Significan agreements and events 2016

In January 2016, the existing trade credit insurance policy with Towarzystwo Ubezpieczeń Euler Hermes S.A. (TUEH S.A.) was renewed for a period from January 1st 2016 to December 31st 2016. The policy covered domestic and export sales of caprolactam and melamine, as well as sales of other products to customers buying caprolactam, melamine, PUC-C and alcohol foreshots. Receivables were insured up to the credit limits set by TUEH (except transactions covered by bank guarantees, letters of credit, or avals).

In January 2016, a new trade credit insurance policy was executed with TUEH S.A. for a period from January 1st 2016 to December 31st 2016. The policy covered exports of fertilizers, sales of NOXy®, LIKAM®, PULNOx® to CHPs, power and cement plants, waste incineration facilities, and wastewater treatment plants, as well as sales of technical grade urea on the Polish market.

Receivables were insured up to the credit limits set by the insurer (except transactions covered by bank guarantees or letters of credit). In December 2016, the validity of the insurance policies was extended until January 31st 2017, and subsequently, after the reporting period, new trade credit insurance policies (with the same cover) were concluded with Euler Hermes for the period until January 31st 2018.

On January 17th 2017, Grupa Azoty POLICE and Titania AS of Hauge and Dalane, Norway, signed a contract for the purchase of ilmenite. The value of the contract is estimated at PLN 140m. The contract was concluded for a definite term from September 1st 2016 to December 31st 2019. The contract sets out the terms of and schedule for ilmenite deliveries.

On January 20th 2016, during the ‘We Change Polish Industry’ Forum, the Group was distinguished for its ‘unprecedented investment projects’ and the wide-ranging investment programme currently implemented. In the citation, the organisers emphasized that the projects under way at all of the Group’s plants will ensure its stable development and improve its competitive position on foreign markets.

A new bulk storage facility was commissioned at the Tarnów plant in February 2016. It was an important investment project in the Polish fertilizers industry. The facility is not only a part of the fertilizer process line, but also enables the parent to season and store its fertilizer products in appropriate conditions.

In February 2016, the parent entered into a master agreement for all-risk construction and assembly insurance under an insurance pool set up by ERGO HESTIA/WARTA/PZU. The agreement, effective from February 6th 2016 to June 30th 2018, defines the terms and conditions of insurance of construction and assembly works performed as part of new and overhaul projects under contracts entered into by the Group companies. The insurance also covers construction and assembly works performed by the companies. To be covered by the insurance, construction contracts must be notified to the insurers during the agreement term.

On January 21st 2016, Grupa Azoty POLICE concluded a potassium chloride supply contract with Uralkali Trading SIA of Riga, Latvia. The contract value was estimated at PLN 288m. The contract was concluded for a definite term from January 4th 2016 to December 31st 2016. Under the contract, potassium chloride was to be supplied according to an agreed delivery schedule, in shipments of ca. 3,000 tonnes each.

On March 9th 2016, the parent and the Office of Technical Inspection (UDT) signed a cooperation agreement. The agreement provides for joint activities to improve safety of the parent’s process units and equipment which are subject to technical inspections.

On March 11th 2016, Grupa Azoty POLICE entered into a gas supply contract with PGNiG Supply & Trading GmbH of Munich, Germany (a PGNiG subsidiary). The estimated value of gas supplies under the contract is approximately PLN 151,600,000. The contract sets out the terms of gas supplies to the company between October 1st 2016 and October 1st 2017.

The Group was included in the FTSE4Good Emerging index, following a thorough assessment of its environmental, social and corporate governance practices. The assessment was performed by FTSE Russell in April 2015 and February 2016. Its presence in the index confirms that the Group conducts its business in a transparent and compliant manner.

On April 13th 2016, the parent and its subsidiaries: Grupa Azoty PUŁAWY, Grupa Azoty POLICE, Grupa Azoty KĘDZIERZYN, Grupa Azoty SIARKOPOL (the “customers”) concluded a framework agreement for gas fuel supply and bilateral individual contracts with Polskie Górnictwo Naftowe i Gazownictwo S.A. The framework agreement defines the procedures, the same for all customers, for the execution and termination of individual contracts, placing orders and making payments, suspension of deliveries, reduction of supply volumes, renegotiation, and joint terms of settlement. The framework agreement was concluded for an indefinite term and covers supplies made as of April 1st 2016. The individual contracts were signed for various supply periods, with the longest one ending on September 30th 2019. The aggregate VAT-exclusive value of the framework agreement and individual contracts over their effective terms was estimated at ca. PLN 3.3bn. The framework agreement and the individual contracts provide for gas fuel supplies satisfying over 50% of the Group’s demand for gas. For details, see Current Report No. 23/2016.

