foundries, in the non-ferrous metal industry, chemical industry and in the production of insulation material. Steam coal is used primarily for energy generation and sold to power companies, industrial and retail customers, however nearly 95% is sold to power plants for the production of electricity and thermal energy.
Jastrzębska Spółka Węglowa S.A. ("JSW", "Parent Company", "Issuer") also acts as a sales center for all coal derivative products, including coke and hydrocarbons produced by coking plants owned by the Group. The principal clients for the Group’s products are located primarily in Poland, Germany, the Czech Republic and also Austria.
The Group is one of the largest employers in Poland. Overall, the Group employs over 34 thousand people, of which over 26 thousand are employed by Jastrzębska Spółka Węglowa S.A.
1.1. GROUP’S BUSINESS MODEL
OPERATING SEGMENTS
The Group presents information on operating segments in accordance with IFRS 8 “Operating Segments”. The Group is organized and managed in segments by type of products offered and type of production activity. An operating segment is a component of the Group: . that engages in business activities from which it may earn revenues and incur expenses, . for which separate financial information is available, . whose operating results are reviewed regularly by the body responsible for operational decisions (Management Board of the Parent Company) about resources to be allocated and assessment of performance in the segment.
The Management Board of the Parent Company has identified operating segments based on the financial reporting of the companies comprising the Group. Information originating from the reports are used for strategic decision-making in the Group. After analyses of the aggregation criteria and quantitative thresholds, the following operating segments were established in the Group’s consolidated financial statements: . Coal Segment – which includes extraction and sales of black coal; . Coke Segment – which includes production and sales of coke and hydrocarbons; . Other segments – include activities performed by the Group’s entities other than those covered by Segments 1 or 2, such as, without limitation, production and sales of electricity and thermal energy, repair services, etc.
The Group’s business model distinguishes the following segments: Coal, Coke and Other segments (including the energy area and an important supporting function, i.e. laboratories, transport, railway infrastructure management, overhauls, sales service, water management and reclamation, IT and training and production support).
The Group plans to take actions aimed at integrating its distinct business areas, focusing on key investment projects, taking advantage of synergies between the business areas and enhancing opportunities arising from economies of scale.
5 MANAGEMENT BOARD REPORT ON THE ACTIVITY
OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Chart 2. Target business model of the Group
EXTERNAL CUSTOMERS Heat Other customers Coking plants Power, co- Foundry production, Customers for other Steel mills for the Group's outside the generation plants industry chemical, sugar outside of the products of the Group key products Group sector Group
Blast furnace Foundry Other Hydrocarbons, coke coke coke coke gas Laboratories Coking Steam COKE SEGMENT coal coal Transport
JSW Capital Group's coking plants Railway SUPPORTING infrastructure management Coke gas Electricity and Surplus of electricity thermal energy and heat Renovations Coking coal Water POWER SEGMENT management JSW Capital Group's co-generation plants and reclamation ACTIVITY
Sales Support Steam Low calorific Electricity Methane value and thermal coal coal sludge energy, cooling IT
Training COAL SEGMENT and production Coal mines of the JSW Capital Group support
6 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
STRATEGY OF THE GROUP
The mission of the Group is to provide the Group’s customers with the highest quality coking coal and coke products in a manner ensuring growth of the Group’s value in line with the expectations of our Stakeholders, using our unique resources, competencies and skills.
The vision of the Group is to strengthen our position as a leading producer of coking coal and a prominent supplier of coke in the European market, setting the directions of development for the whole industry through the highest operating standards.
The Group’s development policy covering strategic objectives, including, among others, production and investments, is described in section 2.10 of this report.
1.2. ORGANIZATION OF THE GROUP
On 31 December 2014, the JSW S.A. Group consisted of the Parent Company and its subsidiaries located in the territory of Poland and one in Sweden. The companies comprising the Group are classified into the distinct operating segments, i.e. the Coal Segment, the Coke Segment and Other Support Areas.
JSW was established on 1 April 1993. On 17 December 2001, JSW was entered in the National Court Register kept by the District Court in Gliwice, 10th Commercial Division of the National Court Register, under file number KRS 0000072093. The Parent Company has been given the following statistical number: REGON 271747631. JSW’s registered office is located in Jastrzębie-Zdrój at Al. Jana Pawła II no. 4. According to the Articles of Association, the Parent Company may operate in the territory of the Republic of Poland and abroad. The duration of JSW is unspecified. JSW’s shares are publicly traded. According to the Warsaw Stock Exchange's classification, JSW has been categorized into the raw materials sector.
LAWS GOVERNING JSW’S BUSINESS
Group companies conduct their business in a sector subjected to a number of special regulations. Above all, the Group’s business has to comply with the laws and regulations governing mining operations - the Act of 9 June 2011 entitled the Geological and Mining Law and the executive regulations issued to this Act.
In addition to this Act, the following provisions of law in particular govern the Group’s business: . Act entitled Commercial Company Code of 15 September 2000 (“Commercial Company Code”), . Act of 7 September 2007 on the Functioning of the Hard Coal Mining Industry, . Program for the operation of the coal mining industry in Poland in 2007-2015, . Act of 10 April 1997 entitled Energy Law, . Act of 27 April 2001 entitled Environmental Protection Law, . Act of 29 January 2004 entitled Public Procurement Law. The Group also operates on the basis of its internal regulations, such as: The Code of the Group, articles of association, strategies, instructions, bylaws, procedures, directives etc.
7 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
INFORMATION ON CONCESSIONS HELD
The Group holds all the required concessions and mining usufruct contracts necessary for the extraction of coal in its mines.
Table 1. Concessions held by the Parent Company
CONCESSIONS FOR EXTRACTION OF HARD COAL AND METHANE AS AN ASSOCIATED MINING PRODUCT DATE OF DATE OF GRANTING CONCESSI EXPIRY OF MINE DEPOSIT SUBJECT TO CONCESSION THE ON NO. THE CONCESSIO CONCESSION N “Borynia” Deposit, “Szeroka I” Mining Area 7/2009 27.10.2009 31.12.2025
BORYNIA- “Jastrzębie” Deposit, “Jastrzębie I” Mining Area 23/94 21.03.1994 20.03.2019 ZOFIÓWKA- JASTRZĘBIE “Zofiówka” Deposit, “Jastrzębie Górne I” Mining Area 5/2010 14.05.2010 31.12.2042 “Bzie - Dębina 2 - Zachód” Deposit „Bzie - Dębina 2 - Zachód” Mining Area 15/2008 01.12.2008 31.12.2042
“Budryk” Deposit, “Ornontowice I” Mining Area 13/94 21.03.1994 31.01.2019 BUDRYK “Chudów - Paniowy 1” Deposit “Ornontowice II” Mining Area 3/2005 18.04.2005 18.04.2020
KNURÓW- “Szczygłowice” Deposit ”Szczygłowice” Mining Area 29/94 08.04.1994 31.03.2020 SZCZYGŁOWICE “Knurów" Deposit “Knurów” Mining Area 60/94 21.04.1994 15.04.2020
KRUPIŃSKI “Krupiński” Deposit “Suszec IV” Mining Area 3/2013 22.03.2013 31.12.2030
“Pniówek” Deposit, “Krzyżowice III” Mining Area 158/1994 26.08.1994 13.08.2020 PNIÓWEK “Pawłowice 1” Deposit, “Pawłowice 1” Mining Area 3/2012 21.06.2012 31.12.2051
EXPLORATION CONCESSIONS DATE OF DATE OF GRANTING CONCESSIO EXPIRY OF AREA COVERED BY THE CONCESSION THE N NO. THE CONCESSI CONCESSION ON “Ruptawa” Area 53/2009/p 04.09.2009 31.12.2017
“Pawłowice Wschód” Area 9/2012/p 23.04.2012 23.04.2016
8 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
LAWS GOVERNING THE GROUP’S BUSINESS
The Group’s companies conduct their business in a sector subjected to a number of special regulations. Above all, the Group’s business has to comply with the laws and regulations governing mining operations – the Act of 9 June 2011 entitled the Geological and Mining Law and the executive regulations issued to this Act.
In addition to this Act, the following provisions of law in particular govern the Group’s business: . Act entitled the Commercial Companies Code of 15 September 2000 (“Commercial Companies Code”),
. Act of 7 September 2007 on the Functioning of the Black Coal Mining Industry,
. Program for the operation of the coal mining industry in Poland in 2007-2015,
. Act of 10 April 1997 entitled the Energy Law,
. Act of 27 April 2001 entitled the Environmental Protection Law,
. Act of 29 January 2004 entitled the Public Procurement Law.
The Group also operates on the basis of its internal regulations, such as: the Code of the Group, articles of association, strategies, instructions, bylaws, procedures, directives, etc.
PARENT COMPANY’S ORGANIZATIONAL STRUCTURE
Chart 3. JSW’s organizational structure
SHAREHOLDER MEETING
BOARD OF DIRECTORS SUPERVISORY BOARD
MANAGEMENT BOARD ADVISORS
MANAGEMENT BOARD'S PROXIES BORYNIA-ZOFIÓWKA-JASTRZĘBIE MANAGEMENT BOARD Coal mine MATERIALS LOGISTICS DIVISION OFFICE
BUDRYK Coal mine
KNURÓW-SZCZYGŁOWICE Coal mine
JSW IS A MULTI-OPERATION ENTERPRISE. KRUPIŃSKI Coal mine AS AT THE DATE OF THIS REPORT, JSW’S ENTERPRISE CONSISTED OF FOUR COAL MINES (POLISH: KOPALNIA WĘGLA PNIÓWEK Coal mine KAMIENNEGO – “KWK”) IN WHICH COKING COAL AND STEAM COAL IS MINED AS WELL AS THE MATERIAL LOGISTICS DEPARTMENT AND THE MANAGEMENT BOARD OFFICE.
9 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Chart 4. Structure of the Group including companies subject to consolidation as at 31 December 2014
67.55% 32.45% 100% Polski Koks S.A. JSK Sp. z o.o.
100% Polski Koks Forwarding & Shipping Sp. z o.o. 100% JSU Sp. z o.o. 21.33% 100% JSW Finance AB
100% PGWiR S.A. 18.7% 50.28% CLP-B Sp. z o.o. 100% ZOD Sp. z o.o.
85.03% 100% WZK VICTORIA S.A. JSW Szkolenie i Górnictwo Sp. z o.o.
100% 75.06% epeKoks Sp. z o.o. JSW ADVICOM Sp. z o.o. 100% 95.71% JSW KOKS S.A. Spedkoks Sp. z o.o.
100% 100% BTS Sp. z o.o. SEJ S.A.
100% 55% REM-BUD Sp. z o.o. SEJ Serwis Sp. z o.o.
45% 100% 99.54% CARBOTRANS Sp. z o.o. PEC S.A. 100% 56.69% 43.31% ZRM Sp. z o.o. JZR Sp. z o.o.
84.97% JZR Dźwigi Sp. z o.o.
INFORMATION ON CONSOLIDATED GROUP ENTITIES
Table 2. List of companies in which JSW holds direct or indirect stakes as at 31 December 2014
Company name Line of business
Jastrzębska Spółka Węglowa S.A. Black coal mining and sales, sales of coke and hydrocarbons. with its registered office in Jastrzębie-Zdrój
JSW KOKS S.A. („JSW KOKS”) with its registered office Production and sale of coke and hydrocarbons in Zabrze
* Baza Transportu Samochodowego Sp. z o.o. (“BTS”) with its registered office in Dąbrowa Transportation and general construction services. Górnicza
* P.P.H.U. REM-BUD Sp. z o.o. (“REM-BUD”) with Construction and renovation services. its registered office in Zabrze
* CARBOTRANS Sp. z o.o. (“CARBOTRANS”) with Freight transport by road its registered office in Zabrze
* Zakład Remontów Mechanicznych Sp. z o.o. Overhauls of machinery, equipment and mechanical tools, electric equipment and (“ZRM”) with its registered offices in Dąbrowa control and measurement devices. Górnicza
10 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Company name Line of business
Wałbrzyskie Zakłady Koksownicze Victoria S.A. Production and sale of coke and hydrocarbons („WZK Victoria”) with its registered office in Wałbrzych
* Zakład Usług Energetycznych epeKoks Sp. z o.o. Power sector, electricity and control and measurement automatics services, design (“epeKoks”) with its registered offices in services for industrial and public utility facilities. Wałbrzych,
Spółka Energetyczna Jastrzębie S.A. (“SEJ”) with its Generation of electricity and thermal energy and compressed air, distribution, trading registered office in Jastrzębie-Zdrój and services in respect of the above.
Services related to the operation of a laundry, washing rooms, cleaning, operation of * SEJ-Serwis Sp. z o.o. (“SEJ Serwis”) with its heavy equipment and operation and maintenance of electrical power equipment and registered offices in Jastrzębie-Zdrój, power installations.
* Przedsiębiorstwo Energetyki Cieplnej S.A. (“PEC”) Generation, transmission and distribution of heat and trading in heat. with its registered office in Jastrzębie-Zdrój
Polski Koks S.A. („Polski Koks”) with its registered office Sale of coal and coke, mainly Group products, on the domestic and foreign markets. in Katowice,
* Polski Koks Forwarding & Shipping Agency Marine freight forwarding and marine transport agency services Sp. z o.o. with its registered office in Gdynia
* Goldcup 100301 AB (from 6 October 2014: JSW Finance AB (publ) with its registered office in Special purpose vehicle established to issue bonds on international financial markets. Stockholm) ("JSW Finance")
Przedsiębiorstwo Gospodarki Wodnej i Rekultywacji S.A. Provision of water and sewerage-related services and discharge of salt waters, supply (“PGWiR”) with its registered office in Jastrzębie-Zdrój of industrial water, reclamation activity
* Zakład Odsalania Dębieńsko Sp. z o.o. (“ZOD”) Treatment of saline mine water to protect surface water and production of salt with its registered office in Czerwionce-Leszczyny
Jastrzębskie Zakłady Remontowe Sp. z o.o. (“JZR”) with Mining work and service activity pertaining to renovation, maintenance and service of its registered offices in Jastrzębie-Zdrój, machinery and equipment.
* JZR Dźwigi Sp. z o.o. (“JZR Dźwigi“) with its Services related to production, upgrade, renovation, maintenance, inspection and registered offices in Jastrzębie-Zdrój, repairs of material handling equipment.
Centralne Laboratorium Pomiarowo – Badawcze Technical research services, chemical and physiochemical analyses of minerals, and Sp. z o.o. („with its registered offices in Jastrzębie-Zdrój solid, liquid and gaseous materials and products.
JSW Szkolenie i Górnictwo Sp. z o.o. (“SIG”) with its Training and mining support activity registered offices in Jastrzębie-Zdrój
Zakład Przewozów i Spedycji SPEDKOKS Sp. z o.o. Operation of a railway siding owned by JSW KOKS and WZK Victoria and ensuring flow (“Spedkoks”) with its registered offices in Dąbrowa of goods between the siding and railway station. Provision of coal transportation Górnicza, services by railway.
Provision of railway lines, maintenance of railway infrastructure structures and Jastrzębska Spółka Kolejowa Sp. z o.o. (“JSK”) with its equipment, construction and repair of railway tracks and facilities, provision of shipment registered offices in Jastrzębie-Zdrój, services, road transport
Advicom Sp. z o.o. (“Advicom”) Computer hardware consulting, programming and data processing services. with its registered office in Jastrzębie-Zdrój
JSU Sp. z o.o. (“JSU”) with its registered offices in Insurance intermediation and insurance administration pertaining to insurance claims Jastrzębie-Zdrój. handling, tourist and hotel activity.
* Indirect subsidiaries. The entities holding a stake in these companies and their stakes are presented in Chart 3.
11 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
1.3. FUNDAMENTAL PRINCIPLES OF MANAGEMENT IN JSW AND ITS GROUP
BASIC MANAGEMENT PRINCIPLES IN THE PARENT COMPANY AND THEIR CHANGES
In accordance with the Articles of Association of JSW, JSW’s governing bodies are the Management Board, the Supervisory Board and the Shareholder Meeting. The powers of JSW’s governing bodies stem from the provisions of the Commercial Companies Code and the Articles of Association of JSW. The powers of JSW’s individual governing bodies are defined in: . Management Board – Management Board Bylaws, . Supervisory Board – Supervisory Board Bylaws, . Shareholder Meeting – Shareholder Meeting Bylaws.
The composition and matters within the powers of the Management Board and the Supervisory Board are described in detail in Section 6.11. The manner of proceeding of the Shareholder Meeting and its powers are presented in Section 6.10 of this report.
The Directors Council, composed of Directors of JSW’s Entities and other invited persons, is an opinion-making and advisory body to the Management Board.
The division of powers between the distinct members of the Management Board ensures effective operation of JSW, and the Organizational Bylaws of JSW, the Organizational Bylaws of the Management Board Office and the Organizational Bylaws of the Company’s Mining Plants adopted by the Management Board ensure the effective performance of tasks assigned by the Management Board.
Chart 5. Departments reporting to JSW Management Board Members as at 31 December 2014
MANAGEMENT BOARD President of the Management Board
Vice-President for Vice-President for Vice-President for Vice-President of the Employment and Financial Matters Technical Matters Social Policy Management Board for Sales
Organization and Employment, Payroll and Controlling Department Production Department Procurement Department Management Department Social Policy Department Coal Sales Department
HR Management Coke and Hydrocarbons Investments and Mine Financial Department Department Sales Strategy Department Development Department
Strategic Development Coal Mechanical Department Office of the Chief Accountant Processing and Quality Department
Department for Organization and Investor Relations (in Warsaw)
Legal Department
Key changes to the management principles in the Parent Company
The most important changes in the organization and management of JSW in 2014 were introduced pursuant to resolutions adopted by the Management Board of JSW and concerned: . inclusion of KWK Knurów-Szczygłowice into JSW’s structures as a result of acquisition of this mine from Kompania Węglowa S.A., . liquidation of the following organizational units: Management Board Proxy for Cooperation with Local Government Authorities, Management Board Proxy for the Integrated Management System and Management Board Proxy for Risk Management,
12 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
establishment of the following organizational units: Management Board Proxy for the Integrated Management System and Risk Management and JSW Group Investment Controlling Team, . organizational changes in Zakład Logistyki Materiałowej (“ZLM”) involving, among other things, establishment of the function of Integrated Management System Director, substantive subordination of the warehouses at KWK Knurów-Szczygłowice to ZLM.
Due to the organizational changes introduced in 2014, the Charts and Organizational Bylaws of JSW Entities as well as the scopes of operation of the relevant organizational units have been updated.
KEY GROUP MANAGEMENT PRINCIPLES AND THEIR CHANGES
In 2014, development of the management process in the Group was continued. The fundamental document governing the Group’s operations is the Group Code laying down the Group’s internal regulations aimed at ensuring the achievement of its business objectives. The Code contains a set of principles for shaping and complying with corporate governance, implementing an effective management model and, as a consequence, maximizing the value of the Group. Regulations created on the basis of the provisions of the Code and pertaining to the process of managing the distinct Business Areas as well as the principles of cooperation in management areas together with specific procedures for their implementation, thanks to increasing the efficiency and effectiveness of the Group’s management, permit the Group to streamline the process of pursuing its shared objective. The basic principle of management in the Group, contained in the articles of association of all subsidiaries of JSW, is to direct the companies’ objectives toward the pursuit of the Group’s mission and strategy.
On 7 January 2014, the JSW Management Board amended the Rules of Corporate Governance in the Jastrzębska Spółka Węglowa S.A. Group in the area of regulations pertaining to the procedures and criteria for the selection of members of the supervisory boards of JSW’s subsidiaries. Among others, a rule was introduced that the Group’s managers who are members of the supervisory boards of the Group’s companies do not collect any remuneration for such membership.
ORGANIZATIONAL OR CAPITAL TIES AND EQUITY INVESTMENTS MADE
JSW is the Group's parent company. As at 31 December 2014, JSW held, directly or indirectly, shares in 27 related companies, including 23 subsidiaries (direct and indirect) and in 4 associates, located in Poland and one in Sweden. The subsidiaries are consolidated by the full method. Investments in associates are measured using the equity method in the consolidated financial statements.
The main line of business of the Parent Company is extraction of black coal, which takes place in separate organizational units, i.e. mines. The production of coke and hydrocarbons is conducted by JSW KOKS and WZK Victoria. The concentration of operations in coal mining and coke production and the correlation of the two kinds of activity within the value chain boost the generation of a significant part of the Group’s added value and enables further development of the Group’s integrated business model.
The distribution of the Group’s products is carried out predominantly by JSW directly through its specialized teams and with the support of dedicated companies, i.e. Polski Koks and Polski Koks Forwarding & Shipping Agency Sp. z o.o. Production of electricity, heat and cooling for the mines is the responsibility of SEJ. Some electricity is also generated by JSW KOKS, which uses it for its own needs. Surpluses are sold on the electricity market. JSW has also other subsidiaries, which provide support services to the Group and minority interest in the share capital of other entities and there are other companies in the Group which are indirect subsidiaries of JSW.
13 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
CHANGES IN EQUITY RELATIONS AND EQUITY INVESTMENTS
In 2014 and after the end of the reporting period, the following changes in capital affiliations and the following increases in the share capital of Group companies were effected:
Table 3. Changes in capital affiliations
Events Description
On 2 January 2014, the District Court for Katowice-East registered the merger of Koksownia Przyjaźń S.A. (“Koksownia Przyjaźń”) and Kombinat Koksochemiczny Zabrze S.A. (“KK Zabrze”) which was effected through the acquisition of Kombinat Koksochemiczny Zabrze S.A. (the acquired company) by Koksownia Przyjaźń S.A. (the acquiring company). Merger of Koksownia Przyjaźń S.A. and The equity of Koksownia Przyjaźń S.A. was increased by PLN 162,356,970.00 and Kombinat Kombinat Koksochemiczny Zabrze S.A. Koksochemiczny Zabrze S.A. was dissolved without going through the liquidation procedure and was deleted from the National Court Register. The company’s business name was changed from Koksownia Przyjaźń S.A. to JSW KOKS S.A. and its registered office was changed from Dąbrowa Górnicza, ul. Koksownicza 1 to Zabrze, ul. Pawliczka 1.
On 19 February 2014, the District Court in Gliwice registered JSW Szkolenie i Górnictwo SIG formation process Spółka z ograniczoną odpowiedzialnością with the share capital of PLN 50 thousand, in which JSW subscribed to 100% shares.
On 11 October 2013, the Extraordinary Shareholder Meeting of JSW gave consent for the subscription of up to 1,157,247 new registered shares of SEJ with a par value of PLN 100.00 each and the issue price of PLN 415.64 per share, i.e. with a total issue price up to PLN 481.0 million issued as part of the authorized capital, through one or more subsequent capital increases. The authorization expires on 30 June 2016.
On 6 December 2013, JSW signed an agreement to subscribe to 198,860 series K shares in SEJ within the framework of the registered capital, with the issue value of PLN 82.7 million. The increased capital was covered by JSW by a non-cash contribution. The share capital Increase of the share capital of SEJ increase was registered by the District Court in Gliwice on 14 January 2014.
On 22 December 2014, the SEJ Management Board, acting pursuant to the authorization set forth in § 7A Sec. 1 of the company’s Articles of Association, adopted a resolution to increase the share capital of SEJ within the authorized capital by PLN 4.8 million by way of the issue of 48,119 new registered shares of series L with a par value of PLN 100.00 each and issue price of PLN 415.64 each, for a cash contribution in the total amount of PLN 20.0 million. All new shares will be subscribed by JSW. The share subscription agreement was entered into on 23 December 2014. The cash contribution was made by JSW on 5 January 2015. As at the date of this report, the capital increase has not yet been registered yet.
On 30 December 2013, an agreement was signed under which JSW subscribed to 831,220 new series D common shares in the increased share capital of PGWiR with a par value of PLN 10.00 each. The increased capital was covered by JSW by a non-cash contribution with a fair value of PLN 28.2 million. The above changes in the capital of the above company were registered on 21 February 2014 by the District Court in Gliwice.
Increase of the share capital in PGWiR On 29 December 2014, the Extraordinary Shareholder Meeting of PGWiR adopted a resolution to increase PGWiR’s share capital by issuing 2,222,037 new series common registered shares of series E with a par value and issue price of PLN 10.00 each, through contribution in kind of JSW’s assets with the total market value of PLN 22.2 million. The share subscription agreement was entered into on 30 December 2014. All new shares will be subscribed by JSW. The above change in the company’s capital were registered after the end date of the reporting period, that is on 4 March 2015 by the District Court in Gliwice.
14 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Events Description
On 29 August 2014, JSW completed the process of acquiring series A registered shares in PGWiR from PGWiR's shareholders (individuals who obtained the shares Acquisition of registered shares in PGWiR in PGWiR's commercialization and privatization process or their heirs and the State Treasury). JSW acquired 127,575 shares in PGWiR for the total amount of PLN 3.9 million. The stake held by JSW in the share capital of PGWiR increased by 5.83% up to 100%.
On 13 June 2014, JSW signed purchase agreements of 138 shares in WZK Victoria for the Acquisition of shares in WZK Victoria overall amount of PLN 0.1 million. The stake in the share capital of the company held by JSW increased by 0.03%.
On 16 December 2014, the Extraordinary Shareholder Meeting of WZK Victoria adopted a resolution to authorize the company’s Management Board to acquire the company’s own WZK Victoria’ share buyback shares from Eligible Persons in line with the Act on Commercialization and Privatization of 30 August 1996 (including employees and old age and disability pensioners), for the purpose of their voluntary redemption, in the number not higher than 70,500 shares.
Establishment of Polski Koks Forwarding & On 26 August 2014, Polski Koks Forwarding & Shipping Agency Sp. z o.o., in which 100% Shipping Agency Sp. z o.o. shares were subscribed by Polski Koks was registered.
On 16 September 2014, Polski Koks acquired 100% shares in Goldcup 100301 AB with its Acquisition of Goldcup 100301 AB (JSW registered office in Stockholm, for EUR 6,500.00. On 6 October 2014, the increase of the Finance) capital to EUR 56,500.00 and change of the company's name to JSW Finance AB (publ) was registered.
On 30 September 2014, PGWiR signed a conditional acquisition agreement to purchase from Acquisition of Zakład Odsalania Dębieńsko Sp. Kompania Węglowa S.A. 235,647 shares in Zakład Odsalania Dębieńsko Sp. z o.o. with a par z o.o. value of PLN 100.00 each, constituting 100% of its share capital. The purchase price was PLN 22.7 million. The purchase of shares was ultimately finalized on 27 November 2014.
On 1 July 2014, the Extraordinary Shareholder Meeting of Jastrzębska Strefa Aktywności Gospodarczej Sp. z o.o. (“JSAG”) with its registered office in Jastrzębie-Zdrój adopted a Liquidation of Jastrzębska Strefa Aktywności resolution to dissolve the company and open its liquidation procedure. The liquidation process Gospodarczej Sp. z o.o. is planned to be completed in H1 2015. As at 31 December 2014, JSW recognized a revaluation charge for the value of JSAG’s shares in the amount of PLN 1.3 m.
After the end of the reporting period, on 17 February 2015, the JSW Supervisory Board gave consent to the sale of 102 shares held by JSW S.A. in OPA-ROW Sp. z o.o., which represent Sale of shares in OPA-ROW Sp. z o.o. 24.82% in the company’s share capital, with the purpose of voluntary retirement, for the price of PLN 10.5 m and issued a positive opinion on the pertinent motion of the JSW Management Board to the JSW Shareholder Meeting to be held on 31 March 2015 in Warsaw.
15 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2. ACTIVITY OF THE GROUP AND ITS CONDITIONS
The Jastrzębska Spółka Węglowa S.A. Group is the largest producer of hard coking coal and a significant producer of coke in the European Union. The Group operates on the basis of its two core lines of business: mining, consisting of the extraction of coal (mainly coking coal), and coking, including the production of a full range of coke products. The Group also consists of companies supporting the two key lines of business. Such companies are involved in energy generation and ancillary activities.
For years, the Parent Company has been the key player on the Polish and European coking coal market. All the production, development, investment and commercial measures taken by JSW are focused on maintaining its leadership position in coking coal production in the long-term in Central and Eastern Europe. As for the coking coal, JSW focuses on providing its customers with deliveries of high quality hard coking coal. The scope of JSW’s activity and the products it offers leads to JSW’s exposure to a number of related markets. The demand for the coking coal produced by JSW is shaped by the global situation in the coal, coke and steel markets.
In the last decade, the global coal, coke and metallurgical markets experienced significant changes in supply, demand and prices. The increases and decreases in demand generated by customers and the accompanying price volatility are the reason for an ever shorter duration of business cycles in the interconnected markets. In the past few years, the world experienced an economic slowdown which also affected JSW due to its product-related effect on the coke and metallurgical markets. The low price levels in the interconnected markets translated significantly into a decrease in total revenues in 2014.
In connection with the very difficult situation in the hard coal mining sector in Poland caused by sharply decreasing coal prices in international markets, oversupply in the domestic market and increasing mining costs, the Group recorded in 2014 a negative financial result. In light of the current very difficult market conditions, the Group is taking a number of cost-saving measures, including limitation of capital expenditures incurred.
In 2014 the coal production volume was at the level of 13.9 million tons (including 9.9 million tons of coking coal and 4.0 million tons of steam coal), i.e. 0.3 million tons more than in 2013, however this figure comprises the production of KWK Knurów-Szczygłowice acquired by JSW, amounting to 1.6 million tons (from 1 August 2014 to 31 December 2014).
Including KWK Knurów-Szczygłowice, incorporated into JSW’s structures in August 2014, in 2014 the Group sold 8.8 million tons of coal. Coke sales reached 4.2 million tons, up by nearly 0.3 million tons compared to the previous year.
The Group comprises the following coking plants: Koksownia Przyjaźń and KK Zabrze (from 2 January 2014 as JSW KOKS) and WZK Victoria. These coking plants produce high quality coke, using the coking coal extracted by the Parent Company and, to a lesser extent, coal from third parties. The product structure of Koksownia Przyjaźń and KK Zabrze is dominated by metallurgical coke and WZK Victoria specializes in the production of foundry coke. In 2014, the Group’s coking plants produced 4.0 million tons of coke, i.e. 2.6% more than in 2013.
2.1. MAJOR EVENTS IN 2014
Table 4. Selected significant events in 2014
Q1 2014
Underground connection of The underground connection of three sections of the Borynia-Zofiówka-Jastrzębie Integrated Mine marks the three Sections of the Borynia- closing of another stage of JSW's strategic investment project aimed at achieving technical and organizational Zofiówka-Jastrzębie integration of the Borynia, Zofiówka and Jas-Mos mines. The next stage is to modernize the processing plant in Integrated Mine the Zofiówka Section. By the end of 2016, the processing plant is to be ready to take over the output from all three sections.
Merger of Koksownia Przyjaźń On 2 January 2014, within the framework of the Group Integration Program, the company JSW KOKS was S.A. and Kombinat registered. JSW S.A. holds 95.71% shares of this company. JSW KOKS was created by merging the former Koksochemiczny Zabrze S.A. Kombinat Koksochemiczny Zabrze S.A. (which included Dębieńsko, Radlin, Jadwiga Coking Plants) and Koksownia Przyjaźń. The establishment of JSW KOKS is not the last stage of integration of the coking plants owned by JSW. In the next step, WZK Victoria will be integrated into JSW KOKS.
16 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
JSW Szkolenie i Górnictwo Sp. On 30 January 2014 the Extraordinary Shareholder Meeting of JSW adopted a resolution to consent to JSW z o.o. established establishing a wholly-owned limited liability company doing business under the name of JSW Szkolenie i Górnictwo Sp. z o.o. and JSW subscribing to 100% of the shares in the company. Its purpose is to provide support
in main and auxiliary processes by running comprehensive training courses for Group employees and securing a stronger market position in the area of activity compared to entities from outside the Group. The company will cater to the Group’s training services to the extent required by the Group.
Crew head’s zone and more In January 2014, a training and information platform “Crew head’s zone and more” was launched, where employees can find a lot of useful information in their day-to-day work. This platform contains extensive information on attesting to qualifications to perform actions in the operation of a mine, the main legal acts, collections of sample exam questions, control tests making it possible to expand and check the extent of familiarity with mining regulations, labor regulations and occupational safety and health regulations, an extract of the more important mining regulations, crew head’s booklet, etc. The platform won the first prize in the “Organizational and Educational Projects” category .
Launch of the Composite On 3 February 2014, at KWK Krupiński, a Composite Solid Fuels Production Plant was opened. This construction Solid Fuels Plant project is a result of the implementation of the “Clean Air for Silesia” Research and Development Program carried out by: Polski Koks, JSW, the Silesian University of Technology, the Institute for Chemical Processing of Coal and
the Boiler Cluster Association. The fuel produced in the new plant will replace the flotation concentrate used so far, which, burned in a traditional way, causes emission of many health-threatening pollutants. The use of new fuel in boilers with automatic feeding system will make it possible to reduce the emission of sulfur dioxide, nitrogen dioxide, carbon monoxide, dust and highly carcinogenic benzopyrene by a total of over 90%. Retail sales of the VARMO eco-fuel began on 1 July 2014.
Certificate of Energy The Energy Regulatory Office has issued a certificate of Energy Efficiency, in other words a White Certificate, to SEJ to confirm the declared energy savings. SEJ entered the tender to obtain a certificate with the task of Efficiency for SEJ Modernizing the Air Compressions Plant in Elektrociepłownia Pniówek (Pniówek Combined Heat and Power Plant) belonging to the Section of Cogeneration Combined Heat and Power Plants. The assumption was to obtain 255 tons of equivalent oil, which corresponds to obtaining 255 energy efficiency certificates.
Receipt of a concession by SEJ has received a concession from the Energy Regulatory office to generate electrical energy and to generate Spółka Energetyczna heat for Elektrociepłownia Nowa (Nowa CHP Plant) in Częstochowa. Jastrzębie S.A.
Transport integration project In 2014, a new integration project was launched in the area of road transport in the coke segment, under which the whole road transport area (including assets) was handed over by JSW KOKS to BTS. The second project involved contribution of JSW KOKS’ shares in CARBOTRANS to Polski Koks.
Energy integration project In 2014, the process of integration of SEJ and PEC (integration is to be completed in 2015) was continued. Its goal is to leverage the synergy of resources in the two companies in heat production and sale.
Q2 2014
Letter of intent pertaining to On 10 April 2014, a Letter of Intent was signed regarding opportunities to deepen cooperation in respect of the potential purchase of KWK extraction of deposits in KWK Knurów-Szczygłowice and potential acquisition of the mine by JSW. Knurów-Szczygłowice by JSW
Modernization of the benzol In accordance with the prevailing JSW KOKS Investment Plan for 2015-2016, the company is planning to execute plant in Koksownia Radlin an investment project entitled “Modernization of the benzol plant together with hydrocarbon accompanying (JSW KOKS) facilities in Koksownia Radlin”. In 2014, JSW KOKS launched the process of raising aid funds for execution of investment project from the National Fund for Environmental Protection and Water Management in Warsaw under
the E-KUMULATOR – Environment-Friendly Battery for Industry priority program.
Q3 2014
JSW bond issue program On 30 July 2014, a bond issue program agreement was entered into for PLN 700,000,000 and USD 163,750,000, representing the maximum permitted par value of the bonds issued under the issue program, to be used for the
17 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
purchase of KWK Knurów-Szczygłowice. The terms and conditions of the bond issue program are described in Item 2.8 and 2.9 of this report. The bond issue under the established bond issue program was held on 6 August 2014 and was composed of 70,000 registered bonds denominated in PLN with the par value of PLN 10,000.00 each, with a total par value of PLN 70,000,000 and 16,375 registered bonds denominated in USD with a par value of USD 10,000.00 each with a total par value of USD 163,750,000. The final date of maturity of the bonds will be 30 December 2020 and the bonds will be redeemed at their par value. According to the signed Indenture, the Bondholders may request an early redemption of bonds in case of an Early Redemption Event with Consent or in case of an Event of Default, as described in Note 16 to the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
Acquisition of KWK Knurów- On 31 July 2014, JSW signed the final agreement on acquisition of KWK Knurów-Szczygłowice from Kompania Szczygłowice Węglowa SA. The acquisition of KWK Knurów-Szczygłowice was an element of the Group’s strategy and expanded the Group’s resource base and procured a higher production volume and stabilized the run rate. The sale price was PLN 1,490,000,000. This investment has been described more extensively in Items 2.8 and 2.11 of these financial statements. For JSW this means a consolidation of high quality coking coal in the Group, expansion of the resource base by 65% and ultimately increase of production to 18.7 million tons coal per annum, starting from 2018. In addition, the profitability of the mine itself will increase - thanks to JSW’s investments the mine intends to increase the share of coking coal to 80% of total production over several years.
"Yellow certificate " for SEJ In August 2014, the Energy Regulatory Office awarded SEJ certificates, which confirm generation of electricity through highly efficient cogeneration. Those were the first "yellow" certificates of origin for electricity generated in a gas engine fired by coke gas in Poland. A technical solution was used that allowed the Energy Regulatory Office to recognize the coke gas burned in the engine in the Częstochowa Branch as fuel gas. In addition to obtaining "purple" cogeneration certificates in 2010, this is national scale success for SEJ. Currently, SEJ produces a full range of certificates of origin: "green", "red", "yellow", "purple" and "white", which are the source of additional funds.
Establishment of Polski Koks Polski Koks incurred expenditures for long-term financial assets related to: Forwarding & Shipping . establishment of Polski Koks Forwarding & Shipping Agency Sp. z o.o. in the amount of PLN 130 thousand. Agency Sp. z o.o. and The activity of Polski Koks Forwarding & Shipping Agency Sp. z o.o. involves the provision of marine freight acquisition of Goldcup (JSW forwarding and marine transport agency services. Its area of operations is marine commercial ports in Finance AB (publ)) Gdynia, Gdańsk, Świnoujście and Szczecin. The Group is the company's strategic customer, for which it will handle all marine operations related to coke and coal exports and imports.
. and acquisition of Goldcup 1000301 AB – currently JSW Finance AB (publ), in the amount of PLN 236 thousand. JSW Finance AB is a Special Purpose Vehicle (SPV) established to issue bonds on international financial markets.
Distinction in International Rescue teams of the Borynia Section took two first places and one second place in the IX International Mine Rescue Competition Rescue Competition in Poland. The competition was attended by 21 teams from 13 countries. The competence of the rescue teams was evaluated in five areas: simulated rescue operation, skills of rescue equipment mechanics and metering equipment mechanics, first medical aid and knowledge test.
Q4 2014
First coal in the Bzie 1 shaft In the Bzie1 shaft drilled by KWK Borynia-Zofiówka-Jastrzębie for 4 years, the first coal appeared. Although there was not much coal but its presence confirmed the results of the exploratory boreholes indicating that at the depth of 750 m there are layers of Carbon formations with 17 coal seams with the thickness from 1 to 4 m. 414 meters are still left to drill in the shaft to the ultimate depth of 1,164 m. The investment in the new Bzie-Dębina mining field will enable JSW to open one of the biggest in Europe deposits of coking coal.
Planned Eurobond issue On 20 December 2014, the JSW Management Board announced the planned issue of Eurobonds and selection of the bank syndicate to carry it out. In connection with the planned Eurobond issue, JSW was awarded a corporate
rating of Ba2 with a stable outlook by Moody’s and B+ with a stable outlook by Fitch rating agency, while the planned senior notes, to be issued by JSW's Subsidiary, JSW Finance AB (publ), received a rating of Ba3 with a stable outlook by Moody’s and B+ with a stable outlook by Fitch.
On 3 November 2014, the Management Board of JSW announced that the Eurobond issue will not be carried out at the current time on account of unfavorable market conditions. After the date ending the reporting period, the
18 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
JSW Management Board announced that on 6 February 2015, Fitch withdrew the B+ corporate rating with a stable outlook for JSW with regard to the senior note issue by JSW Finance AB (special purpose vehicle in Sweden, established by Polski Koks) planned at the time of awarding the ratings. The ratings were withdrawn in connection with the decision not to carry out the issue, which follows from the principles adopted by Fitch.
40 years of KWK Pniówek In 2014 KWK Pniówek celebrated 40 years of existence.
CSR Report In 2014 JSW issued the first corporate social responsibility (CSR) report, available on the JSW website (www.jsw.pl./odpowiedzialny-biznes/).
JSW S.A. among RESPECT Once again JSW found itself among the companies comprising the RESPECT Index. On 18 December 2014, a Index companies conference was held to sum up the 5 years of the RESPECT Index project – the first in this part of Europe stock exchange index of socially responsible companies, aimed at selecting companies that are managed in a responsible and sustainable manner. During the conference, the results of the eighth edition of the project were announced. In RESPECT Index portfolio there are currently 24 companies. A verification carried out by an external auditor confirmed that JSW once again satisfied the stringent criteria regarding corporate social responsibility. The RESPECT Index groups together companies from that operate in accordance with the highest management standards of corporate governance, information governance and investor relations and it also takes into account the environmental, social and economic factors.
Czarny Diament 2014 KWK Pniówek received the prestigious “Czarny Diament 2014” award.
Distinction for JSW in three JSW was awarded in three categories of “The Best Annual Report 2013” contest organized by the Accounting and categories of "The Best Tax Institute. It took the first place in the "Best Annual Report on the Internet" category, second place in the "Best Annual Report 2013" contest Content of an Annual Report" and a distinction for major progress in the improvements in the Management Board Activity Report.
Overhaul integration On 4 November 2014, the JSW Management Board made a decision regarding changes of the overhaul activities in the Group, involving acceptance of the operation of specialized overhaul companies both in the coal and the
coke segment. The planned changes envisage operation of an integrated overhaul company in the coke segment, JSW KOKS’s 100% subsidiary. The decision of the JSW Management Board will allow for execution of a merger process of subsidiaries: ZRM and REM-BUD through establishment of a new company to take over the assets of the merged companies. The integration process of the aforementioned companies will be completed in 2015.
New power unit in the In 4Q 2014, commissioning work was started in the newly constructed power unit with the capacity of 71 MWe. Koksownia Przyjaźń CHP After its launch, the installed power generation capacity of the Koksownia Przyjaźń CHP plant will amount to 110 Plant (JSW KOKS) MWe. This will make it possible to fully satisfy JSW Koks’s demand for electricity (approx. 1/3 of the aforementioned installed capacity). Energy surpluses will be sold in the energy market, including some energy (at
least 15%) – according to the Energy Law - at the Polish Power Exchange (obligation of generation entities with the total installed capacity exceeding 50 MWe). Consequently, the company entered into an agreement with Tauron Sprzedaż Sp. z o.o. for the sale of generated energy on market terms, effective as of 1 January 2015. The launch of the new power unit will also make it possible to change the method of utilization of generated coking gas, because gas consumption for energy generation purposes will increase from approx. 7.8% to 35.6% of the gas produced, and the sale of coking gas will decrease from approx. 40% to approx. 21.2% of the gas produced. Arrangements are made as regards supply of electricity from the new unit in Koksownia Przyjaźń to KWK Knurów- Szczygłowice.
Phasing out mining activity in Due to the deteriorating conditions and limitation of the scope of work in the area of mining activity JZR in JZR, starting in November 2014, the process of phasing out its activity started, which results to reduction of employment in this area. Focus of the company’s activity only on overhaul services and production of mining equipment will allow for better organization of work, simplified remuneration system and stronger focus on the activity of key importance for the Group. On 28 November 2014, the Management Boards of SIG and JZR signed a memorandum of understanding in which SIG declares priority treatment to the employees of JZR’s mining part who want to undertake work in SiG.
Acquisition of shares in ZOD On 27 November 2014, PGWiR acquired 100 % of shares in ZOD from Kompania Węglowa S.A. This share purchase is aimed at extending the range of mine water drainage services provided to KWK Budryk by adding treatment. At the same time, acquisition of control over ZOD will make it possible, through repairs and
19 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
modernization of mine water desalination technologies, to reduce the footprint of KWK Budryk on the natural environment of the Bierawka river.
Fire in Elektrociepłownia On 16 December 2014 as a result of a fire in EC Zofiówka, basic production equipment was destroyed, ruling out Zofiówka (SEJ) normal operation of the CHP plant. As a result of this situation, SEJ’s result is lower by approx. PLN 6 m.
Execution of the Fluidized In 2014 work was continued on execution of the Fluidized Bed Unit Construction Project in EC Zofiówka. The Bed Unit Construction Project construction of a 75 MWe cogeneration fluidized bed unit in EC Zofiówka is intended to contribute to the maximum in SEJ (EC Zofiówka) possible use of byproducts derived from coal mining operations, increase the Group’s own electricity generation and reduce the negative impact of the Group’s operations on the environment. The contractor building the fluidized
bed unit executed work in 36 open work fronts in the following areas: construction, sanitary area, electricity, Control and Measurement Instruments and Automation, and technology. On 29 December 2014, SEJ signed with the contractor building the fluidized bed unit the Financial Report for Stage III of the Contract.
2.2. MAJOR EVENTS WITH MATERIAL EFFECT ON ACTIVITY AND FINANCIAL RESULTS IN THE PERIOD OR WHOSE EFFECT IS POSSIBLE IN SUBSEQUENT YEARS
KEY EVENTS IN 2014
Mining and geological problems in 2014
Net coal production output in 2014 (without KWK Knurów-Szczygłowice) was approx. 1.5 million tons lower than originally assumed, which results from the sum of the difficulties of different severity, which prevented attainment of the assumed execution and which could not have been estimated at the stage of preparation of difficulty assumptions. The most important ones included:
. total disappearance of the seam in part of longwall C-6, seam 502/1 in the Borynia Section, generating daily losses from 2.5 thousand tons to 3.0 thousand tons, resulting in decline of production in H1, . level of methane hazard in long-wall N-17a, seam 328/1 in KWK Krupiński, which significantly exceeded the capacity of known and applied preventive solutions, as a result of production capacity of the long-wall dropped from the projected level of approx. 2.9 thousand tons per day to approx. 2.0 thousand tons per day, . no possibility to mine, for six months, longwall P-3, seam 361 in KWK Pniówek, due to unacceptable level of fire hazard, despite intensive preventive measures.
As a result of shortage of coal production in JSW’s home mines, the sales volume decreased both within and outside the group. The total sale of coal extracted in JSW’s home mines was in the range of 13.7 million tons, i.e. 0.7 million tons less than in 2013.
Conditions on industry markets
The main coke sales market is Europe. In light of the economic slowdown, low rate of growth of steel production in Europe, overseas customers have become a significant market for deliveries of coke. The conditions on industry markets, drastically decreasing prices of the Group’s main products caused much lower results in the period in question.
The Group’s sales revenues in 2014 dropped in relation to 2013 by PLN 817.3 million, i.e. by 10.7% from PLN 7,632.2 million to PLN 6,814.9 million, and the average coal price sold to external customers dropped by PLN 47.82, i.e. 12.4%, from 386.77 PLN/t to 338.95 PLN/t, and the average coke price dropped by PLN 90.32, i.e. by 11.9% from 758.50 PLN/t to 668.18 PLN/t.
Adjustment Measures Program
Considering the continuing difficult situation in the industry’s markets, which directly affects the Group’s economic and financial performance, in order to mitigate the effects of the Group’s deteriorating results in 2014, the JSW Management Board, in an attempt at balancing cash flows, decided to implement the Adjustment Measures Program (“AMP”) to enable cuts in operating expenses and capital expenditures. The AMP’s underlying assumption is to maintain the planned volume of production and sales and to keep the reference prices of hard coal at a satisfactory level. The Program has been constantly monitored and the results thoroughly analyzed by the Management Boards and controlling services. Only in the Parent Company operating expenses were reduced by PLN 353 m compared to the amount budgeted for the year and capital expenditures were reduced by PLN 419 m.
20 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Acquisition of KWK Knurów-Szczygłowice
In connection with the acquisition of KWK Knurów-Szczygłowice, JSW paid the purchase price in the full amount, i.e. PLN 1,490 million. The KWK Knurów-Szczygłowice acquisition transaction was settled in the consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. Considering the time of acquisition, the results of the mine have been recognized in JSW’s result since 1 August 2014. In its statement of financial results and other comprehensive income, the Parent Company recognized a bargain purchase gain of PLN 297.4 million, which is a difference between the value of net assets purchased (PLN 1,787.4 million) and the purchase price (PLN 1,490.0 million).
For the Group this means a consolidation of high quality coking coal in the Group, expansion of the resource base by 65% and ultimately increase of production to 18.7 million tons coal per annum, starting from 2018. The profitability of the mine itself will also increase; thanks to capital expenditures it intends to increase the share of coking coal to 80% of total production over several years.
JSW bond issue
On 31 July 2014 an agreement was concluded by and between Kompania Węglowa S.A. and JSW to purchase an organized part of a business in the form of the "Knurów-Szczygłowice" Mine ("ZORG"). The purchase price for ZORG amounted to PLN 1,490 million. The source of funding for the purchase of these assets was external financing in the form of a private bond issue in the amount of USD 163.75 million and PLN 700 million as well as JSW’s own funds, as described in more detail in Items 2.8 and 2.9 of this report.
Impairment charges
Pursuant to IAS 36 Impairment of Assets, the Group determined for each asset whether there are any circumstances (pre-requisites) evidencing impairment of any asset as at the balance sheet date (31 December of the year). If such evidence is found, the Group is obligated to measure the recoverable amount of the asset. Taking into consideration the necessity to make material reductions in the investment policy and the decline in coal prices and the oversupply of steam coal on the Polish market, it was found justified to perform tests for companies producing coal in JSW. The Parent Company tests individual cash flow centers (mines) by calculating their recoverable value (value in use) and then comparing it with the carrying value of the center. Considering the specific nature of JSW’s plants, the Parent Company calculates their value in use. Value in use (as the current, estimated value of future cash flows which are expected from further use of an asset or a cash flow center) depends, among others, on: residual lifetime of the plant and its production capacity, estimate achievable product sales prices, discount rate (weighted average cost of capital, WACC), capital expenditures made and many other technical factors. The Management Board of JSW made a decision to recognize a revaluation charge of PLN 224.2 million for the assets of the Krupiński Mine.
Moreover, one of the Group companies conducted an impairment test of property, plant and equipment. As a result of the test, a revaluation charge of PLN 6.4 million was recognized for property, plant and equipment. This charge is related to the Others segment and has been recognized in other costs in the consolidated statement of profit or loss and other comprehensive income.
Recognition of the valuation of provisions for employee benefits
As a result of changes in interest rates introduced by the Monetary Policy Council in 2014, the discount rate used to calculate the employee benefit provisions as at 31 December 2014 changed. As a result of these changes the amount of the provisions for employee benefits in the Group increased by PLN 488.4 m (actuarial losses). This increase of the provisions was reflected in the current result (profit before tax) in the amount of PLN 37.4 million, and the amount of PLN 451.0 million was charged to other comprehensive income. Recognition of the above changes of the provisions had no impact on the Company’s current cash position.
SUBSEQUENT EVENTS
Strike in the Parent Company
From 28 January to 13 February 2015, a strike was held in JSW, as a result of which the Parent Company did not produce approx. 751 thousand tons of coal. Thanks to previously accumulated coal inventories which were sold in a small part to business partners during the strike, the total lost revenues for failure to deliver the agreed volumes, were slightly lower than the production losses. It is estimated that during the strike, the Parent Company did not generate revenues on the sale of coal in the amount of approx. PLN 259.3 million and coke, together with hydrocarbons, as a result of interruption of coal deliveries from JSW to the Group’s coking plants in the amount of approx. PLN 41.8 million.
