Poland Wants Utilities to Give Up Profits to Help Save Mines

Poland’s government wants to curb profit-seeking at state-controlled power utilities as it seeks to rescue Kompania Weglowa SA, the country’s largest coal group and third-biggest employer, and bolster the mining industry.

Kompania posted a loss of about 1 billion zloty ($331 million) on coal sales last year as global prices of the fuel plunged and power generators turned to other suppliers. At the same time, net income at PGE SA, the country’s biggest power utility, rose 14 percent to 4.1 billion zloty. PGE shares extended losses today, declining as much as 3.1 percent to 20.22 zloty, after comments from Prime Minister Donald Tusk.

“While we should respect the need for state-controlled utilities to be profitable, the criterion of maximizing profit should be eliminated,” Tusk told reporters in Katowice, the capital of Poland’s main coal-mining region. “We can’t allow power producers to reap huge profits at the same time the mining industry is failing. We need to create a synergy.”

Poland’s government has backed 23.3 billion zloty of investments in new coal-fired generators at Opole, Jaworzno and Kozienice to add 3,700 megawatts of capacity. Tusk said Europe needs to “rehabilitate” coal’s dirty image and use it to break Russia’s grip on energy supply amid Ukraine’s crisis.

Power Supplies

The European Union’s biggest eastern member, which relies on coal for 90 percent of its power output, last month pushed EU leaders to consider diversifying energy supplies.

“We’re not building power plants in Jaworzno and Opole in order to buy fuel from Colombia, South Africa or especially Russia,” Tusk told reporters after a “coal summit” with industry managers and trade unions. “The steps we take should preserve coal as our strategic resource.”

Tusk has presided over the sale of minority stakes in the country’s five biggest power utilities on the Warsaw Stock Exchange since 2008. The sales raised 16 billion zloty in financing for the state budget deficit.

“If somebody wants to be an investor in a state-controlled company, they need to read government strategy documents very carefully,” the prime minister said. “Being a minority shareholder in a state-owned company with a strong market position has its advantages, but it also involves risk.”

Overhaul Plans

Tusk, whose Civic Platform party leads in some polls ahead of May 25 elections to the European Parliament, and four of his ministers are visiting Upper Silesia a week after 12,000 miners protested against job cuts. Tusk said “there’s little room” to cut mining jobs even as the industry’s earnings worsen.

Kompania’s new management will prepare preliminary plans over the next month to overhaul production and restore the company’s financial liquidity, Chief Executive Officer Miroslaw Taras, appointed last week, said at a separate news conference today in Katowice.

The government has created a task force that has 30 days to devise a rescue plan for the ministry industry and Kompania itself, Tusk said. The plan will include case-by-case reviews of why Polish power generators buy imported instead of domestic coal and the government will work closely with companies like coal trader Weglokoks to rectify that situation, according to prime minister.

Among other measures, the state may create a special coal distribution network for retail buyers and investigate electricity imports, Tusk said.

Inventories Rise

Inventories at Kompania, which employs 55,000 workers and accounts for about half of Poland’s 75 million-ton yearly output of coal, rose to 5 million tons this year from about 4 million tons in 2013. Power utilities stopped buying the fuel from the company and drew down their own stockpiles amid mild winter weather as they negotiated lower prices for 2014.

Coal imports rose 7.4 percent to 10.9 million tons last year and kept climbing in the first two months of 2014, according to data compiled by the state-run Industrial Development Agency.

Coal prices for 2015 delivery fell to a five-year low of $79.85 a ton earlier this year, while the 2013 average production cost in Poland was 302.89 zloty a ton, the agency said. Kompania lost 33 zloty per ton of coal sold last year, according to Taras, the former CEO of Poland’s most profitable coal mine Lubelski Wegiel Bogdanka SA.

Market Collapse

“The market totally collapsed and the cause of this disaster isn’t in Silesia,” Taras said at today’s briefing. “Low global coal prices are the main reason for Kompania’s poor performance.”

The company is seeking to sell 5 million tons of coal from its stockpiles priced below production costs to boost liquidity, Taras said.

Kompania has also generated cash by selling assets, raising 1.49 billion zloty via the sale of its Knurow-Szczyglowice mine to state-controlled coal producer JSW SA last month. Another 310 million zloty came from state-owned power utility Tauron Polska Energia SA, which bought out Kompania’s stake in a mining venture in December.

Asked whether Kompania would sell off further units, Tusk said “not everyone is happy” with the disposal of Knurow-Szczyglowice.

“Yes, the transaction helped Kompania make its payroll, but its prospects weren’t improved by selling one of its better mines,” Tusk said.

Before it's here, it's on the Bloomberg Terminal.