On April 18th 2016, Grupa Azoty POLICE concluded a potassium chloride supply contract with Nitron Group Corporation of Greenwich, USA (as the seller). The estimated value of supplies is PLN 176,000,000, and the contract was concluded for a definite term from April 1st 2016 to December 31st 2016. Under the contract, potassium chloride was to be supplied according to an agreed delivery schedule, in shipments of 3,000−15,000 tonnes each.

The broker agreement concluded on May 31st 2013 by the leading Group companies, i.e. the parent, Grupa Azoty KĘDZIERZYN, Grupa Azoty POLICE and Grupa Azoty PUŁAWY, and a broker syndicate comprising Nord Partner Sp. z o.o. and FST–Management Sp. z o.o. expired on December 31st 2016. The subject matter of the agreement was the provision of insurance brokerage and consulting services.

In July 2016, 17 of Poland’s largest companies, including the Group, set up the Polish National Foundation to promote the Polish economy and create a positive image of state-owned companies and their projects in Poland and abroad.

The founders are Poland’s leading businesses in the key sectors of the economy: power, transport, logistics, mining, steel, fuels, insurance, chemicals, finance, property, and lotteries.

They include four power groups delivering electricity to more than 90% of customers in Poland, i.e. PGE Polska Grupa Energetyczna, Enea, Energa, and Tauron, as well as Poland’s largest gas and fuel companies − Polskie Górnictwo Naftowe i Gazownictwo, PKN ORLEN, and Grupa LOTOS. Other founders are the leading providers of insurance and financial services, i.e. PZU, PKO BP, and the Warsaw Stock Exchange, as well as Totalizator Sportowy, the leader in Poland’s lottery market.

The key task of the Foundation is to promote and protect the image of Poland and the Polish economy, and to promote positive reception of projects carried out by state-owned companies. The organization is to work with local communities, social institutions and economic entities, and to undertake and finance social initiatives.

On June 23rd 2016, the Group and PKP Cargo entered into a two-year contract for transport of more than 4 million tonnes of fertilizers, chemical products and raw materials. The contract’s total value is estimated at nearly PLN 200m. The Group’s cooperation with PKP CARGO is governed by a framework agreement and separate volume agreements concluded between PKP CARGO and five Group companies. These arrangements extended the scope of cooperation between the parties. Under the new contract, PKP CARGO will provide comprehensive transport services to the Group. The carrier (Poland’s largest) will transport fertilizers, chemical products and other cargo in containers to customers in Poland and will handle international shipments for the Group. Some of the shipments will also involve transport of products between the Group companies. Under the two-year contract, PKP CARGO will provide services to the parent, Grupa Azoty PUŁAWY, Grupa Azoty KĘDZIERZYN, Grupa Azoty POLICE and Grupa Azoty SIARKOPOL. Under a separate contract with Grupa Azoty, PKP CARGO transports coal from coal mines in Silesia and from the Bogdanka mine in the Lublin region. The contract was signed in March 2016 and provides for transport of nearly 900,000 tonnes of coal.

On July 26th 2016, the parent received from Polski Koncern Naftowy ORLEN S.A. and Anwil S.A. a notice of termination of the non-disclosure agreement executed in January 2015 by and between the parent, the State Treasury, Polski Koncern Naftowy ORLEN S.A. and Anwil S.A., governing confidentiality of negotiations between the parties towards a possible arrangement for potential integration of Poland’s chemical and fertilizers sectors. Given its possible adverse effect on the course or outcome of the negotiations, the disclosure of inside information was delayed pursuant to Art. 57 of the Act on public offering, conditions governing the introduction of financial instruments to organised trading, and public companies of July 29th 2005.