21 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Among other effects of the strike one should also list: . necessity to purchase coking coal from external sources for the Group’s coking plants at spot prices to ensure coke production at a level guaranteeing safe operation of the coking batteries (64.2 thousand tons). . deterioration of the quality parameters of coke due to the necessity to use alternative coal mixes, . serious damage to the image of a reliable supplier, . risk that business partners performing other work, which during the strike could not perform these tasks in the normal course of activity, will have claims for damages, . lost financial profits due to the absence of cash inflows (interest on deposits, costs of loans)..
The strike made it impossible to fill current orders, as a result of which JSW’s business partners made purchases from alternative sources, which may lead to resignation from the contractual sales volumes for the coal from JSW. This situation not only affects the current commercial conditions with customers but primarily affects the future cooperation with the business partners who may strive in the long run to substitute, in full or in part, JSW’s coal with raw materials from another producer (or from imports). Thanks to the long- term reliable commercial cooperation conducted by the Parent Company, the competitive geographic rent and availability of the raw material with the required quality parameters, customers (especially buyers of coking coal) based their production processes predominantly on the coal produced in JSW.
In addition, considering the situation associated with the strike, which in light of the concluded contracts, is treated by the parties as a force majeure event, the business partners were immediately notified thereof. According to contractual provisions, undelivered volumes do not have to be made up for.
After recalling the force majeure the commercial services will take measures to resume deliveries at a level making it possible to deliver full annual amounts. However the current situation in the steam coal market associated with its oversupply makes it very difficult or even impossible. The situation in the coking coal market is similar - global coal supply significantly exceeds demand, which may be an argument for irreparable loss of some contracted deliveries.
On 23 February 2015, an agreement was signed between the JSW Management Board and the Trade Unions Protest and Strike Committee representing trade union organizations active in JSW. The document constitutes an attachment to Current Report No. 16/2015. The agreement constitutes a more specific regulation of the agreement of 13 February 2015, which JSW announced in Current Report no. 12/2015 and on the basis of Article 9 § 1 of the Labor Code, makes it possible to implement the labor cost savings agreed with the trade union organizations. It is estimated that the positive effects of reduction of labor costs following from the agreement entered into on 23 February will amount to, in total for 2015 and 2016, approx. PLN 515 million.
The value of the daily wages which will not be paid to the employees on strike is currently estimated at PLN 31.4 million (together with the Employer’s social security contribution, PLN 38.5 million).
Detailed information about the course of the strike is presented in Item 5.5 of this report.
Firefighting operation in KWK Knurów-Szczygłowice
After the date ending the reporting period, in the Szczygłowice Section of KWK Knurów-Szczygłowice, on 12 February, a firefighting operation was announced in connection with the endogenous fire in the goafs of longwall XIV in seam 405/1, level 850 m. 31 workers were withdrawn from the threatened area without the use of emergency escape apparatuses. No worker suffered any injuries. The operation was aimed at stopping the threatened area through building explosion stoppings in the longwall galleries.
22 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2.3. DESCRIPTION OF THE INDUSTRY AND COMPETITION
The Group has been the key player on the Polish and European coal and coke markets. The Group’s main objectives are to strengthen its leading position in the production and sale of high-quality coking coal and coke and maintain the position of a leading supplier in the European market.
Chart 6. Location of key customers
On a global scale, the share of the Group’s mines in total coal production is very low, representing approx. 0.2% of the world’s coal production. The global production of coal is approx. 7 billion tons per year, of which coking coal for the needs of the coking industry represents approx. 15% and the remaining 85% of coal production are made up of products used primarily for thermal purposes. For many years, the largest producer and consumer of coal has been China (producing more than 3.5 billion tons). The world’s largest coal producers ranked below China are the United States, India, Australia, Indonesia, Russia and South Africa.
In Europe, major producers of hard coal are: Poland, Czech Republic, Germany, Ukraine and Russia (the European part). Coal production of JSW‘s competitors from Poland’s neighboring countries, i.e. Czech Republic, Germany and Ukraine is approx.: 8.6 million tons, 8.3 million tons and 65.8 million tons, respectively, of which approx. 4.6 million tons, 4.8 million tons and 20.2 million tons of coking coal, respectively. The total European production of coal does not cover the demand of the customers, hence the need, especially in Western countries, to import the required coal. The annual deficit of coal in the European Union is estimated at approx. 150-200 million tons, including approximately 40-50 million tons of coking coal.
23 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 1. Share of individual European countries in the total production of hard coal
Other producers
8% Poland 41%
Ukraine 35%
United Kingdom Czech Republic Germany 7% 4% 5% Source: Coal Information (2014 Edition)
In Poland, the vast majority of coal companies produce coal for the generation of electricity and heat. In 2014, coal production in Poland totaled 72.5 million tons, of which 83.1% was steam coal. In Poland, besides the Group, the largest coal producers are: Kompania Węglowa S.A., Katowicki Holding Węglowy S.A., LW Bogdanka S.A. and other smaller companies. In Poland, only JSW and Kompania Węglowa S.A. produce coking coal. In 2014, the overall production of coking coal was 12.3 million tons.
Graph 2. Production of coal in Poland in 2007-2014 (million tons).
90
80 87,2
70 83,4
79,2
77,5
76,5 76,2
75,7
60 72,5
50
40
30
20 10 0 2007 2008 2009 2010 2011 2012 2013 2014
Source: Agencja Rozwoju Przemysłu S.A., Katowice Branch, ul. Mikołowska 100, 40-065 Katowice
Graph 3. Production of coking and steam coal in Poland in 2012-2014 (million tons)
90 80 70 11,7 12,1 12,3 60
50 40 67,5 30 64,4 60,2 20 10
0 2012 2013 2014
STEAM COAL COKING COAL
Source: Agencja Rozwoju Przemysłu S.A., Katowice Branch, ul. Mikołowska 100, 40-065 Katowice
24 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
In the production of coking coal, the Group is the only domestic producer of “hard” coal and a major producer of “semi-soft” coal. In turn, Kompania Węglowa S.A. in addition to steam coal, produces small amounts of semi-soft coking coal (approx. 2.4 million tons in 2014).
Graph 4. Group’s share in the domestic production of coal COKING COAL STEAM COAL JSW semi-soft 6,7% other 19,6%
semi-soft hard JSW JSW Other 19,8% 60,6% 93,3%
Source: Agencja Rozwoju Przemysłu S.A., Katowice Branch, ul. Mikołowska 100, 40-065 Katowice; own material.
The Group’s second major product, after hard coking coal, is coke produced in the Group’s own coking plants. Strategic product types offered by the Group are blast furnace coke and foundry coke whose share in the Group’s total coke production in 2014 was 76%. The remaining 24% was industrial, metallurgical and heating coke.
Graph 5. Group’s share in the domestic production of coke
COKE JSW Group 43,0%
Other 57,0%
In the coking process, certain hydrocarbons are also obtained. Their production is closely correlated with the volume of coke produced. The hydrocarbons of the largest sales value, besides coking gas, are tar and benzene. Other hydrocarbons include ammonium sulfate and liquid sulfur. On the global scale, the Group’s share in the sale of hydrocarbons is minor.
The variety of coal and coke products offered by the Group allows it to operate in many markets and flexibly manage its trading policy, adjusting it to the current market conditions.
25 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2.4. KEY PRODUCTS, GOODS AND SERVICES
The Group’s strategic products include:
. coking coal (hard and semi-soft) and steam coal, . coke (mainly blast furnace and foundry coke).
Due to the intended use of the Group's products, there is a direct relationship between the Group’s activity and the supply and demand in the coal, coke, steel and energy markets:
. coking coal – production of coke, . steam coal – production of electricity and thermal energy, . coke – component of the feed for steel production in steel mills, foundries, the chemical industry, the non-ferrous metal industry, production of insulation materials, etc.,
The structure of the Group’s products is adapted on an ongoing basis to the rapidly changing market needs, taking into account the supply and demand of the domestic and foreign markets.
The Group’s mining activity is performed by five coal mines. The share of coking coal and steam coal in total net coal production in 2014 was 70.9% and 29.1%, respectively; in terms of the intended use of the coal produced in the Group, the share of the coking sales volume in the Group’s total deliveries in 2014 constituted 72.4% and the remaining 27.6% was steam coal (calculation thousand tons). The Borynia-Zofiówka-Jastrzębie and Pniówek mines offered mainly high-quality hard coal characterized by a low content of ash, sulfur and volatile matter (except for Pniówek where the level of volatile matter was slightly higher but still within the acceptable levels). The semi- soft coal from KWK Budryk and Krupiński (typical semi-soft coal) and Knurów-Szczygłowice (semi-hard coal) is a gas-and-coking coal with a low content of ash and sulfur but a higher content of volatile matter which is typical for this type of coal. All types of coking coal produced are also characterized by appropriate CRI and CSR parameters on good levels acceptable to business partners. In addition, the Group’s mines, in particular: Budryk, Krupiński and Knurów-Szczygłowice, offer steam coal with good purity parameters and a calorific value compatible with market demand.
In 2014 coking activity in the Group was conducted by: JSW KOKS (including four coking plants: Przyjaźń, Radlin, Jadwiga and Dębieńsko) and WZK Victoria. In 2014, the shares of coke production in individual companies were as follows: JSW KOKS - 89%, WZK Victoria - 11% of the Group’s total coke production. The main product of the coke segment is blast furnace coke produced accounting for 67% of the total amount of coke produced in 2014. Metallurgical coke accounted for 9% of the Group’s total production, and the remaining production included: industrial coke, metallurgical coke and heating coke, whose share was 19%, 2% and 3%, respectively.
PRODUCTION AND SALES OF COAL
The coal production volume in 2014 was in the range of 13.9 million tons, i.e. 0.3 million tons more than in 2013. This figure comprises also the production of KWK Knurów-Szczygłowice in the amount of PLN 1.6 million, excluded from JSW’s structures (as of 1 August 2014).
Graph 6. Coal production (in millions of tons)
10 9,9 9,5 9,8 8 8,8
6
4 3,8 4,0 3,8 4,0 2
0 2011 2012 2013 2014
COKING COAL STEAM COAL
26 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 7. Structure of coal production by the Group’s mines in 2014
Steam JSW coal 29,1%
Coking coal 70,9% PNIÓWEK BORYNIA-ZOFIÓWKA-JASTRZĘBIE Steam coal 0,9% Steam coal 3,8%
Coking Coking coal coal 96,2% 99,1% KNURÓW-SZCZYGŁOWICE
Steam coal 41,2%
Coking coal 58,8% Steam coal KRUPIŃSKI 64,5% BUDRYK Steam coal 70,1%
Coking coal Coking 35,5% coal 29,9% In 2014, the quality parameters of respective shipments of coal were within the limits set by the trade contracts.
The total sales of coal produced by the Group’s mines, comprising intra-group and external deliveries, were realized at 13.7 million tons, i.e. 0.7 million tons less than in 2013. The decrease of the sales volume resulted from execution of production tasks in the home mines, as a result of extraordinary difficulties associated with natural hazards and difficult mining and geological conditions.
Graph 8. External sales volume (millions of tons) 6
5 5,3 5,2 4,9 4,9 4 3,9 3 3,6 3,5 3,3 2 1
0 2011 2012 2013 2014
COKING COAL STEAM COAL
27 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
In 2014 compared to the same period of the previous year, sales of coking coal decreased by 0.4 million tons and steam coal deliveries were down by 0.3 million tons. The share of sales of the best quality hard coal that attracts the highest prices in total coal deliveries is maintained at a satisfactory level (2014: 54.4%, 2013: 56.5%).
Table 5.Production and sales of coal
Growth Item 2014(1) 2013 2012 2011 rate 2013=100
Production (in millions of tons) 13.9 13.6 13.5 12.6 102.2
. Coking coal (in millions of tons)(2) 9.9 9.8 9.5 8.8 101.0
. Steam coal (in millions of tons) 4.0 3.8 4.0 3.8 105.3
Total volume of JSW’s sales (in millions of tons)(3) 13.7 14.4 12.7 12.4 95.1
. Coking coal (in millions of tons) 9.9 10.3 9.1 8.6 96.1
. Steam coal (in millions of tons) 3.8 4.1 3.6 3.8 92.7
Intra-group sales (in millions of tons)(3) 4.9 5.2 4.5 4.0 94.2
. Coking coal (in millions of tons) 4.7 5.0 4.2 3.7 94.0
. Steam coal (in millions of tons) 0.2 0.2 0.3 0.3 100.0
External sales volume (in millions of tons)(4) 8.8 9.2 8.2 8.4 95.7
. Coking coal (in millions of tons) 5.2 5.3 4.9 4.9 98.1
. Steam coal (in millions of tons) 3.6 3.9 3.3 3.5 92.3
Sales revenues (PLN million)(4) 5,166.7 5,970.3 7,040.9 8,036.3 86.5
Revenues on inter-segment sales (PLN million) 2,194.4 2,411.3 2,906.0 3,093.0 91.0
Revenues on sales to external buyers (PLN million) 2,972.3 3,559.0 4,134.9 4,943.3 83.5 (1) including KWK Knurów-Szczygłowice in JSW’s structures from 1 August 2014, (2) the share of hard coal in total coal production in 2014, 2013, 2012 and 2011 was: 53.4%, 57.2%, 57.5%, 58.2%, respectively. (3) the volume of sales of coal produced by the Group, (4) the figure includes the Group’s revenues in 2014, 2013, 2012 and 2011: PLN 159.5 million, PLN 70.7 million and PLN 186.7 million, respectively, from the sale of coal produced outside the Group.
In 2014, sales of steam coal to external customers decreased by 0.3 million tons compared to 2013 (and increased in relation to 2011 and 2012 by 0.1 million tons and 0.3 million tons, respectively), primarily as a result of commercial cooperation with local and foreign companies from the commercial power sector in the conditions of a significant oversupply of coal.
In 2014, a slight decrease in external sales of coking coal was also recorded (by 0.1 million tons as compared to 2013). The Group’s hard coking coal accounted for 74.0% of external supplies of coking coal (in 2013: 82.6%). The remaining 26% was semi-soft coal (2013: 17.4%). The increase of the share of semi-soft coal (and decrease of the share of hard coal) results from the acquisition of KWK Knurów- Szczygłowice. In intra-group coking coal sales, hard coal produced by the Group accounted for 76.3% (2013: 75.3%) and semi-soft coal accounted for 23.7 (2013: 24.7%) which results from the company’s internal commercial policy.
In 2014, external coal deliveries to local buyers accounted for 79% (by volume) and 75.9% (by revenues), (2013: 75.7% (by volume) and 71.3% (by revenues)). The remaining supplies were shipped to foreign markets.
In 2014 revenues on sales to external buyers in the Coal segment reached PLN 2,972.3 million and were approx. PLN 586.7 million (16.5%) higher than in 2013. The existing market conditions (downtrend in the coal and coke market and imbalance between supply and demand) led to another significant pressure on price reductions and lower revenues on coal sales in 2014.
SALES OF COKE
In comparison to 2013, coke production in 2014 increased 2.6% and its sales in the Group was 7.7% higher. Revenues on sales of coke and hydrocarbons in the period under analysis reached PLN 3,489.2 million and were 5.8% lower than in 2013. As was the case in the
28 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
coal segment, the lower revenues in the coke segment were the result of the difficult situation in the steel and coke sector, which brought lower prices of coke obtained from sales to external customers.
Table 6. Production and sales of coke and revenues on the sales of coke and hydrocarbons
Growth Item 2014 2013 2012 2011 rate 2013=100
Production (in millions of tons) (1) 4.0 3.9 3.8 3.1 102.6
External coke sales volume ( mm ton) (2) 4.2 3.9 3.8 3.0 107.7
Revenues on sales from external buyers ( PLN million) (3) 3,489.2 3,704.3 4,307.9 4,220.0 94.2
(1) coke production from the Group's coking plants, (2) the volume of sales of the coke produced by the Group, (2)revenues on the sales comprise coke and hydrocarbons.
Graph 9. Production and sale of coke (millions of tons)
5
4 4,2 4,0 3,8 3,8 3,9 3,9
3
3,1 3,0
2
1
0 2011 2012 2013 2014 PRODUCTION SALES TO EXTERNAL CLIENTS
SALES PRICES OF COAL AND COKE
The prices of the Group’s basic products in 2014 were significantly lower than in 2011-2013. Coal prices in 2014 compared to 2013 dropped on average by approx. 12%. As in the case of coal prices, coke prices decreased by approx. 11%.
Table 7. Average sales prices of coal produced by the Group and average sales prices of coke
Growth rate Item 2014 2013 2012 2011 2013=100
Average coal sales prices
Coking coal (PLN/t) 410.36 473.34 625.70 811.78 86.7
Steam coal (PLN/t) 234.39 267.58 315.27 266.93 87.6
Total (PLN/ton)(1) 338.95 386.77 500.90 583.26 87.6
Average coke sales prices
Coke (PLN/t)(2) 668.18 758.50 970.20 1,197.93 88.1
(1) The prices pertain to deliveries of coal produced by the Group and include transportation costs which in 2014 in JSW, on average, amounted to: 7.31 PLN/t in 2013: 10.19 PLN/t in 2012: 11.07 PLN/t in 2011: 5.61 PLN/t, (2) FCA prices pertain to the Group’s coking plants in the relevant periods.
29 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
The prices of coke and coking coal offered by the Group followed the market trends, as illustrated in the following charts.
Graph 10. Prices of coking coal and coke
Prices of coking coal (hard - in USD/t) Prices of blast furnace coke (USD/t)
390,00 580 340,00 530 480 290,00 430 240,00 380 190,00 330 280 140,00 230
90,00 180
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 spot (FOB Australia) contract benchmark (FOB Australia) CMR quotations European market (CFR) JSW Group JSW Group (FCA)
Source: Platts
The nature of the pressure on the market prices of coking coal and coke (and steam coal) is one of a stabilized trend resulting from the balance of supply and demand both in the European markets and in the global markets. The main factors currently shaping the demand and supply situation (oversupply, technological changes such as the emergence of pulverized coal injection technology, low cost of extraction and high efficiency of mining quarries) suggest that the relatively low prices in the global markets will continue for at least some time.
OTHER ACTIVITY
In 2014, from other activity performed by the Group, including various types of support activity (production and sale of electricity and thermal energy, overhauls and maintenance, logistics, laboratory services) and non-core business (travel and insurance services), the Group generated PLN 353.4 million, i.e. 5.2% of the Group’s sales revenues. These revenues were PLN 15.5 million (4.2%) lower than those recorded in 2013.
2.5. SELLING MARKETS
The Group as an active participant of the supply chain: coking coal - coke - steel, is forced to operate in a volatile market environment, determined by the situation in the steel market and strong competition in the coking coal and coke supplier market.
The steel market is dominated by global metallurgical concerns, and steel production is increasingly concentrated in Asian countries. In 2014, compared to 2013, global steel production rose by 1.2%, reaching 1.661 billion tons. Higher than average production increases were recorded in the European Union and North America, and lower in Africa and South America. Raw steel production in the entire European Union in 2014 recorded a 1.8% increase in relation to the year before, but is still 20% lower than the level recorded before the market collapse in 2008. Several out of 75 blast furnaces in Europe returned to operation in 2014, but 14 still remained shut down. The decrease of steel production by 2.8% in the Commonwealth of Independent States led to a decline of steel production in entire Europe by 0.1%. In Poland, in 2014 the increase of steel production amounted to 8.4%, but just like in EU countries, steel production is still approx. 19% lower than before the market collapse in 2008.
In 2014 the situation in the coke market, in addition to natural impact of steel market fluctuations, was subject to two strong impacts:
. Significant increase of the sale of Chinese coke
Coke production in China in 2014 amounted to PLN 476.9 million and was 1% higher than the year before. In the situation of decreasing internal demand, coke exports from China in 2014 totaled 8.5 million tons, i.e. 85% more than the year before and were the highest since 2008, when the coke exports volume was 12.2 million tons.
30 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. Supply-demand changes in the European market
The Ukrainian conflict led to significant reduction of deliveries of Ukrainian coke and anthracite which, in some applications, is a coke substitute. Coke production in Ukraine in 2014 amounted to approx. 13 million tons, compared to 16.6 million tons in 2013.
The prices of blast furnace coke in the European market (CFR North Europe) in Q2 and Q3 2014 remained unchanged (USD 220 per ton), following the decline from USD 277 per ton in Q1 2014. As a result of the conflict in Ukraine, coke prices increased in October to USD 247.5 per ton, and the dropped again to USD 235 per ton.
The prices of foundry coke in the European market (CFR North Europe) also systematically decreased from USD 525 per ton in March 2014 to USD 450 per ton in December 2014.
For coking coal producers, 2014 was one of the most difficult years recently. Despite earlier announcements of increases, reference prices for Australian hard coal in individual quarters of 2014 were in a downward trend. Reference price of premium hard coal in Q1 2014 amounted to USD 143 per ton and in Q4 2014 - USD 119 per ton (16.8% decrease), as a result of which many producers recorded a loss on their operations. Unlike in previous years, price decrease did not lead to reduction of production capacities and even increased coal supply leading to further price decline. Apart from opening of new mines whose construction started at the times when coal prices were very high, many producers tried to compensate for the price decreases with increase of production at lower costs.
In 2014, trading conditions on the steam coal market were even more difficult. Steam coal price (CIF North Europe) at the beginning of the year were USD 76-83 per ton and in Q4 2014 dropped to USD 70-73 per ton. The domestic steam coal market faced excessive supply and weakening demand resulting from the changes occurring in the energy policy. The share of hard coal in the production of electricity systematically shrinks in favor of other energy sources (e.g. RES).
The low price levels in the interconnected markets translated significantly into a decrease in the Group’s sales revenues in 2014, which were realized at the level of PLN 6,814.9 million, down PLN 817.3 million from 2013
Graph 11. Revenues from sales of coal, coke and hydrocarbons broken down by geographical area of end customers
6 000 REVENUES ON COAL SALES (PLN M)
5 000
4 000
3 000 3876,7
2 000 3134,1 2538,7
1 000 2255,5
0,0 36,7
872,5 680,1 215,7 147,8
785,1 1066,6 0 POLAND EUROPEAN UNION OTHER COUNTRIES 2011 2012 2013 2014 REVENUES ON THE SALES OF COKE AND HYDROCARBONS (PLN M) 3 000
2 500
2 000 2885,8
2711,6 2659,5
2493,8 1 500
1 000
500
934,0
883,6 682,3 668,5 400,2 712,7 528,2 161,2 0 POLAND EUROPEAN UNION OTHER COUNTRIES 2011 2012 2013 2014
31 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
The Group’s production structure, both with regard to the production of hard and semi-soft coking coals, steam coal and coke, is adapted flexibly to the dynamically changing market needs and in consideration of the supply and demand in the local and foreign markets. Polish market is the main selling market of coal produced by the Group.
The main market for the sale of coke produced by the Group is the European market. In light of the recent market conditions (the economic slowdown, a low rate of growth of steel production in Europe, high inventories of coke), the Group’s customer base was expanded to include overseas customers. Accordingly, part of the coke produced in the Group’s coking plants has been exported to India. Coke offered by Poland in overseas markets successfully competes against Russian, Ukrainian, Japanese or Colombian coke.
Hydrocarbons, such as benzol and tar, have regular buyers on the European market, while sulfur and ammonium sulfate are sold on the domestic market. Surplus coking gas is sold to consumers directly by the coking plants.
Graph 12.. Structure of the Group’s revenues by end customers as at 31 December 2014, in value terms
Other ArcelorMittal 28% 28%
Deza a.s. 2%
EDF 3% Voestalpine 8%
Koksownia U.S. Steel Częstochowa Nowa 2% 2% Ilva Spa Moravia Steel ThyssenKrupp PGE Salzgitter 11% 4% 4% 5% 3%
Graph 13. Structure of the Group’s revenues by destination country as at 31 December 2014, in value terms
Slovakia Other 3% 7% Austria 8% Poland 48% Czech Republic 10%
Italy 11%
Germany 13%
2.6. FINANCIAL RESULTS BY OPERATING SEGMENTS
The Group is organized and managed in segments by type of products offered and type of production activity. The Group presents information on operating segments in accordance with IFRS 8 "Operating Segments". The Management Board of the Parent Company has identified operating segments based on the financial reporting of the companies comprising the Group. The Group's operations are conducted by the following operating segments:
. Coal Segment – which includes extraction and sales of black coal; . Coke Segment – which includes production and sales of coke and hydrocarbons; . Other segments – include activities performed by the Group’s entities other than those covered by the Coal and Coke Segments, such as, without limitation, production and sales of electricity and thermal energy, repair services, etc.
32 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 14. Structure of sales revenues by operating segment in 2011-2013 (PLN million)
5 000
4 000
4943,3 4307,9
4220,0
3 000 4134,9
3704,3 3559,0 3489,2
2 000 2972,3
1 000
213,5 378,2 368,9 353,4 0 COAL SEGMENT COKE SEGMENT OTHER SEGMENTS
2011 2012 2013 2014
The measure of the financial results generated by the Group’s distinct operating segments analyzed by the Management Board of the Parent Company is the segment’s operating profit/(loss) determined according to IFRS.
Graph 15. Impact of operating segments on EBITDA (PLN million)
1 600,0 1 403,4 (800.9) 1 400,0
1 200,0
1 000,0
800,0 (57.6) 600,0 (40.2) 23.8 528,5
400,0
200,0
0,0 2013 EBITDA CHANGE OF COAL CHANGE OF COKE CHANGE OF OTHERS CHANGE IN 2014 EBITDA SEGMENT EBITDA SEGMENT EBITDA SEGMENT EBITDA CONSOLIDATION EXCLUSIONS
COAL SEGMENT – HARD COAL MINING AND SALES
Table 8. Operating results of the coal segment
Growth rate Item 2014* 2013 2012 2011 2013=100
Sales revenues from external recipients 2,972.3 3,559.0 4,134.9 4,943.3 83.5
Operating profit/(loss) (843.8) 70.1 1,268.6 2,736.3 (1,203.7)
Depreciation and amortization 1,034.8 921.8 806.0 685.8 112.3
EBITDA 191.0 991.9 2,074.6 3,422.1 19.3
* including KWK Knurów-Szczygłowice, as of 1 August 2014.
In 2014, revenues on sales to external buyers were PLN 2,972.3 million, down by 16.5% compared to 2013. This decrease is a result of the economic slowdown which caused price drops compared to the same period of 2013: coking coal prices fell by 13.3% and steam coal prices by 12.4%. The decrease of revenues on sales to external buyers was associated also with lower coal sales volume (despite
33 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
inclusion of KWK Knurów-Szczygłowice into the Group’s structures as of 1 August 2014), which resulted from underperformance of production tasks in the home mines, as a result of extraordinary difficulties associated with natural hazards and difficult mining and geological conditions.
In 2014, the share of revenues on sales of coal to 5 main external customers was 80.9% of total revenues in this segment (2013: 69.6%). Other buyers, whose unit share did not exceed 10% of revenues, generated the remaining 19.1% of total revenues of the coal segment.
The 2014 EBITDA of the coal segment was PLN 191.0 million. In the same period of the previous year, EBITDA was PLN 991.9 million. Such a significant 80.7% decrease in EBITDA compared to 2013 was caused mainly by a decline in operating profit (by PLN 913.9 million) caused mainly by the aforementioned lower revenues on the sales of coal. In addition the gain on bargain purchase of KWK Knurów-Szczygłowice in the full amount of PLN 297.4 million has been recognized in the Coal Segment.
COKE SEGMENT – PRODUCTION AND SALE OF COKE AND HYDROCARBONS
Table 9. Operating results of the coke segment
Growth rate Item 2014 2013 2012 2011 2013=100
Sales revenues from external recipients 3,489.2 3,704.3 4,307.9 4,220.0 94.2
Operating profit/(loss) 12.9 62.0 (97.8) 171.4 20.8
Depreciation and amortization 195.4 203.9 201.1 125.6 95.8
EBITDA 208.3 265.9 103.3 297.0 78.3
In 2014, sales revenues to external customers were PLN 3,489.2 million, down by 5.8% compared to 2013. The overall situation in the coke market caused by the global crisis translates directly into the price of coke which, in the wake of the drop in the prices of coking coal in 2014, followed a downward trend (the decrease in the average selling price of coke vs. 2013 was approx. 11.9%).
The share of revenues on the sales in the coke segment to 5 top customers represented 62.4% (2013: 61.6%). Other buyers whose unit share did not exceed 10% of revenues, generated the remaining 37.6% of total revenues of the coke segment.
EBITDA for 2014 amounted to PLN 208.3 million (in 2013: PLN 265.9 million). The decline of EBITDA in the analyzed segment by PLN 57.6 million, or 21.7%, compared to 2013, resulted mainly from a 79.2% drop of operating profit, caused by a PLN 215.1 million reduction of revenues on sales.
OTHER SEGMENTS – OTHER OPERATIONS
Table 10. Operating results of other segments
Growth rate Item 2014 2013 2012 2011 2013=100
Sales revenues from external recipients 353.4 368.9 378.2 213.5 95.8
Operating profit 45.5 82.9 73.7 20.4 54.9
Depreciation and amortization 80.2 83.0 65.3 36.6 96.6
EBITDA 125.7 165.9 139.0 57.0 75.8
In 2014, revenues on sales to external customers were PLN 353.4 million, down 4.2% from the same period in 2013. The segment's EBITDA for 2014 was PLN 125.7 million. The year before, EBITDA was PLN 165.9 million. The 24.2% EBITDA reduction in this segment in the analyzed period was driven mainly by a reduction of operating profit, by 45.1% compared to 2013.
34 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2.7. SOURCES OF SUPPLIES
Course of procurement procedures
The Parent Company is obligated to apply the provisions of the act entitled public procurement law (Journal of Laws 907 of 2013, as amended) to the holding of public tenders for procurements with a value in excess of EUR 414.0 thousand for supplies and services in accordance with the procedures prescribed by law. The most commonly applied procedure is an open tender procedure. Bids may be submitted by all potential suppliers satisfying the awarding party’s requirements as to the conduct of the tender procedure. The prices set during such a procedure remain valid for the duration of the contract. In the event of a decrease in the market prices of relevant materials during the year, the awarding party will conduct additional price negotiations with the suppliers.
For procurements with a value of less than PLN 1.7 million, the Parent Company selects suppliers under an “owner’s tender procedure” based on its internal bylaws, mostly in the form of open tenders or electronic auctions. The ongoing supplies of materials for the mines are performed by the Material Logistics Department.
Suppliers
The Group’s biggest suppliers for the needs of mining activity were: (methane removal services in the mines), Huta Łabędy S.A. and ArcelorMittal Poland (gallery supports), KOPEX S.A. (drilling of shaft 1 in Bzie and delivery of machinery and equipment), FAMUR S.A. and BECKER-WARKOP Sp. z o.o. (suppliers of machinery and equipment, providers of maintenance services and consumables), DB SCHENKER RAIL Polska S.A. (rail transportation services).
The Group’s biggest suppliers for the needs of coking activity were primarily Polish companies, including among others: PCC Rokita S.A. (chemicals), PIEC-BUD Sp. z o.o. (overhaul services), Energoinstal S.A. Katowice, ZK-REM Sp. z o.o., Koksoprojekt Biuro Projektów Zabrze (construction and assembly services), TAURON Sprzedaż Sp. z o.o., MERCURY Energia Sp. z o.o. (electricity), PKP Cargo S.A., PU Jurex Sp. z o.o., MILLENNIUM LEASING Sp. z o.o., PPHU WAREX Sp. z o.o., Anwil S.A., DAW COTM Sp. z o.o., Huta Cynku „Miasteczko Śląskie” (chemicals). The biggest foreign supplies included Industrial Quimica Del Nalon S.A. (Spain) and BorsodChem Zrt. (Hungary).
In the Management Board’s opinion, its relations with suppliers do not make the Group dependent on any supplier in a way which could impact the Group’s activity.
2.8. SIGNIFICANT CONTRACTS
In 2014 to the date of this report, the Parent Company’s Management Board disclosed information in the current reports on the following agreements of material importance, i.e. agreements and transactions to which JSW or its subsidiaries were one of the parties and the value of their subject matter was equal to at least 10.0% of JSW’s equity.
AGREEMENT BETWEEN GROUP COMPANY – POLSKI KOKS AND MIR TRADE AG
On 22 January 2014, in Current Report No. 3/2014, JSW announced the execution of an agreement of 21 January 2014 between Polski Koks and MIR Trade AG. The estimated net value of the Contract until the end of its term is approximately PLN 2.1 billion. The subject matter of the agreement is the sale of coke. The settlement currency of the contract is USD. In terms of financial terms, the contract contains provisions regarding prepayment or documentary letter of credit for 100% of the value of the product. The remaining terms and conditions of the contract do not deviate from the terms and conditions generally applied in contracts of this type. The agreement shifts part of the contractual obligations of Polski Koks toward the other party in respect of coke deliveries worth approx. PLN 250 million, as explained in detail in Current Report No. 43/2013 of 29 October 2013.
AGREEMENT BETWEEN JSW AND ARCELORMITTAL POLAND S.A.
On 16 July 2014, in Current Report No. 16/2014, JSW announced that on 15 July 2014 a significant agreement was entered into by and between JSW and ArcelorMittal Poland S.A. The agreement provides for supplies of coking coal to the Buyer in 2014. The Agreement was effective from 1 January to 31 December 2014. The estimated net value of the agreement throughout its term is PLN 1.2 billion, of which the value of trade under the agreement completed until the date of publication of the current report amounted to PLN 569.8 million. The settlement currency of the contract is PLN. Pricing is agreed upon on a quarterly basis. The contract comprises mutual provisions
35 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
on sanctions in the event of failure to perform the contractual obligations by any of the parties in the amount of 10% of the gross value of goods that have not been delivered/collected. If the parties to the contract suffer a loss exceeding the payable contractual penalty, they can pursue supplementary damages. The remaining terms and conditions of the contract do not deviate from the terms and conditions generally applied in contracts of this type. Additionally, JSW reported that, in the last 12 months, the value of trading between companies of the JSW Group and companies of the ArcelorMittal Poland S.A. Group was PLN 596.9 million, while the estimated value of contracts concluded in the last 12 months before the date of the report until their expiration is PLN 690.9 million, which totals PLN 1.3 billion and exceeds 10% of the JSW's equity.
AGREEMENT BETWEEN JSW, WITH POLSKI KOKS AND JSW KOKS ACTING ON ITS BEHALF AND IMPORTKOHLE GMBH WITH VOESTALPINE ROHSTOFFBESCHAFFUNGS GMBH
On 25 July 2014, in Current Report No. 19/2014, the JSW S.A. Management Board announced that on 25 July 2014 an agreement was entered into by and between JSW, with Polski Koks and JSW KOKS acting for and on behalf of JSW, and Importkohle GmbH with its registered office in Vienna together with voestalpine Rohstoffbeschaffungs GmbH with its registered office in Linz. The agreement provides for supplies of coke to the Buyer. The agreement will be effective from 1 April 2016 and will expire on 31 March 2021, but may be extended thereafter for another 5 years. The estimate net value of the agreement over its term until 2021 is PLN 1.37 billion. The settlement currency of the agreement is EUR. The pricing conditions will be agreed upon on a quarterly or semi-annual basis. The agreement does not contain any provisions establishing contractual penalties other than clauses, customarily used in this type of agreement, providing for settlement of the quality of supplied coke in the form of price reductions. At the same time, JSW announced that, in addition to the above agreement, in the last 12 months an annex to one of the existing agreements was signed for supplies of coke to the Buyer in 2014-2017 of an estimated value of PLN 560 million.
EXECUTION OF THE BOND ISSUE PROGRAM AGREEMENT
In Current Report No. 21/2014, the JSW Management Board announced that on 30 July 2014 a Bond Issue Program Agreement was signed between JSW and Powszechna Kasa Oszczędności Bank Polski S.A. acting as Issue Agent, Arranger, Issue Program Underwriter, Custodian and Paying Agent, ING Bank Śląski S.A. acting as Arranger, Issue Program Underwriter, Paying Sub-Agent, Sub-Custodian and Security Agent, Bank Gospodarstwa Krajowego acting as Arranger, Issue Program Underwriter, Paying Sub-Agent and Sub-Custodian and PZU Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych BIS 1 acting as Arranger and Issue Program Underwriter, for an amount of PLN 700,000,000 and USD 163,750,000 constituting the maximum permitted aggregate par value of the bonds issued under the issue program. The bond issue program availability period ends on 31 December 2014. Information about the redemption of bonds is presented in Note 16 of the Consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. Under the bond issue agreement, each Issue Program Underwriter has undertaken to purchase, for its own account on the Date of Issue, bonds of the relevant series. The interest rate on the bonds denominated in PLN will be floating and set on an annual basis based on the WIBOR 6M rate plus a fixed margin and the interest rate on the bonds denominated in USD will be floating and set on an annual basis based on the LIBOR 6M rate plus a fixed margin with the possibility of increasing the margin in accordance with the rules set forth in the Terms of Issue of the Bonds. The objective of the bond issue was to raise funds to finance the acquisition of an organized part of a business in the form of the Knurów- Szczygłowice Coal Mine. The bonds were issued pursuant to Article 9 Section 3 of the Bonds Act and will not be offered in a public offering within the meaning of the Act on Public Offering and will not be traded on an organized market within the meaning of the Act on Trading in Financial Instruments. The bonds were secured with sureties on the date of issue. After the bond issue, the bondholders’ claims are secured with additional forms of collateral, such as registered pledges on assets, registered pledges on contractual rights, registered pledges on accounts and mortgages on real properties. The maximum total nominal value of the bonds exceeds 10% of JSW's equity.
ACQUISITION OF ASSETS OF A SIGNIFICANT VALUE - ORGANIZED PART OF A BUSINESS OF A MINING PLANT, THE KNURÓW -SZCZYGŁOWICE COAL MINE
On 31 July 2014, in Current Report no. 22/2014, the JSW Management Board announced in reference to the earlier current reports on the planned acquisition of an organized part of a business in the form of the Knurów-Szczygłowice Coal Mine ("ZORG") that the suspending conditions described in Current Report no. 9/2014 of 10 April 2014 have been satisfied. Accordingly, on 31 July 2014 the
36 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
ZORG acquisition agreement was concluded by and between Kompania Węglowa S.A. with its registered office in Katowice (“Seller”, “KW S.A.”) and JSW (“Buyer”). ZORG as the object of the acquisition by JSW consists of tangible and intangible assets used for coal mining operations in the Knurów- Szczygłowice Coal Mine whose annual production capacity is 3.8 million tons of coal, of which approximately 40% is coking coal, and whose measured resources are 1.26 billion tons and recoverable reserves are 375.1 million tons, including 119.7 million tons covered by currently valid concessions. The ZORG purchase price was PLN 1,490,000,000. The source of funding for the purchase of these assets was external financing in the form of a private bond issue in the amount of USD 163,750,000 and PLN 700,000,000 as well as JSW’s own funds (the details were presented in Current Report no. 26/2014 of 6 August 2014). The business of ZORG prior to the acquisition by JSW was the production of coal. JSW has no intention to change the ZORG’s line of business and will continue its previous operations.
CONCLUSION OF AN AGREEMENT BY A JSW KOKS SUBSIDIARY WITH A TAURON POLSKA ENERGIA S.A. SUBSIDIARY, i.e. TAURON SPRZEDAŻ SP. Z O.O.
After the day ending the reporting period, i.e. 9 January 2015, in Current Report no. 1/2015, the JSW Management Board announced that on 9 January 2015 it was informed about conclusion by a JSW KOKS subsidiary of an agreement with a TAURON Polska Energia S.A. subsidiary, i.e. TAURON Sprzedaż Sp. z o.o. with the estimate value of PLN 55 million regarding trade balancing of electricity. Consequently the estimate value of currently prevailing agreements and the turnover realized over the past 12 months between JSW Group companies and TAURON Polska Energia S.A. Group companies amounts in total to approx. PLN 746 million, i.e. exceeds the threshold of 10% of the Issuer’s equity. JSW Group companies have concluded a number of agreements with TAURON Polska Energia S.A. Group companies pertaining in particular to: deliveries, distribution, trade balancing of electricity and coal sales. Among the prevailing agreements, the contract with the highest value is the three-year agreement entered into by JSW and TAURON Polska Energia S.A. on 30 December 2013, for the period from 1 January 2014 to 31 December 2016, on JSW’s coal deliveries which are executed from the effective date of the agreement. Pricing is agreed upon for each year. The estimate net value of the agreement from the date of the report to the end of its term is PLN 256 million. The settlement currency of the contract is PLN. The agreement contains standard clauses pertaining to contractual penalties and the remaining terms and conditions of the contract do not deviate from the terms and conditions generally applied in contracts of this type.
2.9. BOND ISSUE PROGRAM
BONDS ISSUED BY THE PARENT COMPANY
Bond issuing is an important source of funding the activities in JSW. As at 31 December 2014, the liability related to the issue bonds captured in JSW’s financial statements is PLN 1,271.9 million. As at 31 December 2014, proceeds from the bond issue less expenditures related directly to the issue, captured in the consolidated cash flow statement, are PLN 1,197.4 million.
On 6 August 2014 JSW issued bonds under the established Bond Issue Program. The issue comprised 70,000 registered bonds denominated in PLN with the par value of PLN 10,000.00 each, with a total par value of PLN 70,000,000 and 16,375 registered bonds denominated in USD with a par value of USD 10,000.00 each with a total par value of USD 163,750,000. The funds raised from the bond issue were used to finance the acquisition of an organized part of a business in the form of the Knurów-Szczygłowice Coal Mine. The bonds were issued pursuant to Article 9 Section 3 of the Bonds Act and will not be offered in a public offering within the meaning of the Act on Public Offering and will not be traded on an organized market within the meaning of the Act on Trading in Financial Instruments.
The outstanding bonds are secured by: . sureties extended by JSW KOKS (up to the maximum amount equal to 100% of its equity as at 2 January 2014, i.e. up to PLN 2,218.5 million) and WZK Victoria S.A. up to the maximum amount equal to 100% of its equity as at the end of the financial year preceding the date of the surety, i.e. up to PLN 405.4 million), . mortgage on properties that are owned by or in perpetual usufruct of the Parent Company and comprise the organized parts of JSW’s business, i.e. KWK Knurów-Szczygłowice and KWK Pniówek, . registered pledges on movable assets of KWK Knurów-Szczygłowice and KWK Pniówek, . registered pledges on receivables under three commercial agreements,
37 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. registered pledges on the Parent Company’s bank accounts. The above mortgage on properties and registered pledges provide security up to PLN 1,050,000,000 and USD 245,625,000.
The interest rate on the bonds denominated in PLN is floating and set on an annual basis based on the WIBOR 6M rate plus a fixed margin and the interest rate on the bonds denominated in USD is floating and set on an annual basis based on the LIBOR 6M rate plus a fixed margin with the possibility of increasing the margin in accordance with the rules set forth in the Terms of Issue of the Bonds. According to the bond redemption mechanism, the bonds will be redeemed in semi-annual periods, starting from 30 December 2016. The final date of maturity of the bonds is 30 December 2020 and the bonds will be redeemed at their par value.
According to the signed Indenture, the Bondholders may request an early redemption of bonds in case of an Early Redemption Event with Consent or in case of an Event of Default.
According to the Issue Program, JSW (directly or through a Group member) is obligated to carry out, by 30 July 2015, a bond issue on international capital markets to ensure early redemption of all the bonds issued under the Issue Program (“Bonds on International Capital Markets”). If such funds are raised, JSW has undertaken to redeem all the bonds issued under the Issue Program immediately. According to the Issue Program, each bondholder will be obligated to demand early redemption of the bonds it holds in the event that: . not all of the bonds issued under the Issue Program are redeemed using the funds raised by issuing Bonds on International Capital Markets, immediately after their receipt by JSW, or . JSW fails to issue (directly or through a Group member) the Bonds on International Capital Markets by 30 July 2015 or the amount of the issue is not sufficient to redeem all the bonds issued under the Issue Program.
Considering the market conditions, JSW decided not to launch the planned Eurobond issue in Q4 2014, which it announced in its Current Report no. 32/2014. Consequently the entire liability under bonds issued has been presented as part of short-term liabilities. In order to minimize the risk of the debt securities becoming due and payable in the short term, the Parent Company has taken steps to defer its obligation to Bondholders, under which they may demand early repayment.
In accordance with the provisions of the Bond Issue Program JSW is obligated to monitor the ratios: net debt / EBITDA and net debt / equity, calculated on the Group level, according to the rules set out in the Terms and Conditions of the Bond Issue. According to the Terms and Conditions of the Bond Issue, equity means the consolidated level of equity at the end of the given period stemming from the Group’s consolidated financial statements. JSW assumes that the net debt/EBITDA ratio will be not higher than 2.5x and the net debt / equity will be not higher than 0.6x. If any of the ratios exceeds the permissible level Bondholders, in accordance with the Terms and Conditions of the Bond Issue, are entitled to exercise the option of early redemption of their bonds.
BONDS ISSUED BY SEJ
On 17 October 2013, a Group company, SEJ (Issuer) signed a Bond Issue Program Agreement up to PLN 420.0 million with Bank Gospodarstwa Krajowego and Alior Bank S.A., as underwriters and buyers of the bonds in the primary market, aimed to finance the Investment Program. The nominal value of the bonds is PLN 100,000.00. The Issue Program provides for multiple bond issues within two facilities: . Tranche “A” - up to PLN 369.0 million Matures on 20 December 2022. . Tranche “B” - up to PLN 51.0 million Availability period till 20 September 2017. Matures on 20 December 2017.
The funds raised through the bond issue will be used to finance the investment project named: "Development Program – Power Sector 2016, based on the construction of a 75 MWe CFB fluidized bed unit in Elektrociepłownia Zofiówka and also modernization and development projects associated with the existing assets of SEJ and PEC".
On 12 February 2014, SEJ redeemed Tranche B short-term bonds in the amount of PLN 51.0 million issued on 12 November 2013. On 11 July 2014, SEJ redeemed Tranche B bonds issued on 11 April 2014 in the amount of PLN 10.2 million. On 17 November 2014, SEJ issued Tranche A long-term bonds of PLN 36.9 million maturing on 20 December 2018. The outstanding bonds are secured by: . joint contractual mortgage securing the receivables of the holders of SEJ’s bonds, . sureties granted by JSW and PEC, . registered pledges on assets, registered pledges on rights under contracts with JSW, registered pledges on SEJ accounts.
38 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2.10. DESCRIPTION OF THE GROUP’S DEVELOPMENT POLICY
The Group’s overriding objective is to build the Group’s value, taking into consideration the principles of sustainable development in all business activities oriented at maximizing the shareholder value.
JSW Group’s strategy is a response to the challenges following from the dynamically evolving environment, market situation, changes and development of the Group’s capital structure, and ensuring its stable growth and execution of Shareholders’ expectations in the long run. The Group’s strategy sets out the directions of development and defines the key areas in which the Group will develop in sustainable way to build shareholder value.
Strategic objectives
The Group's key strategic objectives comprise:
. strengthening the leading position in production of the best quality coking coal in Europe . retaining the position of a major coke producer in the European Union . related diversification leveraging the synergy effect of the coal and coke segment . ensuring energy security for the Group, . improvement of the efficiency of core activity, taking into account the standards of corporate social responsibility
The key objective of the Group’s activity in the long run is to continue its efficiency improvement programs in all areas of activity, with special focus on optimization of the costs of operations and increase of the efficiency of basic processes, while maintaining high safety standards in conducted activities.
The Group takes action to integrate its different business areas, focuses on the key investment projects, continues to implement cost optimizing activities, using the synergies between its business areas and improving the opportunities resulting from the economies of scale in its operations.
All the production, development, investment and commercial measures taken in the Group are focused on maintaining its leadership position in coking coal production in the long-term in Central and Eastern Europe.
Production
As for coal production, the Group focuses on providing its customers with deliveries of high quality hard coking coal. Increased production of hard coal in the production and sale structure will improve profitability of sales. The building of competitive advantage in Europe and outside the region is based on maintaining the quality parameters of the coal at the level required by the customers and ensuring stable and uninterrupted coal deliveries.
In order to attain the strategic objectives, inter alia strengthen the leading position in the coking coal market in Europe, in 2014-2030 it is planned to increase net coal production from 13.9 million tons in 2014 to 18.7 million tons in 2018. In total production coking coal will account for approx. 80%, i.e. 10 percentage point increase in relation to 2014. The key conditions for achieving this objective are as follows: procuring the right extraction capacities in mines, obtaining competitive costs of production, and the major determinant for these actions is rooted in the difficult conditions of conducting mining activity entailing: . mining works at a significant depth frequently deeper than 1000 meters, . complicated tectonics of deposits, . presence of natural hazards, frequently in tandem, especially methane hazard.
As for the coking activity, the Group assumes adaptation of the coke production volume to a level at which the target structure of the products offered by the Group will make it possible to maximize the margin generated by the Group in the long run. To this effect, the strategy assumes integration of the coking activity as regards production management, and cooperation of individual internal units and modernization of coking assets.
Investments
To achieve the aforementioned objectives, investment efforts are required primarily to increase the size of available recoverable reserves of top quality coking coal and their extraction, maintaining the highest possible environmental standards. Investment projects leading to execution of the following tasks have been defined as strategic:
39 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. expanding the resource base for hard coal and optimum utilization of resources in the concession deposits of the existing mines, . developing extraction capacity for hard coal, . obtaining access to recourses of the best possible quality of semi-soft coal, . improving the quality of the coking coal extracted, . improving the efficiency of mining operations, . improving work safety and mitigating the impact of mining activity on the environment.
The Group’s development directions in the coking segment are focused primarily on:
. maintenance of a balanced volume of coke production as determined by existing demand, . rationalization of the costs of production and optimization of technology while maintaining the standards of performance and production quality, . increase in the effectiveness of production of coke and hydrocarbons, . maximization of the effectiveness of the use of available resources (generation of energy from coking gas),
Strengthening the leading position among foundry coke producers in Europe, with special focus on the +100mm foundry coke, is an important direction of development. To achieve this objective it is necessary to maintain the quality of the produced coke. Maintenance of high quality and its stabilization are the condition of and create the opportunity for, further increase of the markets to include entities so far supplied by other suppliers.
Another development direction is the consolidation of coke assets in the Group, serving the aim not only of streamlining management of the coking plants, but also optimizing the investment processes. In the times of high volatility on the coke market, strategic management of investment projects and processes in a separate coke segment will be quicker and better defined. In the first phase, which is already complete, the following companies were merged: Kombinat Koksochemiczny “Zabrze” S.A. and Koksownia Przyjaźń S.A. into JSW KOKS. In the second phase, a merger with Wałbrzyskie Zakłady Koksownicze Victoria S.A. is planned. The investment actions currently taken by JSW KOKS focus largely on building coke gas-fired power units in the company’s coking plants in order to utilize the surplus coke gas to produce electricity.
