ENERGY SECURITY AND RESTRUCTURING PROCESS IN HARD COAL SECTOR

1
ENERGY SECURITY AND RESTRUCTURING PROCESS IN
HARD COAL SECTOR
2
Energy Security

• Energy security is such a condition of the
  economy which makes it possible to cover the
  current and prospective demand of consumers for
  fuels and energy, in a technically and
  economically justified way, with the minimum
  negative impact of the energy sector upon the
  natural environment and on the living conditions
  of the society.

3
The Components of Energy Security

• Technical
• capacity of productivity of domestic sources of
  fuels and energy
• quantity and diversification of fuels stocks
• transport capacity and energy crossborder
  connections
• Ecological
• energy efficiency of national economy
• capacity of use of RES (renewable energy sources)
• emission of pollutions

4
The Components of Energy Security

• Economic
• financial condition of consumers and enterprises
• level of market competitiveness
• level of prices
• Political
• international situation from geopolitical point
  of view
• policy of European Communities
• policy of foreign affairs
• internal policy

5
Short term Priorities

• Building a balanced structure of primary fuels
• Improvement of diversification degree of
  electricity and fuel supply sources
• Increase of efficiency of energy production,
  transmission and use
• Promotion of RES and CHP
• Implementation of the trading system for
  certificates of electricity from RES

6
Forecast of Final Energy Demand (Mtoe)
7
Policy of Primary Energy Utilization

• changes in the structure of primary energy, in
  favour of natural gas and liquid fuels
• stabilization of the level of lignite use
• increase of hard coal use for electricity
  generation after 2015
• increase share of renewable energy
• nuclear power introduction after 2020

8
Energy Sector

• Coal mining sector and brown coal
• Electricity sector
• Gas sector
• Liquid Fuels
• District Heating

9
Hard coal basins and reserves
DZW Lower Silesia Coal Basin GZW Upper Silesia
Coal Basin LZW Lubelskie Coal Basin

• Viable reserves 16.050 million t
• Industrial reserves 6.725 million t
• Operational reserves 4.800 million t
• Easily accessible reserves 2.750 million
  t

10
BROWN COAL INDUSTRY IN POLAND IN 2004

• At the end of 2004 the employment in brown coal
  industry amounted to 21 558 persons.
• The 2004 production of brown coal was 61,1
  million tons.

11
Definition of restructuring

• Restructuring a process of continuous changes
  in all fields of activity, particularly in
• Product adjustment to customers needs,
• Cost reduction,
• Technical-technological development,
• Organizational structure, management,
• Ownership structure,
• Decreasing environmental impact,
• Employment reduction and rationalization.

12
Definition of restructuring

• Purpose achieving effectiveness in free market
  conditions and open and strong competition.
• Restructuring - reaction to changes in
  the environment.
• Restructuring process of adjustment or saving
  companys market position.
• Efficiency of actions promptness, deepness and
  the range of actions .
• The range and deepness of the process depend on
  companys resources.
• There must be value increase further
  development and modernization, as well as
  improvement and introduction of modern management
  methods which enable quick and effective reaction
  to approaching crisis situation in the future.

13
Need for management of restructuring process

• Stressing of difficulties - simultaneous
  restructuring of several sectors. The processes
  overlap and are conducted in the same regions.
• Social aspects - overemployment, obsolete
  structure, reduced pace of economic growth, high
  activity of trade unions and developed structures
  of workers rights protection impose less
  effective and smoother scenario.
• Difficult economic-financial situation
  necessity of engagement of public sources into
  restructuring process, The State Treasury remains
  indirect or direct owner of majority of
  enterprises.
• Management of restructuring process by the person
  legally responsible for the whole Polish economy
  is of great importance.
• This guarantees at the time continuity of
  process through realization of the uniform
  general objective.

14
Individual programmes algorithm of restructuring
15
CORPORATE SUPERVISION OVER HARD COAL SECTOR

• According to Article28 of Act on Hard coal mining
  restructuring during the period 2003-2006,
  Minister of Economy and Labour has competences of
  Minister of Treasury in relation to coal
  companies, that means, exercises the ownership
  rights of State Treasury - so called corporate
  supervision.
• However Minister of Treasury privatizes companies
  in agreement with Minister of Economy and Labour.
  

• Main purposes of corporate supervision include
• effective exercise of ownership rights by the
  Minister of Treasury for the purpose of
  implementing objectives of national economic
  policy ,
• rationally using state assets,
• improving performance, management effectiveness
  and value of the companies,
• preparing entities for the privatization
  process.

16
CORPORATE SUPERVISION OVER HARD COAL SECTOR

• The corporate supervision is executed within the
  framework of law regulations in force, first of
  all commercial companies code, according to which
  supervisory board executes basic supervision over
  companys activity.
• In coal companies The Minister of Economy and
  Labour who represents the only shareholder plays
  the role of general assembly of shareholders,
  whose competences include
• Acknowledgement of fulfillment duties by
  supervisory board and management board members
• Appointing supervisory board members,
• Approval of changes in company statutes,
• Granting the management consent for actions
  resulting in capital involvement in other
  companies,
• Giving approval for sales or acquisition of
  property of value exceeding the amount stated in
  the company statutes.