On June 30th 2016, PZU issued insurance policies for four leading companies of the Group, i.e. the parent, Grupa Azoty KĘDZIERZYN, Grupa Azoty POLICE and Grupa Azoty PUŁAWY. The policies cover:

• all-risk property insurance (ALLR),
• all-risk electronic equipment insurance (EEI),
• loss of profit insurance ALLR (BI),
• all-risk machinery insurance (MB).
• Also on June 30th 2016, the ERGO HESTIA/PZU/WARTA pool issued annual policies for the Group covering business liability insurance as well as goods in transit insurance for domestic and international shipments.

The policies are valid from July 1st 2016 to June 30th 2017 and were issued under the second annual settlement period of the three-year master agreements signed by the Group’s four leading companies, effective from July 1st 2015 to June 30th 2018, which provide the Group with comprehensive insurance cover against catstrophic and material risks.

In November 2016, six companies of the Group, i.e. the parent, Grupa Azoty KĘDZIERZYN, Grupa Azoty POLICE, Grupa Azoty PUŁAWY, Grupa Azoty SIARKOPOL and GZNF Fosfory Sp. z o.o. joined Towarzystwo Ubezpieczeń Wzajemnych PZUW (a mutual insurance company) as a mutual insurance union (związek wzajemności członkowskiej).

In November 2016, the same Group companies concluded with PZU S.A. agreements to shorten the terms of and to terminate the master agreements and the ALLR, EEI, BI and MB insurance policies, with effect as of February 28th 2017.

Subsequently, after the reporting period, these companies negotiated and concluded with TUW PZUW a new insurance programme for the two-year period from March 1st 2017 to February 28th 2019, covering:

• all-risk property insurance (ALLR),
• all-risk electronic equipment insurance (EEI),
• loss of profit insurance ALLR (BI),
• all-risk machinery insurance (MB).

On July 27th 2016, the Group renewed an insurance policy under the consolidated environmental insurance agreement with AIG Europe Limited Sp. z o.o. Oddział w Polsce (Polish Branch) covering the period from August 1st 2015 to July 30th 2016. The total sum insured is PLN 20m for the Group’s four key companies.

On August 4th 2016, Grupa Azoty POLICE was notified of the following decisions taken by the Ministry of Industry and Mining of Senegal:

• A decision to extend the licence for exploration for phosphates and related substances in the KEBEMER area (Louga region, Senegal), granted to Grupa Azoty POLICE’s subsidiary African Investment Group S.A., for another three years starting from July 9th 2016. Formerly, the exploration licence was granted for the period from July 10th 2013 to July 9th 2016. The extended licence covers an area of approximately 472 km2. During the new licence term, African Investment Group S.A. is required to spend USD 3m on exploration activities. African Investment Group S.A. is also taking steps to obtain a production licence in the KEBEMER area.
• A decision to refuse to extend the licence for exploration for heavy minerals and related substances in the KAYAR OFFSHORE field (Dakar region, Senegal), held by African Investment Group S.A. The expired licence covered ilmenite as the main mineral, as well as rutile and zirconium. An estimate of mineral resources by African Investment Group S.A. showed that incurring high costs of exploration is too risky. Thus the company did not meet the minimum expenditure requirement defined in the exploration licence, which resulted in the negative decision of Senegal’s Ministry of Industry and Mining.

Grupa Azoty KĘDZIERZYN will establish advanced research facilities. On August 8th 2016, the Ministry of Development and Grupa Azoty KĘDZIERZYN signed an agreement on co-financing of an R&D centre which will focus on research into advanced plastics. Upon completion of the project, an application laboratory will be launched in Kędzierzyn-Koźle to carry out scientific research and development work with the use of the R&D infrastructure. The project’s total costs are estimated at almost PLN 13m. Of that amount, PLN 2.8m will be covered by a grant received from the European Regional Development Fund.

The Group will create its own Research and Development Centre in Tarnów. On September 2nd 2016, Grupa Azoty and the Ministry of Development signed an agreement for a PLN 20m grant for construction of an R&D centre, marking the launch of the project with a total amount of almost PLN 88m. The grant, received as part of the ‘Support for Investment in R&D Infrastructure’ measure of the Operational Programme Smart Growth, covers almost 30% of the project’s eligible costs.