In addition to the coal and coke sectors, work is constantly underway aimed at integrating the energy sector. There are ongoing efforts to integrate the entities involved in this area, including SEJ and PEC, as well as to build and acquire markets and generation assets, both external and internal for the Group. The energy integration process is to be completed in 2015. Its goal is to use the synergy of resources in heat production and sale. The development program for the power segment being built is based on the creation of production and energy centers located near the Group’s mines. The goal is to use local fuels (coal, low calorific value sludge, methane), achieve synergies in the production of different energy media (electricity, heat, compressed air, cooling), combine heat and power production (to reduce production costs), maximize the utilization of heat (increased production efficiency, cost reduction). The development program in the heat production area focuses on investment tasks, which include primarily modernization of heat networks, modernization of sources and construction of co-generation installations.
The energy area development policy also includes the "Program for adapting the equipment used by SEJ to the requirements of the Environmental Law in the years 2013-2023". The program sets out the investment activities necessary to adapt the emission of gases from SEJ's equipment to the requirements of the IED directive.
The establishment as of 1 September 2014 of Polski Koks Forwarding & Shipping Agency Sp. z o.o., whose activity involves provision of marine freight forwarding and marine transport agency services, is an important element of the Group’s development. The company’s main customer is the Group, commissioning it to handle operations related to coke and coal imports and exports on all overseas contracts.
Implementation of the Group development tasks will optimize management of its value chain, increase control over internal processes, improve decision-making processes, enhance the efficient use of assets and human resources and contribute to the achievement of cost savings.
40 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
IMPLEMENTATION OF THE STRATEGY
Adjustment Measures Program
In order to minimize the negative effects of the difficult situation affecting the Group’s financial results, the Parent Company’s Management Board decided to implement the Adjustment Measures Program in all companies of the Group. The purpose of the Program was to maintain competitiveness of the Group’s core products by introducing a number of saving mechanisms in the areas of operating costs and investments across the Group. The Program came into force in June 2014, was regularly monitored and the effects of its implementation are reported to the JSW Management Board on an ongoing basis. As part of the Adjustment Measures Program the operational assumptions and the assumptions regarding capital expenditures have been updated (Current Report no. 29/2014).
Key measures of the Group as regards execution of strategic objectives are taken in the coal and coke segment. In addition, the Group takes actions in the energy area and support activities.
Coal and coke production
The mining activity brings mainly high quality coking coal and the Group is a major supplier of this coal in the local and European market. Acquisition of KWK Knurów-Szczygłowice from Kompania Węglowa S.A. in 2014 was an important element of execution of the strategy, affecting the Group’s current and future results. The mine extracts 3.8 million tons of coal per annum. Currently, 38% of the production is high-quality coking coal, the extraction and sales of which are the areas of the Group’s specialization. Economically-viable resources of coal amount to 1,260 million tons.
From mid-2014, in connection with the extraordinary difficulties associated with natural hazards and difficult mining and geological conditions in the Group’s home mines, the coal production was limited. As the production tasks were not fully executed, the JSW Management Board updated the assumptions in this respect for 2014 (Current Report no. 29/2014 of 17 October 2014). The coal production assumptions were updated from 13.8 million tons (net of KWK Knurów-Szczygłowice) to 13.8 - 14.0 million tons (including KWK Knurów-Szczygłowice’s production of approximately 1.5 - 1.6 million tons) compared to the 13.6 million tons produced in 2013.
The coal production volume in 2014 was in the range of 13.9 million tons, i.e. 0.3 million tons more than in 2013. This figure comprises also the production of KWK Knurów-Szczygłowice in the amount of PLN 1.6 million, excluded from JSW’s structures (as of 1 August 2014). The share of coking coal and steam coal in total net production in 2014 was 70.9% and 29.1%, respectively. In terms of the intended use of the coal produced in the Group, the share of the coking sales volume in the Group’s total deliveries in 2014 constituted 72.4% and the remaining 27.6% was steam coal.
The main product of the coke segment is blast furnace coke produced accounting for 67% of the total amount of coke produced in 2014. Metallurgical coke accounted for 9% of the Group’s total production, and the remaining production included: industrial coke, metallurgical coke and heating coke, whose share was 19%, 2% and 3%, respectively.
Integration of business areas
As part of the efforts in the coal, coke and energy segments and auxiliary activities, the Group takes actions aimed at integration of individual business areas, concentrates on key and most profitable investment projects, continues implementation of actions associated with cost optimization, leverages synergy effects between the business areas and increases the opportunities following from the economy of scale of its operations. In the remaining business areas the Group assumes focus on auxiliary activities in specialized subsidiaries to the extent corresponding to the Group’s needs or going beyond internal demand, provided strategic objectives are attained.
In the coke segment, as a result of implementation of the Group Integration Program, on 2 January 2014, former Kombinat Koksochemiczny “Zabrze” S.A. (comprising Koksownia Dębieńsko, Koksownia Radlin and Koksownia Jadwiga) and Koksownia Przyjaźń S.A. were merged. Establishment of JSW KOKS does not end the process of integration of the coking plants belonging to JSW. In the next step, WZK Victoria will be integrated into JSW KOKS. This consolidation of Group’s coke assets serves the aim not only of streamlining management of the coking plants, but also optimizing the investment processes. As a consequence, investment plans and production capacity will be more efficiently adjustable to the current and anticipated market needs. One outcome of consolidation will also entail standardizing the reporting process of cost management in the coking plants as well as eliminating redundant activities.
The Group’s strategy in the area of power generation activity relies on the SEJ Group Business Plan entitled "Development Program – Power Sector 2016”, based on the construction of a 75 MWe CFB fluidized bed unit in Elektrociepłownia Zofiówka and also
41 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
modernization and development projects associated with the existing assets of SEJ and PEC. The fluidized bed unit construction project is of strategic importance for SEJ and the Group, mainly due to supply of electricity for JSW and heat for JSW and PEC. Its execution is forced by the requirements of the IED Directive and at the same time makes it possible to replace OP-140 boilers with a modern unit based on the CFB fluidized bed and production of electricity and heat.
In 2014, the integration of SEJ and PEC was continued in the energy segment. The strategy of this project assumes striving to balance the Group’s energy position with its needs with regard to production of electricity and other energy media (including heat, compressed air and cold air). An additional benefit of development of energy activity will be the increase of the stable portion of revenues through offering the surplus in the market. The integration process is expected to be completed on 30 June 2015.
As for laboratory activity, the Group ended the process of consolidation of laboratory services around one company - CLPB. The purpose of this process is to ensure comprehensive provision of laboratory and control-and-appraiser services to interested entities in the Group.
As regards transport activity, in 2014 a new integration project was started in the area of road transport in the coke segment. As part of the process, the whole internal road transport area in JSW KOKS, including the assets, was contributed to BTS (through capital increase). The second project involved contribution of JSW KOKS’ shares in CARBOTRANS to Polski Koks as part of capital increase. The project assumes that Polski Koks, as a company executing the sale of products and purchase of materials for and on behalf of the Group, has direct influence on management of CARBOTRANS and organizes the sale and purchase of hydrocarbons for the needs of the Group’s coking plants, fully leveraging CARBOTRANS’ potential. This integration process is planned to be completed in H1 2015.
As for overhaul activity, on 4 November 2014, the JSW Management Board made a decision regarding changes of the overhaul activities, involving acceptance of the operation of specialized overhaul companies both in the coal and the coke segment. The planned changes envisage operation of an integrated overhaul company in the coke segment, JSW KOKS’s 100% subsidiary. The decision of the JSW Management Board will allow for execution of a merger process of subsidiaries: ZRM and REM-BUD through establishment of a new company to take over the assets of the merged companies. The integration process of the aforementioned companies will be completed in 2015.
One of the types of auxiliary activities is training and production support. This activity is aimed at acquiring highly qualified personnel from among employees with high competences and experience with retirement entitlements, of decommissioned or restructured mines. To this effect, in 2014, SIG was established, a Group company that provides training services to the extent required by the Group.
MATERIAL FACTORS RELATING TO THE GROUP’S DEVELOPMENT
Implementing its planned investment policy in the mining sector, the Group is able to remain in the future the basic supplier of top quality coking coal to domestic and foreign coking plants. Maintaining the Group's market position in the long run requires both rational resource management in the existing mining concession areas and taking actions aimed at expansion of the resource base through opening further coking coal deposits. The Strategy calls for investments to be pursued in the long-term, while their financial outcomes will become visible in the more distant future. On account of the long period of investing in the mining industry, it is very important to commence investments with the appropriate lead time to guarantee timely execution. Among the investments of key importance from the standpoint of the Group’s functioning one should list the development investments described in Item 2.11 of this report. The gradual depletion of resources in the areas being mined means that the currently forecasted life of mines in the Group is determined by the need to explore immediately ways of expanding the current resource base of orthocoking coal and to utilize optimally resources in the concession deposits of active mines. In order to ensure that the Group is capable of functioning in the longer term, it is necessary to continue actions to gain access to resources and to utilize new deposits to the appropriate extent and at the right pace. One of the fundamental conditions for obtaining robust production results while operating in difficult mining conditions and having in mind the priority treatment of preserving the required level of occupational safety is to have modern equipment of a high technological level. The Group’s mines have spent PLN 3.4 billion over the last ten years to procure modern machinery, plant and installations thereby achieving a high technical level of equipment. In subsequent years these efforts will be consistently continued to elevate the engineering level of the mines steadily. The priority is to modernize and develop underground transportation systems based on a suspension internal combustion rail transport system. Equally important projects involve the widespread implementation of automation systems and systems to monitor the operation of machinery and plant and to identify the movements of staff in particularly dangerous places. The positive
42 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
assessment of the plough installation used for the first time in KWK Zofiówka, in a highly-advanced technology version, provides a justification for expanding the extent of remotely controlling technology processes.
The key element of the optimization of activity is the necessity to use technical assets more effectively, including among others more effective usage of employee work time. These measures over the period until 2030 will provide for a stable level of profitability and financial liquidity, which will guarantee development and a high ranking market position. Forecasting financial needs in later years will depend on the situation on the coking coal market, the level of coal prices and the earnings generated.
The results in the nearest future will be affected by the three-week strike organized in January 2015 by the trade unions in JSW S.A.’s mines, after the JSW Management Board announced the introduction of a cost-saving plan due to the difficult situation in the coking coal market. During this period coal production was stopped in nearly all mines belonging to the Group.
One of the strategic objectives to be attained by the Group in the coking sector is maintaining and strengthening the leading position among foundry coke producers in Europe. This is impacted by the overall market situation in terms of coke sales. Another important element is efficient and effective execution of sales functions by the Group’s trade operator, i.e. Polski Koks, which will allow for full utilization of production capacities. Construction of battery no. 6 and the power unit in WZK Victoria is a strategic project. Thanks to battery no. 6 the production capacity will be increased by approximately 100 thousand tons per annum. This will also make it possible to carry out, if necessary, overhauls of the existing coke batteries, without reduction of the current production capacities. The new battery will satisfy the best available techniques, i.e. BAT conclusions for the coking industry as regards environmental protection. The power unit will make it possible to utilize the surplus of coking gas burnt in the gas burnoff installation, thanks to which the coking plant will become independent of external electricity suppliers. Sale of surplus electricity will generate additional revenues.
Another important element of the actions in the coking sector in 2015 will involve increase of production of electricity, which is associated with development of the CHP Plant in JSW KOKS (Koksownia Przyjaźń). Thanks to that, the company will increase the level of its self- sufficiency and energy security. In 2015, on-going control of costs will be effected on all levels of operations to reduce their share in the enterprise’s operating expenses.
An important development driver in the energy sector is provided by the strategic investment project in the form of construction of a cogeneration CFB fluidized bed unit with the gross installed capacity of 75 MWe in EC Zofiówka in SEJ. The key investments are aimed at recreating the generation capacities in EC Zofiówka and utilization of the gas from methane removal in the Group’s mines, while increasing the efficiency of cogeneration of electricity and heat. As for utilization of the gas from methane removal from the mines, in 2016-2018 it is planned to build 3 more gas engines. Construction of the 3 new gas engines will depend on the forecast supply of gas. The objective of the strategic investments is to adapt SEJ’s production to JSW’s needs and adaptation of SEJ’s production equipment to the requirements of the IED Directive.
As for adaptation of SEJ’s production to JSW’s needs, the construction of the heating installation for air-conditioning in KWK Borynia- Zofiówka-Jastrzębie, Zofiówka Section, and the construction of the second stage of the compressor station in EC Pniówek are waiting for commissioning.
As regards adaptation of SEJ’s production equipment to the requirements of the IED Directive, a number of investment projects are planned under the "Program for adapting the equipment used by SEJ to the requirements of the Environmental Law in 2013-2023". These are mainly investments in exhaust cleaning equipment and modernization (reconstruction) of generation equipment to adapt them to the assumptions of the program. The program is implemented in 2014-2015, i.e. before entry into force of the more restrictive emission standards of the IED Directive, and its second stage will be carried out in 2021-2022, i.e. before the end of the heating derogation following from the IED Director and which applies to the Moszczenica Branch.
Additionally, external factors affecting the development which are beyond the Group’s control include: . suspension of investments in new steel production capacities in the blast-furnace process in Europe, . economic slow-down in China and related oversupply of coke and steel, . development of new production capacities in integrated coking industry in Europe, . development of new coking coal production capacities globally and increased availability of cheap overseas coal in Europe, . low prices of raw materials for production of coke and steel, . possibility of implementation of cost-saving programs in mines in which current coal prices do not cover mining costs, . military conflict in Ukraine resulting in reduced supply of raw materials from the east and increased demand for coke and coal in this market,
43 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. restructuring and nationalization of the steelworks in Taranto, . possible disruptions in rail transports, . possible limitations in transloading and logistical processes in ports, . exchange rate fluctuations.
2.11. CAPITAL EXPENDITURES AND EQUITY INVESTMENTS
CAPITAL EXPENDITURES
The total value of capital expenditures incurred in 2014 amounted to PLN 1,688.4 million (PLN 1,685.5 million after consolidation adjustments), i.e. 4.1% down from the expenditures made in 2013.
Table 11.Structure of capital expenditures
Growth rate Item 2014 2013 2012 2011 2013=100
Coal segment Expenditures on property, plant and equipment (without expensable mining pits), real estate investments and intangible 889.4 874.7 980.4 1,005.5 101.7 assets Expenditures for access pits 445.9 503.8 487.2 288.6 88.5
Total* 1,335.3 1,378.5 1,467.6 1,294.1 96.9
Coke segment Expenditures on property, plant and equipment and intangible 147.0 232.4 209.6 88.6 63.3 assets Total 147.0 232.4 209.6 88.6 63.3
Other segments Expenditures on property, plant and equipment and intangible 206.1 151.1 143.0 106.7 136.4 assets Total 206.1 151.1 143.0 106.7 136.4
Total segments Expenditures on property, plant and equipment (without expensable mining pits), real estate investments and intangible 1,242.5 1,258.2 1,333.0 1,200.8 98.8 assets Expenditures for access pits 445.9 503.8 487.2 288.6 88.5
Total** 1,688.4 1,762.0 1,820.2 1,489.4 95.8
* Including (over the period from 1 August to 31 December 2014) the expenditures for KWK Knurów-Szczygłowice in the amount of PLN 105.1 million. ** The table includes expenditures in 2014 before consolidation adjustments in the amount of PLN (-)2.9 million (in 2013: PLN (-)4.2 million, in 2012: PLN (-)3.5 million, and in 2011: PLN (-)10.8 million). From the total expenditures incurred in 2014 in the amount of PLN 1,688.4 million, PLN 1,668.7 million was incurred for property, plant and equipment, PLN 18.0 million for intangible assets and PLN 1.7 million for real estate investments. The capital expenditures in 2014 were financed from funds generated from operating activities; in addition the Group used external financing in the form of investment loans, borrowings and leasing.
INVESTMENT PROJECTS IN PARENT COMPANY’S MINES
In 2014, the Parent Company incurred capital expenditures for PPE in the amount of PLN 1,335.3 million, 3.1% less than in 2013.
44 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Table 12.Structure of capital expenditures
Growth rate Item 2014 2013 2012 2011 2013=100
Investment construction 625.9 595.6 487.3 429.2 105.1
Purchases of finished capital assets 263.5 279.1 493.1 576.3 94.4
Expenditures for access pits 445.9 503.8 487.2 288.6 88.5
Total* 1,335.3 1,378.5 1,467.6 1,294.1 96.9
* Including (over the period from 1 August to 31 December 2014) KWK Knurów-Szczygłowice in the amount of PLN 105.1 million.
From the total expenditures incurred in 2014 in the amount of PLN 1,335.3 million, PLN 1,331.9 million was incurred for property, plant and equipment, PLN 1.7 million for intangible assets and PLN 1.7 million for real estate investments. In 2014, the capital expenditures were financed from funds generated in operating activities, financial leasing (PLN 48.2 million) and a prevention fund subsidy granted by UNIQA TU S.A. (PLN 0.3 million).
Graph 16. Structure of expenditures
+13.4% -6.1% -3.1%
1,294.1 1,467.6 1,378.5 1,335.3 1 400 343,9 1 200 288,4 450,0 393,1
1 000
800 636,5 424,7 496,3 717,1 600 400
503,8 200 487,2 445,9 288,6
0 2011 2012 2013 2014
Expenditures on expensable mining pits Capital expenditures to ensure current production capacity Capital expenditures on key tasks
KEY INVESTMENTS IN THE PARENT COMPANY
As for key investments, in 2014, the Parent Company executed the following projects pertaining to vertical and horizontal expansion of its mines.
Construction of a new level in the existing KWK Budryk The Parent Company continued construction of the 1290m mining level. This will make it possible to open resources of Type 35 (hard) coking coal in the mine’s deposits. The total amount of the recoverable reserves at level 1290m is estimated at 167.9 million tons. The start of construction of level 1290m took place in 2007 and by 31 December 2014 capital expenditures in the amount of PLN 363.2 million were incurred. The remaining capital expenditures scheduled for project execution associated with construction of level 1290 m are estimated at PLN 401.1 million.
Expansion of KWK Pniówek The Parent Company continued its work on opening and utilizing the new Pawłowice 1 deposit started in 2007. The total amount of operable resources in this deposit is estimated at 54.2 million tons up to level 1140m. After their extraction, resources up to the level 1300m are planned to be opened. The deposit contains mainly type 35 (hard) coking coal. The preparation of the Pawłowice 1 deposit for mining operations started in 2007 and by 31 December 2014 capital expenditures in the amount of PLN 96.8 million were incurred. The remaining capital expenditures scheduled for project execution associated with opening and development of the “Pawłowice 1” deposit are estimated at PLN 1,331.3 million.
45 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
In addition, JSW continued construction of the 1000m mining level in KWK Pniówek. The total size of the recoverable reserves at level 1000m is estimated at 69.6 million tons. The start of construction of level 1000m took place in 1998 and by 31 December 2014 capital expenditures in the amount of PLN 699.7 million were incurred. The remaining capital expenditures scheduled for project execution associated with construction of level 1000m are estimated at PLN 45.0 million.
Expansion of KWK Borynia-Zofiówka-Jastrzębie, Zofiówka Section The Parent Company continued the opening and utilization of new deposits started in 2005: “Bzie-Dębina 2-Zachód” and “Bzie-Dębina 1-Zachód” from level 1,110m. Recoverable reserves planned to be opened from level 1110m amount to 133.8 million tons. After their extraction, resources up to the level 1300m are planned to be opened. The deposits contain mainly type 35 (hard) coking coal. The Bzie-Dębina 2-West and the Bzie-Dębina 1-West deposits were prepared for mining operations in 2005 and by 31 December 2014 capital expenditures in the amount of PLN 485.4 million were incurred. The remaining capital expenditures scheduled for project execution associated with opening and developing “Bzie-Dębina 2-Zachód” and “Bzie-Dębina 1-Zachód” deposits are estimated at PLN 2,189.5 million.
In addition, in the Zofiówka Section mine, JSW continued the construction of the 1080m mining level. The total size of the recoverable reserves at level 1080m is estimated at 49.3 million tons. The deposits at this level contain mainly type 35 (hard) coking coal. The start of construction of level 1080m took place in 2006 and by 31 December 2014 capital expenditures in the amount of PLN 232.1 million were incurred. The remaining capital expenditures scheduled for project execution associated with construction of mining level 1080m are estimated at PLN 349.4 million.
Expansion of KWK Krupiński The Parent Company continued the opening of seams in E and Zgoń parcels of KWK Krupiński and part of the Żory-Suszec deposits. The total amount of potential recoverable reserves is estimated at 27.2 million tons of coking coal. The preparation of E and Zgoń parcels and part of the Żory-Suszec deposit for mining operations started in 2010 and by 31 December 2014 capital expenditures in the amount of PLN 230.6 million were incurred. The remaining capital expenditures for project execution associated with opening of seams in E and Zgoń parcels in KWK Krupiński and part of the Żory-Suszec deposit are estimated at PLN 184.3 million.
Technical and organizational integration of KWK Zofiówka, Borynia and Jas-Mos The Parent Company continued to invest in the technical and organizational integration of the mines: Zofiówka, Borynia and Jas-Mos, into the three-section mine KWK Borynia-Zofiówka-Jastrzębie (final organizational merger took place on 1 January 2013). Works on the technical integration of the mines began in 2005 and by 31 December 2014 capital expenditures in the amount of PLN 192.0 million were incurred. The remaining planned capital expenditures are estimated at PLN 102.8 million. The integration of three neighboring mines offers an opportunity to improve the efficiency of utilization of reserves and improve the economic efficiency of coal extraction in the mining areas of these mines, and to extend their effective operational life within the integrated structure.
Construction and expansion of the 1050 level in KWK Knurów-Szczygłowice, Szczygłowice Section In Q4 2014, construction of level 1050m was started to increase the coking coal resources base through opening and industrial development of the coal deposits in level 850-1050. It is estimated that the total amount of the resources for potential mining on the basis of level 1050m amounts to approx. 90 million tons. By 31 December 2014 capital expenditures in the amount of PLN 0.7 million were incurred. The remaining capital expenditures scheduled for project execution associated with construction of level 1050m in the Szczygłowice Section of KWK Knurów-Szczygłowice are estimated at PLN 293.9 million.
Modernization of the Coal Preparation Plants in KWK Knurów-Szczygłowice associated with increase of coking coal production and selective preparation of type 34 and 35 coal In Q4 2014, an investment project was launched to modernize the coal preparation plants in both sections to be able to route whole coal produced to preparation and to ultimately increase the share of coking coal produced (type 34 and 35) to 80%. By 31 December 2014 capital expenditures in the amount of PLN 0.1 million were incurred. The remaining capital expenditures scheduled for execution of the project associated with modernization of the Coal Preparation Plants in KWK Knurów-Szczygłowice are estimated at PLN 108.9 million.
46 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Table 13.Expenditures incurred for execution of the aforementioned projects of key importance for the Parent Company
Growth rate Item 2014 2013 2012 2011 2013=100
VERTICAL DEVELOPMENT OF THE MINES
KWK Budryk 110.9 98.7 62.6 36.2 112.4 Construction of level 1290m
KWK Pniówek 20.2 58.1 95.7 80.5 34.8 Construction of level 1000m
KWK Borynia-Zofiówka, Zofiówka Section 56.1 50.5 41.0 25.6 111.1 Construction of level 1080m
KWK Knurów-Szczygłowice, Szczygłowice Section 0.7 - - - - Construction and expansion of level 1050m
Total 187.9 207.3 199.3 142.3 90.6
HORIZONTAL DEVELOPMENT AND DEVELOPMENT OF POTENTIAL NEW MINING AREAS
KWK Borynia-Zofiówka-Jastrzębie, Zofiówka Section Opening and industrial development of resources in the deposits: 82.0 116.8 61.9 71.9 70.2 Bzie-Dębina 2-Zachód and Bzie-Dębina 1-Zachód
KWK Pniówek Opening and industrial development of resources in the Pawłowice 1 23.2 28.7 15.8 19.8 80.8 deposit
KWK Krupiński Opening and industrial development of black coal resources in 61.9 79.8 43.3 43.7 77.6 section Zgoń and E and former part of the Żory-Suszec deposit
KWK Borynia-Zofiówka-Jastrzębie, Borynia Section 0.6 - 2.9 0.3 - Development of the Żory-Warszowice deposit
Total 167.7 225.3 123.9 135.7 74.4
Technical and organizational integration of the Borynia, Zofiówka and 37.4 17.4 20.7 10.4 214.9 Jas-Mos mines
KWK Knurów-Szczygłowice Modernization of the Coal Preparation Plant associated with increase 0.1 - - - - of coking coal production and selective preparation of type 34 and 35 coal
CAPITAL EXPENDITURES FOR KEY TASKS 393.1 450.0 343.9 288.4 87.4
INVESTMENT PROJECTS EXECUTED IN OTHER GROUP COMPANIES
Capital expenditures in other Group companies in 2014 amounted to PLN 353.1 million and were 7.9% lower than in the year before. Capital expenditures in the coke segment and other segments in 2014 accounted to 20.9% of the Group’s total expenditures. The capital expenditures incurred by the companies were allocated for execution of key investments and tasks securing on-going their operating activities.
Modernization of coking batteries in Koksownia Przyjaźń (JSW KOKS) The coking plant has continued its investment program as a part of which in 2011 modernized battery no. 1 was commissioned for use and further coking batteries are to be modernized. On 15 September 2011, the company signed an agreement with BP Koksoprojekt Sp. z o.o. from Zabrze, selected in a tender procedure, to perform formal, legal and design work for the purpose of modernization of coking batteries no. 3 and 4, and execution designs for modernization of coking battery no. 4. In 2014, expenditures of PLN 3.4 million were incurred for modernization of battery no. 4 (capital expenditures comprised completion of the working design for the project).
Building of a power unit in Koksownia Przyjaźń (JSW KOKS) As part of continuation of the process of increasing the power efficiency as a result of reduction of electricity consumption and gradual attainment of the Group’s power self-sufficiency, on 21 December 2011 Koksownia Przyjaźń (JSW KOKS) concluded an agreement with
47 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
the General Investment Contractor for construction of the power unit increasing the production capacity by 71 MWe. The investment will reduce electricity acquisition expenses in the Group through use of coking gas for electricity generation, which will diversify the Group’s coking gas sales, which directly translates into revenues from the hydrocarbons segment. On 26 August 2013, in connection with obtaining aid funds for co-financing its investment projects, the coking plant signed a loan agreement for PLN 10.0 million with the Voivodship Fund for Environmental Protection and Water Management in Katowice (“WFOŚiGW”). As part of the financing of investments with external funds, the coking plant also uses PLN 10.0 million derived from a partial forgiveness of a preferential loan obtained from WFOŚiGW. In 2014, expenditures of PLN 48.5 million were incurred in connection with the execution of the construction project. The construction of the energy unit together with the technical and technological installations was completed and the unit commissioning was started. The project is expected to be completed in March 2015. The remaining planned capital expenditures under the project are estimated at PLN 6.2 million (including inter alia adjustment work and optimization of the work of the unit, completion of commissioning).
Modernization of the Jadwiga coking plant (JSW KOKS) JSW KOKS continued the implementation of its investments in modernization of the Jadwiga Coking Plant, which comprises modernization of the coal processing plant and construction of a coal storage yard and a burdening line, coke sorting unit combined with construction of a coke storage yard, and construction of a new feed-push machine for the coking battery. In 2014 expenditures of PLN 10.8 million were incurred for the project.
Construction of a power unit in Koksownia Radlin (JSW KOKS) This project aims to use coking gas to generate electricity and heat for own needs and for sale. Using excess coking gas after removing sulfur and dust in boilers or in installations for the co-generation of heat and power to produce steam and electrical energy makes it possible to curtail the sulfur content in coking gas and to limit the emission of sulfur oxides during firing, and to observe the permissible concentration of sulfur oxides in exhaust gas. The construction of the power unit with an estimated budget of PLN 135.0 million will take place in parallel with modernizing the benzol recovery plant and its neighboring facilities. The total forecast cost estimate for this project is estimated to be PLN 196.5 million. Work is presently underway to handle the formal, legal and design-related issues. In 2014, expenditures of PLN 4.3 million were incurred in connection with the execution of the task.
Construction of coking battery no. 6 with infrastructure in WZK Victoria WZK Victoria continued its work started in 2007 on the construction of coking battery no. 6 together with associated process units and auxiliary facilities. Execution of the project will allow the Coking Plant to increase its production capacity and perform overhauls of the other batteries. At the first stage of the project, capital expenditures were incurred for the construction of ancillary infrastructure for the future battery no. 6, including expenditures on the construction of a biochemical post-process water treatment facility, the construction of a coal yard and other tasks. In 2012, as part of the implemented task, the construction of a coal yard with a capacity of 30 thousand tons was completed and a final decision on the construction permit for coking battery no. 6 was obtained. On 3 July 2013, WZK Victoria entered into an agreement with the General Contractor of the Investment Project to build coking battery no. 6 on a turnkey basis, including the construction of the battery, furnace machinery, coke chute and other equipment and installations of battery no. 6. The total value of the contract is PLN 125.9 million. In 2014, expenditures of PLN 21.0 million were incurred in connection with the execution of the construction project.
Construction of the 70 MWe CFB fluidized bed unit in EC Zofiówka (executed by SEJ) The project provides a solution supporting gradual withdrawal of the worn out units in EC Zofiówka, which will make it possible to generate heat and electricity in full compliance with the requirements of the IED Directive, with higher generation efficiency and fully satisfying the demand of EC Zofiówka’s customers for heat and electricity in this period. The solution will make it possible to generate electricity and heat on the basis of the fluidized bed boiler burning steam coal and low calorific value coal fuels from JSW mines, and other types of renewable fuels (biomass). The Company is performing the contract signed on 14 October 2013 for the “Construction of a cogeneration CFB unit with a 75 MWe gross installed capacity in the Zofiówka CHP at SEJ S.A.”. The contract includes the construction of a complete CHP power unit equipped with an extraction condensing turbine and a boiler with a circulating fluidized bed suitable for co-firing biomass and coal slurry with coal and the construction of ancillary installations. The total value of contracts being performed as part of the investment project amounts to PLN 514.7 million (this value includes the contract for the construction of the CFB unit, the investment insurance contract and the Contract Engineer agreement). In 2014 expenditures of PLN 77.2 million were incurred for the project.
48 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
ACQUISITION OF THE KNURÓW-SZCZYGŁOWICE COAL MINE
On 10 April 2014, JSW and Kompania Węglowa S.A. signed a preliminary agreement to sell the KWK Knurów-Szczygłowice hard coal mine (Current report 9/2014). The object of the contract was for JSW to buy an organized part of a business in the form of a mine („ZORG”), entailing tangible and intangible assets used to mine hard coal in this mine with an annual production capacity of 3.8 million tons, with approximately 40% being coking coal, economically viable resources of 1.26 billion tons, recoverable reserves of 375.1 million tons, of which 119.7 million tons are in the concessions currently in force. The sales price for ZORG amounted to PLN 1,490.0 million. The obligation of Kompania Węglowa S.A. ("Seller") and JSW ("Buyer") to execute the promised ZORG sale agreement materialized after a number of conditions precedent is fulfilled. The key conditions include: for the Buyer to obtain a consent from UOKiK; for the Buyer to raise funding in the agreed amount; for parties to some agreements concluded by the Seller, relating to the operation of ZORG, and specific leases concluded by the Seller, to allow the Buyer to enter into rights of a party (assignment of rights/claims or duties, as applicable) or amend those agreements and conclude relevant new agreements with the Buyer for the Seller and the Buyer to obtain legally required decisions, permits, approvals and licenses from public administration authorities or courts and other entities; and obtain all internal approvals and consents from their corporate bodies, which are required to execute or perform the preliminary agreement and the promised ZORG sale agreement, for the Seller to obtain an approval from bondholders, which is required under the bond issue program, to sell ZORG and release encumbrances established on ZORG or its components.
On 30 May 2014 (Current Report no. 13/2014), JSW announced its receipt of the consent from the President of the Office for Competition and Consumer Protection dated 22 May 2014 for a concentration involving the acquisition by JSW of Kompania Węglowa S.A.’s assets in the form of ZORG.
On 31 July 2014 the ZORG acquisition agreement was concluded by and between Kompania Węglowa S.A. and JSW. The contract’s terms and conditions are described in Item 2.8 of this report. A settlement of the acquisition of KWK Knurów-Szczygłowice is presented in Note 26 of the “Consolidated financial statements of Jastrzębska Spółka Węglowa S.A. for the financial year ended 31 December 2014”. Considering the time of acquisition, ZORG’s results have been recognized in JSW’s result since 1 August 2014.
EQUITY INVESTMENTS
A detailed description of the capital investments made in the period from 1 January to 31 December 2014 is presented in Item 1.2 of this report and Note 36 to the Consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. Capital expenditures in 2014 were financed from own funds or in return for in-kind contributions.
2.12. RISK FACTORS AND THREATS
The Group is exposed to various risks in each are of its operations. In order to ensure the achievement of its business objectives, the Group actively manages the risks arising in its operations, striving to mitigate or eliminate their potential negative effect on the Group’s financial result.
The Parent Company has in place a comprehensive enterprise risk management system which comprises the Enterprise Risk Management Policy and Procedures, an IT tool, appointed risk owners (key managers knowledgeable about potential threats) and a dedicated unit to coordinate risk management. The Enterprise Risk Management Policy and Procedures in place describe a systemic approach to risk which comprises the key risks occurring in the activity of the Parent Company and satisfies the highest ERM standards.
RISK MANAGEMENT PROCESS
Recognizing the importance of risk management in pursuance of strategic objectives, the Group uses a formalized risk management system whose main aim is to identify potential events that may have negative impact on the Group, contain the risks within predefined boundaries (through defining risk measurement and assessment tools and rules for preparation of action plans for individual risks), and strengthen the Group’s reputation in the market.
The Group’s Corporate Risk Management System is the outcome of implementation of the resolution adopted by the Stock Exchange Council and is consistent with the guidelines contained in the document entitled Best Practices of WSE Listed Companies, recommending introduction of a formalized risk management system.
49 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Chart 7. The enterprise risk management process in the Group
BUSINESS OBJECTIVES
RISK MANAGEMENT PROCESS
RISK IDENTIFICATION
CONTEXT DEFINITION RISK ANALYSIS UNDERWRITING DESCRIPTION OF THE RISK
RESPONSE TO RISK
PERIODIC REPORTING
RISK REVIEW CONSULTATIONS INFORMATION ON RISKS
Risk management is a continuous process and occurs in all links of the Group’s organizational structure, and the key managers are responsible for risk management in all areas of operations, including: operational, strategic, financial, commercial, and legal and regulatory. The solutions used make it possible to systematically identify, assess and analyze the risks, whose results make it possible to design the response to the risks. Risks are identified by risk owners and then are measured by them based on predefined scales. For identified risks, control mechanisms are defined in connection with the risks and action plans aimed at their mitigation and reduction of their effects, if any. The information prepared about potential and changing threats occurring in the Parent Company is reported quarterly to members of the Management Board, Audit Committee and Supervisory Board. At a later stage, control works are carried out, involving verification and assessment of the consequences of the actions taken and introduction of adjustments to the risk management process, in order to improve its efficiency.
Chart 8. The benefits of having an ERM system in place
THE SUPERVISORY BOARD RECEIVES IN-DEPTH INFORMATION ABOUT KEY RISKS, THEIR SIGNIFICANCE FOR JSW AND INFORMATION ABOUT THE CURRENT ACTIONS TAKEN TO PREVENT OR MITIGATE THE RISKS
MANAGEMENT BOARD DECISIONS ARE MADE ON THE BASIS OF SOLID INFORMATION, WITH FULL AWARENESS OF THE RISK INVOLVED AND THE POSSIBILITY OF CONTROLLING IT TO ENSURE ACHIEVEMENT OF PLANNED RESULTS
EFFICIENT OPERATION OF A RISK MANAGEMENT SYSTEM GIVES THE MANAGEMENT BOARD, SUPERVISORY BOARD, AUDIT COMMITTEE AND STAKEHOLDERS THE CERTAINTY THAT ALL MATERIAL RISKS ARE KNOWN, UNDERSTANDABLE AND CONTROLLED
FOR OWNERS AND STAKEHOLDERS, RISK MANAGEMENT MINIMIZES UNCERTAINTY ASSOCIATED WITH EXECUTION OF THE
ORGANIZATION’S OBJECTIVES AND IMPROVES THE CAPABILITY TO RESPOND TO CRISIS SITUATIONS
50 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
A planned and regular approach to risk management results in identification of the Group’s key risks. The report below presents the risks, which have a material potential impact on the Group’s operations, performance or financial standing and may at the same time cause a decline in its value and share price. Consequently there is a strong need for monitoring and periodic verification of the effectiveness of the existing control mechanisms and response to the risks.
The risks described below are the only factors to which the Group is exposed. Additional risk factors, which are currently unknown, or which are currently believed to be immaterial may also have a material and adverse effect on the Group’s operations, its financial performance and financial standing.
SELECTED KEY RISKS
Table 14.Risk factors and threats
RISKS RELATED TO SOCIAL, ECONOMIC AND MARKET ENVIRONMENT
Downtrend in global economies, in particular in the steel and power industry or events causing a significant decline of demand for coal and coke, may have adverse impact on the Group’s activity, results and financial standing.
The global economic situation determines the demand and supply in the coal, coke and steel market. Unequal levels of global GDP, stagnation in the Euro zone, continuing uncertainty in connection with the conflict between Ukraine and Russia and uncertainty regarding the future prices of energy raw materials will have significant impact on the demand for the Group’s products.
RISK ASSOCIATED WITH In 2014 global steel production rose by 1.2%, reaching 1.661 billion tons. Higher than average production increases THE SITUATION IN THE were recorded in the European Union and North America, and lower in Asia, Africa and South America. The European GLOBAL ECONOMY Union produced 169.2 million tons of steel, up 1.8%. The decrease of production by 2.8% in the Commonwealth of Independent States led to a decline of steel production in entire Europe by 0.1%. In Poland, the increase of steel production amounted to 8.4%, but steel production is still lower than before the market collapse in 2008.
The market position of the Group, which operates in the coal-coke-steel supply chain, is affected, in addition to steel production fluctuations, by the supply-demand changes in the European market associated with the Ukrainian conflict, leading to significant reduction of deliveries of Ukrainian coke and anthracite which, in some applications, is a coke substitute.
The oversupply of coal and coke in global markets may cause a significant decrease of prices, which may have significant adverse impact on the Group’s activity, results and financial standing. Due to the interconnections of these industries, a downtrend (lack of demand) in the coke and steel market has direct influence on the results generated by the coal market. Also expansion of local completion may be a threat through increase of the sale of the domestic coal RISK OF FLUCTUATION OF and coke volumes obtained at much lower production costs or inflow of cheap coal and coke from import. In addition, DEMAND AND SUPPLY IN expansion of application of the PCI technology for blast furnaces (Pulverized Coal Injection – the process of direct GROUP’S MAIN PRODUCT injection of pulverized coal instead of coke) may impair demand for blast furnace coke. MARKETS Although the Group has limited capability of changing this risk, as it is attributable to factors beyond its control, in 2014 despite unfavorable conditions, the Group sold to external customers 8.8 million tons of coal, i.e. 64% of its total deliveries. The remaining 4.9 million tons (36%) was used for the Group’s own needs (production of coke and electricity and heat). In 2014, also coke, together with some of the inventories from previous periods, was sold to external markets.
Due to the continuing process of curtailment of steel production in Europe through decommissioning of blast furnaces and bankruptcies, there is a risk of loss of market as a result of reduction of demand for coke caused by lower steel production. At the same time, the process of expansion of the coke production capacity of steel manufacturers is taking RISK OF REDUCTION OF place, which makes them independent of market purchases. Crude steel production in the entire European Union in BLAST FURNACE PIG IRON 2014 recorded a 1.8% increase in relation to the year before, but is still 20% lower than the level recorded before the PRODUCTION CAPACITY IN market collapse in 2008, which indicates that the economic slowdown continues. 14 out of 75 blast furnaces installed EUROPE in Europe were still shut down. Several blast furnaces returned to operation in 2014. With some delays, German steel producer, ThyssenKrupp, following an overhaul, started up blast furnace no. 2 in Schwelgern. One blast furnace was also started up in Dunaferr, Hungary, and Tata Steel (Scunthorpe) in England.
RISK OF VOLATILITY OF The significant volatility in coal and coke prices observed by the Group in the past indicate a high probability that such COAL AND COKE PRICES volatility may also occur in the future. The situation on the coking coal market is linked to the coke and steel market;
51 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
business cycles entail variation in prices in those sectors. The sales prices for the Group's coking coal depend strongly on demand on the global steel market, while steam coal prices depend also on actions taken by other domestic producers. Even though the Group has its loyal customers, every inflow of cheap imported coal or increased output from other domestic producers entails a potential risk of a downward pressure on prices. For coking coal producers, 2014 was one of the most difficult years recently. Despite earlier announcements of increases, reference prices for Australian hard coal in individual quarters of 2014 were in a downward trend. Reference price of premium hard coal in Q1 2014 amounted to USD 143 per ton and in Q4 2014 - USD 119 per ton (16.8% decrease). The prices of blast furnace coke on the European market in 2014 ranged from 247.5 to 220 USD/t (CFR North Europe), but for most of the time were at 220 USD/t (CFR North Europe). In 2013 coke prices on the European market fluctuated around 285- 247 USD/t (CFR North Europe).
To reduce the impact of the risk, the Group conducts ongoing market monitoring and analyses and keeps track of price trends in the coal, coke and steel markets. The terms and conditions of long-term contracts allow for periodic price negotiations. Also the size of coal imports into Poland and coal prices of other produces are monitored.
The most significant impact on the competitiveness of the coal and coke industry is exerted by such parameters, among others, as the price, production capacity, quality and physicochemical properties of coal and coke, logistics, costs and occurrence of new competitive producers. The Group may not be able to effectively compete with the effects of the INDUSTRY COMPETITION above risk, due to the possibility of occurrence of worse mining and geological conditions of coal extraction and change RISK of the production structure of appropriate coal ranges. In addition, price pressures due to the necessity to adopt the market prices, may significantly impact sales revenues.
In 2014 in order to maintain the competitiveness of its products, the Group pursued a flexible pricing policy, adapting product quality offering in accordance with business partners’ expectations.
The Group’s business activity may prompt disputes with local communities concerning the areas where the Group conducts or intends to conduct its operations. These situations may in turn lead to protests in these communities or RISK ASSOCIATED WITH third party claims. The inability to reach a positive solution to issues related to local communities may exert a material CORPORATE SOCIAL and adverse impact in the future on the Group’s operations, financial position and operating results. RESPONSIBILITY In 2014, the Corporate Social Responsibility (“CSR”) Report for 2013 was published. It defined the main CSR objectives and the actions taken in individual areas such as: customers, employees, natural environment and local community.
RISKS IN CONDUCTED BUSINESS ACTIVITY
The Group’s coal production volume is subject to operational determinants and events beyond its control, which may disrupt its operations and affect the production volumes in the various mines in different periods. The Group’s mining activity is above all subject to the influence exerted by mining determinants, which include among others: . difficult geological conditions such as disruptions to the continuity of deposits characterized by volatility and irregularity that may curtail the effectiveness of mining longwall parcels to a greater extent than anticipated; . level of natural hazards higher than forecast which may lessen the ability to mine individual longwalls; . mine accidents, fires, explosions and methane combustion, coal dust explosions, methane and rock OPERATIONAL RISKS THAT outbursts and rock falls and collapses; MAY CONTRIBUTE TO . failures of machinery and equipment used in mining and processing. LOWER OUTPUT OR HIGHER COSTS Even though the Group has taken a multitude of measures to enhance safety these risks may grow in particular in conjunction with mining at deeper levels in the Group’s mines. Moreover, the events and determinants that may affect production volume and in particular cost growth should include changes to the legal regulations concerning the coal industry. A new geology and mining law is in force as of 1 January 2012. At present, work is in progress on the executive regulations to this law. The regulations governing coal mining in the face of natural hazards are expected to become more stringent. In truth, the Group undertook advance measures to make it possible to achieve the assumed level of output but it will be difficult to assess their impact on the Group’s mines’ production capacities and mining costs until the final wording of the regulations is published.
Estimates concerning coal resources inevitably entail a certain amount of uncertainty and to some extent depend on RISK THAT THE VOLUME the geological criteria used, which may ultimately prove to be imprecise. In addition, limited technical and organizational AND QUALITY OF capabilities, including: application of inadequate production technologies, incorrect specification of the time of delivery ESTIMATED RECOVERABLE of materials, equipment and spare parts and inadequate level of employee competences may impact the quantity and COAL RESERVES MAY BE quality of produced coal. Historical data do not constitute good basis for construction of precise operating forecasts for LOWER THAN THOSE the future, because they have no analogies in the mining activities. EXPECTED BY BUYERS The risk of occurrence of methane hazard remains the dominant hazard in the Group’s mines. To minimize the methane explosion risk, the longwall production level is adapted to the maximum allowed level of methane emission and not the
52 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
longwall mining capacity. Considering the fact that the Group’s mining activity is largely conducted in the existing area, it is assumed that the level of mining hazards (faults, methane, rock burst, water, fire etc.) will be similar to the existing one and will impact the production volume and shape of the operated longwalls. If the Group’s actual resources prove to be lower than current estimates, this may adversely affect its operations, operating performance and financial standing. The Group intends to achieve the desired production level inter alia through on-going analysis of production planning based on an analysis of the conditions occurring in the mining work areas, monitoring and analysis of production indicators, adaptation of production to overall economic situation or optimization of the preparation and mining work.
RISK THAT THE QUANTITY The mining process requires many years of pre-production planning and mining in order to prepare the relevant part of AND QUALITY OF COAL the deposit for proper mining operations. This process requires adequate capital expenditures. A disturbance in the MINED BY THE GROUP MAY required level of capital expenditures or their incorrect planning may result in a deterioration of the quantity or quality BE LOWER THAN of the coal mined by the Group compared to those expected by the buyers, which will adversely affect the results of the CUSTOMERS EXPECT Group’s operations and its financial standing.
RISK THAT THE In the process of planning the mining of a longwall, it is impossible to ascertain the actual mining or geological conditions PERFORMANCE OF A – such conditions are eventually discovered in the course of mining operations and have a significant impact on the MINING FRONT MAY BE performance of the mining front. LOWER THAN EXPECTED
This risk is about the business and financial strategy being based on cooperation with a relatively low number of clients and there being no possibility of enforcing payments from them. The considerable downturn in the economy, especially in the steel and coke industries, may have a material and adverse impact on the Group’s operations, its results and financial position. Furthermore, if one or more of the Group’s major buyers cuts back on the volume of coal or coke purchased or fails to extend supply contracts, this could have a material and adverse impact on the Group’s operations, results and financial position. Such extraordinary, unfavorable circumstances associated with the possibility of losing business partners including, for example, a strike. Although agreements contain provisions on force majeure event (like a strike) but one should remember that failure to fulfill current obligations may lead to alternative purchases by the buyers and, as a consequence, to resignation from SALES TO A RELATIVELY contractual sales volumes from the Group. This situation may affect future cooperation with business partners who may SMALL NUMBER OF strive to replace uncertain coal deliveries from the Group with imported coal in the long run. Coking plants from the CLIENTS Group conduct their production processes on the basis of the Group’s own coal. The coking process is a continuous process and cannot be interrupted. The process can be only slowed down, which leads to both loss of revenues (lower production) and the technical condition of the coking batteries. The impact of the strikes continued after the end of the reporting period, i.e. from 28 January to 13 February 2015 is described in Item 2.2. of this report. To minimize the negative consequences of this risk, the Group, among others, monitors performance of coal sales agreements, performs reporting of payments for deliveries (debt collection), applies contractual provisions about contract performance security, reviews and assesses clients’ financial statements and provisions of appropriate procedures.
Production capacities of the coking batteries may be affected by a number of factors remaining outside of the Group's THE QUANTITY AND control. These forecasts inevitably contain some level of uncertainty and to this extent they rely on economic and QUALITY OF COKE technical assumptions made, which in the end may prove to be imprecise. As a result, estimates concerning coke PRODUCED BY THE GROUP production are regularly checked on the basis of new information; as a result, one should expect that they may change. MAY BE LOWER THAN If the actual utilization of coke production capacity by the Group is lower than the current estimates then this may CUSTOMERS EXPECT adversely affect the Group's outlook and value and its operations, performance and financial standing. In 2014, the Group used about 92% of the production capacity of its coking plants.
Since the coal resources held by the Group are depleted as they are used, the Group’s ability to achieve the planned RISK CONNECTED WITH level of production in the long-term partially depends on its ability to acquire and operate new coal resources fit for PERFORMANCE OF extraction from an economic point of view, and its ability to develop new and expand existing extraction activity. The DEVELOPMENT PROJECTS Group’s ability to acquire additional resources in the future may be curtailed by a host of factors over which the it has OR DELAYS IN THEIR no control. The Group’s inability to complete investment projects according to plan may exert a material and adverse PERFORMANCE impact on its development, operations, results and financial standing.
RISK OF REDUCED Resources may not be available when they are needed or if they are available their extraction at a competitive cost in CAPACITY TO MINE THE a given period may not be plausible. The Group may not be able to assess the geological structure of deposits precisely EXISTING RESERVES AND in forward-looking regions, which may adversely affect its profitability and financial position if this assessment proves TO ACQUIRE AND MANAGE to be erroneous. Moreover, the investment, acquisition and exploration projects planned by the Group may not provide
53 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
ECONOMICALLY VIABLE additional material resources or the operation of these resources may not be profitable. Effectiveness of the process of COAL RESERVES acquiring and managing reserves may be limited by amendments to law, prevailing regulations etc. as well as decisions and agreements or amendments to them issued by external bodies, e.g. local government institutions. Periodic analysis of on-going and planned actions aimed at mitigation of risk is carried out.
As part of development of the Coal and Coke Group, the Group acquired majority stakes in the following companies: Koksownia Przyjaźń, KK Zabrze and WZK Victoria. The Parent Company exercises on-going supervision over the RISK OF THE INTEGRATION integration processes and appoints steering and operational committees and project coordinators for on-going projects. PROCESS FAILURE After completion of the purchase transaction of KWK Knurów-Szczygłowice from Kompania Węglowa S.A. in 2014 the Group is not planning further acquisitions. The Controlling Department, in cooperation with other Departments, conducts constant monitoring of the synergy effects following from the acquisition of KWK Knurów-Szczygłowice.
The Group’s ability to conduct its operations effectively may deteriorate if the Group loses the current members of the management team and fails to acquire new ones. The Group’s retention of its competitive position and the implementation of its business strategy hinge upon its ability to retain and source experienced and qualified managers. RISK CONNECTED The Group’s managers on average have 10 to 20 years of professional experience in the coal industry. If the Group’s WITH RETAINING AND competitors offer more favorable terms and conditions of employment, the Group may lose some managers. If the ACQUIRING KEY Group is unable to source, train and retain qualified managers, it may not be able to manage its growth effectively and PERSONNEL compete effectively in the European coal industry, which may exert an adverse impact on its operations, results and financial position.
The Group pursues an active HR policy to reduce the risk associated with human resources by performing the HR Strategy adopted by JSW.