17
Primary energy consumption structure
18
POLANDS DOMESTIC COAL MARKET SITUATION

• Coal share in production of

• Electricity 96,

Hard coal share approx. 63,

• heat approx. 77.

19
Hard coal sector organizational structure as on
1st of May 2005 production capacity at the end
of 2004.
Jastrzebska
Spólka
Kompania Weglowa
Katowicki Holding
Individual
Spólka Weglowa
Restrukturyzacji
S.A.
Weglowy S.A.
Coal mines
S.A.
Kopaln S.A.
Bytomska
SRK
Lubelski Wegiel
Centralny Zaklad
KWK Krupinski
ZG Piekary
KWK Wujek
Sp. z o.o.
Bogdanka S.A.
Odwadniania Kopaln
ZG Bobrek-Centrum
KWK Jas - Mos
KWK Wieczorek
Kopalnie wegla
KWK Budryk S.A.
KWK Powstanców
kamiennego w calkowitej
KWK Bielszowice
KWK Borynia
KWK Murcki
ZGE Sobieski-Jaworzno III
Slaskich - Bytom I
likwidacji
Sp. z o.o.
KWK Halemba
KWK Pniówek
KWK Wesola
KWK Katowice-Kleofas
KWK Jowisz
ZGE Janina Sp. z o.o.
KWK Pokój
KWK Zofiówka
KWK Myslowice
KWK Bytom II
Siltech Sp z o.o.
KWK Polska Wirek
KWK Staszic
KWK Boleslaw Smialy
KWK Kazimierz-
KWK Knurów
Juliusz Sp. z o.o.
Operating mines
KWK Makoszowy
KWK Sosnica
KWK Szczyglowice
KWK Brzeszcze-Silesia
Laczne zdolnosci produkcyjne kopaln ok. 100,1 mln
ton
Total production capacity 100,1 million
tons Production of steam coal 83,7 million
tons Production of coking coal 16,4 million tons
KWK Piast
w tym
KWK Ziemowit

• wegla energetycznego ok. 83,7 mln ton
• wegla koksujacego ok. 16,4 mln ton

KWK Rydultowy-Anna
KWK Marcel
KWK Chwalowice
KWK Jankowice
20
COAL SECTOR REFORM SINCE 1990
21
Reasons for hard coal mining restructuring in
Poland

• Excessive production capacity
• Overemployment and employment structure
• Management system
• Ownership structure
• High indebtedness
• Environmental impact
• Low competitiveness
• Technical condition of machines and equipment
• Lack of own sources, time

22
SECTOR RESTRUCTURING STAGES

• Stage I 1989 - 1993
• Stage II 1994 - 1995
• Stage III 1996 - 1997
• Stage IV 1998 - 2002
• Stage V 2003 - 2006

23
HARD COAL PRODUCTION
24
Hard coal sales structure in 2004
25
OPERATING COAL MINES
26
AVERAGE DAILY PRODUCTION FROM A LONGWALL
27
EMPLOYMENT
28
PRODUCTIVITY
29
PODSTAWOWE CELE
RESTRUCTURING TARGETS

• Sector profitability,
• Adjustment of production to market needs,
• Mining enterprises debt clearing
• Unfortunatelly some of them have not been
  achieved

30
RESTRUCTURING ACTIONS TAKEN
On 28th November 2003 Polish Parliament adopted
the Act on hard coal mining restructuring during
the period 2003 2006 The Act enabled
annulments of legal public liabilities of mining
enterprises and interests. The Act provided for
protective and activating-adaptation instruments
for mining enterprises workers.
31
RESTRUCTURING ACTIONS TAKEN
Restructuring of the hard coal mining sector
during the period of 2004  2006 and the Strategy
for the period of 2007 2010, adopted by the
Council of Ministers on 27th April 2004 is a
document updating the assumptions of reform
programme. The update was the effect of Rapid
improvement of global and domestic coal market
situation. European Union accession of Poland
and necessity to prepare documents required to
give state aid to coal sector, in accordance with
the Council Regulation EC 1407/2002.
32
FINANCIAL RESTRUCTURING

• Total annulment of legal public liabilities in
  2003 was
• 18 148,6 million zl
• Total postponement of legal public liabilities in
  2003 was
• 2 637,1 million zl

33
COAL SECTOR STRATEGY TILL 2010
34
RESTRUCTURING IN 2004 2006target status

• business entities will function in an
  economically effective manner
• mining entities will ,as their utmost priority,
  secure the home demand for coal
• mining undertakings will be realizing
  economically effective exports
• costs will be adjusted to revenues
• employment in mining undertakings will be
  adjusted to the production capacity, and the
  production capacity will be adjusted to sales
  possibilities
• modernization and investment tasks of entities
  will be realized up to their own financial
  sources
• mining entities will not benefit from any form of
  state aid, acknowledged in international
  contracts as non-permissible
• mining entities will comply with the requirements
  of environment protection and work safety
  standards

35
RESTRUCTURING 2004 2006European Targets

• Maintenance of the energy security of the country
  and co-operation in improving the standard of
  energy security of the European Union
• Maintenance by mining enterprises of sustainable
  profitability, economic effectiveness and
  competitive advantage on the uniform market of
  the EU.