On September 17th 2016, the parent renewed its consolidated directors and officers (D&O) liability insurance agreement with PZU S.A. The insurance provides cover for the Group companies from September 17th 2016 to September 16th 2017. The total sum insured is PLN 200m.

On October 4th 2016, the parent and Grupa Azoty POLICE signed a letter of intent on the parent’s equity participation in the PDH project.

The investment project (construction of a propane dehydrogenation unit for the purposes of propylene production, with an annual capacity of over 400 thousand tonnes) is being implemented by PDH Polska S.A. (the “PDH project”), Grupa Azoty POLICE’s subsidiary.

Currently, following a review, the total value of the PDH project covered by a project finance plan (including capital expenditure, capital expenditure reserve, finance cost in the construction phase, debt service reserve account and PDH Polska’s operating expenses in the construction phase) exceeds USD 700m (over PLN 2,693m at the mid-rate quoted by the National Bank of Poland for October 4th 2016), with the following model financing structure:

• 30% − subordinated financing (equity and subordinated loan),
• 70% − senior debt.

The letter of intent will remain valid until December 31st 2019 or until the parties resolve to terminate the cooperation. The letter of intent also provides for its optional extension upon the parties’ agreement. The final amount of the PDH project’s capital expenditure will be known after work is completed on the FEED documentation and the contractor for the delivery of a PFH unit is selected.

On December 6th 2016, Grupa Azoty PUŁAWY signed an annex to the long-term agreement for supply of thermal coal executed by Grupa Azoty PUŁAWY and Lubelski Węgiel Bogdanka S.A. of Bogdanka on January 8th 2009.

Under the agreement, thermal coal is supplied and sold to Grupa Azoty PUŁAWY. The annex extends the agreement until the end of 2021 (previously, the agreement was to expire at the end of 2019) and sets out new terms for the sale of thermal coal:

• the price and volume of thermal coal to be supplied in 2017, and
• the volume of thermal coal to be supplied in 2018−2021.

In individual years of the agreement term the price will be determined by negotiation or will be based on a price formula which takes into account prevailing market prices.

Following the signing of the annex, the estimated value of the agreement from its original date to December 31st 2021 (net of possible increases, deviations and tolerance) currently totals PLN 1,001m (VAT exclusive), including approximately PLN 343m (VAT exclusive) for coal supplies in 2017–2021.

Under the agreement, Lubelski Węgiel Bogdanka S.A. is the main supplier of coal to Grupa Azoty PUŁAWY’s CHP plant. The agreement’s objective is to secure long-term supplies of coal meeting the customer’s specific requirements.

On November 8th 2016, Grupa Azoty POLICE concluded with Thorø Nielsen A/S of Herning, Denmark, a contract for the sale of compound fertilizers and urea. The contract was executed for a definite period from January 1st 2017 to December 31st 2019, and sets out a specific schedule and other commercial terms of deliveries. The estimated value of the deliveries is PLN 135,295 thousand.

On December 30th 2016, a regulation of the Council of Ministers dated December 22nd 2016 amending the regulation on the Starachowice special economic zone (Dz.U. of December 29th 2016, item 2241) took effect. Under the new regulation, the Starachowice Special Economic Zone − Puławy Sub-Zone was extended to include a land lot located in the Puławy municipality, to which Grupa Azoty PUŁAWY holds a perpetual usufruct right and where the company located its project ‘Facility for production of granulated fertilizers based on ammonium nitrate’ is to be located. The regulation was issued in response an application submitted by Grupa Azoty PUŁAWY to the Minister of Economy on August 12th 2014, and enables the company to continue its efforts to obtain a licence to operate the project in the Starachowice special economic zone.

As the broker agreement expired on December 31st 2016, the Group resolved to implement a new insurance programme and to insure the Group’s assets with TUW PZUW. In December 2016, the parent’s Management Board, acting on behalf of the Group’s six largest companies, signed a letter of intent and a declaration of accession to TUW PZUW. In January 2017, the Group commenced negotiations with TUW PZUW concerning a new insurance programme and new terms of insurance cover for the Group’s assets as of March 1st 2017. In the second phase of work on the new insurance programme, the Group expects to conclude with TUW PZUW new insurance agreements to ensure effective cover of the other risks after the existing agreements and policies expire on June 30th 2017. In the third phase, the other Group companies will be gradually transferred to TUW PZUW.