In the bituminous coal sector, trade unions play an important role in shaping the remuneration policy. The position held by trade unions is particularly strong on account of the headcount in the sector and its strategic influence over the functioning of the economy. In addition, trade unions’ expectations are based on the terms and conditions obtained by RISK CONNECTED WITH employees of other companies undergoing privatization. The strong position of trade unions under the prevailing law RELATIONS WITH TRADE gives rise to a situation in which there exists a risk of increasing salaries under the negotiated salary agreements, which UNIONS AND COLLECTIVE consequently may adversely affect the financial performance of the Group. The Group’s failure to maintain proper LABOR DISPUTES employee relations may exert a material and adverse impact on the Group’s operational outlook, results and financial position. There are 80 trade union organizations operating in the Group. The total number of trade union members, since an employee may be affiliated with several unions, exceeds the number of the Group’s employees and as at 31 December 2014 it was 40,798, which means that the union membership ratio is 119.6%.
ENVIRONMENTAL RISKS
The legal regulations applicable to the environment and the usage of natural resources are subject to constant change and the trend over the most recent years has been toward making the binding standards more stringent. Consequently, the Group may be unable to comply with and act in compliance with provisions of law as amended in the future or such amendments may have an adverse effect on the Group’s business activity. Additionally, changes to the environmental protection law may force the Group companies to adapt to new requirements (e.g. adjusting the technologies used by RISKS CONCERNING the Group to curtail atmospheric emissions or changes to how waste is managed or water and sewage management ENVIRONMENTAL by the Group), inclusive of obtaining new permits, or changes to the conditions of the current permits held by the Group. PROTECTION Such an obligation may require the Group to incur specific additional capital expenditures and may, by the same token, REGULATIONS affect the its financial standing by increasing the costs of its activity. The Group strives to limit risk by constantly overseeing environmental protection legal requirements and making the necessary investments to meet all environmental requirements. The Group’s priorities are to act with awareness and responsibly based on the highest environmental standards and to be consistent in undertaking environmental tasks. These actions create great opportunities to lower the level of risk and the costs of adaptation in the Group’s environmental operations and to new conditions.
The risk is connected with that fact that the Group, because of coal reserves being located under forest and intensely urbanized areas, will have to incur high costs to carry out land rehabilitation in advance and repair mining damage. THREATS FOLLOWING According to the Geological and Mining Law, the Group is obligated to repair mining damage in facilities and structures FROM CAUSING MINING and it may be obligated to reinstate land to its state from before the mining activity commenced. Any and all changes DAMAGE ON THE SURFACE to the law that would make these requirements more stringent may lead to higher costs of reclamation and repairing damages.
54 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
One of the priorities of the European Union is to prevent climate change, among others through limiting the consumption of natural energy resources, introducing modern and efficient energy generation technologies, limiting carbon dioxide emissions, reducing energy consumption through improved efficiency and increasing the importance of renewable energy generation. In order to achieve these objectives, the European Union has introduced a package under the name RISK ASSOCIATED WITH of "3x20% by 2020”. The European Commission has been very consistent in implementing these goals and we cannot ADAPTATION OF THE rule out that all the future decisions referring to those matters may result in even more stringent standards of GROUP’S ACTIVITY TO THE consumption, efficiency and quality of energy. Recently however, the true impact of this policy on the economy (entire EU CLIMATE POLICY branches of industry leaving to countries outside of the EU), an increase in energy prices and the resulting loss of competitiveness on the global market and socially unacceptable increases in energy prices for individual customers – all of these factors create an increasingly strong resistance of the public and EU member states. Therefore, there are reasons to expect a change of the direction of the climate policy.
The Group’s utility companies involved in the generation of electricity and selling electricity to end users, including JSW, are required to have in their volume of production the statutory share of the so-called ‘color’ energy. Since 11 September RISK OF THE 2013, JSW as an industrial buyer (for 80% of its consumed energy) is required to obtain and present for redemption to REQUIREMENT TO the President of the Energy Regulatory Office certificates of origin for electricity obtained from renewable energy INCREASE THE SHARE OF sources (‘green certificates’), from high-efficiency cogeneration (‘yellow certificates’) and mine methane (‘purple ENERGY OBTAINED FROM certificates’) or pay a replacement fee. There exists a risk that the cost of obtaining such certificates or the amount of RENEWABLE SOURCES the substitution fee will increase in the years to come. Furthermore, failure to present such certificates for redemption AND OTHER SO-CALLED to the President of the Energy Regulatory Authority or pay the substitution fee will result in the imposition of a fine on ‘COLORS’ the company by the President of the Energy Regulatory Authority. This as a result may adversely affect the Group's activity, financial standing and performance.
THE GROUP IS A MEMBER OF THE COMMUNITY JSW KOKS and SEJ are participants of the community scheme for greenhouse gas emission allowance trading in SCHEME FOR connection with CO2 emissions. The necessity to purchase the allowances at an auction, if any, or the necessity to GREENHOUSE GAS execute projects aiming at reduction of emissions may have negative impact on the Group’s financial standing. EMISSION ALLOWANCE TRADING
The Industrial Emissions Directive came into force on 6 January 2011. It defines the rules associated with integrated prevention and control of pollution associated with industrial activity and rules associated with reduction of air, water and soil emissions. The period of implementation of the Industrial Emissions Directive ended on 7 January 2013. The Directive will in particular affect utility companies and provides for a transition period for certain power plant installations until 2016. After this period, more stringent emission standards will apply in relation to such substances as NOx, SO2 THE GROUP WILL BE or dust. FORCED TO ADAPT ITS In connection with the Industrial Emission Directive, more stringent emission standards for such substances as NOx, ACTIVITY TO THE SO2 or dust, will come into effect as of 2016. Keeping this in mind, SEJ intends to report some of its installations for INDUSTRIAL EMISSIONS derogation and perform major modernizations. Among the investment projects intended to help fulfill these DIRECTIVE environmental requirements, SEJ is executing the construction of a 70 MWe fluidized bed in the Zofiówka CHP. Moreover, SEJ has developed and is implementing a plan to adjust its plants to the requirements of the IED. The risk of non-performance of the necessary investments included in SEJ’s investment plan (the construction of a fluidized bed boiler, modernization of boilers in the Moszczenice Branch, EC Zofiówka and EC Pniówek) will result in significant production cutbacks in 2016-2023 and a complete cessation of production in coal units after 2023.
RISKS OF FINANCIAL NATURE
The Group’s main products are usually priced in PLN, EUR and USD, while its operating expenses, including employee benefits, the consumption of materials, energy and external services are predominantly incurred in PLN. Other costs and capital expenditures are incurred mainly in PLN and partially in EUR and USD. Having regard for the structure of FOREIGN EXCHANGE RISK sales revenues and expenses, the strengthening of the PLN against the EUR and USD may cause the Group’s RELATED TO EUR/PLN AND revenues to fall and as a result may lead to a lower operating result. According to data published by the National Bank USD/PLN EXCHANGE RATE of Poland (NBP), the PLN appreciated against the EUR at the end of 2014 compared to the beginning of the year by FLUCTUATIONS about 2.8%, and depreciated against the USD by about 16.4%. In connection with the signed Bond Issue Program of July 2014, the Parent Company issued bonds denominated in USD. This curtails the FX volatility risk resulting from selling products in a natural way. PLN volatility against the EUR or USD may affect the Group’s operations, its financial standing and operating performance. The overriding objective of the Group’s FX risk management policy which is currently being prepared is
55 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
to curtail to the minimum the FX risk resulting from the Group’s FX exposure to a minimum as resulting from the threat to future cash flow and financial results as a consequence of movement in the price of the underlying instrument. The Group is exposed to a significant foreign exchange risk associated with the sales of products to domestic and international markets. To eliminate FX risk, in 2014 the Group entered into FX forwards. The Group also makes small purchases of materials, services or investment assets in foreign currencies, also purchases indexed to foreign currencies. This curtails the FX volatility risk resulting from selling products in a natural way. The prospective impact exerted by EUR/PLN and USD/PLN exchange rate growth and decline has been depicted in Note 38 to the Consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
The Group’s exposure to interest rate risk concerns primarily potential changes in cash flows caused by shifts in market interest rates. The Group finances its operating and investing activities partly with external funds bearing interest at floating interest rates and invests free cash in financial assets which also in most cases bear interest at floating interest INTEREST RATE RISK rates. In connection with the current debt level, the Group is exposed to the risk of changes in interest rates in respect to its liabilities under debt securities issued; to a lesser extent the Group is exposed to changes in interest rates in respect to deposits and cash and financial lease liabilities. As part of financial risk management, in 2014 one of the Group companies used interest rate risk hedging.
This risk is about an unexpected shortage of cash or unavailability of financing, leading to a temporary or permanent loss of capacity to settle liabilities or forcing the Company to raise funding on disadvantageous terms. Prudential risk liquidity management assumes, among others, maintaining an appropriate (minimum) level of cash available for service LIQUIDITY AND WORKING of current payments. In connection with the negative cash flows on operations, including high capital expenditures and CAPITAL MANAGEMENT absence of available additional long-term financing sources, the risk of the Group companies losing liquidity has RISK increased significantly. If the scenario of difficult market situation and absence of additional external funding does materialize then it will result in elevated probability of losing capacity to pay liabilities. In order to mitigate its liquidity risk, the Group takes actions to obtain additional funding and cut expenditures. The JSW Management Board has undertaken numerous cost-saving initiatives aimed at reducing outflow of cash and improving its financial standing.
RISKS RELATED TO LEGAL ENVIRONMENT
The Group's core business relies on the effective power of its concessions, its compliance with the terms of those concessions and its capacity to obtain new concessions. Granting of a new or extension of a current concession RISK OF PROBLEMS WITH requires satisfaction of certain requirements prescribed by the law. The granting or extension of a concession may be RECEIVING OR RENEWING refused if the intended activity violates environmental requirements, is contrary to purpose of the real property or is a CONCESSIONS FOR COAL threat to its safety or is a threat to defense and security of the state or its citizens. The Group consults with local MINING AND EXTRACTING government bodies regarding the opening of coal resources in deposits adjacent to the mines. A mining concession is METHANE AS A BY- granted following a reconciliation with a local zoning plan and if there is no zoning plan – based on the study of zoning PRODUCT OF MINING OR conditions and directions. New concessions may be obtained on certain conditions, which include among others WITH EXECUTING MINING introduction of provisions to local zoning plans which allow for the possibility of coal mining. Life expectancy of mines USUFRUCT AGREEMENTS may be reduced significantly if new deposits are not opened. If the concessions are canceled or if new concessions or BY THE SET DEADLINES extensions are not granted, the Group may be unable to fully utilize its mineral resources and identified mineral deposits, which may have a material adverse effect on the Group's performance and business outlook. The Group conducts regular cooperation with local government units and the local community in the concession process.
The settlements of property tax made by the Group with respect to mine workings and plants (facilities) located on them have been challenged by tax authorities, which is described in item 5.6 of this report. Unfavorable results of proceedings pending before tax authorities as well as tax proceedings possibly initiated with respect to future periods may obligate RISK RELATED TO the Group to pay overdue tax liabilities with default interest. PROPERTY TAX ON As a result of the issuance of legally binding judgments by the Supreme Administrative Court quashing the cassation UNDERGROUND MINE appeals of the Local Government Board of Appeals filed against judgments, favorable for the Group, issued by the WORKINGS OR EQUIPMENT Voivodship Administrative Court in Gliwice, the stance of the Group was confirmed that mine workings do not constitute (FACILITIES) LOCATED IN structures, hence the value of the workings (drilling costs) cannot be included in the taxable base for property tax UNDERGROUND MINE purposes. It is possible to impose a tax on facilities located in mine workings if they may be classified as building WORKINGS, structures as defined in the Taxes and Local Charges Act, with relevant references to the building code. In the course of pending proceedings, the Group as a principle challenges the taxation of mining supports classified by Municipalities as structures and the value of facilities located in the workings determined on the basis of market valuations, despite the fact that the Group submitted the value of such facilities based on allocation of the original value of such workings.
RISK OF ADDITIONAL The Group incurred expenses on the establishment of “expensable” mine workings and recorded them for the purposes BURDENS CONNECTED of corporate income tax directly in tax deductible expenses at the moment of incurring them. If tax authorities challenge
56 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
WITH THE CLASSIFICATION the method of qualification of mine workings adopted by the Group, this may result in the obligation to adjust tax OF EXPENDITURES ON THE liabilities by reducing tax deductible costs in tax settlements from previous years, and, at the same time, to increase ESTABLISHMENT OF MINE tax deductible expenses in future tax settlements as well as to pay overdue tax liability with default interest, which may WORKINGS AS TAX adversely affect, to a significant extent, the Group’s financial results. DEDUCTIBLE EXPENSES. After the end of the reporting period, on 16 January 2015, the Parent Company received a positive individual tax ruling, file ref. no. IBPBI/2/423-1287/14/JD in this regard, in which the Director of the Tax Chamber in Katowice, in light of the prevailing legal status, subscribed to JSW’s stance regarding inclusion of the expenditures in questions in tax deductible expenses on the day when they are incurred (they are related to mining of the seam and simultaneous generation of revenues). In connection with the above, this risk has been eliminated.
57 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
3. FINANCIAL AND PROPERTY STANDING OF THE GROUP
Table 15.Summary of key Group data in 2011-2014 (financial data are presented in a 4-year period due to the limited comparability of data prior to JSW’s IPO, i.e. prior to 2011)
GROWTH Item Unit 2014(1) 2013 2012 2011 RATE 2013=100 CONSOLIDATED STATEMENT OF FINANCIAL POSITION PLN Total assets 15,369.3 13,862.0 14,067.1 13,617.0 110.9 million PLN Non-current assets 13,085.9 10,300.0 9,792.0 8,873.6 127.0 million PLN Current assets 2,283.4 3,562.0 4,275.1 4,743.4 64.1 million PLN Equity 7,267.5 8,351.6 8,573.9 8,443.4 87.0 million PLN Liabilities 8,101.8 5,510.4 5,493.2 5,173.6 147.0 million CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME PLN Sales revenues 6,814.9 7,632.2 8,821.0 9,376.8 89.3 million PLN Gross profit (loss) on sales (4.7) 1,152.7 2,435.2 3,409.7 (0.4) million PLN Operating profit/(loss) (774.8) 201.9 1,308.2 2,708.5 (383.8) million PLN EBITDA 528.5 1,403.4 2,374.8 3,552.8 37.7 million EBITDA margin % 7.8 18.4 26.9 37.9 42.4 PLN Pre-tax profit/(loss) (882.2) 109.7 1,276.9 2,675.0 (804.2) million PLN Net profit/(loss) (657.1) 82.2 988.1 2,086.0 (799.4) million PLN Total comprehensive income (1,079.2) 84.4 798.5 2,105.5 (1,278.7) million CONSOLIDATED CASH FLOW STATEMENT PLN Net cash flow on operating activity 644.3 1,630.1 2,359.4 2,835.3 39.5 million PLN Net cash flow from investing activities (3,040.4) (804.2) (2,634.3) (1,667.2) 378.1 million PLN Net cash flow from financing activities 1,077.4 (280.5) (821.5) (436.9) (384.1) million PLN Change in net cash and cash equivalents (1,318.7) 545.4 (1,096.4) 731.2 (241.8) million FINANCIAL RATIOS(2) PLN/sha Dividend per share - 2.52 5.38 2.16 - re Current liquidity 0.58 1.59 1.97 2.09 36.5 Quick liquidity 0.45 1.35 1.60 1.77 33.3 Net return on sales % (9.6) 1.1 11.2 22.2 (872.7) Return on Assets (ROA) % (4.3) 0.6 7.0 15.3 (716.7) Return on Equity (ROE) % (9.0) 1.0 11.5 24.7 (900.0) Total debt ratio 0.53 0.40 0.39 0.38 132.5 Debt to equity ratio 1.11 0.66 0.64 0.61 168.2 Fixed capital to non-current assets ratio 0.81 1.06 1.13 1.20 76.4 PRODUCTION DATA million Coal production 13.9 13.6 13.5 12.6 102.2 tons
58 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
GROWTH Item Unit 2014(1) 2013 2012 2011 RATE 2013=100 million Coking coal production 9.9 9.8 9.5 8.8 101.0 tons million Steam coal production 4.0 3.8 4.0 3.8 105.3 tons Mining cash cost(3) PLN/ton 353.22 334.25 348.09 368.84 105.7 Cash conversion cost(3) PLN/ton 151.85 148.01 151.77 138.46 102.6 OTHER DATA PLN/sha Stock price at the end of the period 16.25 53.13 92.40 84.10 30.6 re Headcount at the end of the period persons 34,120 29,167 29,718 29,790 117.0 Average headcount during the year persons 31,280 29,420 29,785 29,565 106.3 PLN Investments in non-current assets 1,685.5 1,757.8 1,816.7 1,478.6 95.9 million PLN Depreciation and amortization 1,303.3 1,201.5 1,066.6 844.3 108.5 million
(1) Including KWK Knurów-Szczygłowice, as of 1 August 2014, (2) The methodology for calculating indicators is presented in Item 3.4. of this report, (3) Mining cash cost has been recalculated according to the methodology modified in 2013, years 2011 and 2012 were adjusted accordingly.
59 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
3.1. DISCUSSION OF ECONOMIC AND FINANCIAL FIGURES
The following financial data and the resulting ratios were presented on the basis of the Consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. The tables show data for the years 2011- 2014, i.e. from the moment of the Parent Company going public.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Graph 17. Structure of non-current and current assets in the total assets 15,369.3 16 000 13,617.0 14,067.1 13,862.0 2 283,4 14 000 4 275,1 4 743,4 3 562,0 12 000 13 085,9
10 000 10 300,0 9 792,0 8 000 8 873,6 6 000
4 000
2 000
0 31.12.2011 31.12.2012 31.12.2013 31.12.2014
NON-CURRENT ASSETS CURRENT ASSETS Table 16. Property standing
31 December 31 December Growth rate Item 31.12.2012 31.12.2011 2014 2013 2013=100
Assets
Non-current assets
Property, plant and equipment 12,153.6 9,726.0 9,230.9 8,458.8 125.0
Intangible assets 156.2 77.9 77.3 64.9 200.5
Investment property 23.6 22.5 23.1 - 104.9
Investments in associates 1.7 12.9 10.8 9.1 13.2
Deferred income tax assets 436.9 173.5 184.2 101.6 251.8
Other long-term assets 313.9 287.2 265.7 239.2 109.3
Total non-current assets 13,085.9 10,300.0 9,792.0 8,873.6 127.0
Current assets
Inventories 538.2 540.9 806.1 739.7 99.5
Trade receivables and other receivables 1,008.2 937.8 1,020.4 1,363.2 107.5
Surplus of income tax paid 2.5 32.4 4.2 22.0 7.7
Derivatives 2.9 3.2 3.9 4.0 90.6
Investments in associates 10.9 - - - -
Other short-term financial assets 0.2 10.8 948.9 24.6 1.9
Cash and cash equivalents 720.5 2,036.9 1,490.7 2,589.0 35.4
2,283.4 3,562.0 4,274.2 4,742.5 64.1
Non-current assets available for sale - - 0.9 0.9 -
Total current assets 2,283.4 3,562.0 4,275.1 4,743.4 64.1
TOTAL ASSETS 15,369.3 13,862.0 14,067.1 13,617.0 110.9
60 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
The increase of the Group’s assets at the end of 2014 in relation to 2013 results mainly from inclusion into the Parent Company’s structure of KWK Knurów-Szczygłowice, which includes tangible and intangible components used to extract black coal in the KWK Knurów-Szczygłowice mining plant. A settlement of the acquisition transaction is presented in Note 26 of the Consolidated financial statements of Jastrzębska Spółka Węglowa S.A. for the financial year ended 31 December 2014.
Fixed asset change factors (increase by PLN 2,785.9 million)
The biggest non-current assets line item was property, plant and equipment which, as at the end of 2014, accounted for 92.9% of fixed assets. Its value increased during the year by PLN 2,427.6 million (25.0%), mainly as a result of acquisition of KWK Knurów- Szczygłowice (PLN 2,213.1 million) and execution of the investment program. In 2014 the Group incurred expenditures for property, plant and equipment in the amount of PLN 1,685.5 million (2013: PLN 1,757.8 million), with depreciation of PLN 1,303.3 million (2013: PLN 1,201.5 million).
Pursuant to IAS 36 Impairment of Assets, the Group determined for each asset whether there are any circumstances (pre-requisites) evidencing impairment of any asset as at the balance sheet date (31 December of the year). If such evidence is found, the Group is obligated to measure the recoverable amount of the asset. Considering: the oversupply of steam coal on the Polish market and a decline in its prices compared to 2013, the necessity to incur capital expenditures to maintain current production with limited financial resources, talks with the trade unions concerning the personnel costs incurred by JSW, the Management Board of JSW decided to carry out the test for JSW plants. A discount rate of 6.57% was used for the test. As a result of the test, the Management Board made a decision to recognize a revaluation charge of PLN 224.2 million for property, plant and equipment of KWK Krupiński. The charge is related to the Coal segment and has been recognized in other costs in the statement of profit or loss and other comprehensive income.
As at 31 December 2014, deferred income tax assets increased by PLN 263.4 million, from PLN 173.5 million at the end of 2013 to PLN 436.9 million at the end of 2014, which was related to the negative level of total comprehensive income, which amounted to PLN (1,088.0) million.
During the 12 months of 2014, other long-term assets increased by PLN 26.7 million, or 9.3%, as a result of increase of the funds to finance the decommissioning of a mining plant. The Parent Company is obligated to accumulate funds which may be expended solely and exclusively to finance a total or partial decommissioning of a mining plant
After the end of the reporting period, on 3 February 2015, the JSW Management Board made a decision to sell, by verbal tender, the Parent Company’s real estate in the form of a property developed with a building of the “Różany Gaj” hotel with equipment.
Current asset change factors (decrease by PLN 1,278.6 million)
The biggest element of current assets (44.2%) is trade receivables and other receivables; their balance increased by PLN 70.4 million, i.e. 7.5%. Cash and cash equivalents at the end of 2014 amounted to PLN 720.5 million and were lower by PLN 1,316.4 million (64.6%) than at the end of 2013. The decrease of cash and cash equivalents was associated with investing cash in the execution of the Group’s investment program and acquisition of KWK Knurów-Szczygłowice.
The share of inventories in current assets amounts to 23.6%. The value of inventories was PLN 538.2 million, i.e. 0.5% less than at the end of 2013.
Graph 18. Structure of inventories as at 31 December 2014
PRODUCTION IN MATERIALS PROGRESS 12.4% 1,4%
MERCHANDISE 1.4%
FINISHED PRODUCTS 84,8%
61 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
In connection with the acquisition of KWK Knurów-Szczygłowice, as at 1 August 2014, JSW has purchased an inventory worth PLN 35.9 million (including 136 thousand tons of coking and steam coal which, for record-keeping purposes, was measured at market prices at PLN 28.0 million). The value of inventories at the end of the reporting period included the inventories of KWK Knurów-Szczygłowice.
In addition, in accordance with the provisions of the Agreement of 10 April 2014 to sell inventories of Kompania Węglowa S.A., JSW should purchase coal inventories and inventories of sludge deposits located in the area of KWK Knurów-Szczygłowice, which are owned by Kompania Węglowa S.A. and are not covered by the KWK Knurów-Szczygłowice acquisition agreement, in 15 equal installments, from January 2015, which was described as a Material off-balance sheet item in this report.
Graph 19. Structure of equity and liabilities
15,369.3 16 000 13,617.0 14,067.1 13,862.0 8 101,8 14 000 5 493,2 5 173,6 5 510,4 12 000
10 000
8 000 8 443,4 8 573,9 8 351,6 6 000 7 267,5
4 000 2 000
0 31.12.2011 31.12.2012 31.12.2013 31.12.2014 EQUITY LIABILITIES
Table 17.Sources of covering the assets
31 December 31 December Growth rate Item 31.12.2012 31.12.2011 2014 2013 2013=100
Equity
Equity attributable to the Parent Company’s shareholders
Share capital 1,251.9 1,251.9 1,251.9 1,260.9 100.0
Share premium account 905.0 905.0 905.0 905.0 100.0
Capital on revaluation of financial instruments (56.8) - - - -
Retained earnings 5,012.2 6,028.1 6,245.6 6,070.4 83.1
7,112.3 8,185.0 8,402.5 8,236.3 86.9
Non-controlling interest 155.2 166.6 171.4 207.1 93.2
Total equity 7,267.5 8,351.6 8,573.9 8,443.4 87.0
Liabilities
Long-term liabilities
Loans and borrowings 105.3 184.8 189.9 241.2 57.0
Liabilities under debt securities issued 36.9 - - - -
Derivatives 0.3 - - - -
Deferred income tax liabilities 42.1 47.2 47.4 - 89.2
Employee benefit liabilities 2,803.9 2,078.8 2,084.7 1,774.3 134.9
Provisions 700.2 488.7 502.9 436.6 143.3
Trade liabilities and other liabilities 298.6 223.1 211.2 208.0 133.8
62 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
31 December 31 December Growth rate Item 31.12.2012 31.12.2011 2014 2013 2013=100
Total long-term liabilities 3,987.3 3,022.6 3,036.1 2,660.1 131.9
Current liabilities
Loans and borrowings 100.5 81.0 75.7 187.6 124.1
Liabilities under debt securities issued 1,272.2 51.3 - - 2,479.9
Derivatives 15.0 - 0.3 0.1 -
Current income tax liabilities 1.7 3.5 40.4 3.6 48.6
Employee benefit liabilities 306.6 288.3 269.7 239.7 106.3
Provisions 208.4 251.1 286.7 246.4 83.0
Trade liabilities and other liabilities 2,210.1 1,812.6 1,784.3 1,836.1 121.9
Total short-term liabilities 4,114.5 2,487.8 2,457.1 2,513.5 165.4
Total liabilities 8,101.8 5,510.4 5,493.2 5,173.6 147.0
TOTAL EQUITY AND LIABILITIES 15,369.3 13,862.0 14,067.1 13,617.0 110.9
Equity change factors (decrease by PLN 1,084.1 million)
Increase of total equity by 13.0% was associated primarily with the decrease of the retained earnings item – PLN 1,015.9 million, in relation to the end of 31 December 2013, which resulted directly from the net loss incurred for this period in the amount of PLN (659.1) million and recognition of an actuarial loss in other comprehensive income (after taking into account income tax: PLN 365.3 million). In addition, in 2014 the Group recognized in the statement of financial position the capital on revaluation of financial instruments in the amount of PLN (56.8) million, including the valuation of hedging instruments which meet the hedge accounting criteria. FX forward derivative transactions with maturities exceeding six months were designated for hedge accounting. Moreover the Group designated USD-denominated bonds as the instrument to hedge future cash flows.
Liability change factors (increase by PLN 2,591.4 million)
As at the end of 2014, liabilities constituted 52.7% of total equity and liabilities, compared to 39.8% as at the end of 2013. The main change pertains to short-term liabilities which increased as at the end of 2014 by PLN 1,626.7 million, primarily as a result of recognition of liabilities on the issue of debt securities - bonds (PLN 1,272.2 million). An increase was also recorded in the items of trade liabilities and other liabilities (by PLN 397.5 million). The level of long-term liabilities increased by PLN 964.7 million, mainly as a result of increase in employee benefit liabilities by PLN 725.1 million, and in provisions by PLN 211.5 million. Long-term liabilities in 2013 also recognized the liability on the issue of SEJ’s debt securities in the amount of PLN 36.9 million.
The main movements in liabilities pertained to:
. liabilities on the issue of debt securities in the amount of PLN 1,257.8 million, which is described in greater detail under Items 2.8 and 2.9 of this report;
. liabilities for employee benefits, which increased by PLN 743.4 million, including the free coal allowance for old age and disability pensioners by PLN 532.3 million, jubilee awards by PLN 90.1 million and write-offs for the Company Social Benefit Fund for old-age and disability pensioners by PLN 88.0 million. It should be noted that as a result of changes in interest rates introduced by the Monetary Policy Council in 2014, the discount rate used to calculate the employee benefit provisions as at 31 December 2014 changed. As a result of these changes the amount of the provisions for employee benefits in the Group increased by PLN 488.4 m (actuarial losses). This increase of the provisions (actuarial losses) was reflected in the current result (loss before tax) in the amount of PLN 37.4 million, and the amount of PLN 451.0 million was charged to other comprehensive income. The increase of liabilities for employee benefits was also affected by inclusion of KWK Knurów- Szczygłowice into JSW’s structures (the amount of taken over employee benefit liabilities as at the date of acquisition of KWK Knurów-Szczygłowice was PLN 237.1 million);
. trade liabilities and other liabilities, which increased by PLN 473.0 million. The change resulted from the growth in trade liabilities by PLN 239.2 million (including the effect of extension of payment dates and increase o purchases in connection
63 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
with the acquisition of KWK Knurów-Szczygłowice), financial lease liabilities by PLN 96.1 million (including liabilities taken over in connection with the acquisition of KWK Knurów-Szczygłowice), which as at the date of acquisition amounted to PLN 53.2 million and as at 31 December 2014, to PLN 45.2 million), payroll liabilities by PLN 55.5 million and social security and other tax liabilities by PLN 42.0 million;
. increase of provisions by PLN 168.8 million, which was associated largely with the acquisition of KWK Knurów-Szczygłowice and recognition, by the Parent Company, of provisions for mining damage, decommissioning of a mining plant and biological reclamation of a waste landfill in the total amount of PLN 169.6 million.
STRUCTURE OF ASSETS AND LIABILITIES AND LIQUIDITY OF JSW
2014 saw very important changes in the Group’s assets and capital structure, i.e. significant decrease of cash and cash equivalents, with simultaneous significant increase of short-term liabilities.
Graph 20. Cash flows (in PLN millions)
3 000,0 644,3 (1,554.3)
2 500,0 2 036,9 2 000,0
1 500,0 (1,490.0) 1,249.2 (169.5) 1 000,0 720,5
500,0
0,0 3.9
( 500,0)
(1 000,0) Cash as at Operating Acquisition of property, Acquisition of the Other cash flow Debt securities Other cash flow Cash as at 1 January 2014 activity plant and equipment Knurów-Szczygłowice on investing activity issued on financing activity 31 December 2014 mine and exchange differences
The Parent Company incurred debt in the form of a bond issue for the total amount of PLN 1.2 billion earmarked for financing the acquisition of KWK Knurów-Szczygłowice. According to the bond redemption mechanism, the bonds will be redeemed in semi-annual periods, starting from 30 December 2016. The final maturity is 31 December 2020. Since the Bondholders have the right to request early redemption of the bonds, the liability under the debt securities issued is presented as a short-term liability, as a result of which the most liquid assets do not cover liabilities with short maturities. In order to minimize the risk of the debt securities becoming due and payable in the short term, the Parent Company has taken steps to defer its obligation to Bondholders, under which they may demand early repayment.
Table 18. Net cash flows in 2011-2014
Growth rate Item 2014 2013 2012 2011 2013=100
Net cash flow on operating activity 644.3 1,630.1 2,359.4 2,835.3 39.5
Net cash flow from investing activities (3,040.4) (804.2) (2,634.3) (1,667.2) (178.1)
including acquisition of KWK Knurów-Szczygłowice (1,490.0) - - - -
64 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Growth rate Item 2014 2013 2012 2011 2013=100
Net cash flow from financing activities 1,077.4 (280.5) (821.5) (436.9) 584.1
including debt securities issued 1,249.2 51.0 - - 2,449.4
Change in net cash and cash equivalents (1,318.7) 545.4 (1,096.4) 731.2 (241.8)
Cash flow on operating activity
The positive cash flows from operating activities generated in 2014 in the amount of PLN 644.3 million did not cover capital expenditures, including mainly expenditures for purchase of property, plant and equipment in the amount of PLN 1,554.3 million for the acquisition of KWK Knurów-Szczygłowice in the amount of PLN 1,490.0 million. The cash from operating activities in relation to 2013 was negatively impacted mainly by the loss before tax in the amount of PLN (882.2) million, which takes into account the gain on bargain purchase (in the amount of PLN 306.2 million, resulting from settlement of the acquisition transaction of KWK Knurów-Szczygłowice and ZOD), change in the balance of trade receivables and other receivables (in the amount of PLN 73.5 million) and change in the balance of provisions (in the amount of PLN 68.0 million). The exact impact of changes in the above items is presented in Note 35 of the Consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
Cash flow on investing activity
In 2014, cash used in investing activities was PLN 3,040.4 million and was PLN 2,236.2 million higher compared to 2013.
The change pertained primarily to recognition of the expenditures for acquisition of property, plant and equipment in the amount of PLN 1,782.8 million in 2013 and expenditures for the purchase of KWK Knurów-Szczygłowice in the amount of PLN 1,490.0 million. The lower level of expenditures for purchase of property, plant and equipment in the amount is a result of the Adjustment Measures Program aimed at adjusting the Group to the current market situation and the need to protect the Group’s liquidity.
Cash flow on financing activity
In 2014 net cash flow on financing activity was PLN 1,077.4 million compared to PLN (280.5) million of cash flows incurred in 2013. The difference is due to the recognition in 2014 of the issue of debt securities in the amount of PLN 1,249.2 million earmarked primarily for purchase of KWK Knurów-Szczygłowice, and distribution of dividend to the Parent Company’s shareholders in 2013 in the amount of PLN 295.8 million.
As a result of the above described events, the balance of cash and cash equivalents 2014 amounted to PLN 720.5 million, and was PLN 1,316.4 million lower than at the end of 2013, while the net change of cash and cash equivalents during the year was PLN (1,318.7) million.
MANAGEMENT OF FINANCIAL RESOURCES
The Group manages its financial resources both at the level of individual companies and at the consolidated level. The management process is systematized by the JSW Group Liquidity management policy approved in 2014 together with a procedure, where one of the overriding principles is to keep the appropriate level of available resources for service of current payments.
In connection with the difficult market situation, negative cash flows on the Group’s operations, including high capital expenditures, reduced availability of additional long-term financing sources, the risk of the Group losing the capacity to pay its liabilities in 2014 has increased significantly. If the scenario of difficult market conditions and the absence of additional external funding does materialize then it will result in elevated probability of losing liquidity. In order to mitigate this risk, the Group has taken action to obtain additional funding and at the same time cut its expenses. In addition, the Group has undertaken numerous cost-saving initiatives aimed at improving the capacity to pay its liabilities.
The Zero-Balance Cash Pooling (“ZBCP”) service implemented in 2013 is a key element supporting effective cash management. The legal basis for cash transfers between Group companies is the institution of debt conversion as a result of which the rights of the satisfied creditor are assumed (pursuant to Article 518 § 1 item 3 of the Polish Civil Code). The objective of the service is first of all improvement
65 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
of financial liquidity of the Group companies and optimization of financial income and costs. Due to the service, the Group companies having short-term cash shortages use cash of companies having cash surpluses, without the need to apply for external financing.
MATERIAL OFF-BALANCE SHEET ITEMS
Contingent items are presented in Note 39 to the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. The extent of performance of contingent items pertaining to investment liabilities, employment guarantees and contingent liabilities associated with the acquisition of KWK Knurów-Szczygłowice, are presented below.
Agreement on the acquisition of PGWiR shares by JSW
In the agreement of 7 December 2010 on the acquisition of a 90.59% stake in PGWiR from the State Treasury, JSW undertook to procure, within a period not longer than 5 years from the date of the agreement, that PGWiR acquires property, plant and equipment of a total value as at the acquisition date of not less than PLN 20.0 million and to make an in-kind contribution of property, plant and equipment used by PGWiR as at the date of the agreement under lease agreements concluded with JSW acting as the lessor, in the amount of at least PLN 12.0 million. As at 31 December 2014, PLN 21.0 million had been expended for the purchase of property, plant and equipment, which represented 105.0% of the total commitment amount. Additionally, as at 31 December 2014, JSW increased the share capital of PGWiR by making an in-kind contribution of property, plant and equipment used by PGWiR as at the date of the aforementioned agreement, in the amount of PLN 19.2 million, which represented 160.1% of the share capital increase (taking into account only a portion of the contribution-in-kind worth PLN 8.3 million under the capital increase, which has not yet been registered)
Agreement on the purchase of PEC shares by SEJ
On 29 September 2011, the State Treasury Minister signed an agreement to sell an 85% stake in PEC to SEJ. Based on the agreement, SEJ accepted an unconditional obligation to procure and ensure that, by 31 December 2014, PEC acquires property, plant and equipment components for the overall amount of PLN 71.7 million. Under the corporate guarantee agreement, JSW undertook to secure the funding for SEJ to make the expenditures required due to the acquisition of PEC. On 30 December 2013, SEJ concluded with the State Treasury an annex to the above agreement, under which the settlement of investments guaranteed in PEC was changed, from project-and-amount-based to amount-based only. In 2014, PLN 29.3 million was expended for the purchase of property, plant and equipment, which represented 40.9% of the total commitment amount mentioned above (the State Treasury Ministry classified PEC’s investment in property, plant and equipment in the amount of PLN 38.6 million in 2013 and of PLN 4.5 million in 2012). Currently, PEC has sent its 2014 operational reports reviewed by a chartered auditor to the State Treasury Ministry for approval and begins the preparation of an investment report covering the period from 20 December 2011 to 31 December 2014 in which it will present the overall amount of investments in property, plant and equipment of PLN 79.6 million (this amount also includes investments made in 2012, which will be settled in the combined report in the amount of PLN 7.2 million).
Agreement on the purchase of WZK Victoria shares by JSW
On 5 October 2011, JSW and the State Treasury concluded an agreement on the sale of 399,500 shares constituting 85% of the share capital of WZK Victoria seated in Wałbrzych for PLN 413.9 million. As a result of the aforementioned agreement, an investment commitment was made, under which the Buyer (JSW) undertakes to procure that within 60 months of the Transaction Closing (19 December 2011), WZK Victoria will make investments in the amount of at least PLN 220.0 million. JSW also took upon itself other commitments concerning the continuation of operations conducted by WZK Victoria, restrictions on selling shares, ensuring participation of the Seller’s representative in the Company’s Supervisory Board and presentation of reports on the fulfillment of these commitments to the Seller. To secure the commitments, JSW submitted a Statement of submitting to enforcement up to the amount not exceeding PLN 300.0 million. As at 31 December 2014, PLN 84.5 million had been expended, which represented 38.4% of the mentioned total commitment amount. Other commitments have been fulfilled in their entirety.
Guarantee of employment
As a result of discussions conducted with the social side in the Voivodship Social Dialog Commission pertaining to, among others, guarantee of employment and matters associated with the public offering, on 5 May 2011, the Management Board of the Parent Company signed and the unions operating in JSW initialed a memorandum of understanding with the Management Board ("Memorandum of Understanding"). In the Memorandum of Understanding, the parties agreed among others that by principle the
66 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
employment guarantee period for Parent Company employees is 10 years from the date the JSW's shares are made public. If JSW fails to observe the employment guarantee the Parent Company will be obligated to pay a compensation in the amount corresponding to the product of the average monthly salary in JSW in the year preceding the termination of the employment contract and the number of months remaining till the elapse of the employment guarantee (in the case of administration employees, no more than 60 times the average salary in the preceding year). The provisions relating to the employment guarantee came into force on the date the shares of JSW were made public on the Warsaw Stock Exchange.
According to the Agreement signed after the end of the reporting period, on 23 February 2015, between the JSW Management Board and the Trade Unions Protest and Strike Committee representing trade union organizations active in JSW, the employees of KWK Knurów-Szczygłowice working for the mine during the IPO of JSW will be covered by the employment guarantee on the same terms as the employees of JSW’s mines.
On 18 May 2011, KK Zabrze and JSW concluded a memorandum of understanding with the trade unions operating in KK Zabrze regarding the social guarantee package for KK Zabrze employees; its content with respect to employment guarantees is the same as the content of the Memorandum of Understanding agreed upon in JSW. The Parent Company appeared in the capacity of guarantor of the liabilities of KK Zabrze.
On 6 September 2011 the Parent Company concluded a memorandum of understanding with the trade unions operating in WZK Victoria regarding the social package for WZK Victoria employees, including among others the guarantee of employment in the company for 7 years from the effective date of the WZK Victoria share purchase agreement.
Contingent liabilities associated with the acquisition of KWK Knurów-Szczygłowice
In connection with the acquisition of KWK Knurów-Szczygłowice, the Parent Company has joint and several and subsidiary liability for the liabilities of Kompania Węglowa S.A. resulting from or associated with the management of KWK Knurów-Szczygłowice up to the acquisition date (inclusive): . to business partners supplying and providing services to KWK Knurów-Szczygłowice - the liabilities as at the mine acquisition date amounted to PLN 184.2 million, and as at 31 December 2014 to PLN 2.1 million, . on account of property tax on underground mine workings, limited to the amounts specified in certificates of the seller’s overdue liabilities - the liabilities amount to PLN 108.6 million.
In connection with the transaction of acquisition of KWK Knurów-Szczygłowice from Kompania Węglowa S.A., there are also theoretical prerequisites for JSW’s potential subsidiary liability for Kompania Węglowa S.A.’s debt shown in the certificate of the seller’s overdue liabilities to ZUS on account of social security contributions. In the Certificate, ZUS stated that as at 2 July 2014, i.e. on the date of the certificate, Kompania Węglowa S.A. had no overdue liabilities to ZUS. At the same time, in item 5 of the certificate, ZUS disclosed liability of Kompania Węglowa S.A. under an installment procedure under the Act of 7 September 2007 on the Functioning of the Hard Coal Mining Industry in 2008-2015 in the amount of PLN 252.5 million. According to legal opinions held by the company, such a disclosure in a certificate (in most court judgments) should be treated as an overdue amount, but only in respect to social security contributions in the part financed by the Payer. JSW has obtained a confirmation from ZUS that contributions and interest accruing as at the effective date of the act in this respect are PLN 94.9 million.
Accordingly in order to eliminate the risk of financial losses as much as possible after the subsidiary liability is materialized, JSW made the payment of the last installment of the purchase price conditional upon Kompania Węglowa S.A. establishing collateral in the form of registered pledge on its financial non-current assets, i.e. 100% of shares in Nadwiślańska Agencja Turystyczna Sp. z o.o. in Tychy. This pledge was registered in favor of JSW on 1 December 2014 by decision of the District Court in Katowice, IX Economic Division - Pledge Register, up to PLN 99.99 million. Upon signing of the agreement, the value of the shares was greater than the potential liability to ZUS.
Acquisition of inventories of Kompania Węglowa S.A. located in KWK Knurów-Szczygłowice
Pursuant to the agreement of 10 April 2014 to sell inventories of Kompania Węglowa S.A., JSW undertook to purchase inventories of:
. coal owned by Kompania Węglowa S.A. and not covered by the KWK Knurów-Szczygłowice acquisition agreement and located in the area of KWK Knurów-Szczygłowice on the date of the transaction, according to agreed prices. The coal is to be purchased in 15 equal installments, starting in January 2015, while Kompania Węglowa S.A. may also in parallel sell this coal. As at the date of purchase of KWK Knurów-Szczygłowice, there was about 1.48 million tons of coal worth PLN 179.1 million
67 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
in the area of KWK Knurów-Szczygłowice; as at 31 December 2014, these amounts decreased to 1.42 million tons, by PLN 167.2 million. On 16 December 2014, Kompania Węglowa S.A. informed JSW about concluding a sale of steam fine coal stored on the KWK Knurów-Szczygłowice storage yards; about 652.6 thousand tons was to be sold (that is about 46% of all the coal stored as at 31 December 2014) and gradually released to the buyer. Consequently, JSW’s obligation under the coal purchase agreement has been reduced.
. sludge – according to the rules agreed on the basis of the measurements, JSW should purchase 0.5 million tons sludge worth PLN 10.6 million and it should receive the remaining 2.1 million tons without payment. Out of the 17 facilities with sludge deposits, inventories in 14 sedimentation tanks have been agreed upon between the parties, while for 3 other facilities, the contents of the tanks is subject to repeated quality and quantity measurements to finalize the consultations between Kompania Węglowa S.A. and JSW.
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
The table below presents line items from the Group's consolidated statement of financial result and other comprehensive income for 2014. These items and the resulting growth figures are quoted in accordance with the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014. The presented data include also the results of KWK Knurów-Szczygłowice until the incorporation of the mine into JSW’s structures.
Table 19.Consolidated statement of profit or loss and other comprehensive income
2011 Growth rate Item 2014 2013 2012 (pro forma) 2013=100
Sales revenues 6,814.9 7,632.2 8,821.0 9,376.8 89.3
Cost of products, materials and merchandise sold (6,819.6) (6,479.5) (6,385.8) (5,967.1) 105.2
Gross profit/(loss) on sales (4.7) 1,152.7 2,435.2 3,409.7 (0.4)
Selling expenses (362.4) (398.6) (361.9) (272.2) 90.9
Administrative expenses (610.8) (598.1) (662.5) (508.9) 102.1
Employee share ownership plan - - - (293.0) -
Other income 160.3 134.6 53.5 49.4 119.1
Disputed property tax on underground mine workings - - (48.5) 359.7 -
Profit on bargain purchase 306.2 - - - -
Other costs (262.4) (100.7) (111.5) (48.8) 260.6
Other net profits/(losses) (1.0) 12.0 3.9 12.6 (8.3)
Operating profit/(loss) (774.8) 201.9 1,308.2 2,708.5 (383.8)
Financial income 49.2 41.5 119.8 118.1 118.6
Financial expenses (157.0) (136.4) (153.1) (152.7) 115.1
Share in profits of associated entities 0.4 2.7 2.0 1.1 14.8
Pre-tax profit/(loss) (882.2) 109.7 1,276.9 2,675.0 (804.2)
Income tax 225.1 (27.5) (288.8) (589.0) (818.5)
Net profit/(loss) (657.1) 82.2 988.1 2,086.0 (799.4)
Other comprehensive income that will be reclassified to net result (56.8) - - - -
Change in the value of hedges (70.1) - - - -
Income tax 13.3 - - - - Other comprehensive income that will not be reclassified to profit (365.3) 2.2 (189.6) 19.5 (16,604.5) or loss
68 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
2011 Growth rate Item 2014 2013 2012 (pro forma) 2013=100
Actuarial profit/(loss) (451.0) 2.7 (234.0) 24.1 (16,703.7)
Income tax 85.7 (0.5) 44.4 (4.6) 17,140.0
Total other comprehensive income (422.1) 2.2 (189.6) 19.5 (19,186.4)
Total comprehensive income (1,079.2) 84.4 798.5 2,105.5 (1,278.7)
Net profit/(loss) attributable to:
- shareholders of the Parent Company (659.1) 77.3 985.1 2,067.1 (852.7)
- non-controlling interest 2.0 4.9 3.0 18.9 40.8
Total comprehensive income attributable to:
- shareholders of the Parent Company (1,080.9) 79.3 795.7 2,086.6 (1,363.1)
- non-controlling interest 1.7 5.1 2.8 18.9 33.3 Basic and diluted earnings/(loss) per share attributable to shareholders of the Parent Company (5.61) 0.66 8.35 18.25 (850.0) (in PLN per share)
Sales revenues in 2014 were PLN 6,814.9 million and were PLN 817.3 million lower than in 2013. Revenues on coal sales, which in 2014 accounted for 43.6% of total revenues, stood at PLN 2,972.3 million, i.e. were PLN 586.7 million lower than in 2013. Revenues on coke and hydrocarbons sales in 2014 were PLN 3,489.2 million and were PLN 215.1 million lower than in 2013. In both cases lower revenues are the outcome of lower sales prices for the products offered by the Group and lower coal sales volume in 2014.
The volume of coal sales by the Group in 2014 decreased by 0.4 million tons, i.e. 4.3%, along with a lower selling price by an average of 12.4% (decrease from 386.77 PLN/ton to 338.95 PLN/ton). As part of the external coal sales, a drop in sales of coking coal was recorded by 0.1 million tons compared to H1 2013 (the Group’s hard coking coal accounted for 74.0% of external supplies of coking coal, the remaining 26% was semi-soft coal) and decrease of steam coal sales by 0.3 million tons. The volume of coke sales in 2014 dropped by 0.3 million tons, along with a 11.9% decrease in the average selling price compared to 2013.
In 2014, costs of products, materials and merchandise sold increased by PLN 340.1 million, which is attributable to the acquisition of KWK Knurów-Szczygłowice. Gross loss on sales in 2014 was PLN 4.7 million, compared to the profit of PLN 1,152.7 million recorded in 2013.
In 2014, the total selling and distribution expenses, where the costs of transportation services were the biggest item, amounted to PLN 362.4 million, up by PLN 36.2 million from the year before. The decrease in selling expenses resulted primarily from lower sales volumes of coal and coke.
Administrative expenses encompassing costs associated with execution of management and administrative functions in 2014 were PLN 610.8 million which represents a PLN 12.7 million growth as compared to 2013. The main factor impacting the increase of these costs was the recognition of the civil law transactions tax on the purchase of KWK Knurów-Szczygłowice in the amount of PLN 45.1 million (despite reversal of the provision for the property tax on underground workings (PLN -32.6 million).
Other revenues in 2014 were PLN 160.3 million which represents PLN 25.7 million growth as compared to the amount of PLN 134.6 million recorded in 2013, which is attributable mainly to: indemnification received (PLN +28.0 million), reversal of the revaluation charge for the receivables pertaining to the property tax (PLN +13.0 million), written off liabilities (PLN +32.1 million).
In 2014 the Group recognized a bargain purchase gain of PLN 306.2 million in conjunction with the acquisition of KWK Knurów- Szczygłowice and ZOD in the statement of profit or loss and other comprehensive income. A settlement of the transaction is presented in Note 26 of the Consolidated financial statements of Jastrzębska Spółka Węglowa S.A. for the financial year ended 31 December 2014.
Other costs in the analyzed period amounted to PLN 262.4 million and were PLN 161.7 million higher than in 2013, mainly due to recognizing a revaluation charge for part of KWK Krupiński's property, plant and equipment in the amount of PLN 224.2 million, as a result of impairments tests carried out for the Parent Company’s coal mining plants.
69 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Other net profits/(losses) in 2014 were PLN (1.0) million and were PLN 11.0 million lower than in 2013. including inter alia, due to recognition of the loss on the sale of property, plant and equipment (PLN 6.0 million higher than in 2013) and profits on financial derivative instruments which were PLN 5.1 million lower.
In 2014, operating loss was PLN (774.8) million compared to PLN 201.9 million operating profit in 2013, down by PLN 976.7 million.
Financial income in 2014 amounted to PLN 49.2 million and was PLN 7.7 million higher than in 2013. The increase of financial income was attributable mainly to revaluation of interest on liabilities for disputed property tax in the amount of PLN 12.8 million. Financial expenses were at a level of PLN 157.0 million, and their level was higher than in 2013 by PLN 20.6 million, primarily due to recognition of interest on bonds in the amount of PLN 27.3 million.
As a result of aforedescribed factors, pre-tax loss for 2014 amounted to PLN (882.2) million compared to the profit generated in 2013 in the amount of PLN 109.7 million. After income tax in the amount of PLN 225.1 million, the net loss for 2014 was PLN (657.1) million, compared to PLN 82.2 million profit recorded in 2013.
In 2014, actuarial losses on liabilities of defined employee benefits, resulting from a change to the assumptions (mainly change of the discount rate used for calculation of provisions for employee benefits as a result of change of the interest rates made by the Monetary Policy Council in 2014) in the amount of PLN (451.0) million, and deferred tax in the amount of PLN 85.7 million, and the loss on valuation of hedging instruments in the amount of PLN (70.1) million together with deferred tax in the amount of PLN 13.3 million, were recognized in other comprehensive income. As a result, total comprehensive income amounted to PLN (1,079.2) million.