36
RESTRUCTURING 2004 2006

• These objectives will be achieved through
• Cost reduction in all business segments.
• Marketing policy that enables reduction of sale
  costs, direct customer contacts, an effective
  competition with imported coal, along with
  blocking settlements by netting, or other barter
  practices, which reduce revenues and cause
  pathology and irregularities .
• Reduction of production capacity
• Reduction of employment using the protective and
  adaptation and activation measures referred to in
  the Law on Hard Coal Mining Sector Restructuring,
  to the level matching the actual requirements,
  between 2004 and 2006 .
• Streamlining the organisation structure of mining
  .
• Introduction of innovative management practices
  and optimisation of company organisation
  structures, along with pursuing of a rational
  employment policy and
• Maintenance of supplies to the uniform EU market
  and export levels to third countries at between
  20 million and 17.5 million tones, assuming
  break-even operation of the given production unit
  or group of production units .

37
MINING ENTERPRISES PERFORMANCE

• Mining enterprises performance
• Merger of mines,
• Closure of mines,
• Transformation of mines into commercial
  companies,
• Simplification of organizational structure and
  liquidation of useless subsidiaries,
• Sale of shares in needless subsidiaries,
• Gradual disposal of needless property,
• Settlement of legal status of grounds.

38
PRODUCTION CAPACITY REDUCTION
Scenarios of production capacity reduction
1st scenario reduces production capacity by 14
million ton till the end of 2006 (basic) target
model

• Under the continuous upward market trends with
  respect to steam coal and compliance by companies
  of specific economic conditions, the base case
  scenario (target model) may be extended in time.

2nd scenario, less strict, reduces production
capacity by 7,8 million ton till the end of 2006
alternative model
39
PRODUCTION CAPACITY REDUCTION
Conditions of realization of target model

• Generating net loss in the period of three
  consecutive months or during the period of six
  not consecutive months within a single accounting
  period
• Change of the coal market situation involving a
  decline in coal sales revenue during three
  consecutive months in the total amount of, at
  least, 10 relative to the same period of the
  previous year .
• Delay in execution of payments due to public
  creditors within the period of three consecutive
  months or six non-consecutive months within one
  accounting year.

40
HARD COAL SECTOR PRIVATIZATION
Privatization offers will be announced firstly
for

• Katowicki Holding Weglowy S.A.

• Jastrzebska Spólka Weglowa S.A.

• Privatization process in Kompania Weglowa S.A.
  will start as soon as basic restructuring tasks
  are completed, but the end of 2006 at the latest.

41
Creation of Coal-Coke Group
The Coal-Coke Group will consists of the
following companies - Jastrzebska Spólka
Weglowa S.A., - Koksownia Przyjazn sp. z
o.o., - Kombinat Koksochemiczny Zabrze
S.A., - Zaklady Koksownicze Walbrzych S.A.

• The purpose of transformation is creation of
  Coal-Coke Group with Jastrzebska Spólka Weglowa
  S.A. as a dominant company due to its strategic
  position in coking coal and coke sector.
• These entities are much related with Jastrzebska
  Spólka Weglowa S.A. through commercial and
  cooperation links

42
STATE AID
On 22nd June 2005 European Commission accepted
THE PLAN FOR ACCESSING COAL RESERVES IN
2004 - 2010and THE CLOSURE PLAN IN 2004 - 2007

• Council Regulation dated 23rd July 2002 on state
  aid to the coal industry and related to this
  regulation Commission Decision no 2002/871/EC
  dated 17th October 2002 establishing joint
  framework for communication of information are
  legally binding for the state aid.
• According to Council Regulation No (EC) 1407/2002
  the state aid may cover cost in connection with
  coal for the producing of electricity and the
  combined production of heat and electricity the
  production of coke and the fuelling of blast
  furnace in the steel industry. The Regulation
  does not foresees any aid for coal mines
  producing coal for other purposes.

43
SUBSIDIES FOR HARD COAL SECTOR1990 2004
44
CONCLUSIONS

• Restructuring of coal industry due to its
  peculiarity is a continuous processes, and the
  supervision of this process by The Minister of
  Economy is necessary for increased effectiveness
  of the changes.
• At the situation coordination of restructuring
  plans in a centralized manner is necessary and
  the influence of centralized control of
  restructuring process in very large.
• The more advanced restructuring process is the
  less influence of central administration on the
  process.

45
CONCLUSIONS

• Changing is neither popular nor easy
• Needs persistence and consistency
• Often results in loss of popularity
• Invokes conflicts
• Is a threat of making a mistake
• Today there is no way back
• RESIGNATION FAILURE

46
THANK YOU