Table 20.Costs by nature
2011 Growth rate Item 2014 2013 2012 (pro forma) 2013=100
Depreciation and amortization 1,303.3 1,201.5 1,066.6 844.3 108.5
Consumption of materials and energy 1,464.4 1,321.2 1,661.4 1,399.2 110.8
External services 1,622.0 1,546.2 1,542.8 1,410.1 104.9
Employee benefits 3,643.4 3,459.1 3,562.6 3,194.2 105.3
Employee share ownership plan - - - 293.0 -
Taxes and fees 211.7 205.0 203.9 228.0 103.3
Other costs by nature 38.3 53.3 65.5 13.0 71.9
Cost of materials and merchandise sold 67.2 77.7 121.4 203.7 86.5
Total costs by nature 8,350.3 7,864.0 8,224.2 7,585.5 106.2
Selling expenses (362.4) (398.6) (361.9) (272.2) 90.9
Administrative expenses (610.8) (598.1) (662.5) (508.9) 102.1
Disputed property tax on underground mine workings - - (36.6) - -
Employee share ownership plan - - - (293.0) - Cost of performances and property, plant and equipment produced (533.6) (633.3) (644.3) (468.4) 84.3 for own use and expensable mining pits Change in products (23.9) 245.5 (133.1) (75.9) (9.7)
Cost of products, materials and merchandise sold 6,819.6 6,479.5 6,385.8 5,967.1 105.2
The expenditures incurred by the Group in 2014 on operating activity amounted to PLN 8,350.3 million, compared to PLN 7,864.0 million incurred in 2013. The increased costs are attributable mainly to inclusion of KWK Knurów-Szczygłowice into the Parent Company’s structures as of 1 August 2014. Inclusion of KWK Knurów-Szczygłowice increased JSW’s operating expenses in 2014 by PLN 527.6 million (KWK Knurów-Szczygłowice’s costs by nature constitute 5.4% of JSW’s costs by nature).
70 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
The biggest changes in the operating expenses (including KWK Knurów-Szczygłowice) occurred in the following line items:
. employee benefits, which increased by PLN 184.3 million, mainly as a result of recognizing, in 2014 costs, employee salaries at KWK Knurów-Szczygłowice as of 1 August 2014. As at the end of the reporting period, the Group’s headcount stood at 34,120 persons, out of which 5,456 persons were employees of KWK Knurów-Szczygłowice.
. The costs of consumption of materials and energy increased in total by PLN 143.2 million, out of which, consumption of materials increased by PLN 106.0 million (as a result of recognition of the costs of KWK Knurów-Szczygłowice and higher volume of coal purchased outside the Group for production of coke by Polski Coke and JSW by PLN 49.4 million) and consumption of energy increased by PLN 37.2 million (which is attributable mainly to increased coal production in 2014 by 0.3 million tons).
. Amortization increased by PLN 101.8 million, driven by the implementation the Group’s investment program. In addition, the increase of amortization costs was affected by increased amortization resulting from capitalization of expensable mining pits - in 2014 in relation to 2013, without KWK Knurów-Szczygłowice, it was higher by PLN 18.3 million. It resulted primarily of the higher settlement ratio which, in 2014, amounted to 37.62 PLN/ton and was higher than in the corresponding period of 2013 by 5.07 PLN/ton. The increase of settled costs pertained to KWK Borynia-Zofiówka-Jastrzębie and KWK Pniówek.
. Costs of external services increased by PLN 75.8 million, mainly as a result of inclusion of the new mine whose costs in this respect in the period from 1 August to 31 December amounted to PLN 90.0 million.
After adjusting the Group’s costs by nature by selling and distribution expenses, administrative expenses and the cost of performances and property, plant and equipment produced for own needs and underground mine workings, and a change in products, the resulting cost of products, materials and merchandise sold in 2014 was PLN 6,819.6 million, up by 5.2% from 2013.
3.2. EXTRAORDINARY FACTORS AND EVENTS INFLUENCING THE RESULT
The Group’s financial results for 2014 point to continuing unfavorable situation in the coal and coke market. The continuing economic slowdown, including lack of stability in the steel market, is reflected in the anticipated purchases of coke and coking coal. The significant decline of market prices of coke and coal directly affected the Group’s results.
The Group does not have influence on the prices of raw materials, so its competitiveness and long-term profitability depends on its flexibility in adaptation to the changing conditions.
EXTERNAL FACTORS
The Group’s financial results are mostly affected by the economic situation and macroeconomic trends. The main external factors exerting significant influence on the Group’s results include, inter alia: decrease of coal and coke prices in global markets and deterioration of the main macroeconomic factors. The uneven level of global GDP growth and global economic slowdown, in particular in Europe (where financial problems in the Eurozone and the overall economic situation in the world were and still are additional factors hindering crisis management), shaped the demand and supply in the coal, coke and steel market in 2014.
In addition to the above factors, the Group’s results in 2014 were impacted by the following external factors:
. historically low prices of raw materials for production of steel in the Asian market, including iron ore and coking coal, their overproduction and easy allocation due to very low marine freight rates, . drastically declining coal prices on industry markets, . exchange rate fluctuations (potential impact of changes of the EUR/PLN and USD/PLN exchange rates on net profit and impact of interest rate changes on net profit is presented in Note 38.1 to the Consolidated financial statements of Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014), . expansion of Chinese coke in the global market, with an export volume of 8.6 million tons in 2014 - the highest since 2008, and over 80% higher than in 2013, and return of Chinese coke to the Asian and South American markets, principally to India and Brazil. . the conflict in Ukraine and the ensuing changes to coal, coke and anthracite production in the region, . on-going shale revolution in the US and the resulting reduced domestic demand for coal and lower prices,
71 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. commissioning of a new coke battery in Hüttenwerke Krupp Mannesmann (“HKM”) with the capacity of 1.15 million tons p.a., and thus increase of HKM’s total coke production capacity to 2.3 million tons p.a. and surplus of coke in the amount of 500 thousand tons per annum.
INTERNAL FACTORS
The Group’s results in 2014 were impacted by the following internal factors:
. lower sales revenues due to lower sales prices for the Group’s core products, i.e. coke and coal, in relation to 2013, by 12.4% and 11.9%, respectively. . coal sales volume to external buyers 4.3% lower than in 2013, . the production volume in 2014 in the Group’s home mines was diversified; there were higher than in previous years difficulties associated with natural hazards and mining and geological conditions in the areas of operation and preparation for mining, of different severity, which prevented attainment of the assumed execution. In 2014, due to the aforementioned difficulties, the Group’s mines produced 12.3 million tons of coal (without KWK Knurów-Szczygłowice), i.e. 1.3 million tons less than in 2013. . on 31 July 2014 an agreement was concluded by and between Kompania Węglowa S.A. and JSW to purchase an organized part of an enterprise (“ZORG”) in the form of the KWK "Knurów-Szczygłowice” mine. The purchase price for ZORG amounted to PLN 1,490 million. The source of funding for the purchase of these assets was external financing in the form of a private bond issue in the amount of USD 163.75 m and PLN 700 m as well as the Parent Company’s own funds. For JSW this means a consolidation of high quality coking coal in the Group, expansion of the resource base by 65% and ultimately increase of production to 18.7 million tons coal per annum, starting from 2018. In addition, the profitability of the mine itself will increase - thanks to JSW’s investments the mine intends to increase the share of coking coal to 80% of total production over several years. Economically-viable resources of coal in this mine amount to 1,260 million tons. . the coal production volume in 2014, taking into account the production in the newly acquired mine, amounted to 13.9 million tons, i.e. 0.3 million tons more than in 2013, . in connection with the acquisition of KWK Knurów-Szczygłowice, the financial results for 2014 showed a bargain purchase gain of PLN 297.4 million,. . as a result of the impairment test carried out for the fixed assets, a revaluation charge of PLN 224.2 million was recognized for KWK Krupiński, . The JSW Management Board made a decision to keep in the books of the Parent Company, starting from June 2014, a provision for hypothetical interest of 1% of the maximum amount of interest due the counterparties, i.e. the amount corresponding to the current level of risk that the counterparties may put forward a claim for the payment of interest due for the extended dates of payment in excess of those provided for in the Act on payment terms in commercial transactions (Journal of Laws 2013, Item 403). Accordingly, in June 2014, the hypothetical interest provision in the amount of PLN 39.6 million was reversed, . due to the continuing difficult situation in the industry markets and the continuing decrease or coal and coke prices, the Management Board of the Parent Company, with the aim of limiting its negative impact on the Group’s economic and financial results, made a decision to implement the Adjustment Measures Program in the Group. The basic task was to reduce the cost of operations and limit the scope of investment activity and the amount of capital expenditures, . in December 2014 as a result of a fire in SEJ’s EC Zofiówka, basic production equipment was destroyed, ruling out normal operation of the CHP plant. As a result of this situation, SEJ’s result is lower by approx. PLN 6 m.
72 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 21. EBITDA drivers in 2014 (PLN million)
IMPACT OF EXTRAORDINARY EVENTS ON THE LEVEL OF COSTS INCURRED
Both 2014 and 2013 saw extraordinary events whose nature and scope had significant influence on the level of revenues in the reporting year. To present a comparable structure and dynamics of EBITDA, an adjustment was made to take into account the events which had significant impact on the results.
Table 21.EBITDA for 2014 and 2013 after exclusion of extraordinary events
Item 2014 2013
EBITDA 528.5 1,403.4
Payment of the bonus for JSW’s employees in 2013 for the generated results - 90.5
Impairment charge for selected property, plant and equipment components in Koksownia - 39.3 Dębieńsko
Revaluation charges for property, plant and equipment in KWK Krupiński 224.2 -
Profit on bargain purchase of KWK Knurów-Szczygłowice (297.4) -
Tax on civil transactions associated with the acquisition of KWK Knurów-Szczygłowice 45.1 -
Cancelled interest on liabilities calculated pursuant to Article 5 of the Polish Act on Payment (39.4) (7.3) Terms in Commercial Transactions
Employee provisions (actuarial losses) 37.4 3.9
Compensation for a fire at KWK Krupiński (25.0) -
Reversal of the provision by Polski Koks for the claim for damages of ThyssenKrupp (18.3) - Metallurgical Products GmbH in connection with the completed court proceedings
TOTAL ADJUSTMENTS (73.4) 126.4
EBITDA adjusted for non-recurring events 455.1 1,529.8
73 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
3.3. DIFFERENCES BETWEEN FINANCIAL RESULTS IN THE ANNUAL REPORT AND PREVIOUSLY PUBLISHED FORECASTS FOR 2014
In the Jastrzębska Spółka Węglowa S.A. Group Management Board Activity Report for the financial year ended 31 December 2013, in Item 3.10, we presented the key assumptions of the Group’s Technical and Economic Plan (PTE) for 2014. The Plan did not take into account the acquisition of KWK Knurów-Szczygłowice as of 1 August 2015.
The JSW Management Board, in the Current Report of 17 October 2014, updated the operating assumptions for the Group’s coal production and capital expenditures, in relation to the data presented in the Management Board Reports on the activity of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2013.
The operating assumptions pertaining to coal production in 2014 were updated from 13.8 million tons (net of KWK Knurów-Szczygłowice) to 13.8 - 14.0 million tons (including KWK Knurów-Szczygłowice’s production of approx. 1.5-1.6 million tons), compared to 13,6 million tons produced in 2013. The operating assumptions pertaining to the Group’s capital expenditures have been updated from PLN 2,167.3 million (net of KWK Knurów-Szczygłowice) to PLN 1,809.0 million (including KWK Knurów-Szczygłowice in the amount of PLN 68.0 million).
The Group has not published other forecast results due to high market volatility and significant number of variables influencing market predictability.
Table 22.Key assumptions of the Plan for 2014 and their implementation
Updated Assumptions for Actuals Item assumptions for 2014 2014 2014 13,790.7 thousand 13,946.6 thousand Coal production* 13.8-14.0 million tons tons tons 1,581.4 thousand including KWK Knurów-Szczygłowice - 1.5-1.6 million tons tons 10,263.4 thousand 9,881.6 thousand Coking coal* - tons tons Share of coking coal* 74.4% - 70.9% 4,065.0 thousand Steam coal* 3,527.3 thousand tons - tons 4,015.9 thousand Coke production 4,052.0 thousand tons - tons CAPEX for PPE* PLN 2,167.3 million PLN 1,809.0 million PLN 1,685.5 million
Headcount – as at 31 December* 28,874 persons - 34 120 persons
including KWK Knurów-Szczygłowice - - 5,456 persons
* actuals in 2014 including KWK Knurów-Szczygłowice
Production
In 2014, JSW’s mines produced 13,946.6 thousand tons of coal (including KWK Knurów-Szczygłowice’s production, starting from 1 August 2014, in the amount of 1,581.4 thousand tons), including 9,881.6 thousand tons of coking coal, representing approx. 70.9% of total production. Coke production amounted to 4,015 thousand tons, 0.9% less than assumed.
Capital expenditures
In 2014 the Group incurred expenditures in the amount of PLN 1,685.5 million (including KWK Knurów-Szczygłowice since its incorporation into JSW’s structures). The scope of the investments made in 2014 was reduced due to the Group’s limited financial capabilities, nonetheless the main objectives of the investment program are executed.
In the analyzed period the Parent Company incurred expenditures in the amount of PLN 1,335.3 million (including KWK Knurów- Szczygłowice) for execution of the key tasks described in Item 2.11 of this report.
74 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Headcount
As at 31 December 2014, the headcount in the Group was 34,120 persons, and without the employees of KWK Knurów-Szczygłowice, 28,664 persons, i.e. 210 persons fewer than planned.
3.4. RATIO ANALYSIS
DEBT AND FINANCING STRUCTURE OF THE GROUP
As at the end of the reporting period, the share of liabilities in financing the Group’s activity measured with the total debt ratio rose from its level at the end of 2013. The increase was related mainly to the liability resulting from debt securities which, as at 31 December 2014, amounted to PLN 1,309.1 million.
Graph 22. Group’s debt and financing ratios
Debt and financing ratio calculation methodology: Equity ratio: (Equity – intangible assets) / Total assets. Total debt ratio: Total liabilities / Total liabilities and equity. Short-term debt ratio: Short-term liabilities / Total liabilities and equity. Long-term debt ratio: long-term liabilities / Total liabilities and equity. Equity debt ratio: Total liabilities / Equity. Non-current capital to non-current assets ratio: (Equity + long-term liabilities excluding long-term provisions) / Non-current assets.
LIQUIDITY
In 2014, the current ratio dropped significantly reaching a value of 0.58 in relation to 1.59 in 2013 (down by 63.5%), as a result of a decrease in current assets by 35.9% with a concurrent increase in short-term liabilities (excluding short-term provisions) by 74.6% (mainly as a result of recognition of the liability from the issue of debt securities in the amount of PLN 1,272.2 million). The quick ratio decreased by 66.7% as a result of a decrease in current assets (excluding inventories) by 42.2%. The main decrease in current assets pertained to cash and cash equivalent by PLN 1,316.4 million, compared to the end of 2013.
75 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 23. Liquidity ratios
2,50 2,09 1,97 2,00 1,59 1,50 1,77 1,60 1,35 1,00 0,58 0,50 0,45 0,00 2011 2012 2013 2014
CURRENT LIQUIDITY RATIO QUICK LIQUIDITY RATIO
Liquidity ratio calculation methodology: Current ratio: Current assets / Short-term liabilities excluding short-term provisions. Quick ratio: (Current assets – inventories) / Short-term liabilities excluding short-term provisions.
If the scenario of difficult market situation (including decrease of revenues) does materialize and the cost-saving program is not consistently implemented then the ratios may further deteriorate the probability of losing capacity to pay liabilities may increase.
PROFITABILITY
Analysis of profitability ratios indicates a lower efficiency of the Group’s performance in 2014 caused by the continuing economic slowdown resulting in a decrease in unit prices of coal and coke and lower sales revenues. The operating loss for 2014 was PLN (783.6) million. This result is down by PLN 985.5 million compared to the result achieved in 2013, which is attributable to deterioration of profitability ratios in relation to 2013.
Graph 24. Profitability ratios
40 3 000 30
37,9 3552,8 2 000
20 28,9 26,9 2708,5 2374,8 10
1 000 18,4
2086,0
2,6 7,8
14,8
201,9 528,5 988,1 82,2 1403,4 1308,2 0 0
-10 (11,4)
-1 000 (657,1) EBIT (PLN M) (774,8) EBITDA (PLN M) NET RESULT (PLN M) -20 EBIT MARGIN (%) EBITDA MARGIN (%)
2011 2012 2013 2014 2011 2012 2013 2014
Profitability ratio calculation methodology (part I): EBIT Margin: Operating result x 100 Sales revenues EBITDA: Result on operating activity + depreciation EBITDA Margin: EBITDA margin: EBITDA x 100 / Sales revenues.
In 2014, the return on assets (ROA) and return on equity (ROE) ratios were negative, i.e. indicated a decrease, compared to 2013, in the efficiency of the Group’s utilization of assets and equity.
76 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 25. Profitability ratios 25
20 24,7
15 22,2
10
15,3 11,5
5 11,2
1,1 7,0 0,6 1,0 0
-5 (9,0)
(4,3) (9,6) -10
-15 NET RETURN ON SALES (%) RETURN ON ASSETS (ROA) RETURN ON EQUITY (ROE) (%) (%)
2011 2012 2013 2014
Profitability ratio calculation methodology (part II): Net sales profitability: Net financial result x 100 / Sales revenues. Return on assets (ROA): Net financial result x 100 / Total assets. Return on equity (ROA): Net financial result x 100 / Equity.
Table 23. Other additional ratios calculated on the basis of recommendations of the State Treasury Ministry
Growth Item Calculation methodology: 2014 2013 2012 2011 rate 2013=100 LIQUIDITY RATIOS Current assets Liquidity ratio I (current liquidity ratio) 0.55 1.43 1.74 1.89 38.5 Current liabilities Current assets - inventories Liquidity ratio II (quick liquidity ratio) 0.42 1.21 1.41 1.59 34.7 Current liabilities Liquidity ratio III (immediate liquidity Short-term investments 0.18 0.82 0.99 1.04 22.0 ratio) Current liabilities PROFITABILITY RATIOS Net financial result x 100 Net return on sales (ROS) (9.6) 1.1 11.2 22.2 (872.7) Sales revenues Net financial result x 100 Return on Assets (ROA) (4.3) 0.6 7.0 15.3 (716.7) Total assets Net financial result x 100 Return on equity (ROE) (9.0) 1.0 11.5 24.7 (900.0) Equity ASSET TURNOVER Sales volume Asset turnover (TAT) 0.44 0.55 0.63 0.69 80.0 Total assets
77 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
MINING CASH COST
Mining cash cost is a ratio used by the Group for management purposes. The methodology of calculation and presentation of coal mining cash cost reflects the cost from the point of view of cash consumption regardless of the period in which it was incurred. The Parent Company calculates mining cash cost by subtracting costs not directly associated with the production of coal and costs not permanently affecting the JSW’s financial flows from all costs incurred in the period.
Table 24.Mining cash cost*
2014 2014 Growth Item (incl. KWK (excl. KWK 2013 2012 2011 rate Knurów- Knurów- 2013=100 Szczygłowice) Szczygłowice) Total costs by nature 9,793.8 9,266.1 9,481.5 8,230.6 6,129.0 103.3 Selling expenses (382.0) (373.2) (401.7) (259.7) (127.0) 95.1 Capitalization of mining pits (445.9) (409.1) (503.8) (487.2) (288.6) 88.5 Employee share ownership plan - - - - (293.0) - Depreciation and amortization (1,034.8) (937.4) (921.8) (806.0) (685.8) 112.3 Cost of materials and merchandise sold (2,892.8) (2,891.7) (3,001.0) (1,854.5) (51.6) 96.4 Other costs of the period not applicable to coal (112.0) (104.6) (98.4) (137.2) (113.8) 113.8 production Mining cash cost (in PLN millions) 4,926.3 4,550.1 4,554.8 4,686.0 4,569.2 108.2 Coal extraction (in millions of tons) 13.9 12.4 13.6 13.5 12.6 102.2 Mining cash cost (PLN/ton)** 353.22 367.98 334.25 348.09 362.35 105.7
* Mining cash cost has been recalculated according to the methodology modified in 2013, years 2011 and 2012 were adjusted accordingly. ** To achieve greater accuracy, the value of mining cash cost per ton of coal was calculated based on values expressed in thousands of PLN and thousands of tons.
Mining cash cost in 2014 (excl. KWK Knurów-Szczygłowice) stood at PLN 4,550.1 million, i.e. was comparable to the actuals in 2013. On a separate basis, the ratio 10.1% higher, which results from a 8.8% decrease of net coal production in 2014.
At the same time, mining cash cost, including KWK Knurów-Szczygłowice acquired in 2014 was at 353.22 PLN/ton, i.e. PLN 14.76 PLN/ton less than with this mine included.
CASH CONVERSION COST
Cash conversion cost for coke (“Cash conversion cost”) is a measure used by the Group's coking plants and calculated as the sum of costs by nature incurred by the coking plants, net of the cost of coal feedstock (including the cost of transporting the feedstock) and cost of sales net of depreciation attributable to cost of sales. Unit cash conversion cost is calculated as the value of this measure divided by the volume of coke production available for sale.
Table 25. Cash conversion cost
Growth rate Item 2014 2013 2012 2011 2013=100 Consumption of materials net of coal feedstock 53.6 59.4 50.2 35.9 90.2 Consumption of energy 43.2 50.3 51.0 28.4 85.9 External services net of transport costs of coal feedstock 214.5 213.5 263.6 241.2 100.5 Taxes and fees 47.1 43.2 20.8 27.9 109.0 Personnel costs 285.3 275.6 304.5 77.9 77.9 Other costs by nature 3.8 2.2 2.7 15.6 372.7 Selling expenses less depreciation attributable to selling (38.2) (56.9) (110.5) (121.6) 67.1 expenses Cash conversion cost (in PLN millions) 609.3 582.9 582.3 427.0 104.5
78 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Growth rate Item 2014 2013 2012 2011 2013=100 Coke production for sale (million tons) 4.0 3.9 3.8 3.1 102.6 Cash conversion cost (PLN/ton) 151.85 148.01 151.77 138.46 102.6
In the twelve months of 2014 the cash conversion cost was PLN 609.3 million compared to PLN 582.9 million in the same period of 2013. The change in the cash conversion cost encompasses the following:
. Decline in the costs of materials net of the coal feedstock by PLN 5.8 million, i.e. by 9.8%, which was directly caused by the lower prices for commodities and the decline in the costs of other materials ensuing mostly from the reversal of impairment charges for unnecessary and non-rotating materials and the lower costs of nitrogen consumption. . Decline in power consumption by PLN 7.1 million, i.e. 14.1% driven by balancing energy in JSW KOKS (that is transmission of the electricity generated at Koksownia Przyjaźń to the other coking plants in JSW KOKS). . Growth in taxes and fees by PLN 3.9 million, or 9.0%, driven by higher taxes - among others by the adjustment to property tax and fees for the permanent usufruct of land for the costs of maintaining non-production plants in coking plants belonging to the former Kombinat Koksochemiczny Zabrze S.A. . Growth in personnel costs by PLN 9.7 million, or 3.5%, resulting from updating the actuarial provision for employee benefits in JSW KOKS to PLN 14 million. . Level of other costs by nature up by PLN 6.0 million, or 159.5%, which chiefly results from recognizing in 2013 the costs of JSW KOKS’s reversal of an amount of PLN 9.3 million on the impairment charges for receivables pertaining to the Zinc Mill Miasteczko Śląskie. . Decline in selling expenses minus depreciation attributable to selling expenses by PLN 18.7 million, or 32.9%, whose major driver is the decline in coke transportation costs.
3.5. PROCEEDS FROM SECURITIES ISSUES
In 2014 the Parent Company conducted a debt securities issue as portrayed in Section 2.9 hereof. The funds raised from the bond issue were used to finance the acquisition of an organized part of an enterprise in the form of a mine called the Knurów-Szczygłowice Coal Mine. The bonds were issued pursuant to Article 9 Section 3 of the Bonds Act and will not be offered in a public offering within the meaning of the Act on Public Offerings, nor will they be traded on an organized market within the meaning of the Act on Trading in Financial Instruments.
3.6. TRANSACTIONS WITH RELATED PARTIES
All transactions executed with related parties in 2014 were transactions concluded on an arm’s length basis. Detailed information on JSW’s transactions with related parties is presented in Note 41 to the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
3.7. INFORMATION ON LOANS AND BORROWINGS CONTRACTED AND TERMINATED
In the period covered by these financial statements Group companies did not contract any additional loan obligations. At the same time, in the period covered by these financial statements Group companies contracted the following borrowings from the Voivodship Environmental Protection and Water Management Fund:
. loan agreement for PLN 45.0 million maturing on 20 December 2021, . loan agreement for PLN 2.6 million maturing on 30 September 2019, . loan agreement for PLN 8.3 million maturing on 31 March 2020.
The interest rate of the above loans is based on the WIBOR 3M reference rate set from time to time by the European Commission and the rediscount rate for bills of exchange.
79 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
The Group’s total liabilities for contracted loans and borrowings as at the end of 2014 amount to PLN 205.8 million (2013: PLN 265.8 million), including investment liabilities of PLN 201.5 million and working capital liabilities of PLN 4.3 million.
Furthermore, according to the signed agreements as at 31 December 2014, the Group had unused overdraft and working capital loan limits totaling PLN 196.6 million (as at 31 December 2013: PLN 204.3 million).
3.8. INFORMATION ON LOANS AND SURETIES GRANTED AND SURETIES AND GUARANTEES RECEIVED
Borrowings
In the reporting period under analysis Group companies did not grant loans. The loan granted by JSW on 24 August 2012 to Advicom, a subsidiary was repaid on 31 October 2014 and the loan granted by WZK Victoria on 20 November 2013 to the Górnik Wałbrzych Football Club was repaid on 28 March 2014.
Sureties
In 2014 Group companies granted the following sureties:
. JSW KOKS granted a surety to PKO Bank Polski S.A., ING Bank Śląski S.A., Bank Gospodarstwa Krajowego and PZU FIZAN Bis 1 up to a total of PLN 2 218.5 million and
. WZK Victoria granted a surety to PKO Bank Polski S.A., ING Bank Śląski S.A., Bank Gospodarstwa Krajowego and PZU FIZAN Bis 1 up to a total of PLN 405.4 million for the Parent Company’s liabilities under the Bond Issue Program with a total nominal value of PLN 700 million and USD 163.8 million maturing on 31 December 2021.
Additionally, the Parent Company extended a surety up to PLN 0.3 million for the liabilities of Wojewódzki Szpital Specjalistyczny Nr 2 in Jastrzębie Zdrój for the loan contracted from Bank Ochrony Środowiska S.A. maturing on 31 December 2020.
The following sureties are still in effect:
. the Parent Company’s surety of up to PLN 5.3 million for the liabilities of Koksownia Przyjaźń S.A. (currently, JSW KOKS) under a loan of PLN 10.0 million contracted on 26 August 2013 from the Voivodship Environmental Protection and Water Management Fund (WFOŚiGW) in Katowice, for an investment project named Building of a power unit in Koksownia Przyjaźń S.A. in Dąbrowa Górnicza. The surety is valid until 2 January 2018,
. Parent Company’s surety of up to a total of PLN 420.0 million for SEJ’s liabilities under the bond issue program subscribed for by Bank Gospodarstwa Krajowego and ALIOR Bank S.A. to finance an investment task entitled "Development Program – Power Sector 2016, based on the construction of a CFB 75 MWe fluid bed unit in Elektrociepłownia Zofiówka and modernization and development projects associated with the existing assets of SEJ S.A. and PEC S.A. This surety was granted to secure the redemption of the following bonds: - in tranche A subscribed for by Bank Gospodarstwa Krajowego in the amount of PLN 246.0 million, - in tranche B subscribed for by Bank Gospodarstwa Krajowego in the amount of PLN 34.0 million, - in tranche A subscribed for by ALIOR Bank S.A. in the amount of PLN 123.0 million, - in tranche B subscribed for by ALIOR Bank S.A. in the amount of PLN 17.0 million.
The surety is valid no longer than up to 20 June 2023 for tranche A bonds and no longer than up to 20 June 2018 for tranche B bonds,
. PEC’s surety of up to PLN 50.0 million for SEJ’s liabilities under the bond issue program subscribed for by Bank Gospodarstwa Krajowego and ALIOR Bank S.A. to finance an investment task entitled "Development Program – Power Sector 2016, based on the construction of a CFB 75 MWe fluid bed unit in Elektrociepłownia Zofiówka and also modernization and development projects associated with the existing assets of SEJ and PEC,
. Parent Company’s surety for SEJ’s liabilities under a loan contracted from the Voivodship Environmental Protection and Water Management Fund in Katowice, for a total amount of PLN 5.0 million, valid until 30 January 2016,
80 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
. surety extended by KWK Krupiński (JSW) to secure a credit facility granted by PKO BP S.A. up to the amount of PLN 0.3 million to cover the liabilities of Górnicza Spółdzielnia Mieszkaniowa [Miners’ Housing Cooperative] maturing in 2030,
. SEJ SERWIS’s surety extended to SEJ as security under the Lease Agreement for PLN 0.7 million, valid until 15 April 2015.
Guarantees
As at yearend 2014, the following bank guarantees were in force in the Group:
. seven bank guarantees for a total of PLN 22.5 million as security for repayment of loans granted by the Voivodship Environmental Protection and Water Management Fund in Katowice with different maturities,
. one guarantee for EUR 1.5 million with the liability being reduced to EUR 0.2 million on terms and conditions described in the letter of guarantee, valid until 30 June 2015. The guarantee has been issued to secure contractual obligations,
. one guarantee for EUR 19.3 thousand to secure timely payment of liabilities, valid until 6 March 2015,
. guarantees to secure contractual liabilities in the amount of PLN 91.3 thousand with different terms of validity.
In addition, under instruction from some Group entities, insurance guarantees were issued for a total amount of EUR 15.0 million and PLN 40.1 thousand to secure contractual performance with different terms of validity.
3.9. FINANCIAL INSTRUMENTS
APPLICATION OF FINANCIAL INSTRUMENTS TO HEDGE PRICE CHANGES, CREDIT RISK, RISK OF SIGNIFICANT CASH FLOW DISRUPTIONS AND LOSS OF LIQUIDITY
The situation on the coking coal and coke market is closely related to the market for steel and metallurgical products; market trend cycles display price fluctuations in these sectors. The prices for the Group's coking coal depend strongly on demand on the global steel and metallurgical market, while steam coal prices depend also on actions taken by other domestic producers. Even though the Company has loyal customers, every inflow of cheap imported coal or increased output or supply by other domestic producers entails a potential risk of pressure to reduce prices. If market prices change then the following actions are taken to mitigate their impact on the Group's financial standing:
. increase production and sales volumes; . change the production structure to increase efficiency of product sales (increase production of goods commanding better prices and finding demand in the period - optimization of the sales structure), . abandon less economic directions, in favor of the directions with higher price.
In order to react to changing prices at the right moment, the Group constantly monitors markets, analyses them and tracks price trends on the coal, coke, steel and electricity markets. The terms and conditions of long-term contracts allow for periodic price negotiations (annually for steam coal and quarterly for coking coal and coke). The following have been established to manage risks: Consultation Committee pursuant to the rules described in the JSW Group’s Commercial Procedure and the Foreign Exchange Risk Committee that monitors FX proceeds on supplying coal, coke and hydrocarbons. Coal imports and the prices of coal produced by Polish mines as well as coke and steam coal prices in ARA ports are monitored periodically.
Credit risk identified in trade receivables is related to their concentration and timely service. Sales are made to a limited number of buyers and therefore there is a concentration of risk associated with trade receivables. The ArcelorMittal Group and companies in which the State Treasury holds shares still remain the principal offtakers responsible for 37.0% and 15.4%, respectively of all trade receivables as at 31 December 2014.
In order to mitigate the risk of uncollectible receivables, the following security interests from offtakers are used: blank promissory notes, sureties extended by companies with a strong position on the market, letters of credit and assignments.
In the event of trade arrangements with a business partner or new customers or customers with an uncertain financial position, the Group makes the sale after the business partner has made a prepayment. In the case of some buyers using trade credit, their trade
81 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
receivables are insured by insurance companies. The Group does not require any security interest from buyers with a strong market position, considering the strategic nature of the cooperation and the ability to assess their financial documents.
The credit risk pertaining to cash and cash equivalents is limited because the Group invests its cash in banks with an established market position. In addition, the Group diversifies its cash deposits.
On an ongoing basis, the Group monitors risks associated with cash flow disruptions and risk of loss of liquidity. In order to minimize such risks, the Group maintains cash at a level enabling it to service its current liabilities. Additionally, the Group has in place the Zero- balancing Cash Pooling service implemented in 2013 and lines of credit in force in the form of current account overdrafts supporting current liquidity management.
To mitigate insolvency risk the Group is undertaking a number of savings initiatives. Additionally, by the decision of the Parent Company’s Management Board, the Liquidity Management Policy and procedure were implemented in the Group whose main objective is to ensure efficient monitoring and reporting of the liquidity position allowing it to take preventive measures if a threat of insolvency arises.
As part of its foreign exchange risk management, the Group used FX forward contracts in 2014. The purpose of these transactions was to hedge the Group against the FX risk emerging in the course of ordinary commercial activity.
Under interest rate risk management, SEJ was the only company that hedged the interest rate risk in 2014 linked to its indebtedness based on the WIBOR reference rate by entering into an Interest Rate Swap (“IRS”) transaction to swap the floating interest rate for a fixed interest rate.
OBJECTIVES AND METHODS OF FINANCIAL RISK MANAGEMENT
The Group manages FX risk on the basis of the JSW Group’s foreign exchange risk management policy whose purpose is to centralize the foreign exchange risk management process in the Parent Company. This policy defines, among others, the objectives and principles for managing foreign exchange risk. The purpose of the foreign exchange risk management policy is, among others, to define the rules for foreign exchange risk management, in particular the rules for identification, quantification, monitoring and reporting foreign exchange risk, which, in turn, should lead to limiting the adverse effect of foreign exchange risk factors on the Group’s cash flows and economic result.
The JSW Group Foreign Exchange Risk Committee functions in the JSW Group. It is responsible, among other things, for making key FX risk management decisions, in particular for hedging contracted and planned cash flows. The net exposure ensuing from planned, contracted or invoiced sales is hedged in accordance with the adopted hedging ratios using forwards maturing over the upcoming 12 months.
To hedge FX risk the Group uses not only its natural hedge but FX Forward derivative transactions. Derivatives are carried at fair value. For record-keeping purposes, the Group uses proprietary valuations.
In 2014, the Parent Company implemented cash flow hedge accounting. To hedge FX risk the Group employs derivative transactions whose nature facilitates the usage of hedge accounting. In principle, derivative transactions with maturities exceeding six months are designated for hedge accounting. Moreover, the Group designated USD-denominated bonds as the instrument to hedge future cash flows.
As at 31 December 2014, the Group had outstanding derivatives to hedge FX risk with a total notional amount of EUR 124.0 million and USD 47.5 million, of which EUR 55.7 million and USD 36.1 million were designated for hedge accounting. Derivative transactions hedge proceeds from the sales of products denominated in EUR and USD which the Group expects to receive by October 2015. The fair value of outstanding derivative transactions as at the final day of the reporting period was PLN (12.0) million.
As at 31 December 2014, as a result of the measurement of transactions to hedge future cash flow, the amount of PLN (56.8) million was recognized in other comprehensive income, of which: . PLN (8.5) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments, . PLN 1.6 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments, . PLN (64.0) represents the negative FX differences from the valuation of the effective part of outstanding bonds, . PLN 0.8 million is the value posted to the period’s profit or loss after the hedged position is realized, . PLN 13.3 million is the effect in deferred income tax on the above positions.
82 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Interest rate risk management is accomplished in the Group on the basis of the Interest rate risk management policy devised and adopted for application in Group companies in which this risk is assessed as being material. The fundamental purpose of interest rate risk management is to curtail the Group’s acceptable level of the unfavorable impact exerted by changes to market interest rates on future cash flows.
In 2014 one of the Group companies hedged the cash flow volatility risk stemming from the contracted debt based on the WIBOR reference rate. During the reporting period, the Parent Company did not use any instruments to hedge interest rate risk.
As at 31 December 2014, the Group had outstanding derivatives hedging interest rate risk with a nominal value of PLN 36.9 million. The fair value of outstanding derivative transactions as at the final day of the reporting period was PLN (0.3) million. In connection with the hedge accounting standards used, the negative measurement of the fair value of IRS as at 31 December 2014 was posted to the line item capital on financial instruments measurement.
3.10. GROUP’S CURRENT AND ANTICIPATED FINANCIAL STANDING
What can be expected in 2015
The Group’s liquidity position is challenging. To mitigate liquidity risk, Group companies call for maintaining a minimum level of available funds. In connection with the negative cash flows on the Group’s operations, including the need for incurring high capital expenditures and the dearth of available additional long-term financing sources, the Group’s insolvency risk has increased significantly. If the scenario of challenging market situation and death of additional external funding persists, then there will be a higher probability of losing the capacity to pay liabilities.
Due to the pessimistic assessment of the market situation and the persisting declining trend in coal and coke prices, the JSW Management Board, with the aim of limiting the adverse impact of this situation on the Group’s future economic and financial results, made the decision to implement the Adjustment Measures Program in the JSW Group whose fundamental objective is to balance the Group’s cash flows by cutting its operating expenses and curtailing the physical scope of investing activity and the amount of capital expenditures, which will make it possible to maintain the competitiveness of the Group’s main products and retain jobs.
The 2015 plan was devised on the basis of the Group’s 2014 performance and the detailed operating and macroeconomic assumptions for 2015. It incorporates the consequences of the industrial action lasting from 28 January to 13 February 2015 and the clauses of the agreement between the JSW Management Board and the trade unions, as well as elements of the implemented Adjustment Measures Program.
Table 26.Scope of the basic assumptions in the plan for 2015
Growth rate Item 2015 2014 2014=100
Production of coal (in thousands of tons) 16 442.6 13 946.6 117.9
Coking coal (in thousands of tons) 11 870.7 9 881.6 120.1
Coking coal percentage (%) 72.2 70.9 (+) 1.3 p.p.
Steam coal (in thousands of tons) 4 571.9 4 065.0 112.5
Production of coke (in thousands of tons) 4 218.6 4 015.9 105.0
CAPEX for PPE 1 257.0 1 685.5 74.6
Headcount – as at 31 December (persons) 33 303 34 120 97.6
Production
The main production objective defined in the Technical and Economic Plan for 2015 will be the optimal utilization of the mines’ resource base and production capacity. In 2014, the Group’s mines produced 13 946.6 thousand tons of coal. In 2015 the Group is planning to increase the production level by 17.9%, i.e. by 2 496.0 thousand tons (incorporating the output of KWK Knurów-Szczygłowice within JSW’s structures). The basic condition for achieving this objective will be to ensure that the mines have extraction capacity and have duly prepared areas to mine in 2015 and the following year by performing the planned quantity of heading work. At the same time, it is
83 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
assumed that the production volume of coking coal will increase by 1 989.1 thousand tons as compared to 2014 (an increase by 20.1%). In 2015 the Group’s coking plants intend to produce 4,218.6 thousand tons, i.e. 5.0% more than in 2014.
Investments in non-current assets
As a result of implementing profound adjustment measures in the Group’s current financial standing, the capital expenditures planned for 2015 have been reduced to PLN 1 257.0 million. The planned capital expenditures entail only expenditures to maintain the ongoing operation of the mines and the completion or maintenance of some key investments in progress.
Employment
The Group’s plan for 2015 assumes reduction of headcount by 817 persons in relation to 31 December 2014. The challenging situation in the coking coal market compels us to pursue restructuring measures in headcount on an continual basis.
3.11. PRINCIPLES GOVERNING PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS AND THE MANAGEMENT BOARD ACTIVITY REPORT
The consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014 were prepared in accordance with the International Financial Reporting Standards ("IFRS") approved by the European Union (“EU”).
The consolidated financial statements have been prepared based on the assumption that the Group would continue as a going concern in an unchanged form and scope for at least 12 months after the final date of the reporting period. As at the date of approval of the consolidated financial statements, there are no facts and circumstances that would indicate a threat to the continued operation in the foreseeable future.
The adopted accounting principles were employed using the principle of continuity in all of the presented financial years. The accounting (policy) principles applied to prepare the consolidated financial statements have been presented in Note 2 to the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
This report is consistent with the requirements of the provisions of law and regulations of capital market institutions pertaining to the scope of activity reports. This report has been prepared while retaining the internal coherence of the document and consistency with the consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
3.12. INFORMATION ABOUT THE AUDIT FIRM AUDITING THE FINANCIAL STATEMENTS
The audit firm authorized to audit the consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014 is Deloitte Polska Spółka z ograniczoną odpowiedzialnością Sp. k.
The agreement between JSW and Deloitte Polska Spółka z ograniczoną odpowiedzialnością Sp. k. was entered into on 23 July 2013 and pertains to audit of JSW’s financial statements for 2013 and 2014, the Group’s consolidated financial statements for 2013 and 2014, review of JSW’s interim financial statements for H 1 2014 and the Group’s interim consolidated financial statements for H1 2014.
Additional information pertaining to the remuneration of the audit firm authorized to audit financial statements is presented in Note 42 of the consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2014.
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4. JSW’s OWNERSHIP STRUCTURE AND SHARE QUOTATIONS
4.1. PARENT COMPANY’S CAPITAL AND OWNERSHIP STRUCTURE
As at 31 December 2014 and as at the preparation and publication date hereof, JSW’s share capital amounted to PLN 587,057,980.00 and was divided into 117,411,596 ordinary shares with a nominal value of PLN 5.00 each, comprising: 99,524,020 series A shares, 9,325,580 series B shares, 2,157,886 series C shares and 6,404,110 series D shares. The total number of votes attached to all the shares issued by JSW corresponds to 117,411,596 votes at the JSW Shareholder Meeting.
The Parent Company does not have a detailed breakdown of the shareholding structure as at the last day of the reporting period and as at the date of preparation and publication hereof. In the last financial year, JSW did not receive any information about exceeding the percentage thresholds of the total number of votes specified in Article 69 Section 1 of the Act on Public Offerings and the Conditions for Floating Financial Instruments in an Organized Trading System and on Public Companies. According to the most recent statutory notice from 2012, received from a shareholder holding directly or indirectly through subsidiaries at least 5% of the total number of votes at the JSW Shareholder Meeting (Current Report No. 40/2012 of 30 November 2012), JSW’s ownership structure is as follows:
Table 27. Shareholder structure
Number of votes % of total votes Number of at the % of share at the Shareholder shares Shareholder capital Shareholder Meeting Meeting State Treasury 64 775 542 64 775 542 55.16% 55.16%
Other shareholders 52,636,054 52,636,054 44.84% 44.84%
Total 117 411 596 117 411 596 100.00% 100.00%
* According to Current Report no. 18/2014 of 18 July 2014, the State Treasury was the only shareholder holding 5% of the votes at the Extraordinary Shareholder Meeting on 16 July 2014, with 64 400 400 votes, representing a 54.85% stake in total votes.
After the date ending the reporting period, in connection with the effective date of the act of 22 January 2015 on amending the act on the operation of the hard coal mining sector in 2008-2015 and some other laws (Journal of Laws of 2015, item 143), the State Treasury Ministry assumed ownership supervision over mining companies, including JSW as of 4 February 2015.
On 9 February 2015 the State Treasury submitted a written request to convene an Extraordinary Shareholder Meeting of JSW to adopt a resolution to make changes to JSW’s Articles of Association and to make changes to the Supervisory Board composition. The Extraordinary Shareholder Meeting is convened for 31 March 2015 at 11:30 a.m. in Room A of the Ministry of the Economy at Plac Trzech Krzyży 3/5 in Warsaw. In conjunction with assuming power of overseeing mining companies, including JSW, the State Treasury Ministry proposed amending the JSW’s Articles of Association as part of the packet of measures to counteract the demanding situation faced by mining companies and companies in the hard coal mining sector.
Graph 26. JSW’s ownership structure
85 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
AGREEMENTS PERTAINING TO POTENTIAL CHANGES IN THE SHAREHOLDING STRUCTURE
As at the date of preparing this report, the Parent Company’s Management Board does not have information about any agreements that could lead in the future to changes to the percentage of shares held by current shareholders.
PURCHASE OF TREASURY STOCK
In 2014, the Parent Company did not engage in purchasing any treasury stock.
NUMBER AND NOMINAL VALUE OF JSW SHARES AND SHARES IN THE COMPANY’S RELATED PARTIES HELD BY PERSONS DISCHARGING MANAGEMENT AND SUPERVISORY FUNCTIONS
Table 28. Holdings of JSW’s shares with a par value of PLN 5.00 each by persons discharging management and supervisory functions
Number of shares Number of shares Number of shares First and last name on the day of publishing the report at 31 December 2014 on the date hereof for Q3 2014
JSW Management Board
Jarosław Zagórowski 210 210 -*
Grzegorz Czornik 378 378 378
Robert Kozłowski - - -
Jerzy Borecki 406 406 406
Artur Wojtków 367 367 367
JSW Supervisory Board
Józef Myrczek - - -
Antoni Malinowski - - -
Eugeniusz Baron 382 382 382
Marek Granieczny 372 372 372
Andrzej Karbownik - - -
Stanisław Kluza - - -
Robert Kudelski 256 256 256
Tomasz Kusio - - -
Alojzy Nowak - - -
Andrzej Palarczyk 591 591 591
Łukasz Rozdeiczer-Kryszkowski - - -
Adam Rybaniec - - -
* Mr. Jarosław Zagórowski acted in the capacity of CEO until 17 February 2015.
The persons discharging management and supervisory functions in the Parent Company hold no shares in JSW’s subsidiaries.
86 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
4.2. JSW’S SHARE QUOTATIONS ON THE CAPITAL MARKET
JSW’s shares have been listed on the Warsaw Stock Exchange since 6 July 2011. Exchange transactions on securities are concluded in PLN. In 2014, JSW’s shares belonged to the following indices: WIG20, WIG30, WIG-Surowce and the RESPECT index.
Table 29. Summary of JSW’s share quotations
Information on shares 2014 2013 2012 2011*
Number of shares at yearend (units) 117 411 596 117 411 596 117 411 596 119 207 920
The lowest closing price (PLN) 16.25 53.13 82.20 81.30
The highest closing price (PLN) 54.05 97.60 110.60 141.50
Closing price on the last day of quotation (PLN) 16.25 53.13 92.40 84.10
Capitalization at the end of the year (PLN million) 1 907.9 6 238.1 10 848.8 10 025.4
* data for 2011 from JSW’s first listing on WSE, i.e. from 6 July 2011
STOCK PRICE HISTORY
In 2014, the average annual price per JSW share was PLN 39.00 and the difference between the listing at the beginning and end of 2014 was minus 69.94%. By comparison, the WIG20 index fell by 4.72% and the WIG-Surowce (WIG-Commodities) index fell by 16.15%.
In 2014, the lowest closing price per JSW share was PLN 16.25 while the highest closing price per share was PLN 54.05. The JSW share price at yearend was PLN 16.25. During 2014, the average daily trading volume was 233,392 shares.
Graph 27. JSW stock quotations and WIG20, WIG-Commodities, RESPECT and WIG30 indices
6000 60
4500 40
3000
20 1500
0 0
WIG 20 WIG SUROWCE WIG 30 RESPECT JSW S.A.
Under its announcement of 12 February 2015 the Management Board of the Warsaw Stock Exchange reported that the annual review of index portfolios will be conducted on 20 March 2015 as a result of which JSW will exit the WIG20 and WIG20TR indices.
87 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
RECOMMENDATIONS FOR JSW’S SHARES
According to the Parent Company’s knowledge, 43 recommendations were issued by brokerage houses concerning JSW’s shares in 2014.
Graph 28. Structure of the recommendations for JSW’s shares
BUY 7.0% HOLD 18.6%
NEUTRAL 4.6%
SELL 60.5% UNDERWEIGH 9.3%
4.3. DIVIDEND
In Report no. 6/2014, the JSW Management Board announced that on 12 March 2014 it made a decision to suspend the application of JSW's dividend policy in respect of the financial results earned for the financial year ended 31 December 2013. In accordance with the dividend policy set forth in the JSW prospectus of 2011 (page 59), in 2014 the Management Board of the Parent Company should propose to the JSW Shareholder Meeting to pay a dividend in the amount of at least 30% of the consolidated net profit for 2013.
Bearing in mind the potential acquisition in 2014 of key mining assets (the acquisition by JSW of an organized part of a business of Kompania Węglowa S.A., including KWK Knurów-Szczygłowice) and the investment program being implemented, the JSW Management Board decided not to recommend to the JSW Shareholder Meeting a dividend payment for 2013. On 13 March 2014, the JSW Management Board reported on a resolution on the distribution of JSW’s net profit for the financial year ended 31 December 2013 (Current Report no. 7/2014). According to the above resolution, the Management Board proposed to allocate in full the net profit earned by JSW in 2013 amounting to PLN 8,123,242.97, to additional reserve capital to finance JSW's investment program. On 9 April 2014, the Supervisory Board issued a positive opinion on the method of distribution of 2013 net profit proposed by the JSW's Management Board (Current Report 8/2014). On 22 May 2014, JSW’s Ordinary Shareholder Meeting, after examining the JSW Management Board’s motion on the distribution of net profit and after familiarizing itself with the results of the assessment of the motion submitted by the Supervisory Board, decided to allocate JSW’s total net profit for 2013 to reserve capital for the purposes of financing JSW’s investment program.
In 2014, the Parent Company incurred a net loss of PLN 684.3 million, which the JSW Management Board will propose to cover with JSW’s supplementary capital, which was PLN 5,090.0 million as at 31 December 2014.
4.4. INFORMATION ON THE CONTROL SYSTEM FOR EMPLOYEE SHARE PLANS
KEY INFORMATION ON EMPLOYEE SHARES
Series A and D shares – for employees eligible to acquire shares free of charge
Since JSW was incorporated as a result of transformation of state-owned enterprises into a joint-stock company, pursuant to the provisions of the Act on Commercialization and Privatization, eligible employees and their heirs are entitled to gratuitous receipt of 15% of JSW’s shares from the State Treasury. The number of employees eligible to acquire such shares amounted to 46,996. On 6 July 2011, the State Treasury introduced JSW’s shares into trading on a regulated market, consequently as of 10 October 2011 JSW started to hand over 14,928,603 series A shares with a nominal value of PLN 5.00 each to eligible employees.
In connection with the contribution of KK Zabrze shares to JSW, the State Treasury Minister, acting pursuant to Article 38 d section 1 of the Act on Commercialization and Privatization, issued an offer addressed to entitled to a gratuitous purchase of KK Zabrze shares allowing them to exercise their right to gratuitous purchase of shares by purchasing JSW shares instead of KK Zabrze shares. The right to acquire JSW’s free of charge is vested in those eligible employees of KK Zabrze who within 2 months of the date of receiving the State Treasury Minister’s offer filed with JSW a written declaration of the intention to exercise their right to acquire series D shares free
88 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
of charge. Out of the 3,957 KK Zabrze employees, 770 persons eligible to acquire 197,628 series D shares, did not file such a declaration. On 23 April 2012, the gratuitous sale of shares commenced, to eligible employees of KK Zabrze who submitted their declarations that their right to a gratuitous purchase of KK Zabrze shares may be exercised by a purchase of 1,130,137 registered series D shares of JSW with a par value of PLN 5.00 each.
Series C shares – for employees ineligible to acquire shares free of charge
Employees employed as at the first day of listing JSW’s shares who were not entitled to acquire shares free of charge were granted the right to acquire free of charge additionally issued 3,954,210 series C shares. On 27 February 2012, the JSW Management Board adopted a resolution on determining the number of shares per each group of ineligible employees, according to their years in service (Current Report 14/2012). Pursuant to the above resolution, the number of the JSW’s series C shares designated to be allocated to employees of the Group eligible to acquire them free of charge was determined to be 2,157,886 series C shares out of 3,954,210 issued shares. Then, in its resolution of 27 February 2012, the JSW Supervisory Board gave consent to divide series C shares in the manner defined in the resolution of the JSW Management Board in the matter of determining the number of shares for each group of ineligible employees divided by period of employment. Considering the above, the JSW Management Board recommended retirement of the surplus of 1,796,324 series C shares. On 17 April 2012, the Extraordinary Shareholder Meeting adopted a resolution to retire the surplus shares. On 26 April 2012, the reduction of JSW’s share capital associated with the retirement of series C shares was registered. The allocation process of series C shares started on 1 March 2012.
In connection with the lockup-ban on trading series C shares for the same period as in the case of series A and series D shares acquired pursuant to the Commercialization and Privatization Act, Series C Shares were subscribed for in a private subscription by the DM PKO BP brokerage house on the basis of a share custody agreement concluded with JSW on 30 June 2011. In accordance with the agreement, DM PKO BP undertook to hand over the shares free of charge to the employees named by JSW according to the rules specified in the agreement and in the issue resolution. Series C shares for which no free acquisition agreements are concluded in the offering period will be disposed of free of charge by DM PKO BP to JSW for retirement.
By 20 April 2012 the process of distributing series A and series C shares was launched in JSW’s units. After this date agreements on gratuitous disposal of series A and C shares are concluded in the branches of Dom Maklerski PKO BP brokerage house.
Number of JSW shares sold to employees
By 31 December 2014, the following shares were transferred: . 14,420,703 out of 14,928,594 series A shares earmarked for eligible employees (9 shares were not allocated to eligible employees and remain the property of the State Treasury). 507,891 shares remain to be distributed. . 2,127,663 out of 2,157,886 series C shares earmarked for ineligible employees. 30,223 shares are still available. . 894,833 of the 1,010,830 series D shares earmarked for eligible employees (119,307 shares were not allocated to eligible employees and remain the property of the State Treasury). 115,997 shares remain to be distributed. The process of gratuitous sale of series A and C shares was concluded on 8 October 2013. For series D shares, the gratuitous sale process continued until 21 March 2014. This deadline is extended for heirs of the eligible employees, by the period specified in the act on commercialization and privatization, if the conditions specified in the act are met (Article 38c section 5 of the Act).
ADMISSION OF EMPLOYEE SHARES INTO TRADING
Table 30. Status of employee shares introduced into trading and remaining to be introduced as at the date of preparation hereof
Number of JSW employee Number of shares Number of JSW shares shares introduced on 8 remaining to be admitted Number of shares available for gratuitous July 2013 into stock Series of shares into trading on WSE's remaining to be admitted purchase by Group market trading on the regulated market after 8 to WSE's regulated market employees regulated market of the July 2013 Warsaw Stock Exchange Series A shares 14,928,603 14,091,006 316,036 521,561
Series C shares 2,157,886 2,157,886 - -
Series D shares 1,130,137 855,699 37,076 237,362
TOTAL 18,216,626 17,104,591 353,112 758,923
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On 7 July 2013, the two-year lockup on trading in series A, C and D employee shares expired. This expiry, however, did not apply to series C shares acquired by employees discharging Management Board member functions in Group companies, defined in the resolution adopted by JSW’s Extraordinary Shareholder Meeting on 12 May 2011, and series D shares acquired by employees discharging management board member functions in KK Zabrze, which could not be traded before 7 July 2014. On 8 July 2013, JSW’s employee shares were listed for the first time.
Considering the fact that employees could submit statements of their intention to purchase Series A shares earmarked for them until 8 October 2013 at the latest and 21 March 2014 for Series D shares, JSW is taking constant actions to introduce subsequent pools of shares into public trading.
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5. ADDITIONAL INFORMATION
5.1. MORE IMPORTANT ACHIEVEMENTS IN RESEARCH AND DEVELOPMENT
The Group’s research and development activity in 2014 concentrated on execution of projects to enhance operational efficiency. Work was conducted in-house and in collaboration with external entities.
MORE IMPORTANT PROJECTS EXECUTED BY THE PARENT COMPANY
The following should be classified as being the more important research and development projects executed by the Parent Company in 2014:
. Project in which JSW enrolled under a consortium jointly with research institutes and mining companies from Poland, Germany, France, Spain and Slovenia whose leader is Główny Instytut Górnictwa (“GIG” - Central Institute of Mining) from Katowice. This consortium received a grant from the European Commission’s Research Fund for Coal and Steel to run the GASDRAIN research project whose purpose is to test the possibility of increasing the permeability of coal and rock masses to enhance the efficiency of methane drainage. The project’s term of execution is 42 months, its budget is EUR 4.3 million and the grant is for EUR 2.6 million. Research experiments under the GASDRAIN project will be conducted in the Zofiówka section of the Borynia- Zofiówka-Jastrzębie mine.
. Project in which the consortium headed up by Imperial College of Science of London with JSW, among others, as a member submitted a grant application to the European Commission’s Research Fund for Coal and Steel in September 2014. The project’s purpose is to define preventive measures to attenuate the risk of gas and rock breakouts. Project research will be conducted in JSW’s mines.
. Project in which KWK Knurów-Szczygłowice has established cooperation with the Military Technical University in Warsaw and
EMIR 62 of Poznań to drain methane gas using CO2 from sub-economic coal beds. Tests will be conducted in coal beds in the Szczygłowice deposit.
. Project in progress in KWK Pniówek where a drilling system was used for the first time in the Polish mining sector to drill long directional holes up to 1000 m from underground mining pits. The drilling rig manufactured by the Australian company of Valley Longwall International Drilling has been certified for compliance with the requirements of the Machine Directive and ATEX in the Barbara GIG Experimental Mine in Katowice and the KOMAG Institute of Mining Engineering in Gliwice. The drilling rig will be used to drill long holes for methane drainage, it may also be used to drill test and technical holes, e.g. to remove water. It facilitates drilling holes with great precision according to the intended trajectory and to change the direction of drilling as needed.
. Project continued by the consortium to which JSW enrolled under the Research Fund for Coal and Steel and entitled Sophisticated mine shield systems to improve control of the rock mass in conditions of large pressure, including the project: Shield for underground mining pits along the wall at a depth greater than 1000 m. The coordinator of the Advanced shield systems (…) project is the Central Institute of Mining ("GIG"), while the international partners are DMT of Germany, Gecontrol of Spain, Armines of France, OKD of the Czech Republic, the University of Nottingham and UK COAL of the United Kingdom. In 2014 project work was conducted in JSW’s mines to obtain data concerning the parameters of change taking place in the rock mass during corridor works and operations affecting the operation and conduct of the roadway shield of underground mining pits along the wall.
In addition, the Parent Company continued cooperation in 2014 on the basis of the agreement signed with GIG to prepare the technical documentation for the rails in suspended trains to meet the needs of JSW’s mines while continuing the process of unifying selected machinery, plant and equipment used in JSW's mines. Having this documentation will facilitate outfitting mines with uniform rail routes and it will simplify and accelerate tender procedures and as a result it will enhance work productivity.
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MORE IMPORTANT PROJECTS CARRIED OUT BY SUBSIDIARIES
Projects executed by JZR
. Design and modernization of the construction of mechanized shields. . Design and production of mine reach stackers. . Research and implement technology for welding work and streamlining the plant and personnel to weld and control it.
Projects executed by ZOD
. Since 2012 cooperation is underway with ZM Ropczyce, University of Mining and Metallurgy in Cracow and the Silesian University of Technology on recovery of magnesium from underground brines. The first tests at the quarter-scale of engineering were held in 2014. Further work related to this topic is anticipated in 2015. ZM Ropczyce is underwriting the cost of all the work. . Development and deployment of technology for the recrystallization of rock salt from Kopalnia Soli Kłodawa S.A. (salt mine). It was developed and deployed based on proprietary experience and proprietary engineering. This technology mostly uses modified existing salt removal nodes. This facilitated the commissioning and implementation of this project with minimal financial expenditures. As a result of the process of recrystallization and treatment, full value edible salt is derived from the waste rock salt (known as sieves). This technology was adapted to recrystallize salt from KGHM Metraco in subsequent years which became the backup supplier of rock salt. . Implementation of new technology to modernize SC-40 and GTO-98 air compressors. The whirling assemblies for this equipment were made from a new type of material using machining technology. The changes made should extend the durability and lifetime of the whirling assemblies by 25%-50%.
Projects carried out by other Group companies
. Advicom is one of the first companies in Poland to implement an innovative system for keeping electronic records of TRITON explosive materials. . JSK entered into an agreement with the Silesian University of Technology to facilitate the conduct of scientific research on the rail area managed by JSK and entailing mining damages.
5.2. ISSUES RELATED TO THE NATURAL ENVIRONMENT
2014 was another year for the Group of management based on the principles of sustainable development. In 2013 the Group continued its integrated environmental protection efforts, made in compliance with legal environmental conditions while taking into account the needs of local stakeholders and the local community. The Group treats care for the natural environment as its Corporate Social Responsibility to the local community and not just as a matter of fulfilling the duties following from the application of the law. The Group’s priorities are to act responsibly on the basis of the highest standards concerning the environment, safety and product quality and to be consistent in undertaking environmental tasks. The Company's commitment to protecting the natural environment is reflected by its activities to minimize the adverse environmental impact exerted by its business, including activities meeting the environmental protection requirements described in the best available technologies ("BAT"). By following best practices in this area the Group is taking action focused on constant oversight and monitoring while showing care for having the lowest possible volume of pollutants emitted into the environment, and taking all steps possible to utilize space and natural resources in an optimum manner.
By raising its responsibility for the natural environment and social community, the Group pursued designated environmental protection tasks in 2014 in the following area:
. protecting water, . rationally managing waste, . Curtailing emissions of air pollutants, . eliminating excessive environmental noise pollution, . minimizing the impact of mining operations on the land surface, . and conducting reclamation and development of sites transformed as a result of mining activity.
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Water protection
. The Parent Company took actions to reduce the quantity and load of underground brines released into surface sewage by use them to the greatest extent for the mines’ technological purposes and in underground mining pits for fire prevention and to liquidate unnecessary mining pits.
. Unused water from draining JSW’s mines was dosed into the Oder River using a hydroengineering method for water protection, i.e. the Olza retention and dosage system operated by PGWiR (mines: Borynia-Zofiówka-Jastrzębie, Krupiński and Pniówek); salt was removed in Zakład Odsalania Dębieńsko (KWK Budryk) owned by the JSW Group until the end of 2014 and was released in a controlled fashion into surface water according to the water rights permits held (KWK Knurów-Szczygłowice).
. PGWiR consistently improved the Olza retention and dosing system by continuing modernization and renovation work and achieving the necessary retention capacity of the settlement tanks.
Rational waste management, reclamation and development of sites transformed as a result of mining activity
. The Parent Company continued to pursue measures to reduce the quantity of mine waste produced and to utilize it to the greatest extent in underground mining pits and to use it to produce and sell crushed rock, as well as to use mine waste on the surface in a way that is safe for the environment in accordance with the assumptions of the “Strategy for managing post- production mine waste in Jastrzębska Spółka Węglowa S.A.” Intensifying actions to produce crushed rock in the mines’ wash plants and to sell it provided for optimum utilization of the mining waste created in highway and road construction and in civil engineering and hydro engineering projects. In 2014 about 0.5 million Mg (tons) of crushed rock and mine waste was sold.
. All of JSW’s waste management facilities are covered by technical and biological reclamation based on traditional and soil-free greening methods guaranteeing rapid and sustainable achievement of the intended environmental effects.
. The Parent Company continued activities to build a plant to recover coal in the facilities for managing mine waste from the Krupiński Mine. JSW signed an agreement to build and operate Zakład Odzysku Węgla (Coal Recovery Plant) in KWK Krupiński in Suszec.
Taking these measures will lead to higher revenues as a result of selling waste and crushed rock used as a construction material and to lower unit costs associated with the utilization of mine waste, while also substantially curtailing the unfavorable impact exerted by mine waste on the natural environment through the optimum utilization of space and natural resources with special emphasis placed on reclaiming and revitalizing terrain and land transformed as a result of mining operations.
Integrated prevention of pollutants and their control (including: curtailing emissions of air pollutants)
. Curtailing greenhouse gas emissions in JSW was accomplished by making the maximum energy utilization of gas through methane drainage in mines. As a result of utilization of captured methane for production of electricity and heat in high-efficiency co-generation systems, in 2014 the emission of methane into the atmosphere was reduced by approx. 111.2 million m3.
. In connection with the participation of JSW KOKS, WZK Victoria and SEJ in the carbon dioxide allowance trading system in reference to greenhouse gases, actions aimed to secure in full the emission needs of the coking installations, heat generation plants and combined heat and power plants in the third settlement period, comprising 2013-2020, were continued.
. To satisfy the emission requirements of the Industrial Emission Directive (IED), which are to become more stringent as of 2016, a new cogeneration power unit was undergoing construction t in EC Zofiówka (SEJ) based on a fluid bed boiler, CFB, which will be fired with coal fuels (including low calorie coal sludge) and biomass.
. PEC executed tasks in the area of construction and modernization of heating grids and modernization of heat generation sources to reduce the emission of air pollutants. Continuation of tasks making it possible to expand the area supplied with system heat in townships will facilitate reduction of low emissions.
. The Group’s coking plants continued efforts to adjust their business to the requirements of the IED Directive so that their coking installations meet the conclusions of the best available technologies (BAT). Construction of power units using coking gas to generate electricity and heat in the Group’s coking plants, apart from benefits in the area of power generation activity, will also allow for limiting emissions of air pollutants.
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. Environment-friendly fuels in the form of coal pellet for boilers with an automatic feeder known as VARMO fuel were produced in Zakład Produkcji Kompozytowych Paliw Stałych of Polski Koks (Composite Solid Fuel Production Plant), which thanks to their new method of production and combustion will facilitate reduction of low emissions.
Elimination of excessive noise pollution emitted into the environment
The Parent Company’s strategy regarding liquidation of excessive noise emitted into the environment assumes taking actions leading to reduction of noise emissions from the most onerous sources to a permissible level. In 2014 the Parent Company continued performing the tasks associated with muffling the facilities in the main plant of the Zofiówka Section in KWK Borynia-Zofiówka-Jastrzębie.
Minimizing the impact of mining operations on the surface
In curtailing and eliminating the impact exerted by mining activity on the earth surface, preventive activities were continued and the scale of mining damage repairs increased in JSW. In 2014, 943 facilities were repaired at an expense of PLN 77.7 million within the boundaries of the mining area of JSW’s mines which has a surface area of 291.85 km². All the planned activities have been consulted on an ongoing basis with local self-governments and with interested individuals and they were monitored and adjusted to ensure the maximum efficiency.
5.3. CORPORATE SOCIAL RESPONSIBILITY POLICY
Responsibility for the natural environment and social community is an element of the Parent Company’s mission. Putting special stress on corporate social responsibility in corporate policy, JSW is giving evidence of its conviction of the importance of responsible and ethical leadership, based on sustainable development principles.
In the CSR area in 2014, the Parent Company implemented the JSW Corporate Social Responsibility Strategy for 2013-2015 adopted by the Management Board in January 2013.
The corporate social responsibility objectives JSW formulated provide support for JSW’s strategic business objectives. The Parent Company carries out business activities taking into account the impact of its decisions and actions on society and the environment, through transparent and ethical behavior which takes into account the expectations of stakeholders, complies with the law and contributes to sustainable socio-economic development.
In the Parent Company, a responsible approach to conducting business signifies:
. doing business in compliance with legal requirements and other accepted obligations, . showing care for internal management systems, . cultivating honest and open relations with customer and suppliers, . sourcing commodities in a balanced way, . curtailing the natural environment impact by following an environmental program, preventing pollution and failures and minimizing the adverse environmental impact and striving to improve the state of the environment on a continuous basis. . ensuring safe working conditions, improving occupational safety and health measures and in particular taking actions to procure the application of safe technological processes, striving to prevent accidents, occupational disorders and events that may lead to accidents, . following a responsible personnel policy, . setting and observing ethical standards.
The Parent Company is building a corporate culture model to address the ever greater requirements of the market and stakeholders defined in the CSR strategy (shareholders, clients, suppliers, employees, administrative and local government authorities, etc.). Considering the requirements of the CSR standard, the JSW Management Board simultaneously implements measures in the fields of economic development, social cohesion and environmental protection in all areas of the Group’s operations, while its human resources management policy is predicated on knowledge pertaining to employee potential and the development thereof.
The Corporate Social Responsibility measures ensure that JSW is perceived as a socially responsible company and will bring measurable benefits such as building competitive advantage, augmenting attractiveness in investors’ eyes, good relations with stakeholders, higher transparency and predictability of actions, perception of JSW as a desirable employer, improving relations with the
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local community and authorities, improving organizational culture, molding JSW’s positive image among employees and their satisfaction.
5.4. HEADCOUNT AND PAYROLL
HEADCOUNT
As at 31 December 2014, the Group had 34,120 employees. In 2014 headcount rose by 4,953 employees compared to 2013.
Table 31. Headcount and average headcount in the Group
Headcount level Average headcount Item as at 31 December: in the year: 2014 2013 2012 2011 2014 2013 2012 2011 Laborers 26,201 22,455 23,075 23,349 24,017 22,714 23,231 23,302
Non-laborers 7,919 6,712 6,643 6,441 7,263 6,706 6,554 6,263
Total 34,120 29,167 29,718 29,790 31,280 29,420 29,785 29,565
The biggest headcount is present in the parent company and at the end of 2014 it was 26,356 (i.e. up 4,192 over yearend 2013). The considerable growth in JSW’s headcount compared to 2013 ensues from including the Knurów-Szczygłowice mine in JSW’s structures as of 1 August 2014 in which the headcount at the time of the acquisition was 5,623. In the period from 1 January to 31 December 2014, 1,565 employees left JSW, including 1,365 people for natural causes (with 1,249 persons retiring). With the establishment of JSW Szkolenie i Górnictwo Sp. z o.o. in the Group, all hirings in JSW S.A. were frozen.
Graph 29. Staff turnover in the Parent Company
In Group’s headcount structure in 2014, similarly as in previous years, employees with vocational and secondary education predominated. The most numerous group consists of employees in the 30-40 age range. Among the Group’s employees men predominated; they accounted for 88.2% of all employees.
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Graph 30. Group’s employment structure by education
Graph 31. Group’s headcount structure by age
JSW’S HR STRATEGY
According to JSW’s HR Strategy adopted by the Parent Company’s Management Board on 15 October 2013, the Parent Company’s business strategy is supported by pursuing the following objectives:
. We recruit the best in accordance with our needs – the objective is to replace and ensure optimum staff selection to carry out JSW’s assignments incorporating employee rotation, pertaining in particular to retirement-related severance, through the subsidiary SIG and from available resources in the local labor market. . We manage our resources rationally – the objective is to ensure the optimum utilization and allocation of human resources to execute the tasks in JSW’s plants . We develop key areas – the objective is to ensure a high level of employee competence supporting stable furtherance of business objectives, including ensuring a high level of leadership competence of employees on managerial positions. . We motivate people to attain objectives – the objective is to develop a model for each employee group to ensure a high level of motivation among employees to complete the entrusted tasks and objectives. . It’s worth making a career with us – the objective is to ensure continuity and attractive terms of employment in JSW’s plants and the Group’s units. . We act consistently – the objective is to apply uniform standards in JSW’s organizational units in processes related to how an employee functions in a company, from recruitment to termination.
INFORMATION ABOUT ACCIDENT RATES
In 2014, 323 work accidents occurred (including 1 severe accident and 3 fatal accidents) in the Group’s employee population. Compared to 2013, the number of accidents dropped by 2 events.
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Table 32. Group’s accident rate
Growth rate Item 2014* 2013 2012 2013=100
Number of employee accidents, including: 323 325 336 99.4
. fatal 3 1 2 300.0
. severe 1 3 3 33.3
. light 319 321 331 99.4
* Including 31 accidents in KWK Knurów-Szczygłowice in the period from 1 August to 31 December 2014.
JSW’s LTIFR ratio (specifying the number of accidents among employees and firms rendering services to JSW’s mines, net of accidents involving fatalities and causing temporary inability to work per one million hours worked) (net of KWK Knurów-Szczygłowice) was 6.23 in 2014 compared to 2013, whereby it fell by 3.1% (in KWK Knurów-Szczygłowice the LTIFR ratio for the period from 1 August to 31 December 2014 was 5.8).
Due to the uniqueness of the activity and exposure of employees, particularly underground, to a number of natural and technical hazards, and harmful and onerous work conditions, the Group pays particular attention to ensure safety and broadly monitors risks, and applies prevention suitable to the risk level. The assumption is to improve the level of work safety and health constantly, inter alia through improvement of the technical level of the mines, monitoring of natural risks, limitation of the impact exerted by people on the accident rate and improvement of training quality. JSW has in place an Occupational Safety and Health Improvement Program for 2009-2015 to reduce the number of work accidents steadily and limit factors reducing the incidence of occupational diseases. In addition, the Parent Company has implemented and certified the Occupational Safety and Health Management System under the Integrated Management System.
PAYROLL
In each Group company different employee remuneration principles apply. The level of remuneration in individual Group entities ranges from PLN 2,285.72 to PLN 8,249.28 (in 2013: from PLN 2,245.43 to PLN 8,411.41).
The rules of remuneration for the Parent Company’s employees are defined in employment contracts or in remuneration bylaws. The remuneration of most JSW employees is paid on the basis of company-level collective bargaining agreements (“ZUZP”) terminated in August 2009, while employees employed after 15 February 2012 are paid according to the principles defined in new employment contracts.
Employee remuneration principles in KWK Knurów-Szczygłowice
Remuneration is paid in KWK Knurów-Szczygłowice on the basis of the Agreement of 20 December 2004 as amended executed by Kompania Węglowa S.A. and trade union organizations. As a rule, the components of remuneration are similar to the regulations in force in JSW. However, the base pay rates are significantly different from the ones set in JSW. According to the clauses of §2 section 17 of the Agreement executed on 23 February 2015, no changes to the terms and conditions of employment for employees in KWK Knurów-Szczygłowice are contemplated through the end of 2015.
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Graph 32. Average monthly salary in the Parent Company (PLN)
* Average monthly pay in 2014 of PLN 8,249.28 also encompasses the remuneration of employees at KWK Knurów-Szczygłowice they receive for their time of work at JSW. ** According to the Agreement executed on 20 May 2013 by and between the JSW Management Board and the Company-level Trade Union Organizations operating in JSW, a cash bonus of PLN 73,765,890 was paid to JSW employees in 2013 for the performance achieved in the 2012 financial year. The average monthly salary in 2013 was PLN 8,136.87 without giving consideration in the salary fund to the above cash bonus, which was paid instead of the profit bonus.
The following factors contributed to the level of the average monthly salary in 2014:
. fulfillment of the agreement concluded on 8 November 2012 between the JSW Management Board and the Trade Unions Protest and Strike Committee at JSW, by whose power new base salary rate tables were introduced as of 1 January 2014 which were 2.4% higher than the previous ones and
. the inclusion of KWK Knurów-Szczygłowice in JSW’s structures as of 1 August 2014.
Starting from 2010, there is no need to agree the average monthly salary growth rate with the trade unions (see Journal of Laws of 2009, Number 219, Item 1707).
5.5. RELATIONS WITH TRADE UNIONS
RELATIONS WITH TRADE UNIONS IN THE PARENT COMPANY
As at the date hereof, 50 Company-level Trade Union Organizations operate in the Parent Company. JSW’s challenging financial standing caused by the shortfall of production and the price collapse on the global coal, coke and steel markets was the key topic at meetings with the trade unions in 2014. During these meetings the JSW Management Board presented and discussed proposed measures to rescue JSW and jobs for JSW employees.
Disputes pending in 2014 and after the final day of the reporting period
The JSW Management Board asked JSW’s Company-level Trade Union Organizations to take a stance on the following issues:
1. Letter of 10 July 2014 on the possibility of suspending the cash payment as the equivalent for scholastic aids and of suspending the bonus for improvement of occupational safety and health in JSW in 2014-2016 for JSW employees,
2. Letter of 29 July 2014 with a request to withdraw from paying a salary allowance for the time of sickness and sick benefit.
3. Letter of 9 October 2014 to take a stance on the possibility of suspending in the period from 1 January 2015 to 31 December 2017 the validity of the Agreement of 5 May 2011 in the part concerning the application of the rules for compensating and awarding other benefits stemming from the collective bargaining agreements and rules and regulations undergoing termination entailing the suspension of paying the following: 14th salary, free coal allowance, salary allowance for the time of sick absence and sick benefits, equivalent to purchase scholastic aids, “Miner’s Charter Ticket” and change in the current method of computing salary for the time of absence for holiday leave.
4. Letter of 16 October 2014 on withdrawing from the performance of item 3f of the Agreement of 8 November 2012 in 2015, having regard for the fact that the pay raise given in 2013-2014 exceeded the level of inflation and according to the
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clauses of the aforementioned Agreement the base wage rates rose by 2.4% as of 1 January 2014 as accepted under Management Board resolution no. 49/VIII/14 of 28 January 2014.
The trade unions presented a negative stance on the proposals included in these letters.
To enable the trade unions to obtain the key information required to take a position on these matters the JSW Management Board invited the trade union organizations to a meeting on 15 October 2014. During this meeting JSW’s standing was presented and the planned measures to cut costs were discussed. The trade unions did not give consent on the aforementioned issues. The JSW Management Board re-invited the chairmen of JSW’s company-level trade union organizations to attend a meeting on 22 December 2014. After the meeting the trade unions issued a statement saying that the quickest possible signing of a consolidated Company-level Collective Bargaining Agreement will make it possible to undertake measures to improve JSW’s standing.
After the day ending the reporting period, under its letter of 2 January 2015 the JSW Management Board transmitted to the trade union organizations the modified draft version of JSW’s Company-level Collective Bargaining Agreement (“CCBA”). At the same time, the JSW Management Board invited the trade union organizations to a meeting on 8 January 2015 during which the trade unions upheld their position. In turn, in response to another invitation on 12 January 2015 the trade unions transmitted their stance notifying that they will not participate in talks concerning the proposed bundle solutions presented by the JSW Management Board.
Under its letter of 12 January 2015 the Management Board once again invited the trade union organizations to a meeting on 14 January 2015, transmitting to them as an enclosure a draft version of the collective agreement between the JSW Management Board and the trade unions operating in JSW on temporarily suspending the Collective Agreement of 5 May 2011 entered into under the procedure envisaged by art. 9 paragraph 1 of the Labor Code by and between the JSW Management Board and the trade union organizations operating in JSW. Once again the trade Unions refused to commence talks.
Consequently, the Parent Company’s Management Board adopted a resolution on 20 January 2015 terminating:
. in its entirety the Collective Agreement of 28 February 2011 executed by and between the Joint Representation of JSW Trade Unions at JSW S.A. and the JSW Management Board on negotiations concerning the collective dispute commenced on 11 February 2011, . in its entirety the Collective Agreement of 8 November 2012 executed by and between the JSW Management Board and the Trade Unions Protest and Strike Committee at JSW in the matter of a collective dispute on “increasing base salary rates by 7% to ensure a pay raise in 2012”, . the Collective Agreement of 5 May 2011 executed by and between the JSW Management Board and the trade union organizations operating in JSW in the part pertaining to §1-2 and § 5-8, signifying that the employment guarantees recorded in §3 of the Collective Agreement of 5 May 2011 are still in force and the JSW Management Board’s resolution of 20 January 2015 on implementing in JSW the generally binding provisions for calculating salary during holiday leave according to the Regulation of the Minister of Labor and Social Policy of 8 January 1997.
Dispute on providing supportive meals
In the course of meetings with trade unions, the JSW Management Board presented the following proposal: . discontinuation of issuance of supportive meals for employees who do not perform the work referred to in the Regulation adopted by the Council of Ministers on 28 May 1996 in the matter of supportive meals and drinks, . withdrawing from providing soap and towels to persons employed in positions where their job does not make require them to wash their face or entire body.
The trade unions did not consent to the Management Board's proposal. Accordingly, on 14 January 2014, the Management Board adopted resolutions to accept the list of positions entitled to receive supportive meals and to change the manner of performing Article 233 of the Labor Code with respect to employees employed on positions, where work does not make require them to wash their face or entire body.
In their letter of 27 January 2014 the Representative Trade Union Organizations operating in JSW moved to repeal the Management Board resolutions on this subject and to cease and desist from fulfilling employee rights to supportive meals and means of personal hygiene according to the rules prescribed by these resolutions. As a consequence of the above resolutions, the State Labor Inspection Service (“PIP”) conducted an audit in JSW. To implement the conclusions in PIP’s statement, the JSW Management Board sent a letter
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to the company-level trade union organizations on 22 April 2014 with a proposal to determine together the jobs in which employees should receive supportive meals.
In their letter of 24 October 2014 ZOK NSZZ „Solidarność” JSW, ZZ „Kadra” Pracowników JSW and Federacja ZZG notified the JSW “that as of 28 October 2014 they will engage in a collective dispute with their employer concerning the on account of implementing and applying the JSW Management Board resolution of 14 January 2014 on accepting a list of jobs entitled to receive the supportive meals referred to in the Regulation adopted by the Council of Ministers on 28 May 1996 in the matter of supportive meals and drinks”.
In its response of 30 October 2014 the JSW Management Board presented its reservations to the trade union organizations in respect of the legal grounds for commencing a collective dispute caused by the trade unions failing to articulate their “demand” as required by the regulations of the Act of 23 May 1991 on Resolving Collective Disputes. The JSW Management Board depicted its doubts concerning the legal grounds for commencing this dispute to PIP in its letter of 28 October 2014 providing notice of the trade unions commencing a collective dispute.
During the meeting of 7 November 2014 the trade union organizations announced that they will rectify this legal defect and on 14 November 2014 they filed a letter with a demand concerning the “Cessation of applying the resolution of 14 January 2014 on accepting the list of jobs entitled to receive supportive meals”.
On 19 November 2014 the JSW Management Board adopted a resolution on adopting the list of positions entitled to receive the supportive meals referred to in the Regulation of 28 May 1996 in the matter of supportive meals and drinks. The talks held under the dispute ended with the signing of a discrepancy report on 3 December 2014.
On 16 December 2014 the JSW Management Board addressed the Ministry of Labor and Social Policy (“MSPPS”) - the Department of Dialogue and Social Partnership with a motion to designate a mediator to run mediation proceedings on the dispute. During the first mediation meeting on 22 January 2015 with the mediator’s participation from the MPPS list, the parties maintained their stances. At the same time, the Management Board proposed a term for the next mediation meeting on 28 January 2015 on account of the possibility of presenting and consulting on issues pertaining to the collective dispute with the Supervisory Board and eventually adopting a resolution on this matter. In turn, the Trade Unions hand-delivered a declaration to the mediator giving notification on undertaking the actions specified in the Act on Resolving Collective Disputes following the employer’s avoidance of signing the discrepancy report under the mediations and the protraction of the mediations.
After the final day of the reporting period, i.e. on 26 and 27 January 2015, the Trade Unions conducted a referendum during which employees responded to the following question: “Are you in favor of undertaking a protest and strike campaign aiming at the JSW Management Board retracting from resolutions and decisions that strip employees of their hitherto conditions of work, salary and employee benefits?”.
During the subsequent mediation meeting held on 28 January 2015 the Management Board proposed to suspend the resolution, until the end of March 2015, on adopting a list of jobs entitled to receive supportive meals, while in the suspension period, the Employer will prepare jointly with the Trade Unions, with the participation of representatives from the Ministry of Labor and Social Policy and experts on occupational medicine and nutrition and a list of jobs where the hired employees should receive supportive meals. The Trade Unions did not accept the Management Board’s proposal stating that the further conduct of talks on this dispute would be plausible only if the Management Board implements item 1 of the Statement made to PIP of 27 March 2014, pertaining to the cessation of its application to determine the circle of employees eligible to receive supportive meals regarding the provisions of 14 January 2014. After the presentation of the parties’ positions, the mediator set the date for the next mediation meeting to be 11 February 2015.
Protest and industrial action from 28 January to 13 February 2015
After the day ending the reporting period, i.e. on 28 January 2015, an industrial action started in JSW’s mines. Formally, the JSW Management Board was not notified of the commencement of the industrial action.
On 29 January 2015, the Management Board addressed the Protest and Strike Committee to launch talks to craft an agreement making it possible to cease the industrial campaign at the time specified by the Trade Unions.
On 29 January 2015 during a meeting of the JSW Supervisory Board and Management Board, a joint position was agreed upon in order to resolve the social conflict.
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On 30 January 2015 and 2-6 February 2015, negotiations were held with the participation of a mediator, Mr. Longin Komołowski, and in the presence, in the capacity of observers, of the JSW Supervisory Board Chairman, Mr. Józef Myrczek, Chairman of the Trade Unions Protest and Strike Committee at JSW S.A., Mr. Dominik Kolorz and JSW Supervisory Board Member, Mr. Tomasz Kusio.
As a result of the demonstrations held in front of JSW’s offices, on 2 February 2015, the talks were interrupted for several hours. The demonstrations in front of JSW’s offices were held also on the next days.
On 6 February 2015 the talks ended with writing down and initialing a record of agreements and divergences between the Management Board and the Trade Unions Protest and Strike Committee. The Trade Unions wrote down in their stance that not all of their postulates were implemented and that until the JSW Supervisory Board adopts a decision this document, together with attachments thereto, does not contain any form of arrangement.
In the letter addressed to the Trade Unions Protest and Strike Committee on 8 February 2015 and in the open letter to the employees dated 9 February 2015, the JSW Management Board asked for immediate discontinuation of the strike, inviting at the same time the Protest and Strike Committee to a meeting on 9 February 2015 in order to work out solutions aimed at protecting JSW’s financial liquidity and maintaining the jobs in JSW mines and cooperating companies.
The Trade Unions Protest and Strike Committee did not come to the meeting proposed for 9 February 2015.
On 11 February 2015, the JSW Management Board once again sent a letter to the Trade Unions Protest and Strike Committee declaring its readiness to continue the talks aimed at working out solutions aimed at protecting JSW’s financial liquidity and maintaining the jobs in JSW mines and cooperating companies. The talks were resumed on 12 February 2015, with the participation of a mediator Mr. Longin Komołowski, JSW Supervisory Board Chairman, Mr. Józef Myrczek, Chairman of the Trade Unions Protest and Strike Committee at JSW S.A., Mr. Dominik Kolorz and JSW Supervisory Chairman, Mr. Dariusz Trzcionka, as a result of which the parties signed a Memorandum of Understanding on the negotiations ended on 13 February 2015.
On 23 February 2015, the JSW Management Board and the Trade Unions Protest and Strike Committee representing trade union organizations active in JSW signed a “Memorandum of Understanding concluded pursuant to Article 91 of the Labor Code” (which the JSW Management Board announced in Current Report no. 16/2015). The document constitutes more detailed specification of the memorandum of understanding of 13 February 2015 and makes it possible to implement the following arrangements over two years:
1. Effective as of 1 March 2015, remuneration for sick leaves and sick allowance will be accrued on the basis of the Labor Code and the Act on Social Benefits from Social Insurance in Case of Illness or Maternity. 2. Effective as of 1 March 2015, remuneration for holiday leaves will be accrued on the basis of the Labor Code and the Regulation of the Minister of Labor and Social Policy of 8 January 1997 on the detailed rules for granting holiday leaves, setting and paying remuneration for holidays leaves and cash equivalent for holiday leaves. 3. Starting from 2015 payments for scholastic aids will be made from the Company Social Benefit Fund, taking into account the income per family member. The parties will agree on uniform detailed rules and criteria for payment of this benefit for all JSW entities, in the form of attachments to the Bylaws of use of the financial benefits and services financed from the JSW Company Social Benefit Fund. 4. Subsidies to employee commuting costs are suspended as of 1 March 2015. 5. In 2015, the base salary rates are maintained on the 2014 level. 6. Payment of the OHS bonus is suspended starting from 2015, and the incentive bonus will be extended to include OHS elements. 7. Starting from 1 March 2015, the so-called Miner’s Card tickets are suspended. 8. In JSW’s plants, during the suspension, work will be performed on business days, Monday through Friday, observing the rule that work will be performed on average 40 hours per week by employees working underground, in a 5-day work week. The rules for organization of work in the 8-hour work time system will be determined by the Heads of Mining Plant Operations and they will apply to all employees in the plants. 9. Payment of the so-called 14th salary bonus for 2015 and 2016 for administration staff (in accordance with the SZPK classification) is suspended. Work will be conducted to extend the term “administration” to include support group staff. 10. Supportive meals will be issued in JSW’s plants in accordance with the Regulation of the Council of Ministers of 28 May 1996, however for underground employees the meals will be issued on the days when they actually work underground, and the positions entitled to meals on the ground will be agreed upon by the parties. 11. Payment of the “14th salary” for 2014 will be made in two installments: in February 2015 (40%) and in September 2015 (60%).
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12. Rules for calculation of the annual bonus, the so-called 14th salary, starting from 2015 will cover the period of 12 months. 13. The Parties will introduce into the labor bylaws, if legally possible, specification of permissible number of overtime hours, up to 416 per annum, develop rules making it possible to organize work on Saturdays without voluntariness, and the work on Saturdays will be paid based on the daily rate and an allowance in the amount of the work category rate. 14. The production losses caused by the strike will be made up for through work on Saturdays. During making up for the losses work on Saturdays and Sundays will be remunerated according to the Labor Code. The losses will be made up for until the production reaches the level of 105.8% in relation to the 2015 Technical and Economic Plan as at the given day, i.e. the level from the day preceding the commencement of the strike. Daily production in the period of making up for the losses will be communicated on an ongoing basis to the trade unions. 15. The coal allowance for newly employed employees is set at 6 tons From 1 March 2015 the coal allowance for JSW employees will be paid in two equal installments: in March and in October. The coal allowance for employees will be reduced to 7 tons. 16. The employer will develop an economic incentive program to speed up retirement of eligible employees. 17. The work on standardization of the remunerations in KWK Knurów-Szczygłowice will start in 2015, and the agreed schedule will be implemented starting from 2016. KWK Knurów-Szczygłowice employees will be employed in JSW on the basis of the existing employment contracts, outside the procedure following from Article 231 of the Labor Code, hence in 2015 they will not be covered by the cost-saving program for other JSW employees. 18. The Parties agree that employees of KWK Knurów-Szczygłowice working for the mine during the IPO of JSW will be covered by the employment guarantee on the same terms as the employees of JSW’s mines. 19. The parties will undertake talks to discuss the possibility of changing the method of functioning of JSW Szkolenie i Górnictwo Sp. z o.o. 20. The JSW Management Board declares that no disciplinary or legal measures will be taken against employees of JSW plants who refrained from work during the strike.
At the same time the parties jointly expressed the willingness to introduce a 6-day work week, with a 5-day work week for employees, noting that the rules and timing of its introduction must be subject to detailed arrangements.
In addition, the parties agreed that payment of the “14th salary” for 2015, 2016 and 2017 will be made in 40% according to the existing rules and the remaining 50% will depend on JSW’s verified positive financial result for the previous year.
Situation in KWK Krupiński
In 2014 the talks with the Trade Unions were conducted also in order to improve the difficult economic situation of KWK Krupiński and ensure its profitability in the next few years. During the meetings the Parties have worked a document entitled; Agreeing on the position on temporary suspension of § 2 of the Collective Agreement of 5 May 2011 entered into under the procedure envisaged by Article 9 § 1 of the Labor Code by and between the JSW Management Board and the trade union organizations operating in JSW. On 25 September 2014 the JSW Management Board adopted a resolution accepting the content of the document. On 26 September 2014 the JSW Management Board informed the JSW Trade Union Organizations in writing about the adopted Resolution and asked for taking a stand on the content of the document adopted by the Management and the trade unions in KWK Krupiński. Joint Representation of Trade Unions at JSW sent its stance in the letter of 29 September 2014, stating that it adopted a resolution not to accept the content of the document adopted by the mine’s Management and trade union organizations. In turn, the Company Coordination Committee of the NSZZ “Solidarność” JSW and the “Kadra” Pracowników JSW trade unions, in their letter of 30 September 2014, demanded from the employer immediate withdrawal from adoption of the resolution of 25 September 2014, informing at the same time that their demand should be treated as a demand under the Act on Resolution of Collective Disputes of 23 May 1991.
Company Collective Bargaining Agreement
Meetings with the Social Party in 2014 were also important from the standpoint of developing a Collective Bargaining Agreement (CBA) for JSW employees. At the meeting held on 31 March 2014 the Parties agreed and signed the “Rules and regulations for the work of the task force to draft a CBA for JSW employees”. Starting on 31 March 2014 negotiations were re-commenced on the draft version of the Collective Bargaining Agreement of 21 November 2011, which were discontinued in Q2 2012. In total the task force team held 19 meetings.
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Payment of the incentive and task-based bonus
Due to the negative opinion of the Social Party on the proposal of the Draft Rules for Granting Incentive Bonuses to the JSW Staff and the Draft Rules for Granting Task-Based Bonuses to the JSW Staff, the JSW Management Board, recognizing the need for the implementation of incentive pay systems, on 28 January 2014 adopted a resolution on the payment of an incentive and task-based bonus in accordance with the proposal contained in the above draft rules. In its letter of 26 February 2014 the Joint Representation of JSW Trade Unions moved to repeal the resolution of 28 January 2014 and to withdraw from paying an incentive bonus and a task-based bonus. In the letter of 22 December 2014 the Management Board presented to JSW Trade Union Organizations draft rules of the incentive bonus comprising certain modifications in relation to the bonus rules prevailing in 2014, inter alia, in connection with inclusion of KWK Knurów-Szczygłowice into JSW’s structures and application of the incentive bonus to its employees.
Other
As a consequence of the termination of the Agreement entered into on 15 April 2013 by and between the JSW Management Board and the trade union organizations operating in JSW on mutual cooperation, terminated by the letter of 21 May 2014, with effect from the end of August 2014, with regard to all the trade unions which were parties to the Agreement, on 26 August 2014 the JSW Management Board adopted a resolution defining the rules of payment for the use of offices by trade union organizations operating in JSW.
RELATIONS WITH TRADE UNIONS IN OTHER GROUP COMPANIES
Table 33. Material collective disputes in other Group companies
Material disputes initiated by the social side and relations with the social party
JSW KOKS There are 10 trade union organizations operating in the company. On 30 December 2013 a collective dispute started between the company and 7 trade union organizations. On 28 February 2014 a pertinent memorandum of understanding to end the collective dispute was signed by and between the Management Board of JSW KOKS in Zabrze and the Trade Union Organizations operating in the company. The parties agreed that:
. The charge to the Company’s social benefits fund in 2014 will be raised by the gross amount of PLN 3,000 per employee employed as at the date of executing this memorandum of understanding, compared to the basic charge, after first signing the Rules and Regulations for the Company’s Social Benefits Fund in 2014 at JSW KOKS. . Employees subject to the Collective Bargaining Agreement will receive a payment according to the Collective Bargaining Agreement: allowance to celebrate Coker’s Day in 2014 as the gross amount of PLN 1,900 and a Christmas Eve allowance in 2014 as the gross amount of PLN 1,900. Employees will be also paid a one-off cash bonus in the gross amount of PLN 900, payable on 1 July 2014, where the employee must still be employed on the date of paying the one-off cash bonus.
On 25 February 2014, the trade unions operating in JSW KOKS reached a majority consensus on the acceptance of the company’s common Rules for the Company Social Benefit Fund, which enabled the Management Board to access the funds and start their disbursement in accordance with the approved Preliminary Draft Budget. On 17 June 2014, 8 trade union organizations operating in JSW KOKS initiated a collective labor dispute against the company’s Management Board. Demands of the trade union organizations include:
. Payment of a Christmas Eve allowance of PLN 2,000 per eligible employee. . Payment of an additional bonus for Q1 2014 in the amount of PLN 1,000 per eligible employee. . Execution of the Employee Guarantee Package for employees of Koksownia Przyjaźń.
In response to the demands, negotiations were immediately started in order to prepare draft proposals which were presented to the Trade Unions in July 2014. The numerous meetings held did not lead to execution of a memorandum of understanding to end the collective dispute. On 27 May 2014, JSW KOKS Management Board terminated the JSW KOKS (previously Koksownia Przyjaźń) Collective Bargaining Agreement, effective 30 November 2016.
WZK Victoria There are 6 trade union organizations operating in the company. In H1 2014, four meetings were held with representatives of the Trade Unions, during which the principles of cooperation were established and the scope and frequency of the provision of information about the company to the trade union organizations were agreed upon. Other topics included wages in 2014 and the use of the Company Social Benefits Fund.
SEJ There are 3 Trade Unions operating in the company. During 2014, the SEJ Management Board met many times with the representatives of trade union organizations. The main topic of the meetings was the discussion of the possibility of increasing
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Material disputes initiated by the social side and relations with the social party
the salary rate and introduction of changes in work time organization. As a result of the talks held, in April 2014, an agreement was signed, defining the salary growth level and a 4-month settlement period. In addition, the parties conducted talks as regards update of the provisions of the Collective Bargaining Agreement. On 21 January 2015, an additional protocol was signed in this respect.
PEC There are 2 Trade Unions operating in the company. In H1 2014 the PEC Management Board met several times with representatives of the Trade Unions. The main subject discussed during the meetings was to agree on the wage growth rate proposed by the Management Board. The proposal presented by the Management Board was not accepted by the representatives of the trade unions and, as a result, a “temporary agreement” on the wage growth rate was entered into on 15 May 2014 with the Social Party. After the company’s Management Board presented a detailed calculation of the personnel payroll fund and the labor costs for H1 2014, the Trade Unions accepted the Management Board’s proposal and on 1 November 2014 an agreement was signed on granting additional benefits to employees and an increased bonus for November 2014.
PGWiR There are 2 trade union organizations operating in the company. The Management Board, after consultations with the trade unions, amended the Collective Bargaining Agreement in force in the company since 1 July 1998 by executing an annex changing the rules of remuneration for home on-call time. It is expected that the rate for serving home on-call time will be set pro rata to the minimum wage, i.e. for serving home on-call time from Monday to Friday: 9% of the hourly rate resulting from the minimum wage arrangement, for serving home on-call time on Saturdays, Sundays and public holidays: 11% of the hourly rate resulting from the minimum wage arrangement.
JZR There are 5 trade union organizations operating in JZR. In cooperation with the social partner, a salary agreement was prepared and signed according to which new, 2.4% higher salary category rates were introduced as of 1 March 2014. From 18 February 2014 talks were underway with representatives of the Trade Unions Organizations on the introduction of changes to the Collective Bargaining Agreement. On 8 November 2014 the Parties agreed that from 2015 the following changes will be introduced into the Collective Bargaining Agreement: . The rules for payment of remuneration for the time of inability to work - remuneration for illness will be paid on the rules set forth in generally binding provisions of labor law, without payment of the 20% additional payment. . The rules for awarding jubilee bonuses and the old age and disability pension severance pay. The basis for the bonus and severance pay, for the years of work outside the Group, will be the minimum salary for the years of work in JZR and the Group and the basis remains unchanged and is calculated based on the employee’s remuneration. It was decided to exclude from the period taken into account in determining eligibility to the bonus the periods of work in a farm, unemployment periods with entitlement to allowances, child-rearing leaves and childcare leaves (up to 6 years in total). It was decided to abandon granting a jubilee watch after 25 years of work. . Introduction of a bonus of PLN 200.00 for each quarter in which the employee worked 100% of the nominal number of work hours.
In addition, during meetings with the Trade Unions, it was agreed that the cash equivalent (coal allowance) will be retained on the level prevailing in 2013 and from 15 May 2014 flexible work time was introduced for persons not working directly on ensuring continuity of production, making it possible for the employee, upon arrangement with the manager, to start work between 6:00 and 8:00 hours and end the work after 8 hours, i.e. between 14:00 and 16:00 hours. In connection with the decision on phasing out the mining activity, on 3 November 2014, the JZR Management Board notified trade union organizations of the necessity of group lay-offs. On 6 November 2014, the Trade Unions started a collective dispute demanding increase of the severance pays to PLN 26.2 thousand, introduction of an additional break for employees working overtime, introduction of energy expenditure tests for employees working overtime, and issuance of supportive meals if the ratios are exceeded. Following mediations, as there was no agreement as to the increase of the severance pays for group layoffs, on 24 November 2014, a discrepancy report was prepared and the Parties entered into an agreement regarding the remaining issues. On 26 November 2014, JZR signed a memorandum of understanding with SIG declaring priority treatment to the employees of JZR’s mining part who want to undertake work in SiG, under the condition of obtaining a recommendation from the President of JZR’s Management Board. On 3 December 2014, mining workers started a strike. As a result an memorandum of understanding was signed - Voluntary Retirement Program, with a declaration of employment of JZR employees in SIG. At the same time, at meetings with the Trade Unions, on 10 December 2014, the Parties declared their willingness to start cooperation aimed at improvement of work efficiency, extension of availability time and, as a consequence, the actual work time, through introduction of a 9.5 hour work shifts with a 37.5 hour work week for underground workers.
JSK There is 1 trade union organization operating in JSK. At meetings with the Trade Unions changes to the following documents were worked out and agreed upon: JSK Employee Remuneration Rules (pertaining to: increase of the lowest salary level category to the amount of the minimum salary effective as of 1 January 2014, indexation of the base salary category rates of blue-collar and white-collar positions on average by approx. 2.7%, effective as of 1 January 2014), Bylaws of the Company’s
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Material disputes initiated by the social side and relations with the social party
Social Benefits Fund (involving increase of the subsidies to individual types of social activity in accordance with the Company Social Benefit Fund as of 1 January 2014 and increase of the charge for the employees by approx. 10%, i.e. PLN 100), Labor Bylaws (pertaining to: OHS regulations, rules and periods of use of work clothes, personal protection equipment and cleaning materials, effective as of 1 April 2014 and work time, work time systems, work start and end times, work schedule, entries in the Operations Log as measure of control of employee’s presence at work that does not constitute a work time record, effective as of 1 January 2015).
Spedkoks There are 10 trade union organizations operating in the company. In H1 2013, the trade union organizations initiated a collective dispute with the Management Board ended on 7 May with execution of a memorandum of understanding as a result of which the Parties agreed that: . the charge to the Company’s Social Benefits Fund in 2014 will be raised by the gross amount of PLN 2,800.00 per employee employed as at the date of executing this memorandum of understanding, compared to the basic charge, after first signing the Rules and Regulations for the Company’s Social Benefits Fund, . a cash Christmas bonus of PLN 1,000.00 gross will be paid per eligible employee by 17 December 2014.
Rem-Bud There are 2 trade union organizations operating in the company. In 2014 the company was involved in a collective dispute which pertain to the demand to increase the remuneration starting from October 2014. As a result of the negotiations, a bonus in an amount lower than the demanded increases was paid.
In 2014, there were no collective disputes in other Group companies and no other material facts occurred in relations with the trade unions.
5.6. DISPUTES
In 2014, Group companies were not parties to pending proceedings in court or arbitration authority or a public administration body concerning accounts payable or accounts receivable with individual or aggregated value exceeding 10% of JSW’s equity.
Group companies took part in court and administrative proceedings related to their activities. The cases, which may have material impact on the company's position and its financial results, are described below. According to the best knowledge of the Management Board, Group companies are not at risk of proceedings that could materially affect its financial position and profitability other than prospective tax proceedings mentioned in the description below.
Proceedings concerning the property tax on underground mine workings The Parent Company is a party to administrative court and tax procedures regarding property tax. These procedures comprise the largest value of all the pending procedures, on the side of liabilities as well as receivables. The subject of dispute is the classification of underground mine workings and the structures and plant situated in them for the purposes of possibly charging property tax. The dispute concerns the years 2003-2012 and the underground mine workings in the following townships: Jastrzębie-Zdrój, Ornontowice, Gierałtowice, Pawłowice, Mszana, Suszec and Świerklany. The proceedings are pending in connection with the decisions issued by tax authorities specifying the tax liabilities as well as in connection with JSW’s requests to declare an overpayment. After a beneficial judgment of the Constitutional Tribunal issued on 13 September 2011 (case file no. P 33/09) in which the Tribunal unambiguously precluded underground mine workings (excavation costs) from property tax and making the tax on plant and facilities located in these underground mine workings dependent on their classification as structures within the meaning of Construction Law, the tax proceedings remain pending.
In all the cases, the Voivodship Court of Administration in Gliwice issued decisions which were favorable to JSW with respect to the taxation of underground workings and their equipment and the Court generally rescinded tax decisions issued in this respect. However, the rationale for those decisions was challenged by the Local Government Appeal Court in Katowice and also the Local Government Board of Appeals in Bielsko-Biała, which filed cassation appeals with the Supreme Court of Administration against all the judgments which were favorable to JSW. However in May and June 2014, the Supreme Court of Administration dismissed all the cassation appeals submitted by the Local Government Boards of Appeals. In its justifications to the judgments, the Court clearly stated that mine workings are not building structures, and therefore the value of a mine workings thus defined (excavation costs) may not be included in the taxable base for property tax purposes. At the same time, it emphasizes that facilities and equipment located in mining pits may be subject to
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taxation, however this requires evidence that they represent buildings as defined in the Act on local taxes and fees with specific references to the building code.
Up until now, in most cases involving JSW, the Local Government Board of Appeals in Katowice and Bielsko-Biała have rescinded decisions of the Townships and referred the cases for reexamination, or rescinded the decisions of the Townships and discontinued the proceedings due to the resolution adopted by the full panel of the Supreme Court of Administration that regulates the expiration of the statute of limitations.
In December 2012, the Supreme Court of Administration issued a resolution according to which, after the expiration of the statute of limitations, it is not permitted to conduct tax proceedings and rule on the amount of a tax liability which expired upon payment. This resolution does not apply directly to JSW, but it does apply to disputes between JSW and the Townships. On 29 September 2014, the full panel of the Supreme Court of Administration confirmed that the resolution was legal.
The Local Government Boards of Appeals invoked the resolution adopted by the full panel of the Supreme Court of Administration to issue decisions for mining townships (Ornontowice for 2003, Pawłowice for 2003-2005, Suszec for 2003) in which they rescinded the townships’ decisions specifying tax liability amounts and discontinued the proceedings due to the expiration of the statute of limitations. Also the Świerklany township, which conducted the proceedings for the year 2005, discontinued them due to the expiration of the statute of limitations. After the decisions were eliminated from legal circulation, the monies paid on their basis now constitute an overpayment to be refunded to JSW. Out of the disputed property tax on underground mining pits in the amount of PLN 213.5 million paid by the end of 2014, the Parent Company recovered tax refunds in the amount of PLN 53 million in cash and PLN 19.3 million as set-offs with current tax liabilities and newly-issued decisions. Additionally, in subsequent proceedings, JSW filed complaints against the townships’ decisions regarding the interest on the overpaid amounts, which, according to JSW, accrued from the date of payment of the disputed tax. The townships claim that the interest is not due to JSW, because the tax authority did not contribute to the occurrence of the prerequisites for rescinding the overpayment. This means that JSW will be a party to further court proceedings in this area.
Certain issues remain disputable under the pending proceedings. These are: the subject of taxation, i.e. roof supports are classified by the Townships as a retaining structure subject to taxation and the taxable base, i.e. the Townships assume that tax applies to structures located in mining pits in amounts determined based on market valuation, despite the fact that JSW submitted its own findings concerning the initial value of mining pits and the values of individual structures located in the pits.
The total contested amount in the proceedings pending before public administrative authorities is PLN 147.0 million. In view of the positive ruling of the Constitutional Tribunal and the judgments handed down by the Voivodship Court of Administration and the Supreme Court of Administration, JSW has reviewed the estimated potential claim of the Townships relating to the disputed property tax on mine workings, which it recognized as provisions or liabilities. The total estimated amount of the claims of the mining Townships pertaining to the contested real estate tax on underground mining pits as at 31 December 2013 was PLN 177.7 million. In Q2 2014, the Parent Company reviewed the extent to which some infrastructure facilities, especially elements of capitalized mine workings, are subject to taxation with the disputed property tax. As at 31 December 2014, the estimated amount of the claims of the mining Townships, updated on an ongoing basis following the review, was PLN 134.2 million and was reflected in the tax decisions (liabilities) of PLN 73.6 million and provisions of PLN 60.6 million recognized for this purpose.
At the same time, in connection with the decisions issued by the Townships and the Appeal Boards, confirmed by the Voivodship and Supreme Courts of Administration, in December 2014 the Parent Company started declaring underground infrastructure for taxation.
After the date ending the reporting period, i.e. from 1 January to 16 March 2015, overpayments in respect of the disputed real property tax were settled against current liabilities, submitted corrections of real property tax for previous years and the operating fee in the amount of PLN 61.7 million. Furthermore, the Townships repaid PLN 9.2 million to JSW’s bank account.
106 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
5.7. PRIZES AND DISTINCTIONS
Table 34. Prizes and distinctions in 2014
Prizes and distinctions awarded to Group companies in 2014
JSW S.A. among RESPECT JSW S.A. was once again, and has been since 2012, included in the group of companies managed in a sustainable Index companies and responsible manner, i.e. in the group of companies comprising the prestigious RESPECT Index.
JSW won "The Best Annual Report 2013" contest organized by the Institute of Accounting and Taxes in the "Best Prizes in The Best Annual Annual Report on the Internet" category. In the same contest, JSW was second in the “Best Useful Value of the Annual Report 2013 Contest Report” category. Moreover, JSW received a distinction for major progress in the improvements in the Management Board Activity Report.
The Czarny Diament 2014 (Black Diamond 2014) prize was awarded to KWK Pniówek in Pawłowice for excellent contacts with the local authorities. This prize has been granted for 16 years to individuals, companies and institutions Czarny Diament 2014 which significantly contributed to the development of the region and the voivodship. The prize is awarded by the Chamber of Industry and Commerce of the Rybnik Industrial District.
Rescue teams of the Borynia Section of KWK Borynia-Zofiówka-Jastrzębie took two first places and one second place in the IX International Mine Rescue Competition in Poland attended by 21 teams from 13 countries. The competence Prizes for mining rescuers of the rescue teams was evaluated in five areas: simulated rescue operation, skills of rescue equipment mechanics and metering equipment mechanics, first medical aid and knowledge test.
The “Crew head’s zone and more” training and information platform developed and implemented in JSW won the first prize in the “Organizational and educational projects” category in the National Contest for Improvements in Working Conditions organized by the Ministry of Labor and Social Policy in cooperation with the Ministry of the Economy, the Prize awarded by the Ministry Ministry of Health, the Ministry of Science and Higher Education, the Ministry of Education, the Polish Federation of of Labor and Social Policy Engineering Associations, the State Labor Inspection, the Technical Inspection Authority, the State Mining Authority, the Social Insurance Institution, the Farmers Social Insurance Institution, the Solidarity Trade Union, the All-Poland Alliance of Trade Unions and the Forum of Trade Unions. The Contest is a prestigious national competition covering all areas of the economy, science and technology.
JSW KOKS (Przyjaźń Coking Plant) received the Innowator 2014 distinction for the introduction of innovative Innowator 2014 ecological solutions in its production process. The distinction is granted as part of the International Scientific Conference on Innovation and Entrepreneurship. Theory and practice.
“Mouflon” in the Responsible WZK Victoria received the regional award “Mouflon” taking the first place in the Business Contest Muflony 2013 in the Business Company category Responsible Business Company category.
Authorized Economic Operator (AEO) certificates are awarded by the European Union’s customs services to economic operators whose business is based on the provisions of Community customs legislation. This document guarantees that the economic operator holding it is credible to the customs authorities throughout the European Union. This certificate also confirms a positive image of the economic operator in the business community. The AEO status AEO certificate for customs entitles its holder to a range of inspection-facilitating benefits. The certificate may be granted to any economic operator simplifications in Polski Koks with its registered office in the European Union, provided that it meets the criteria defined in the Community Customs Code. Such criteria include: an appropriate system of managing commercial records and, if necessary, transport records, documented solvency, appropriate security and safety standards and compliance with customs requirements. The AEO status is recognized in all EU Member States and in Switzerland, Norway, Japan and the United States.
The idea of the European Medal is to award products and services the quality of which meets European standards. European Medal for coke The organizer of the project is the Business Centre Club, with the Honorary Patronage of the European Economic exports awarded to Polski and Social Committee in Brussels and the Minister of Foreign Affairs of the Republic of Poland. Its purpose is to Koks distinguish and promote products and services offered by companies operating in Poland, to stimulate interest in European standards and regulations adopted by the European Union and to generate interest among consumers and businesses in the European Union in the Winners of the European Medal. The European Medal is awarded for
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Prizes and distinctions awarded to Group companies in 2014
products and services that satisfy European standards. Nominated services or products must satisfy the legally required standards and hold appropriate licenses and patents. An important factor for the assessment is the company’s rate of growth and obtained awards and certificates.
Polski Koks, the owner of the Composite Solid Fuels Production Plant, the manufacturer of VARMO HOME, was Distinction for the Composite awarded with a distinction in the 13th edition of the “Eco-Laurels of the Polish Chamber of Ecology” contest in the “air Solid Fuels Production Plant protection” category. The most recent edition of the “Eco-Laurels of the Polish Chamber of Ecology” contest was in Polski Koks in the “Eco- organized under the honorary patronage of the Minister of the Environment, the Ministry of the Economy, the National Laurels of the Polish Chamber Fund for Environmental Protection and Water Management and the Regional Auditing Association of Cooperative of Ecology” contest in the air Housing Operators. The objective of the contest is to reward the most effective activities and works undertaken with protection category a view to protecting the environment carried out by economic operators, local governments and environmental organizations throughout the country.
CLPB received a Golden Laurel in the Science and Innovation category, awarded for the efficient management of a “Skills and Competence” steadily growing company which is open to new challenges and maintains high standards of services, the continued Golden Laurel implementation of innovative services and the application of modern testing technologies, close cooperation with customers, the provision of the results of commissioned tests in a timely and reliable manner, the search for new areas and appropriate testing technologies and the continuous development of the knowledge and skills of its staff.
JSK received a Golden Laurel in the “Polish Company” category, awarded for the efficient management of the “Polish Company” Golden company, the achievement of good economic results, the provision of high quality services oriented toward customer Laurel expectations, the maintenance of railway infrastructure and associated facilities in good operating condition, the taking of appropriate care in maintaining their efficiency and reliability, the diversification of services provided, the search for new areas and the acquisition of new competences.
Market Leader and Euro JSK received the following titles: Market Leader – Best Polish Company in the provision of railway lines and Euro Leader 2014 Leader in the provision of railway lines.
In February 2014, Advicom received the title of the “Reliable Employer 2013”. The award is granted for an effective and innovative HR policy, and the criteria applied by the jury include: working conditions, compliance with occupational Reliable Employer 2013 health and safety regulations and labor laws, timely payment of employee compensations, social conditions and the path of professional development.
Advicom was among the companies which received the Business Gazelle 2014 award for the most rapidly growing small and medium-sized enterprises. A Gazelle is a small or medium-sized company which, thanks to its very rapid Business Gazelle 2014 growth, is able to deal perfectly well with even much larger competitors. The Business Gazelle rankings are compiled each year by business papers owned by Bonnier Press Group of Sweden.
6. REPRESENTATION ON THE APPLICATION OF CORPORATE GOVERNANCE
Pursuant to § 91 section 5 sub-section 4) of the Finance Minister’s Regulation of 19 February 2009 in the matter of current and periodic information provided by issuers of securities and conditions for considering the information required by laws of a non-member state as equivalent to EU regulations (“Regulation”) and § 29 sec. 5 of the Stock Exchange Regulations and Resolution 1013/2007 adopted by the Management Board of WSE on 11 December 2007, the Management Board of JSW hereby presents its Representation on the Application of Corporate Governance Rules in 2014.
6.1. IDENTIFICATION OF CORPORATE GOVERNANCE RULES BEING APPLIED
Since 4 July 2011, i.e. since the time when JSW S.A. shares were admitted to public trading, JSW has been subject to the corporate governance rules described in the document entitled Best Practices of WSE Listed Companies (Corporate Governance Rules) adopted by Resolution no. 12/1170/2007 of the Stock Exchange’s Supervisory Board on 4 July 2007. The Corporate Governance Rules were
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amended by WSE Supervisory Board Resolution no. 15/1282/2011 of 31 August 2011 and 20/1287/2011 of 19 October 2011 (with effect from 1 January 2012) and WSE Supervisory Board Resolution no. 19/1307/2012 of 21 November 2012 (with effect from 1 January 2013). The text of the Best Practices of Companies Listed on WSE is published on the website of Warsaw Stock Exchange S.A. at the following address: www.corp-gov.gpw.pl.
6.2. IDENTIFICATION OF CORPORATE GOVERNANCE RULES NOT APPLIED
JSW does its utmost to apply the corporate governance rules prescribed by the document entitled Best Practice for WSE Listed Companies. In 2014, JSW did not apply the following rules:
I. Recommendations for Best Practices
Rule no. I.5:
“The Company should have a compensation policy and rules for defining it. The compensation policy should in particular specify the form, structure and level of compensation of the members (directors and officers) of the supervisory and management boards. Commission Recommendation of 14 December 2004 as regards the regime for the remuneration of directors of listed companies (2004/913/EC) and Commission Recommendation of 30 April 2009 complementing that Recommendation (2009/385/EC) should apply to defining the remuneration policy for members of supervisory and management bodies of the company.”
Explanation:
On 18 November 2011, the JSW Supervisory Board adopted a resolution on executing management contracts with the Members of the JSW Management Board. This resolution was adopted in the interest of and in response to the explicit suggestion made by shareholders of JSW who expected a system to incentivize senior management to care for the interests of the owners. Therefore, the Supervisory Board acted in compliance with the Commission Recommendation of 14 December 2004 according to which the “form, structure and level of directors’ compensation are matters falling within the competence of companies and their shareholders”. In turn, the JSW Shareholder Meeting sets the compensation for the Supervisory Board members.
Rule I.12:
“The Company should provide the shareholders with the possibility of exercising the voting rights, in person or through a proxy, remotely, i.e. while staying in location other than the place of holding the shareholder meeting, via means of electronic communication.”
Explanation:
At the moment, the Issuer does not provide the shareholders with the possibility of exercising the voting rights by means of electronic communication. JSW will monitor the market of such services from the standpoint of security and reliability of such solutions as well as the costs of their implementation. If a solution arises that would ensure a good quality to price ratio, the JSW Management Board will consider the possibility of its implementation.
IV. Best Practices of Shareholders
Rule no. IV.10:
“A company should enable its shareholders to participate in a General Meeting using electronic means of communication through: 1) real-life broadcast of General Meetings; 2) real-time two-way communication where shareholders may take the floor during a General Meeting from a location other than the General Meeting;
Explanation:
The rule is not followed for technical reasons related to implementation of the data transmission system. The JSW Management Board will do its best to apply this rule. If this rule is implemented, JSW will make an immediate public announcement of this fact.
In 2014 and as at the date of this report, JSW applied the remaining corporate governance rules set forth in the document entitled Best Practice for WSE Listed Companies.
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6.3. PRIMARY ATTRIBUTES OF INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN REFERENCE TO THE PREPARATION OF FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS
The Parent Company prepares separate and consolidated financial statements based on the generally binding regulations of law and internal regulations. For the purpose of procuring that the financial statements are true and fair and comply with the binding regulations of law and of generating high quality financial data, JSW has in place internal control and risk management systems. The JSW Management Board is responsible for the internal control system and its effectiveness in the process of preparing the financial statements and the periodic reports prepared and published in accordance with the principles of the Regulation.
Under the internal control and risk management system, in the process of preparing financial statements JSW applies a number of procedures and internal bylaws whose purpose is to procure effective and efficient control as well as identification and elimination of prospective risks. The system is implemented mostly on the basis of: . JSW Organizational Bylaws, . Documentation concerning the accepted accounting principles (policies), . Corporate Risk Management Policy and Procedures, . Bylaws and procedures concerning the performance of the reporting duties arising from the laws governing the trading in JSW’s securities on the regulated market and the executive acts to these statutes prescribing the scope of reporting as well as the rules and allocation of responsibility for the preparation of the financial statements, . Instructions concerning documentary workflow, . Scopes of employee rights and duties, . Tax procedure.
The process is also implemented through the Group companies using unified models of financial statements, audit and revision of the financial statements by the same auditor, and through the process of authorizing and opining the financial statements prior to their publication.
The Vice-President for Financial Matters oversees the preparation of financial statements with the financial and accounting teams reporting to him as they perform tasks relating to recording and verifying economic events in the accounting ledgers and generating the data required to prepare the financial statements. The Chief Accountant Department is responsible for preparing the separate and consolidated financial statements, and the Management Boards of the consolidated companies are responsible for preparing the reporting packages for the Group’s consolidated financial statements.
In order to ensure the application of uniform accounting principles, JSW adopted the IFRS-based Documentation of Accepted Accounting Policies, which is binding on JSW and Group companies (principally with respect to the preparation of consolidation packages for the purposes of the consolidated financial statements). The Group companies prepare IFRS-compliant financial statements. The Group companies are also audited by the same auditor, which should eliminate potential errors during preparation of the consolidated financial statements and detect discrepancies in how particular companies follow the accounting principles. Amendments to IFRS are monitored on an ongoing basis, in order to update the Documentation of Accepted Accounting Policies and the scope of disclosures in the financial statements.
The Parent Company continuously employs cohesive IFRS-compliant accounting rules to present financial data in the financial statements, periodic reports and other reports conveyed to shareholders. The same rules are in force in the companies belonging to the Group in which JSW is the parent company. The scope of financial data disclosed in the financial statements results from the reporting duties contemplated in the IFRS, and the method of their presentation should ensure comprehensibility and clarity of information as well as suitability and comparability of data contained in the financial statements.
The data disclosed in the financial statements come from JSW’s accounting records and additional information transmitted by JSW’s various organizational cells. However, the Group companies transfer the required data in the form of reporting packages for the preparation of consolidated financial statements. The persons responsible for preparing the consolidated financial statements also have access to separate financial statements of the companies. As at the moment of preparing the consolidated financial statements, all the financial statements of the companies have already been audited and opined by the auditor.
The data from the accounting ledgers ensure the accuracy of the financial statements as they contain evidence entered on the basis of the appropriate source documentation, while using the most modern IT technology to record, process and present economic and financial data. The system’s modular structure provides for a transparent split of areas and competencies, the coherence of the records of
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operations in the accounting ledgers and control between the ledgers. Access to data in different cross-sections and layouts is achievable through an expanded reporting system. On an ongoing basis, JSW updates its IT system to the changing rules of accounting and other legal standards, which is supported by the high degree of flexibility in the functionalities of the system’s various modules. Consolidated financial statements are prepared using specialized IT tools. The IT solutions used by JSW secure control of access to the finance and accounting system and provide for the appropriate protection and archiving of the accounting ledgers. The security of operating the IT system is afforded by the relevant structure of authorization. Control of access is exercised at every stage of preparing the financial statements, starting from entering source data, through data processing to generating output information. JSW applies security systems at the hardware and system levels.
The Supervisory Board evaluates the separate and consolidated financial statements and appoints an Audit Committee, which is an advisory and opinion-giving body acting collectively within the structure of the Supervisory Board. The primary objective of the Audit Committee’s operation is to support the Supervisory Board in exercising financial supervision and delivering to the Supervisory Board accurate information and opinions, enabling the making of the right decisions on financial reporting, internal control and risk management, as well as to procure independence and objectivity of the audit firm auditing the financial statements. Moreover, in accordance with Article 4a of the Accounting Act of 29 September 1994, the duties of the Management Board and the Supervisory Board include ensuring that the financial statements and the activity report meet the requirements prescribed by law.
According to the binding regulations, JSW submits its financial statements to an audit (annual statements) and a review (interim semi- annual statements) by an independent statutory auditor. The JSW Supervisory Board selects the statutory auditor from among reputable audit firms based on the Audit Committee’s recommendations. Within the framework of its audit work, the statutory auditor makes an independent evaluation of the accuracy and correctness of the separate and consolidated financial statements and confirms the effectiveness of the internal control and risk management system.
The fundamental element of risk management in the process of preparing financial statements is to audit the control mechanisms and the occurrence of risks in JSW’s operations. In performing these duties, the internal audit division assists the Audit Committee by conducting the relevant work to check the effectiveness of control and the efficiency of processes. In 2014, the cooperation between the internal audit division and the Audit Committee was continued. The internal audit division operates on the basis of the Bylaws of Internal Audit approved by the Supervisory Board, performing audit tasks of an assurance and consulting nature, verification audits and ad hoc audits (ordered).
The internal control system in operation in JSW covers all the processes in JSW, including areas having a direct or indirect impact on the correctness of preparing the financial statements. JSW also has in place the means of communication and the IT systems which generate reports containing operational, financial and formal data used to ensure compliance of its activities with the law. The internal control system is monitored through operational monitoring tasks conducted by the employees during the performance of their duties. These are the tasks which result from regular actions related to management and supervision.
The Group’s subsidiaries record, process and present their economic and financial data based on their own procedures for identifying, recording and controlling economic operations. The entities run their accounting ledgers in integrated IT systems and the underlying documentation is subject to periodic reviews and updates. The companies implement their own organizational solutions that are to ensure the correct operation and protection of systems and security of access to data, by developing internal policies and rules and regulations for granting access, awarding rights and control. With respect to operational risk control and assessment systems, the companies adopt their own internal procedures depending on their scale of operation and the needs of the Management Board. Control activities directly or indirectly affect the correctness of financial statements. The Group companies have Management Boards and Supervisory Boards which according to the Accounting Act are responsible for ensuring compliance of the financial statements and company activity reports with the law.
6.4. SHAREHOLDERS WITH MAJOR BLOCKS OF SHARES
JSW shares are traded on the Warsaw Stock Exchange where they are listed on the main floor in the continuous quotation system. JSW shares are included the indices of largest companies, i.e. WIG20, WIG30, WIG, as well as the industry-specific index WIG-Surowce and the prestigious index of socially responsible companies RESPECT.
In the communication of 12 February 2015, the Management Board of the Warsaw Stock Exchange announced that after the 20 March 2015 an annual revision of index portfolios will be performed, as a result of which JSW will leave the WIG20 and WIG20TR indices.
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The Parent Company does not have a detailed breakdown of the shareholding structure as at the final day of the reporting period or as at the preparation date or as at the publication date of this report. In the last financial year, JSW did not receive any information about exceeding the percentage thresholds of the total number of votes specified in Article 69 Section 1 of the Act on Public Offerings and the Conditions for Floating Financial Instruments in an Organized Trading System and on Public Companies. The only shareholder of JSW which held a number of shares constituting 5% of the share capital and giving it the right to the same amount of votes at the Shareholder Meeting, as at 31 December 2014 and as at the date of preparation and publication of this report was the State Treasury.
Table 35. Shareholders holding at least 5% of the share capital as at 31 December 2014 and as at the date of preparation of this report
Number of votes at % of total votes at Shareholder Number of shares the Shareholder % of share capital the Shareholder Meeting Meeting
State Treasury 64,775,542 64,775,542 55.16% 55.16%
* According to Current Report no. 18/2014 of 18 July 2014, the State Treasury was the only shareholder holding 5% of the votes at the Extraordinary Shareholder Meeting on 16 July 2014, with 64,400,400 votes, representing a 54.85% stake in total votes.
6.5. HOLDERS OF SECURITIES WITH SPECIAL RIGHTS OF CONTROL
JSW has not issued securities that would give special rights of control over it.
6.6. RESTRICTIONS REGARDING THE EXERCISE OF VOTING RIGHTS
Restrictions regarding the exercise of voting rights are described in detail in § 9 of JSW's Articles of Association, available at www.jsw.pl. The restrictions set forth in JSW’s Articles of Association have been worded as follows: 1. Voting rights of the shareholders holding above 10% of all the votes in the Company are restricted in such a manner that no such shareholder may exercise more than 10% of all the votes at the Company's Shareholder Meeting. 2. The restriction of the voting rights referred to in section 1 above does not apply to the State Treasury and the State Treasury subsidiaries in the period in which the State Treasury, together with the State Treasury subsidiaries, holds a number of the Company's shares authorizing it to exercise at least 34% plus one vote in all the votes in the Company. 3. The votes held by shareholders linked by a controlling or subsidiary relationship (Shareholder Group) shall be cumulative; if the cumulative number of votes exceeds 10% of all the votes in the Company, it shall be reduced. Vote accumulation and reduction principles are defined in sections 6 and 7 below. 4. Within the meaning of § 9 item 4 of JSW’s Articles of Association, a shareholder is any person, including its parent company and subsidiary, which holds a direct or indirect voting right at the Shareholder Meeting under any legal title; this also applies to a person holding no shares in the Company, in particular a user, lien holder, beneficiary under a depositary receipt within the meaning of the Act of 29 July 2005 on Trading Financial Instruments, and a person authorized to take part in the Shareholder Meeting despite selling the shares after the date when the right to participate in the Shareholder Meeting was determined. 5. The parent company and the subsidiary shall mean, respectively, a person: 1) remaining in a controlling or subsidiary relationship within the meaning of the Commercial Company Code, 2) having the status of a controlling company, subsidiary company or a simultaneously controlling company and subsidiary company, within the meaning of the Act on Competition and Consumer Protection of 16 February 2007; or 3) having the status of a controlling entity, controlling entity of a higher level, subsidiary entity, subsidiary entity of a lower level, or having simultaneously the status of a controlling entity (including controlling entity of a higher level) entity and subsidiary entity (including subsidiary of a lower level and co-subsidiary) within the meaning of the Accounting Act of 29 September 1994; or
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4) who exerts (controlling entity) or is subject to (subsidiary entity) decisive influence within the meaning of the Act of 22 September 2006 on Transparency of Financial Relations between Public Authorities and Public Enterprises and Financial Transparency of Certain Enterprises; or 5) whose votes following from the Company's shares, held directly or indirectly, are cumulative with the votes of another person or other persons on the principles set forth in the Act of 29 July 2005 on Public Offerings and the Terms and Conditions for Introducing Financial Instruments to an Organized Trading System and on Public Companies, in connection with holding, selling or acquiring significant stakes of the Company's shares. 6. Vote accumulation involves adding up the number of votes held by individual shareholders from a Shareholder Group. 7. Reduction of votes involves reduction of the total number of votes in the Company at the Shareholder Meeting vested in the shareholders from a Group of Shareholders, to the level of 10% of total votes in the Company. Reduction of votes is effected according to the following principles: 1) the number of votes of the shareholder holding the biggest number of votes in the Company from among all shareholders from the Shareholder Group is reduced by the number of votes equal to the surplus above 10% of all the votes in the Company vested jointly in all shareholders from the Shareholder Group. 2) if despite the reduction referred to in item 1) above the total number of votes at the Shareholder Meeting vested in the shareholders from a Shareholder Group exceeds 10% of total votes in the Company, further reduction of votes held by other shareholders from the Shareholder Group shall be carried out. Further reduction of votes of individual shareholders shall take place in the order determined on the basis of the number of votes held by individual shareholders in the Group of Shareholders (from the biggest to the smallest). Further reduction is carried out until the total number of votes held by shareholders from the Shareholder Group does not exceed 10% of total number of votes in the Company, 3) in each case a shareholder whose voting right has been reduced, retains the right to exercise at least one vote, 4) the reduction of the voting rights pertains also to shareholders who are not present at the Shareholder Meeting.
6.7. RESTRICTIONS ON THE TRANSFER OF OWNERSHIP TITLE TO SECURITIES
Restrictions regarding the transfer of the ownership title to JSW's shares are specified in § 8 of JSW’s Articles of Association, according to which: "Disposal of 50% + 1 shares by the State Treasury may be effected only with the consent of the Council of Ministers. Disposal of shares without such consent shall be invalid."
On 7 July 2013, the two-year ban on trading in series A, C and D employee shares of JSW expired and 7 July 2014 was the date of expiration of the three-year ban on trading in series C shares acquired by employees discharging Management Board member functions in JSW Group companies, specified in the resolution adopted by the Extraordinary Shareholder Meeting of JSW on 12 May 2011 and series D shares acquired by employees discharging management board member functions in KK Zabrze.
6.8. PRINCIPLES OF APPOINTMENT AND DISMISSAL OF MANAGEMENT AND SUPERVISORY TEAM AND THEIR POWERS
MANAGEMENT BOARD
Rules for appointing and dismissing Management Board members
Composition of the Management Board and the procedure of its operation are defined in the Management Board Bylaws and in JSW's Articles of Association. The Bylaws are adopted by the Management Board and approved by a Supervisory Board resolution. The Management Board Rules and Regulations and the Articles of Association of JSW are available at www.jsw.pl. According to JSW’s Articles of Association, the Management Board consists of three to six members. Following a qualification procedure and election of the Management Board member elected by the employees, the Supervisory Board appointed 5 members of the Management Board of the 8th term of office. The composition of the Management Board is presented in Item 6.11 of these financial statements. Management Board members are appointed for a joint term of 3 years. The mandate of a Management Board member appointed before the end of the term of office of the Management Board expires simultaneously with the expiry of the mandates of the remaining
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Management Board members. Management Board Members are appointed and dismissed by the Supervisory Board following a qualification procedure (except for the Management Board member appointed by JSW employees). If the average annual headcount in JSW exceeds 500 employees one Management Board member shall be elected by JSW employees, in accordance with the election bylaws adopted by the Supervisory Board. Results of the election are binding for the body authorized to appoint the Management Board, i.e. the Supervisory Board. The failure to elect a JSW employee representative to the Management Board shall not hinder the Management Board from adopting binding resolutions. Upon request of at least 15% of all JSW employees, a ballot shall be held to dismiss the Management Board member elected by employees. Such dismissal, death or other important reasons that decrease the number of Management Board members by the member elected by employees shall require supplementary elections. Detailed regulation of this matter is included in JSW’s Articles of Association available on JSW’s website. A Management Board member shall submit a resignation in writing to the Supervisory Board at the address of the registered office of JSW.
Powers of the Management Board
The Management Board manages JSW’s matters, represents it in and out of court and makes decisions on all the matters which are not reserved for other corporate bodies of JSW. Management Board resolutions are adopted by an absolute majority of votes, where at least three Management Board members attend the meeting and are recorded in minutes. Issues exceeding ordinary management shall require a Management Board resolution, in particular: . determining the organizational rules and regulations defining the organization of JSW, . appointing general proxies, . buying and selling real property, . matters in which the Management Board turns to the Shareholder Meeting and Supervisory Board.
Two Management Board members acting jointly or a Management Board member acting with a proxy are authorized to make statements of will and affix signatures on behalf of JSW. The Supervisory Board represents JSW in agreements between the Company and a Management Board member, as well as in disputes with him/her.
Management Board members may also participate in a meeting via teleconference or videoconference. Participation of a Management Board member attending a meeting via teleconference or videoconference, in respect to both discussion and voting will be recorded in the minutes and voting will be noted in the Management Board Resolution in the space designated for that Management Board member’s signature.
The President of the Management Board exercises supervision over all activity of JSW, makes decisions, which are not reserved for JSW’s corporate bodies, convenes Management Board meetings and chairs them and names the Vice-President to perform these duties in his absence. The President of the Management Board also exercises supervision over its reporting Departments, Teams, Proxies and the Spokesman. Vice-Presidents exercise supervision over JSW’s operations in their respective areas of activity and make decisions not reserved for the powers of JSW’s governing bodies. The Vice-Presidents of the Management Board exercise direct supervision over reporting Departments. The Vice-President for Financial Matters also exercises supervision over the Management Board Proxy for Computerization of JSW and the Vice-President for Technical Matters also exercises substantive supervision over the Health and Safety at Work Team. The Management Board oversees the Procurement Department. The division of powers between the distinct members of the Management Board ensures effective operation of JSW, and the Organizational Bylaws of JSW, the Organizational Bylaws of the Management Board Office and the Organizational Bylaws of JSW’s Mining Plants adopted by the Management Board ensure the effective performance of tasks assigned by the Management Board.
SUPERVISORY BOARD
Rules for appointing and dismissing Supervisory Board members
Composition of the JSW Supervisory Board and the procedures of its operation are defined in the Supervisory Board Rules and Regulations and in JSW’s Articles of Association, which are available at www.jsw.pl. Supervisory Board Bylaws are adopted by the Supervisory Board.
According to JSW’s Articles of Association, the Supervisory Board consists of at least nine members. On 27 February 2012, the Shareholder Meeting set the number of Supervisory Board members of the 8th term of office at twelve members. The Supervisory Board
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elects the Chairman, the Deputy Chairman and the Secretary of the Supervisory Board from among its members. The Supervisory Board may dismiss in a secret ballot the Chairman, the Deputy Chairman or the Secretary of the Supervisory Board.
Supervisory Board members exercise their rights and perform their duties in person. Management Board members are appointed for a joint three-year term. If Supervisory Board members are elected by way of separate group voting, the number of Supervisory Board members is set by the Shareholder Meeting in gremio, however in such a situation the Supervisory Board may consist of no less than five members. The mandate of a Supervisory Board member appointed before the end of the term of office of the Supervisory Board shall expire simultaneously with the expiration of the mandates of the remaining Supervisory Board members.
According to the Articles of Association, JSW employees have the right to elect to the Supervisory Board: two members in a Supervisory Board composed of up to 6 members, three members in a Supervisory Board composed of between 7 and 10 members and four members in a Supervisory Board composed of 11 or more members. Upon a written request of at least 15% of all JSW employees, a vote is held in the matter of dismissing a Supervisory Board member elected by the employees. Such a dismissal, death or any other important reason that decreases the number of Supervisory Board members elected by Employees shall require supplementary elections.
The Shareholder Meeting appoints and dismisses Supervisory Board members. A Supervisory Board member shall submit a resignation in writing to the Management Board at the address of the registered office of JSW.
From the date of introduction of JSW’s shares to trade on a regulated market, in the period during which the State Treasury, including subsidiaries of the State Treasury, holds JSW’s shares carrying voting rights of at least 34% of the total number of votes in JSW plus one vote, the State Treasury shall be entitled to appoint and shall be entitled to dismiss Supervisory Board members of a number equal to half the total number of Supervisory Board members set by the Shareholder Meeting (in the event this number is fractional, it shall be rounded down to a whole number) plus one, with the reservation that the State Treasury shall be excluded from the vote in the Shareholder Meeting on appointing or dismissing the remaining Supervisory Board members; however, the State Treasury shall retain the voting right in the event of electing Supervisory Board members by voting in separate groups and in the event of the votes referred to in Article 385 § 6 of the Commercial Companies Code as well as in the event of votes on appointing or dismissing the Supervisory Board members elected by employees and in the event the Supervisory Board is unable to act because the number of its members is smaller than that required by the Articles of Association and the shareholders present at the Shareholder Meeting, other than the State Treasury, fail to supplement the composition of the Supervisory Board in the part which is subject to election by the Shareholder Meeting. Supervisory Board members are appointed and dismissed by the State Treasury by way of a statement delivered to JSW.
At least one member of a Supervisory Board consisting of up to twelve members or at least two members of a Supervisory Board consisting of thirteen or more members should satisfy the requirements of independence for a Supervisory Board member within the meaning of the Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC), in consideration of additional requirements arising out of the Code of Best Practice for Warsaw Stock Exchange Listed Companies.
A candidate for an independent member of the Supervisory Board shall submit to JSW, before his or her appointment to the Supervisory Board, a written representation on satisfying the prerequisites for independence. If a situation arises causing failure to satisfy the prerequisites for independence, the relevant Supervisory Board member shall promptly inform JSW about this fact. JSW will publish information about the current number of independent Supervisory Board members.
In a situation when no Supervisory Board member meets the independence requirement, the JSW Management Board is obligated to convene a Shareholder Meeting immediately and place an item concerning changes in the composition of the Supervisory Board in the agenda of that Shareholder Meeting. Until the moment of making changes to the Supervisory Board composition, aiming at adjusting the number of independent members of the Supervisory Board to the requirements prescribed in the articles of association, the Supervisory Board shall act in the previous composition.
Powers of the Supervisory Board
Powers of the Supervisory Board are set forth in the Articles of Association of JSW. The Supervisory Board exercises permanent supervision over the activity of JSW. The powers of the Supervisory Board include in particular: 1. approving the Management Board Bylaws and issuing an opinion on the Organizational Bylaws defining the organization of the Company’s enterprise,
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2. appointing and dismissing the Company’s Management Board members, without prejudice to §11 section 5 and §34 item 2 of the Company’s Articles of Association, 3. suspending a Management Board member or the entire Management Board from performing its duties for important reasons by secret ballot, 4. delegating any Supervisory Board member or members to temporarily perform the duties of those Management Board members who are unable discharge their functions, 5. signing, terminating and amending agreements with Management Board members, establishing the rules for hiring and remunerating them and setting their remuneration, without prejudice to §34 item 1 of the Company’s Articles of Association, 6. selecting an entity authorized to audit financial statements to audit the Company’s financial statements, 7. evaluate of the financial statements for their consistence both with the ledgers and documents and with the factual status, 8. evaluating reports on the Company’s activity and the Management Board’s motions on the distribution of profit or the coverage of loss, 9. submitting written reports on the results of the activities referred to in items 7 and 8 above to the Shareholder Meeting, 10. submitting to the Shareholder Meeting the annual concise evaluation of the Company’s standing, taking into account the evaluation of the internal audit system and the risk management system, as well as the annual report on Supervisory Board's work; 11. giving an opinion on matters submitted to the Shareholder Meeting, 12. approving the Company's operational strategy, 13. opining the Company's annual plans.
In addition, the Supervisory Board's powers shall include giving consent to the Management Board for: 1. establishment of another company, subscription for, purchase or sale of shares in other companies, without prejudice to §34 item 3 of the Company's Articles of Association, with the reservation that the Supervisory Board’s request referred to in this item 1 is not required for the following: . taking up and acquiring shares in another company in the amount lower than 1/10 of the share capital of such company, . sale of shares in another company in which the Company holds less than a 1/10 share in the share capital, . taking up or acquiring shares in another company in return for the Company's receivables as part of composition or settlement proceedings, . selling shares acquired or taken up by the Company in return for the Company's receivables as part of composition or settlement proceedings, . subscription for, purchase or sale of shares in another company whose shares are listed on a regulated market, unless the value of such shares exceeds 1/20 of the Company’s share capital, 2. establishment of foreign branches, 3. purchase or sale or fixed assets the value of which exceeds 1/20 of the Company’s share capital, 4. contracting of contingent liabilities, including the granting by the Company of financial guarantees and sureties the value of which exceeds 1/20 of the Company’s share capital, 5. disbursement of interim dividends, 6. issuance of promissory notes the value of which exceeds 1/20 of the Company’s share capital, 7. purchase or sale of a real property or a right of perpetual usufruct or of a share in a real property or in a right of perpetual usufruct the value of which exceeds 1/20 of the Company’s share capital, 8. granting consent for the Company to conclude, with an entity related to the Company, a material agreement within the meaning of the provisions regarding current and periodic information submitted by issuers of securities approved for trading on a regulated market, excluding typical agreements concluded by the Company on market terms as part of its operational activity; 9. the voting instructions for the Shareholder Meetings of companies in which the Company holds at least 50% of all shares, in the following matters: . sale or lease of the company’s business or an organized part thereof or establishment of a limited right in rem thereon, . dissolution or liquidation of the company, . introduction of amendments to the company’s articles of association or articles of partnership, . merger, split-up or transformation of the company, . increase or decrease of the company’s share capital.
At the request of the Management Board, the Supervisory Board shall permit a Management Board member to hold positions in the corporate authorities of companies in which JSW has an ownership interest and to collect remuneration for such work.
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6.9. RULES FOR AMENDING JSW’S ARTICLES OF ASSOCIATION
JSW’s Articles of Association are amended by way of a resolution adopted by the Shareholder Meeting where a subsequent decision of a relevant court must be issued to enter the amendment in the national register of businesses. An amendment to the Articles of Association materially changing the line of business of JSW (Article 416 § 1 of the Commercial Company Code) shall not require a buyout of the shares held by shareholders objecting to such an amendment if the relevant resolution of the Shareholder Meeting is adopted by a majority of two thirds of the votes in the presence of shareholders representing at least one half of the share capital.
6.10. OPERATION OF THE SHAREHOLDER MEETING, ITS PRINCIPAL POWERS AND DESCRIPTION OF SHAREHOLDERS' RIGHTS AND HOW THEY ARE EXERCISED
Operation of the Shareholder Meeting
The manner of operation of the JSW Shareholder Meeting and its powers are defined in JSW's Articles of Association and in the JSW Shareholder Meeting Bylaws (adopted by the Shareholder Meeting) available at www.jsw.pl.
A Shareholder Meeting is convened in accordance with the procedure and rules set forth in the provisions of law. Shareholder Meetings are held in Warsaw, in Katowice or at the registered office of JSW.
A Shareholder Meeting is convened by way of an announcement published on JSW's website and in the form of a current report. The announcement is posted on JSW's website and the current report is sent no less than 26 days before the date of the Shareholder Meeting. The persons or the body other than the Management Board that individually convenes the Shareholder Meeting shall promptly notify JSW’s Management Board about this fact and deliver in writing or electronically a relevant resolution or statement on convening the Shareholder Meeting, the agenda, draft resolutions and justifications. If the Shareholder Meeting is convened by Shareholders then they shall also deliver documents confirming the mandate the convene the Shareholder Meeting. The Management Board performs all the activities defined by the law in order to hold an effective Shareholder Meeting.
The Shareholder Meeting shall be opened by the Supervisory Board Chairman or, in his/her absence, the following persons shall be authorized to open the Shareholder Meeting in the following order: a person named by the Supervisory Board Chairman, the Supervisory Board Deputy Chairman, the President of the Management Board, a person appointed by the Management Board or the shareholder who has registered shares at the Shareholder Meeting entitling him/her to exercise the largest number of votes. Subsequently, the Chairman of the Shareholder Meeting shall be elected from among the persons authorized to participate in the Shareholder Meeting.
Resolutions of the Shareholder Meeting are adopted by an absolute majority of votes, unless the Articles of Association or the Commercial Company Code set forth other conditions for adopting a particular resolution.
A Shareholder Meeting may be held if at least 50% of the share capital is represented at the Shareholder Meeting. Any adjournments in the meeting that go beyond a "short technical break" are ordered by the Shareholder Meeting by way of adopting a resolution by a majority of two thirds of the votes. The total duration of the breaks may not exceed 30 days.
Each shareholder who intends to take part in the Shareholder Meeting, directly or by proxy, is obligated to notify the Management Board or the Shareholder Meeting Chairman that he/she holds directly or indirectly more than 10% of total votes in the Company.
Powers of the Shareholder Meeting
Subject to §34 item 1 and §34 item 3 of JSW’s Articles of Association, the following matters in particular shall require a resolution of the Shareholder Meeting: 1. examining and approving the Company’s Management Board activity report and the financial statements for the previous financial year and discharging the members of the Company’s governing authorities on the performance of their duties, 2. distributing profits or covering losses, 3. changing the Company’s line of business, 4. amending the Company’s Articles of Association, 5. increasing or decreasing the share capital, 6. authorizing the Management Board to purchase the Company’s treasury stock for retirement and specifying the manner and conditions for retiring stock, 7. merging, splitting up or transforming the Company,
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8. dissolving or liquidating the Company, 9. appointing or dismissing Supervisory Board members, 10. setting remuneration for Supervisory Board members, 11. allowing the Company to enter into a loan agreement, a surety agreement or another similar agreement with a Management Board member, a Supervisory Board member, a general proxy or a liquidator or in favor of any such person, 12. allowing a subsidiary to enter into a loan agreement, a surety agreement or another similar agreement with a Management Board member, a Supervisory Board member, a general proxy or a liquidator or in favor of any such person, 13. issuing bonds, 14. selling or leasing an enterprise or an organized part thereof and establishing a limited right in rem thereon, 15. making decisions on claims to remedy damages incurred during the establishment of the Company or in its management or oversight, 16. establishing or dissolving the Company’s capitals and funds.
The purchase or sale of a real property or a right of perpetual usufruct or of a share in a real property or in a right of perpetual usufruct shall not require consent of the Shareholder Meeting.
Shareholder rights
The rights of JSW S.A. shareholders are set forth in JSW's Articles of Association and the bylaws of the Shareholder Meeting. Shareholders representing at least half of the share capital or at least half of all the votes in JSW may have the right, among others, to file a request to convene an Extraordinary Shareholder Meeting. The Management Board convenes the Shareholder Meeting also upon request from Shareholders representing at least one-twentieth of the share capital. The request to convene a Shareholder Meeting, place an item in the agenda of a Shareholder Meeting, draft resolutions concerning the items included in the agenda of the closest Shareholder Meeting or the items which will be included in the agenda should be submitted to the Management Board in writing or in the electronic form. Authorization documents of the persons authorized to take action should be attached to the request.
A Shareholder or Shareholders representing at least one-twentieth of the share capital may request that the specified items be placed in the agenda of the closest Shareholder Meeting. The request should be submitted to the Management Board no later than twenty one days before the set date of a Shareholder Meeting. The request should contain a justification or draft resolution pertaining to the proposed item on the agenda. The Management Board is obligated to announce changes to the agenda made upon request of the Shareholders immediately, but no later than eighteen days before the set date of a Shareholder Meeting. Announcement is done following the same procedure as for convening a Shareholder Meeting.
A Shareholder or Shareholders representing at least one-twentieth of the share capital may submit to JSW – before the date of a Shareholder Meeting - the draft resolutions concerning the items included in the agenda of a Shareholder Meeting or the items which will be included in the agenda. JSW will immediately post the draft resolutions on the website.
Every Shareholder may, during a Shareholder Meeting, submit draft resolutions on matters included in the agenda. Draft resolutions and motions submitted during a Shareholder Meeting should be prepared in writing.
A Shareholder has the right to request copies of motions concerning items included in the agenda within one week prior to the date of holding a Shareholder Meeting.
Persons who are JSW's Shareholders sixteen days before the date of a Shareholder Meeting (date of registration of participation in a Shareholder Meeting – "record date") and who satisfy the following conditions have the right to participate in the Shareholder Meeting: . in case of persons authorized on the basis of dematerialized bearer shares – they have submitted to the entity keeping the securities account, no earlier than after the announcement on convening the Shareholder Meeting and no later than on the first business day after "record date", the request to issue a name-specific certificate on the right to participate in a Shareholder Meeting. . in case of persons authorized on the basis of bearer shares in the form of a certificate – they submitted the share certificates to JSW no later than on the "record date" and did not collect them before closing of that day. Certificates attesting that shares have been deposited with a notary, a bank or an investment firm having its place of business or branch on the territory of the European Union or the state which is a party to the European Economic Area agreement specified in the notice on convening a Shareholder Meeting, may be deposited in lieu of shares. Such certificate should specify the numbers of share certificates and contain a statement that the share certificates will not be released before closing of the "record date".
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. in case of persons authorized on the basis of registered shares and interim certificates as well as pledgees and users who have the right to vote – will be entered in the share book on the "record date".
Shareholders may familiarize themselves with the list of the authorized persons which will be displayed in the Management Board's offices for three business days preceding the date of the Shareholder Meeting and may demand a copy of the list against the cost of preparing such a list. Moreover, each Shareholder may request the list of authorized shareholders to be sent to it free of charge by e- mail, specifying the address to which the list should be sent.
Upon request of Shareholders representing at least one-tenth of the share capital represented at a Shareholder Meeting, the Attendance List should be checked by a committee elected for this purpose and composed of at least three people. The persons filing such motion will have the right to elect one member of that committee.
Each participant of a Shareholder Meeting may submit one candidate to become the Shareholder Meeting Chairperson. Election is carried out with participation of the candidates who gave their consent for being candidates.
The Shareholder Meeting may appoint the Election Committee consisting of up to three persons. Voting at a Shareholder Meeting is conducted taking into account the limitations in exercise of the voting right resulting from §9 of the Articles of Association of JSW. Voting on the given item is conducted after holding the discussion. The formulated statements should be specific and they should unequivocally refer to the item which is currently being examined. The shareholder has the right to vote in a different manner under each share held. Votes are cast in an open ballot. Secret balloting is ordered for elections, dismissals, in personal matters and on the motions to charge the members of corporate bodies or liquidators with accountability. Secret balloting should be also ordered at the request of at least one Shareholder in attendance.
6.11. COMPOSITION OF MANAGEMENT AND SUPERVISORY BODIES, CHANGES IN COMPOSITION, DESCRIPTION OF ACTIVITIES OF THE BODIES AND THEIR COMMITTEES
COMPOSITION OF THE MANAGEMENT BOARD AND THE SUPERVISORY BOARD OF JSW
Composition of the JSW Management Board
The current 8th term of the Management Board started on 28 May 2013. Following a qualification procedure and the election of a member of the Management Board of JSW S.A. elected by the employees, the Supervisory Board appointed the following 5 members of the Management Board of the 8th term of office: . Jarosław Zagórowski – President of the Management Board, . Grzegorz Czornik – Vice-President, Sales, . Jerzy Borecki – Vice-President, Technical Matters, . Robert Kozłowski – Vice-President, Economic Matters, . Artur Wojtków – Vice-President, HR and Social Policy (elected by the employees).
No changes were made in the composition of the JSW Management Board in 2014.
After the day ending the reporting period, in connection with the resignation tendered by Mr. Jarosław Zagórowski from the position of the President of the Management Board of JSW on 16 February and effective as of 17 February 2015, on 17 February 2015, the JSW Supervisory Board adopted a resolution to appoint Mr. Jerzy Borecki, Vice-President of the Management Board for Technical Matters, to act as the President of the Company’s Management Board from 18 February 2015 until the new President is appointed.
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Table 36. Composition of the JSW Management Board
Members of the JSW Management Board
In 1994, he graduated from Silesian University of Technology in Gliwice, majoring in machine technologies. In 2001, he completed studies in the same university in enterprise management and industry marketing. In 2004, he completed his PhD studies at the AGH University of Science and Technology in Kraków. In 1995-1996, he worked for the Ministry of International Economic Cooperation. In the years 1997-2007, he was employed by the Ministry of Economy. From 2003 to 2007, he served as Supervisory Board member and then Supervisory Board Chairman of JSW. From 2007 till 17 February, he was President of the JSW Management Board. In addition, since 2007 he served as Supervisory Board Chairman of Koksownia Przyjaźń S.A., which in 2014 was merged with Kombinat Koksochemiczny Zabrze S.A. and currently operates under the business name of JSW KOKS.
Area of management: He managed the work of the Management Board, convened Management Board meetings and chaired them. He oversaw the operations of JSW, in particular in the area of: Organization and Management, HR Management, Jarosław Zagórowski Strategic Development, Organization and Contacts with Investors, Legal Matters, Internal Control, Internal Audit, Innovative Implementations, Integrated Management and Risk Management System, Communication and Promotion, President of the Protection of Undisclosed Information and Defense-Related Matters. He made decisions not reserved for the JSW’s Management Board corporate bodies. [email protected]
In 1988, he graduated from the AGH University of Science and Technology in Kraków with the degree of M.A. Eng. In 1987, he completed studies in international commerce for employees of the mining industry at the AGH University of Science and Technology in Kraków. In 1988 – 2013, he worked for KWK Nowa Ruda, KWK Morcinek, KWK Krupiński, KWK Zofiówka, KWK Jas-Mos and KWK Pniówek. From 1 January 2010 to 27 May 2013, he served as director of KWK Pniówek. Since 28 May 2013, he has been the Vice-President of the Management Board on Technical Matters, and since 18 February 2015, he has been Acting President of the JSW Management Board, to discharge these duties until new President is appointed. Since 1 July 2013, he has been the Supervisory Board Chairman of Jastrzębskie Zakłady Remontowe Sp. z o.o., and since 1 June 2014, he has been Supervisory Board Chairman of JSW Szkolenie i Górnictwo Sp. z o.o.
Area of management: Jerzy Borecki He manages the affairs of JSW, oversees the operations of JSW, in particular in the area of: Production, Investments and Development of Mines, Occupational Safety and Health. He makes decisions not reserved for the JSW’s Vice-President for corporate bodies. Technical Matters [email protected]
In 2014, gained the title of Doctor of Economics from the University of Economics in Kraków. In 1990, he graduated from the AGH University of Science and Technology with the degree of M.A. Eng., majoring in thermal energy management and construction of furnaces. In 1997, he completed post-graduate studies in Management in the EU at Poznań University of Economics. In 2002, he completed an MBA program at Warsaw School of Economics. In 2005, he completed PhD studies in Economics at the University of Economics in Kraków. In 1993-1996, he worked in KOGAG Bremshey & Domning-Solingen GmBH in Germany. In 1996-2007, he worked for Polski Koks S.A., where he was the Sales Director. In 2007-2009, he was the Chairman of the company's Supervisory Board. From the beginning of 2010 to 28 February 2011, he was the Supervisory Board member of Koksownia Przyjaźń S.A. From 5 June 2007 until the present time, he has been the Vice-President of the Management Board on Sales in JSW. In addition, from 1 to 27 March 2011, he was the Supervisory Board member of Przedsiębiorstwo Gospodarki Wodnej i Rekultywacji S.A., and from 28 March 2011 to 5 March 2012, he was the Supervisory Board Chairman of that company. From 10 February 2012 to 9 March 2012 he was the Supervisory Board member of WZK Victoria S.A., and then he was the Supervisory Board Chairman of that company until 18 March 2014. Since 18 March 2014, he has Grzegorz Czornik been Supervisory Board Chairman of Polski Koks.
Vice-President on Sales Area of management: He manages the affairs of JSW, oversees the operations of JSW, in particular in the area of: Coal Sales, Coke and [email protected] Hydrocarbons Sales Strategies, Mechanical Processing of Coal and Coal Quality. He makes decisions not reserved for the JSW’s corporate bodies.
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In 1980, he graduated from Warsaw School of Economics (then the Main School of Planning and Statistics) with master's degree in economics, majoring in economics and organization of international trade. In 2006, he completed the studies of project management according to IPMA standard conducted by ODiTK and BCC, and training for Supervisory Board members of companies with State Treasury shareholding. In 1980-1991, he worked as marketer and manager in export services, sales representative, and then manager of industrial projects in Spółka Handlowo- Przemysłowa Centrozap S.A. In 1991-1994, he worked in Górnośląski Bank Gospodarczy S.A.; from 1992 he was the Bank's Management Board member. Between 1995-2000, he was he was Senior Investment Director in International Westfund Holdings Ltd, Everest Capital Polska Sp. z o.o. and Bre Private Equity Sp. z o.o. In 2001, he was the President of Yawal S.A. and Paged S.A., production and trade companies listed on the stock exchange. In the years 1998-2000 and 2002-2005, he worked in the Group of a chemical company Dwory S.A. (currently Synthos), where he served as Director of Investments and Supervisory Board Chairman designated by the Mutual Funds, and then as the President of the power company Energetyka Dwory Sp. z o.o. From 2006 to 2007, he was the Financial Director at Brasco S.A., and then from 2007 to 2010 he was the advisor to the Bartimpex S.A. Management Board Robert Kozłowski on biofuels and biocomponents segment. Between 2008 and 2011, he served as management board member of Odmet S.A. responsible for finances. Since 1 April 2012, he has been the Vice-President for Economic Matters of the Vice-President JSW Management Board. Since 27 April 2012, he has been the Supervisory Board Chairman of Spółka Energetyczna on Economic Matters Jastrzębie S.A.
[email protected] Area of management: He manages the affairs of JSW, oversees the operations of JSW, in particular in the area of: Controlling, Finances, Accounting and IT Systems at JSW. Makes decisions not reserved for the Company's corporate bodies.
In 1991, he graduated from the University of Silesia with the master's degree in law. In 2001, he completed postgraduate studies in labor social dialog at the University of Economics in Katowice. In 2008, he completed postgraduate studies in management of occupational safety and health in the industry at the Silesian University of Technology in Gliwice. In 1991-1995, he worked in the Regional Police Station in Jastrzębie-Zdrój. In the years 1995- 2009, he was employed at KWK Borynia. From October 2005 to August 2009, he served as Supervisory Board Chairman of KS Jastrzębski Węgiel S.A. Since 18 August 2009, he has been the Vice-President of the Management Board on Labor and Social Policy at JSW. From 2009 to 2012, he also was the Supervisory Board Chairman of Jastrzębska Agencja Turystyczna Sp. z o.o. From 16 October 2013 to 31 December 2014, he served again as Supervisory Board Chairman of KS Jastrzębski Węgiel S.A.
Artur Wojtków Area of management: He manages the affairs of JSW, oversees the operations of JSW, in particular in the area of: Employment, Payroll Vice-President and Social Policy. He makes decisions not reserved for the JSW’s corporate bodies. on Labor and Social Policy
The Management Board makes decisions on all the matters which are not reserved for other corporate bodies. Management Board resolutions are adopted by an absolute majority of votes, where at least three Management Board members attend the meeting. Management Board resolutions are minuted.
The President of the Management Board manages the work of the Management Board, supervises the overall operation of JSW and names the Vice-President to perform these duties in his absence. The President of the Management Board convenes Management Board meetings and presides over them. Management Board meetings are convened by the President of the Management Board on his own initiative or upon request of one of the remaining Management Board members at any time, also upon request of the Supervisory Board Chairperson. In absence of the President of the Management Board, meetings are convened by the Vice-President named by the President.
The JSW Management Board operates pursuant to the Commercial Company Code Act of 15 September 2000 and other generally applicable provisions of law, the JSW Articles of Association and provisions of the JSW Management Board Bylaws. When fulfilling their duties, Management Board members are guided by the principles included in the code of Best Practice for Warsaw Stock Exchange Listed Companies, the JSW Management Board Bylaws and the JSW Articles of Association.
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According to § 20 of the JSW Articles of Association, the Supervisory Board's rights include executing, terminating and amending agreements with Management Board members, and setting the rules for employment and salary of Management Board members, subject to § 34 item 1.
Composition of the JSW Supervisory Board
According to the Articles of Association of JSW, the Supervisory Board consists of at least nine members. On 27 February 2012, the Shareholder Meeting set the number of Supervisory Board members at 12 persons.
Table 37. Composition of the Supervisory Board
First and last name Bio
JÓZEF MYRCZEK In 1980, he graduated from the Wrocław University of Technology in applied mathematics with an M.Eng. degree in fundamental technological research. In 1984, he earned a Ph.D. degree and later, in 1999, a Position: Chairman postdoctoral degree (habilitation) in chemistry. Furthermore, he completed numerous courses and additional Date of appointment: 31 May 2012 studies in banking, finance and risk management, both in Poland and abroad. Representative of: State Treasury Professional career: In 1980-1993, was a doctoral student and subsequently an assistant professor at the Wrocław University of Technology. In 1991-1992, he was a postdoc fellow at the University of Houston, Texas. From 1993 to 2005, he worked at Bank Polskiej Spółdzielczości S.A., including as Deputy CEO in the years 2003-2005. In 2005- 2011, he was a member of the Supervisory Board of Bank Polskiej Spółdzielczości S.A., including as the Chairman of the Supervisory Board and the Chairman of the Audit Committee. Currently, he is an associate professor at the University of Technology and Humanities in Bielsko-Biała. Also currently, he is the President of the Management Board of Śląski Bank Spółdzielczy “Silesia” in Katowice, Deputy Chairman of the Supervisory Board of the brokerage house Dom Maklerski BDM S.A., a member of the Audit Committee of the Archdiocese Hospice in Katowice and the President of the Scientific Council of the “ORGMASZ” Organization and Management Institute.
ANTONI MALINOWSKI In 1973, he graduated from the AGH University of Science and Technology in Kraków in strip mining with a mining engineer degree.
Position: Deputy Chairman Professional career: Date of appointment: 31 May 2012 In 1973-1974, he worked at the lignite mine KWB “Konin” in Konin. In 1974-1976, he was the plant manager Representative of: State Treasury at Warszawskie Zakłady Eksploatacji Kruszywa in Warsaw. In 1976-1983, he worked at the Central Research and Development Unit (COBR) of PKP (Polish Railway Company) in Warsaw as the manager of the mining laboratory. In 1983-1986, he was employed at MB and PMB in Warsaw. In addition, in 1989- 1993, he worked at PPH “Marbetex” sp. z o.o. in Warsaw as a Management Board member. In 1986-1990, he worked at Przedsiębiorstwo Produkcji i Organizacji Dostaw in Warsaw. Since 1993, he has been a civil servant at the Ministry of Economy. In the past, he was a member of the Supervisory Boards of CZW “Węglozbyt” (until 1996), Katowicki Holding Węglowy S.A. (until 2008) and Kompania Węglowa S.A. (until 2009). Until 2000, he was also the Chairman of the Supervisory Board of the mine “Jan Kanty” S.A.
EUGENIUSZ BARON In 1982, he graduated from the Silesian University of Technology in Gliwice with an M.Eng. degree in mechanical engineering in the field of heavy construction machinery. He participated in numerous training courses in the following areas: manager in a changing economic environment, management, duties and Position: Secretary rules of operation of the Supervisory Board audit committee, Public Procurement Law, cost estimation, Date of appointment: 31 May 2012 geological and mining law, new Labor Code, risk management, controlling, conduct of insurance activity and Representative of: JSW employees how to be an effective manager.
Professional career: Since 1982, he has worked at the KWK Pniówek mine, currently as the chief energy and mechanical engineer. Since 2009, he has been Secretary of the Company’s Supervisory Board. Previously (2000-2007), he was a member of the JSW Supervisory Board and then Deputy Chairman of the JSW Supervisory Board (2007-2009).
ANDRZEJ PALARCZYK In 1985, he graduated from the AGH University of Science and Technology in Kraków with the degree of M.A. Eng., majoring in mining geodesy. In 2004, he completed postgraduate studies at the Silesian University of Technology in environmental protection management. He earned a mining surveyor’s license
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First and last name Bio
Position: Member and an independent surveyor’s license. He attended numerous courses in management, public procurement Date of appointment: 31 May 2012 law, risk management, controlling and mining and geological law. Representative of: JSW employees Professional career: Since 1985, he has worked at the Krupiński mine, currently as the chief engineer for the preparation of production, investments and development of the mine. In 1996-2006, he worked as the chief surveying and geological engineer of the mine.
STANISŁAW KLUZA He obtained the degree of Doctor of Economics. In 1995, he won a Top Ten Diploma from Warsaw School of Economics. In 1998, he received a scholarship from the Foundation for Polish Science. From 1999 to 2000, he was a Fulbright scholar at the University of Washington in St. Louis. In 2001, he was a Dekaban- Position: Member Liddle scholar at the University of Glasgow. In 2001, he received the Prime Minister’s award for his Ph.D. Date of appointment: 31 May 2012 dissertation. Academic specialization: monetary policy, statistics, econometrics, macroeconomics, banking Representative of: State Treasury and business cycle research. He is the author of a number of presentations and lectures on financial market supervision and macroeconomic issues. The founder of the Financial Supervision Commission (“KNF”).
Professional career: He has been lecturer at Warsaw School of Economics (since 1994) and has been associated with the Institute of Statistics and Demography. From September 2006 to October 2011, he was President of the Financial Supervision Commission (“KNF”). From May to September 2006, he was Finance Minister and Deputy Finance Minister. In the years 2002-2006, he was Chief Economist and Director of the Analysis Department at Bank Gospodarki Żywnościowej.
His previous experience includes: McKinsey & Co. (1998-1999), Unilever (1994-1998) and the Supervisory Boards of Sygnity (2006), Siarkopol (2006) and Elektrownia Siersza in Trzebinia (1998-1999).
TOMASZ KUSIO He graduated from the University of Warsaw in law.
Professional career: Position: Member In the years 2004-2008, he worked at the Social Security Institution (ZUS) in Warsaw. Since 2008, he has Date of appointment: 31 May 2012 been a civil servant at the Ministry of Economy. Representative of: State Treasury
ADAM RYBANIEC He graduated from the Agricultural Academy in Lublin where he specialized in the operation of machinery and equipment. He also completed postgraduate studies at Warsaw School of Economics in financial management in business and at the National Defense University of Warsaw in national defense. Additionally, Position: Member he completed a course in real property administration earning a Real Property Administrator’s License. Date of appointment: 31 May 2012 Representative of: State Treasury Professional career: In 1987-2002, he worked at the Ministry of Labor and Social Policy. In 2002-2010, he was employed at the Social Security Institution (ZUS). Since 2010, he has worked at the Ministry of Economy.
ROBERT KUDELSKI In 2000, he graduated from the Catholic University of Lublin with an M.A. degree in management and marketing. In 2007, he also completed postgraduate studies in public procurement law at the Silesian University of Technology in Gliwice. Position: Member Date of appointment: 31 May 2012 Professional career: Representative of: JSW employees In the years 1999-2002, he was a Supervisory Board member of Centralne Zakłady Automatyki Hutnictwa S.A. in Katowice. In the years 2009-2012, he was a Supervisory Board member of Towarzystwo Budownictwa Społecznego “DASZEK” Sp. z o.o. in Jastrzębie-Zdrój. Since 1993, he has worked at JSW.
ŁUKASZ ROZDEICZER- He graduated from Harvard Law School and the Department of Law and Administration of the University of Warsaw. He completed specialized studies organized by the University of Cambridge / the University of KRYSZKOWSKI Warsaw and the University of London / Chartered Institute of Arbitration. He is licensed to practice as a lawyer in Poland, the United States (New York) and England and Wales (Solicitor). Has extensive experience Position: Member of many years in business deals and disputes, negotiations and management and as a university lecturer. Date of appointment: 31 May 2012 Professional career: Representative of: Shareholders BATNA Group Sp. z o.o. – General Counsel and Co-Owner since September 2011.
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First and last name Bio
Mediation Center of the Court of Arbitration at the Polish Chamber of Commerce – President since August 2011. Own law firm since September 2008. Clifford Chance (London and Warsaw) – Senior Associate in 2007-2011. Georgetown University Law Center – Adjunct Professor of Law, since September 2004. London University, Queen Mary College – Visiting Lecturer, since August 2008. Mediator in civil-law and commercial cases (in 2003-2004, Member of the Board of the Harvard Mediation Program in Boston, MA) since 2002. Lecturer of postgraduate courses at Warsaw School of Economics, the University of Warsaw and the Catholic University of Lublin (majors: negotiations, mediation, ADRs, procurement and management) Libella Sp. z o.o. – Deputy CEO for Deals and Investments from February 2012 till March 2013. Libella Sp. z o.o. – Chairman of the Supervisory Board in the years 2008-2012. World Bank, International Finance Corporation (Washington, DC) – Consultant in the years 2005-2006. Harvard Law School (Boston, MA) between 2002 and 2006, Program on Negotiation, Senior Hewlett Fellow on Law and Negotiations; Research Associate (since September 2004). Engaged in the provision of community services, e.g. as Vice President of the Auschwitz-Birkenau Foundation and member of the Executive Board of the Club of Catholic Intellectuals (KIK) in Warsaw. The author of numerous publications on negotiations, mediation and dispute resolution.
ALOJZY NOWAK In 2002, he gained the title of Professor of Economics. Since 2012, he has been Vice Rector for Scientific Research and Cooperation at the University of Warsaw, the Head of the National Economy Faculty and the Institute for International Economic Relations at the Department of Management of the University of Warsaw Position: Member and the Faculty of Finance at the Leon Koźmiński Academy in Warsaw. Chairman of the Scientific Board of Date of appointment: 31 May 2012 the European Center at the University of Warsaw. He completed studies in banking and finance at the Representative of: State Treasury University of Exeter in the United Kingdom and economics at the University of Illinois at Urbana Champaign in the United States and the Free University of Berlin in Germany.
Professional career: Member of the Scientific Research Committee of the National Bank of Poland and member of the NewConnect advisory committee to the Management Board of the Warsaw Stock Exchange. His academic interests are focused on banking, international economic relations and risk management in financial markets. His Ph.D. dissertation concerned monetary policy issues and his habilitation dissertation concerned finance and banking issues. The author of more than 170 scientific publications on the processes of regional integration and monetary unions, foreign investments, business cycles, banking and international economic relations published by Polish and foreign publishers and scientific journals. Member of program councils and editorial boards of a number of Polish and foreign scientific journals, including Gazeta Bankowa, Journal of Interdisciplinary Economics, Cross-Cultural Management, Yearbook on Polish European Studies and Problemy Zarządzania, etc.. Lecturer in a number of subjects, including banking, commercial bank, money and money markets, economic analysis of the European Union and finances of the European Union, at Polish and foreign universities – in the United States, the United Kingdom, France, Germany and Russia. Winner of numerous awards for his scientific achievements, including awards from the Minister of Education for his books Banki a gospodarstwa domowe – dynamika rozwoju (“Banks and Households – the Dynamics of Development”) and Unia Europejska. Szansa dla Polski (“European Union. An Opportunity for Poland”). Head of projects funded by the European Union, NATO and the State Committee for Scientific Research (KBN).
ANDRZEJ KARBOWNIK In 1970, he completed studies at the Mining Department. In 1978, gained the title of Doctor of Economics, and in 1987, the postdoctoral degree (‘habilitation’). He received the academic title of professor in 1999. Since the beginning of his career, he has been continuously associated with the Silesian University of Position: Member Technology, where he has been employed since 1970. Date of appointment: 19 February 2013 Professional career: Initially, he worked for the Mining Faculty where he served as Deputy Director of the Institute for Designing Representative of: State Treasury the Construction of Mines and Protecting the Surface and as Head of the Mine Design and Restructuring Department. Since 1997, he has been associated with the Organization and Management Faculty in Zabrze, where he has served as Head of the Business Management and Industrial Engineering Department. Currently, he is Director of the Management and Administration Institute. In 2002-2008, he served as Dean of the Organization and Management Faculty. Since 2008, he has held the post of Rector of the Silesian University of Technology. He was Vice-President and then, in 1993-1996 and 1997-2000, President of the Management Board of the National Agency for Restructuring the Coal Mining Industry in Katowice. In 2000-
124 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
First and last name Bio
2001, he was also Deputy Minister of the Economy in the government headed by Professor Jerzy Buzek and co-author of the program for restructuring the coal mining industry in Poland. He is President of the Supervisory Board of the Foundation for Cardiac Surgery Development in Zabrze. He is also Deputy Chairman of the Advisory Council of the Regional Chamber of Commerce in Katowice and a Member of the Mining Committee of the Polish Academy of Sciences. He is the author of 336 scientific publications, 81 research papers and 92 expert reports for industry. He headed 5 research projects funded by the Ministry of Science and Higher Education (the State Committee for Scientific Research). Among other things, he lectured at the Technical University of Madrid and Oviedo University (Spain). He was a Humboldt Foundation Fellow at the Bochum School of Mining. He has supervised 8 doctoral dissertations. He lectures on engineering design, industrial and business restructuring and project management. He is editor-in-chief of trade magazines: “Wiadomości Górnicze” (Mining News), “Karbo”, “Budownictwo Górnicze i Tunelowe” (Mining and Tunnel Construction) and the scientific quarterly journal “Organizacja i Zarządzanie” (Organization and Management). In May 2010, he was awarded a Honoris Causa Doctorate by the University of Oviedo.
MAREK GRANIECZNY Graduated from the Mining Faculty of the Silesian University of Technology in Gliwice majoring in Mining and Drilling Machinery and Equipment.
Position: Member Professional career: Date of appointment: 12 August 2013 Launched his career in 1989 in the Morcinek Mine and has been employed in the Zofiówka Mine since 1997. Representative of: JSW employees He created and headed the Mine’s contracts and procurement department. Since 2006, he has served as Head of the Investments and Development Department at the Zofiówka Section of the Borynia-Zofiówka- Jastrzębie Mine.
No changes were made in the composition of the JSW Supervisory Board in 2014. The mandates of the JSW Supervisory Board members will expire upon the date of holding the Shareholder Meeting approving the 2014 financial statements.
The Supervisory Board conducts constant oversight over the operations of JSW in all areas of its activity. The Supervisory Board performs its duties as a collective body, however it may delegate its members to carry out specific supervisory and controlling activities individually. Supervisory Board members exercise their rights and perform their duties in person.
The Supervisory Board Chairman convenes Supervisory Board meetings and presides over them, and if the Chairman is unable to convene a meeting, his/her Deputy Chairman or the person named by the Chairman shall do so. The first meeting of a newly elected Supervisory Board shall be convened and opened by the President of the Management Board. The Supervisory Board may elect to and dismiss from among themselves, in a secret ballot, a Supervisory Board member delegated to continuous individual supervision. The Supervisory Board holds its meetings no less frequently than once per two months. The Supervisory Board Chairman shall be obligated to convene a Supervisory Board meeting at the written request of a JSW Supervisory Board member or a JSW Management Board member. The meeting should be held within two weeks after the submission of the request. In order for Supervisory Board resolutions to be valid, all the Supervisory Board members must be invited to the meeting. The Supervisory Board adopts resolutions by an absolute majority of votes present at the meeting, in the presence of at least half the number of the Supervisory Board members. An absolute majority of votes means more than one half of the votes cast. In the event of a tie vote the Supervisory Board Chairman’s vote shall prevail. Supervisory Board members may participate in adopting Supervisory Board resolutions by casting their vote in writing through another Supervisory Board member. Voting in writing cannot apply to matters introduced to the agenda at a Supervisory Board meeting. Supervisory Board members may adopt resolutions by following a written procedure or via remote means of direct communication. A resolution is valid if all Supervisory Board members have been notified of the content of the draft resolution and no Supervisory Board member has requested that the resolution be adopted at the next meeting of the Supervisory Board. Supervisory Board members may also participate in the meeting via teleconference or videoconference on the rules prescribed in the Supervisory Board Bylaws.
The adoption of resolutions by voting in writing through another Supervisory Board member or using teleconferencing, videoconferencing and means of direct remote communication shall not apply to matters decided in secret balloting, including election of the Chairman, the Deputy Chairman or the Secretary of the Supervisory Board, the dismissal of the Chairman, the Deputy Chairman or the Secretary of the Supervisory Board, the appointment or dismissal of Management Board members or the suspension, for important reasons, of any specific or all Management Board members in their duties.
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Votes shall be cast in an open ballot. Secret ballots are ordered in personnel matters or upon request of at least one of the persons eligible to vote. Resolutions adopted by the Supervisory Board are minuted.
Pursuant to § 26 of JSW's Articles of Association, a Shareholder Resolution is required to determine Supervisory Board's salary.
SUPERVISORY BOARD COMMITTEES
The following Committees operate within the framework of the Supervisory Board of Jastrzębska Spółka Węglowa S.A.: . Audit Committee, . Nomination and Compensation Committee, . Corporate Governance Committee.
Audit Committee
The main purpose of the Audit Committee is to support the Supervisory Board in exercising financial supervision and to provide the Board with reliable information and opinions that allow it to efficiently make correct decisions in the area of financial reporting, internal control and risk management.
The principles of operation and the tasks of the Audit Committee are set forth by the Bylaws of the Supervisory Board Audit Committee at Jastrzębska Spółka Węglowa S.A. adopted by the Supervisory Board. The main tasks of the Audit Committee include in particular the following: . monitoring the financial reporting process, . monitoring the effective operation of internal control, internal audit and risk management systems, . monitoring the performance of financial audit activities, . monitoring the independence of the auditor and the entity authorized to audit financial statements, . recommending to the JSW Supervisory Board an entity authorized to audit financial statements and to conduct financial revision activities in JSW.
The Audit Committee is authorized to audit financial statements and to conduct financial revision activities, in particular with respect to any significant irregularities of JSW S.A.'s internal control system relating to the financial reporting process.
In 2014, the Audit Committee was composed of: . Tomasz Kusio – Chairman, . Antoni Malinowski – Member, . Stanisław Kluza – Member, . Alojzy Nowak – Member.
The criteria of an independent Supervisory Board member are met by: Józef Myrczek, Andrzej Karbownik, Stanisław Kluza, Alojzy Nowak, Łukasz Rozdeiczer-Kryszkowski.
Nomination and Compensation Committee
The Nomination and Compensation Committee is an advisory and opinion-giving body in respect of the Supervisory Board and has been formed for the purpose of presenting opinions and proposals to the Supervisory Board on how to shape the governance structure of JSW, including issues related to organizational solutions, the compensation system, the level of compensation and the selection of managers with the qualifications needed to build the success of the JSW Group. The rules governing the operation and the tasks of the Nomination and Compensation Committee are determined by the Bylaws of the JSW S.A. Supervisory Board Nomination and Compensation Committee as adopted by the Supervisory Board.
The scope of the Committee's operation covers giving opinions and conducting analyses to support the Supervisory Board in the performance of its duties defined by the Articles of Association in respect of the overall compensation policy for Management Board members and upper level management at JSW and to articulate recommendations on appointing Management Board members.
The following tasks in particular fall among the powers and duties of the Nomination and Compensation Committee: . recruiting and hiring Management Board members by drafting and preparing draft versions of documents and processes to be submitted to the Supervisory Board for approval,
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. preparing draft versions of contracts and other model documents in connection with employing Management Board members and overseeing the performance of the contractual obligations taken by the parties, . overseeing the implementation of the Management Board's compensation system, in particular preparing settlement documents concerning variable and bonus elements of compensation for the purpose of submitting recommendations to the Supervisory Board, . monitoring and periodically analyzing the compensation system for the management of JSW and if necessary articulating recommendations for the Supervisory Board, . overseeing the proper implementation of perks for the Management Board stemming from their employment contracts such as: insurance, cars, apartments and others.
In 2014, the Nomination and Compensation Committee was composed of: . Józef Myrczek – Chairman, . Eugeniusz Baron – Member, . Alojzy Nowak – Member, . Łukasz Rozdeiczer-Kryszkowski – Member, . Adam Rybaniec – Member.
Corporate Governance Committee
The Corporate Governance Committee is an advisory and opinion-giving body for the Supervisory Board and has been established to enhance the effectiveness of the supervisory activities performed by the Supervisory Board in respect of applying corporate governance principles in the Group and compliance between these principles and the principles laid down by the Warsaw Stock Exchange in the Best Practices of Companies Listed on the WSE.
The operational principles and tasks of the Corporate Governance Committee were defined by the Supervisory Board in the Bylaws of the Corporate Governance Committee of the Supervisory Board of Jastrzębska Spółka Węglowa S.A.
The scope of the Committee's operation covers opinion-giving and analytical activities to support the Supervisory Board in the performance of its control and supervisory duties defined by the articles of association in conjunction with the corporate governance principles applied by the Group. The Committee's powers and obligations include the following in particular: . evaluating the implementation of the corporate governance principles in the Group, . submitting recommendations to the Supervisory Board on implementing corporate governance principles in the Group, . giving opinions on normative documents pertaining to the corporate governance principles implemented in the Group, . evaluation of reports on compliance with corporate governance principles prepared for the WSE.
In 2014, the Corporate Governance Committee was composed of: . Stanisław Kluza – Chairman, . Eugeniusz Baron – Member, . Łukasz Rozdeiczer-Kryszkowski – Member.
6.12. REMUNERATION FOR PERSONS DISCHARGING EXECUTIVE AND SUPERVISORY FUNCTIONS IN JSW
REMUNERATION OF MANAGEMENT BOARD MEMBERS
Rules for paying salaries and bonuses to Management Board members were determined by the Supervisory Board and regulated in the Agreements to provide the services – management contracts. A Management Board member is entitled to fixed salary and the annual bonus, which will be increased by VAT at the applicable rate and reduced by public law dues.
As of May 2013, the new models of management contracts are in effect for the new term of the Management Board. Fixed monthly salary of Management Board members stipulated in the management contracts is PLN 80 thousand for the President and PLN 70 thousand for the Vice-President of the Management Board. Due to difficult financial position of the parent Entity in 2014, the Management Board members have declared to grant JSW the discount amounting to 10% of their fixed remuneration for the period of 12 months (J. Zagórowski, G. Czornik, J. Borecki, R. Kozłowski) and 11 months (A. Wojtków).
127 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Annual bonus amounts to up to 50% of the fixed salary for the given financial year, and it depends on the achievement of the KPIs set for each financial year. KPIs are determined by the Supervisory Board. The primary indicator for the Annual Bonus is the consolidated EBITDA of the JSW Group.
The amount of annual bonus is calculated pro rata on the basis of the time period in which the services were actually performed during the given financial year, where the minimum period of performing the services, giving the right to receive the annual bonus, was three months. The annual bonus is paid on the basis of Supervisory Board resolution. The bonus may be paid out on the condition that the Shareholder Meeting approves the consolidated financial statements.
The Annual Bonus for a Management Board member for 2014 will be paid out in accordance with the Service Agreement – Management Contract concluded on the basis of Resolution adopted by the JSW Supervisory Board on 27 May 2013 in four tranches, i.e. 40% in the year following the financial year in which the bonus was granted, and the next tranches (20% each) during the three years starting from the year following the year in which the first tranche was paid out.
The next tranches of the annual bonus will be paid out after the Supervisory Board ascertains sustainability of the ratios recorded by JSW in the period of three years preceding the year of payment of another tranche, and evaluates the work of the Management Board member and his efficiency. The Supervisory Board may decide to withhold them.
JSW has a claim to return the annual bonus paid out if it is proven after it has been paid out that it had been granted on the basis of the data that turned out to be false.
In 2014, the total value of salaries understood as the amount of salaries, bonuses and perquisites of the management staff was PLN 4.4 million. This amount constitutes the net value of salaries paid out or due to Management Board members in 2014. In 2014, no loans were granted to any members of the JSW Management Board.
Table 38. Remuneration of the Management Board in 2014 (PLN)
Benefits, Period in office in Management Annual income from Income earned First and last name Total 2014 services* bonus** other in subsidiaries sources*** 1 January – 31 Jarosław Zagórowski 920,000.00 30,024.00 - - 950,024.00 December 2014 1 January – 31 Jerzy Borecki 805,000.00 26,271.00 - - 831,271.00 December 2014 1 January – 31 Grzegorz Czornik 805,000.00 48,514.03 - - 853,514.03 December 2014 1 January – 31 Artur Wojtków 812,000.00 83,733.72 - - 895,733.72 December 2014 1 January – 31 Robert Kozłowski 812,000.00 63,000.00 - - 875,000.00 December 2014 Total 4,154,000.00 251,542.75 - - 4,405,542.75
* This item includes the cost of remuneration paid out under management contracts.
** This item includes the annual bonus calculated for 2014 on the basis of a % achievement of selected KPIs by respective Management Board members and the portion of the year in which they discharged their functions. Bonus actually paid may be lower than presented above, conditional upon a decision of the Supervisory Board. The bonus may be decreased or suspended by the decision of the Supervisory Board. The bonus is paid out in four installments, starting from 2015, according to the rules described above. *** This item includes the paid out severance awards and non-compete compensation.
128 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Table 39. Remuneration of the Management Board in 2013 (PLN)
Benefits, Period in office in Management Annual income from Income earned First and last name Total 2013 services* bonus** other in subsidiaries sources*** 1 January – 31 Jarosław Zagórowski 960,000.00 180,072.74 - - 1,140,072.74 December 2013 1 January – 28 May Andrzej Tor 343,225.81 80,666.89 916,774.19 - 1,340,666.89 2013 29 May – 31 Jerzy Borecki 496,774.19 119,620.08 - - 616,394.27 December 2013 1 January – 31 Grzegorz Czornik 840,000.00 197,835.91 - - 1,037,835.91 December 2013 1 January – 31 Artur Wojtków 840,000.00 168,036.21 - - 1,008,036.21 December 2013 1 January – 31 Robert Kozłowski 840,000.00 101,871.82 - - 941,871.82 December 2013 Total 4,320,000.00 848,103.65 916,774.19 - 6,084,877.84
* This item includes the cost of remuneration paid out under management contracts.
** This item indicates the annual bonus for 2013 in the amount stated in the JSW Supervisory Board resolutions. The bonus is paid out in four installments according to the rules described above. Out of the amount stated in the table, PLN 387.6 thousand was paid in 2014. The bonus may be decreased or suspended by the decision of the Supervisory Board. *** This item includes severance awards paid out and non-compete compensation paid out in accordance with the provisions of a management contract concluded on 18 November 2011.
Supervision over the implementation of the salary system for the Management Board, monitoring and periodic review of the salary system for JSW's management staff is exercised by the Nomination and Compensation Committee established by the Supervisory Board.
REMUNERATIONS OF SUPERVISORY BOARD MEMBERS
Rules for paying salaries to Supervisory Board members were determined by Decision no. 69 of the Minister of Economy of 17 October 2007, and changed in the scope concerning the basis for calculation of monthly salary by Decision no. 9 of the Minister of Economy of 23 December 2010. The fact that the basis for accruing the monthly salary determined by Decision no. 9 of the Minister of Economy of 23 December 2010 prevails in 2014 was confirmed by the Act of 8 November 2013 to amend certain acts in connection with implementation of the budget act (Journal of Laws of 27 December 2013, item 1645).
Monthly remuneration for a Supervisory Board member is equal to the average monthly salary in the corporate sector without profit- sharing in the fourth quarter of 2009, as announced by the President of the Central Statistical Office. Supervisory Board member is entitled to receive salary regardless of the number of meetings. Supervisory Board Members are not entitled to any remuneration for the month in which they did not attend any of the correctly convened meetings and their absence was not excused. Supervisory Board decides by way of a resolution whether the absence is justified or unjustified. Salary is calculated pro rata to the number of days in which the function is discharged, if appointment of dismissal was made during the calendar month. Salary is paid out by the 10th day of every month for the preceding month, and it is reduced by public law dues.
In 2014, no loans were granted to any members of the JSW Supervisory Board.
Table 40. Remuneration of the Supervisory Board in 2014 (PLN)
First and last name Period in office in 2014 Remuneration Other income Total
1 January – 31 Józef Myrczek 41,454.96 - 41,454.96 December 2014 1 January – 31 Eugeniusz Baron 41,454.96 - 41,454.96 December 2014 1 January – 31 Tomasz Kusio 41,454.96 - 41,454.96 December 2014
129 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
First and last name Period in office in 2014 Remuneration Other income Total
1 January – 31 Antoni Malinowski 41,454.96 - 41,454.96 December 2014 1 January – 31 Andrzej Karbownik 41,454.96 - 41,454.96 December 2014 1 January – 31 Marek Granieczny 41,454.96 - 41,454.96 December 2014 1 January – 31 Adam Zbigniew Rybaniec 41,454.96 - 41,454.96 December 2014 1 January – 31 Alojzy Zbigniew Nowak 41,454.96 - 41,454.96 December 2014 1 January – 31 Stanisław Kluza 41,454.96 - 41,454.96 December 2014 1 January – 31 Andrzej Palarczyk 41,454.96 - 41,454.96 December 2014 1 January – 31 Robert Kudelski 41,454.96 - 41,454.96 December 2014 1 January – 31 Łukasz Rozdeiczer Kryszkowski 41,454.96 - 41,454.96 December 2014 Total 497,459.52 - 497,459.52
Table 41. Remuneration of the Supervisory Board in 2013 (PLN)
First and last name Period in office in 2013 Remuneration Other income Total
1 January – 31 Józef Myrczek 41,454.96 - 41,454.96 December 2013 1 January – 31 Eugeniusz Baron 41,454.96 - 41,454.96 December 2013 1 January – 31 Tomasz Kusio 41,454.96 - 41,454.96 December 2013 1 January – 31 Antoni Malinowski 41,454.96 - 41,454.96 December 2013 1 January – 30 May Adam Wałach 17,161.46 - 17,161.46 2013 1 January – 31 Adam Zbigniew Rybaniec 41,454.96 - 41,454.96 December 2013 1 January – 31 Alojzy Zbigniew Nowak 41,454.96 - 41,454.96 December 2013 1 January – 31 Stanisław Kluza 41,454.96 - 41,454.96 December 2013 1 January – 31 Andrzej Palarczyk 41,454.96 - 41,454.96 December 2013 1 January – 31 Robert Kudelski 41,454.96 - 41,454.96 December 2013 1 January – 31 Łukasz Rozdeiczer Kryszkowski 41,454.96 - 41,454.96 December 2013 19 February – 31 Andrzej Karbownik 35,779.58 - 35,779.58 December 2013 12 August – 31 Marek Granieczny 16,047.08 - 16,047.08 December 2013 Total 483,537.72 - 483,537.72
130 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
AGREEMENTS WITH MANAGERS PROVIDING FOR COMPENSATION UPON RESIGNATION OR DISMISSAL FROM THE POSITION WITHOUT IMPORTANT REASON OR IF THEIR DISMISSAL RESULTS FROM A MERGER THROUGH AN ACQUISITION
In 2014, Management Board members were bound by the Agreements to provide the services – Management Contracts and no- competition agreements concluded on the basis of decision of the JSW Supervisory Board of 27 May 2013.
According to the provisions of the Agreements to provide the services – Management Contracts in effect as of 28 May 2013, if JSW terminates the Service Agreement – Management Contract for reasons other than gross breach of the provisions of the Service Agreement – Management Contract by the Management Board member or legally binding court ruling convicting for an offense or crime against business transactions, property or fiscal regulations, the Management Board member (Manager) will be entitled to a severance award in the amount of 1 time the fixed monthly salary if he/she served as JSW's Management Board member for less than 12 months, or 3 times the fixed monthly salary if he/she served as Management Board member for more than 12 months. The period, on the basis of which the amount of severance award is calculated, also includes the period of serving as Management Board member in the term directly preceding the current term. Management Board member will not be entitled to severance award if he submits resignation from the function in the Management Board.
According to the provisions of no-competition agreements in effect as of 28 May 2013, in the period of four months after termination or expiration of the Service Agreement – Management Contract, the Management Board member (Manager) will receive compensation in the amount of 50% of fixed salary. The compensation will be paid in monthly installments. Compensation for no-competition will be paid out provided that no competitive activity is performed during the period of the ban on performing competitive activities on the area stipulated in the agreement.
Payments of compensations in 2014 on account of concluded agreements
On 27 May 2013, the mandate of the JSW Management Board member expired due to the end of the 7th term of the Management Board, which resulted in expiration of the Service Agreement – Management Contract with Andrzej Tor, Vice-President of the Management Board for Technical Matters.
On the basis of no-competition agreement, after termination of the Service Agreement – Management Contract, Andrzej Tor also acquired the right to receive compensation in total amount constituting the equivalent of 100% of the fixed salary paid out in the period of 12 calendar months preceding the termination of the Agreement. Compensation was increased by VAT at the applicable rate and reduced by public law dues. Compensation was paid out in monthly installments for 12 months. Subsequent installments were paid out provided that no competitive activity was performed during the period of the ban on performing competitive activities on the area stipulated in the agreement.
The grounds for payment of compensation referred to above was the non-competition agreement concluded with Andrzej Tor effective until 27 May 2013 according to which in the period of 12 months from termination or expiry of the Service Agreement – Management Contract, the Management Board member (Manager) will receive compensation in the total amount equal to 100% of the fixed salary paid to him in the period of 12 calendar months preceding the termination of the Management Contract. The compensation will be paid to the Management Board member (Manager) in monthly installments. Compensation for no-competition will be paid out provided that no competitive activity is performed during the period of the ban on performing competitive activities on the area stipulated in the Agreement.
Andrzej Tor also acquired the right to Annual Bonus for 2013 in the amount pro rata to the time he worked, on the rules contemplated in the Service Agreement – Management Contract concluded on the basis of decision of the JSW Supervisory Board of 18 November 2011. The Annual Bonus for 2013 was accrued and paid out in 2014 in a single tranche in the amount of PLN 80,666.89 according to the rules described above.
131 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
6.13. INFORMATION POLICY AND COMMUNICATION WITH THE CAPITAL MARKET
To maintain the desired Group’s image among JSW’s stakeholders as well as positive standards of communication with capital market participants, JSW continued its previous efforts through providing credible information according to the highest standards in that area. The highest standard of the actions taken is confirmed by the fact that JSW ranked second among 456 WSE-listed companies according to ranking of “Parkiet” daily in the “best investor relations” category in 2014.
Communication with capital market participants took place through:
. participation in several meetings with company's shareholders, potential investors and stock exchange analysts of the sell side and the buy side, which took place in the form of, among other things, organized conferences, such as Morgan Stanley Central & Eastern Europe (“CEE”) Conference in March 2014, Institutional Investor Conference in Zürs and Polish Capital Market in London in April 2014. The meetings were attended by representatives of, among others, Pioneer Pekao Investment Management, Raiffeisen Centrobank, Noble Funds TFI, Raiffeisen Capital Management, Quercus TFI, Volksbank Invest, Vector Capital Management, BCR PENSII, Conseq, Raiffeisen Bank International, Raiffeisen Investment Poland, Finasta Asset Management;
. publication of current reports and periodic reports, and organizing the conferences to present the results, with broadcasts of those conferences via the Internet with the possibility of asking questions to the JSW Management Board via e-mail: - after publication of results for 2013 on 14 March 2014, - after publication of results for 1Q 2014 on 16 May 2014, - after publication of results for 1H 2014 on 14 August 2014, - after publication of results for 3Q 2014 on 14 November 2014;
. organization of additional meetings with analysts to discuss the current situation in JSW, including the meeting connected with the analysts’ visit to the subsidiary SEJ in EC Pniówek and the trip underground to the construction site of 1-Bzie shaft;
. participation in WallStreet18, an investors' conference in Karpacz in June 2014, organized annually by the Retail Investors Association;
. interviews of Management Board members and other JSW representatives for, among others, Retail Investors Association, TVN24 BiŚ, Polsat Biznes, PAP agency, WNP, net.tg portals, Parkiet daily and other industry magazines;
. publication of press releases on JSW's current position, including in particular the information campaign related to acquisition of the Knurów-Szczygłowice mine from Kompania Węglowa SA (information and press releases, Equity Story);
. participation in information and educational campaign entitled "Citizen Shareholders. Invest Knowingly" piloted by the Ministry of Treasury and addressed at individual investors in the 2013/2014 edition, whose purpose is to encourage the society to knowingly invest in securities;
. updating the website on an ongoing basis (the investor relations section), including providing several financial data and operational data in the editable version allowing their quick comparison with historical data, and publication of expert reports on deposits;
. publication, for the second time, of the annual report in the form of independent online service, allowing to easily access the selected information from the financial statements for the previous financial year (http://www.jsw.pl/raportroczny/). JSW was distinguished in "The Best Annual Report 2013" contest organized by the Institute of Accountancy and Taxes taking the first place in the "Best Annual Report on the Internet" category. The report was drafted using the JSW Group’s in-house resources.
132 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Capital market entities may contact the issuer in the following manner:
. Department for Organization and Investor Relations in Warsaw – Director Izabela Tokarz, phone no. +48 22 222 17 50, e-mail: [email protected], [email protected].
. Investors Relation Team – Manager Paweł Warzecha, phone no. +48 32 756 44 25, e-mail: [email protected], [email protected].
Jastrzębie-Zdrój, 18 March 2015 SIGNATURES OF THE JSW MANAGEMENT BOARD MEMBERS
acting President of the Jerzy Borecki …………………………………… Management Board
Grzegorz Czornik Vice-President ……………………………………
Robert Kozłowski Vice-President ……………………………………
Artur Wojtków Vice-President ……………………………………
133 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
LIST OF TABLES Table 1. Concessions held by the Parent Company ...... 8 Table 2. List of companies in which JSW holds direct or indirect stakes as at 31 December 2014 ...... 10 Table 3. Changes in capital affiliations ...... 14 Table 4. Selected significant events in 2014 ...... 16 Table 5.Production and sales of coal ...... 28 Table 6. Production and sales of coke and revenues on the sales of coke and hydrocarbons ...... 29 Table 7. Average sales prices of coal produced by the Group and average sales prices of coke ...... 29 Table 8. Operating results of the coal segment ...... 33 Table 9. Operating results of the coke segment ...... 34 Table 10. Operating results of other segments ...... 34 Table 11.Structure of capital expenditures ...... 44 Table 12.Structure of capital expenditures ...... 45 Table 13.Expenditures incurred for execution of the aforementioned projects of key importance for the Parent Company ...... 47 Table 14.Risk factors and threats ...... 51 Table 15.Summary of key Group data in 2011-2014 (financial data are presented in a 4-year period due to the limited comparability of data prior to JSW’s IPO, i.e. prior to 2011) ...... 58 Table 16.Property standing ...... 60 Table 17.Sources of covering the assets ...... 62 Table 18.Net cash flows in 2011-2014...... 64 Table 19.Consolidated statement of profit or loss and other comprehensive income ...... 68 Table 20.Costs by nature ...... 70 Table 21.EBITDA for 2014 and 2013 after exclusion of extraordinary events ...... 73 Table 22.Key assumptions of the Plan for 2014 and their implementation ...... 74 Table 23. Other additional ratios calculated on the basis of recommendations of the State Treasury Ministry ...... 77 Table 24.Mining cash cost* ...... 78 Table 25. Cash conversion cost ...... 78 Table26.Scope of the basic assumptions in the plan for 2015 ...... 83 Table 27. Shareholder structure ...... 85 Table 28. Holdings of JSW’s shares with a par value of PLN 5.00 each by persons discharging management and supervisory functions ...... 86 Table 29. Summary of JSW’s share quotations ...... 87 Table 30. Status of employee shares introduced into trading and remaining to be introduced as at the date of preparation hereof ..... 89 Table 31. Headcount and average headcount in the Group ...... 95 Table 32. Group’s accident rate ...... 97 Table 33. Material collective disputes in other Group companies...... 103 Table 34. Prizes and distinctions in 2014 ...... 107 Table 35. Shareholders holding at least 5% of the share capital as at 31 December 2014 and as at the date of preparation of this report ...... 112 Table 36. Composition of the JSW Management Board ...... 120 Table 37. Composition of the Supervisory Board ...... 122 Table 38. Remuneration of the Management Board in 2014 (PLN) ...... 128 Table 39. Remuneration of the Management Board in 2013 (PLN) ...... 129 Table 40. Remuneration of the Supervisory Board in 2014 (PLN)...... 129 Table 41. Remuneration of the Supervisory Board in 2013 (PLN)...... 130
LIST OF CHARTS Chart 1. Group’s mining area ...... 4 Chart 5. Target business model of the Group ...... 6 Chart 2. JSW’s organizational structure ...... 9 Chart 3. Structure of the Group including companies subject to consolidation as at 31 December 2014 ...... 10 Chart 4. Departments reporting to JSW Management Board Members as at 31 December 2014 ...... 12 Chart 6. Location of key customers ...... 23 Chart 7. The enterprise risk management process in the Group ...... 50 Chart 8. The benefits of having an ERM system in place ...... 50
LIST OF GRAPHS Graph 1. Share of individual European countries in the total production of hard coal ...... 24 Graph 2. Production of coal in Poland in 2007-2014 (million tons)...... 24 Graph 3. Production of coking and steam coal in Poland in 2012-2014 (million tons) ...... 24 Graph 4. Group’s share in the domestic production of coal...... 25 Graph 5. Group’s share in the domestic production of coke...... 25 Graph 6. Coal production (in millions of tons) ...... 26 Graph 7. Structure of coal production by the Group’s mines in 2014 ...... 27
134 MANAGEMENT BOARD REPORT ON THE ACTIVITY OF THE JASTRZĘBSKA SPÓŁKA WĘGLOWA S.A. GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 (All amounts in tables stated in millions of Polish zloty unless indicated otherwise)
Graph 8. External sales volume (millions of tons) ...... 27 Graph 9. Production and sale of coke (millions of tons) ...... 29 Graph 10. Prices of coking coal and coke ...... 30 Graph 11. Revenues from sales of coal, coke and hydrocarbons broken down by geographical area of end customers ...... 31 Graph 12.. Structure of the Group’s revenues by end customers as at 31 December 2014, in value terms ...... 32 Graph 13. Structure of the Group’s revenues by destination country as at 31 December 2014, in value terms ...... 32 Graph 14. Structure of sales revenues by operating segment in 2011-2013 (PLN million) ...... 33 Graph 15. Impact of operating segments on EBITDA (PLN million) ...... 33 Graph 16. Structure of expenditures ...... 45 Graph 17. Structure of non-current and current assets in the total assets ...... 60 Graph 18. Structure of inventories as at 31 December 2014 ...... 61 Graph 19. Structure of equity and liabilities ...... 62 Graph 20. Cash flows (in PLN millions) ...... 64 Graph 21. EBITDA drivers in 2014 (PLN million) ...... 73 Graph 22. Group’s debt and financing ratios ...... 75 Graph 23. Liquidity ratios ...... 76 Graph 24. Profitability ratios ...... 76 Graph 25. Profitability ratios ...... 77 Graph 26. JSW’s ownership structure ...... 85 Graph 27. JSW stock quotations and WIG20, WIG-Commodities, RESPECT and WIG30 indices ...... 87 Graph 28. Structure of the recommendations for JSW’s shares ...... 88 Graph 29. Staff turnover in the Parent Company ...... 95 Graph 30. Group’s employment structure by education ...... 96 Graph 31. Group’s headcount structure by age ...... 96 Graph 32. Average monthly salary in the Parent Company (PLN) ...... 98
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