Consolidated financial statement of JSW S.A. Capital Group for 2012

36. Contingent items

Contingent assets

Until 2008 the Parent Company in its property tax declarations included a tax on underground infrastructure. In 2008-2010 the Parent Company gradually adjusted the declarations filed and submitted applications to assert an overpayment. Since the municipalities rejecting these applications and on account of the dispute pending with the municipalities on this subject, the Parent Company recognizes payments for the underground infrastructure tax as contingent assets. Contingent assets concerning the overpayment of the property tax on underground infrastructure as at 31 December 2012 are PLN 14.6 million and did not change from the same period of the previous year.

After a court judgment dismissing KK Zabrze's claim for a payment under a good performance guarantee for a construction contract, the balance of contingent assets as at 31 December 2012 decreased by PLN 20.9 million as compared to the previous year.

Contingent liabilities

1. disputed claims
   In its judgment of 27 September 2012, the Arbitration Court at the Polish Chamber of Commerce in Warsaw, resolved a dispute between KK Zabrze and ZARMEN Sp. z o.o., the leader of the “Concord-Radlin II” Consortium, for payment by KK Zabrze for the performance of a construction contract no. DN/NR/RI-35 dated 17 October 2006. As at 31 December 2012, the aggregated liability resulting from the court judgment was PLN 68.5 million. Accordingly, in 2012 KK Zabrze derecognized the contingent liability in the amount of PLN 85.0 million which was recognized in 2011.
2. land reclamation
   KK Zabrze has land in Zabrze, Gliwice and Knurów left over from coking plants that have been shut down and closed. By the power of the regulations of prevailing law on remedial actions concerning damages to the environment, there is a duty of reclaiming land and liquidating the remaining elements left after closing coking plants. The decision regarding the scope of reclamation work, the method thereof and the time of performance is issued by a public administration authority, as a rule after agreement with the entity burdened with the obligation of reclamation. In the last several years, the Group reclaimed some land on the basis of the received decision and sold a considerable amount thereof. However, the Group has not received any decisions regarding the other pieces of land. On the basis of hitherto experience (costs incurred) and after considering the possible methods of rectifying damages to the environment, according to the Management Board the future costs of reclamation will not be material, however the final estimate of the costs of reclamation will not be possible until the relevant decisions of the public administration authorities specifying the scope, methods and deadline for completing the reclamation or similar work (or the lack of their necessity) are received.
3. mining damages
   Under its provisioning policy, the Group establishes provisions for mining damages in the consolidated financial statements which are the result of operating the black coal mines belonging to the Company in the amount of documented claims reported, recognized or being reviewed by the courts. The Group is not aware of a method for establishing the value of future mining damages that would make it possible to estimate in a credible manner future costs of rectifying mining damages resulting from mining operations.
4. 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 S.A. initialed a memorandum of agreement with the Management Board (“Memorandum of Agreement”). In the Memorandum of Agreement, the parties agreed among others that by principle the employment guarantee period for Parent Company employees is 10 years from the date the JSW S.A.'s shares are made public. If the Parent Company does not fulfill its employment guarantee, JSW S.A. will be obligated to pay compensation equal to the product of the average monthly remuneration in the Parent Company in the year preceding the termination of employment and the number of months remaining until the expiration of the employment guarantee period (in the case of administrative employees – no more than 60 times the average salary in the previous year). The provisions relating to the employment guarantee came into force on the date the shares of JSW S.A. were made public on the Warsaw Stock Exchange.
   Moreover, on 18 May 2011, KK Zabrze and JSW S.A. concluded a memorandum of agreement 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 Agreement agreed upon in JSW S.A. JSW S.A. took the responsibility of a guarantor of KK Zabrze's commitments.
   On 6 September 2011 the Parent Company concluded a memorandum of agreement 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.
5. investment commitments
   Under the agreement of 7 December 2010 on the sale of a 90.59% stake in Przedsiębiorstwo Gospodarki Wodnej i Rekultywacji S.A. (“PGWiR”), concluded between the State Treasury and JSW S.A., JSW S.A. accepted an obligation that, within no more than 5 years after the agreement date, it will procure that PGWiR acquires property, plant and equipment with an aggregated value on the acquisition date of no less than PLN 20.0 million and will contribute as contribution-in-kind the property, plant and equipment items used by PGWiR on the date of the foregoing agreement under leases concluded with JSW S.A. as the lessor, worth no less than PLN 12.0 million.
   As at 31 December 2012, PLN 9.9 million has been expended for the purchase of property, plant and equipment, which represents 49.5% of the total commitment amount mentioned above. As at 31 December 2012, JSW S.A. has not yet increased the capital of PGWiR by contributing property, plant and equipment as contribution-in-kind. On 22 February 2013, JSW S.A. and PGWiR signed an agreement transferring the ownership title to property, perpetual usufruct right to land and the ownership title to buildings and equipment and other property, plant and equipment. This agreement is described in Note 39.
   On 29 September 2011, the State Treasury Minister signed a share sale agreement pertaining to the 85% stake in PEC with SEJ, a member company of the Capital Group. 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.
   The Management Board of SEJ asked the Treasury Minister to change the terms of the investment commitment in connection with the development of the investment and modernization program entitled “Business Plan 2016 of the SEJ-Energetyka Group”, which aligns the investment plans of SEJ and PEC in order to achieve the synergies resulting from the operation in the SEJ Capital Group and implementation of the modernization and development program following a consistent vision for a joint business activity in the regional market. The parties eventually agreed that the deadline for fulfilling the commitment cannot exceed the duration of the guaranteed investment in property, plant and equipment, i.e. 31 December 2014. As at 31 December 2012, investments for the overall amount of PLN 11.7 million have been realized, which represented 16.3% of the total commitment amount mentioned above.
   On 5 October 2011, the Parent Company and the State Treasury concluded an agreement on the sale of 399,500 shares constituting 85% of the share capital of WZK Victoria for PLN 413.9 million. As a result of the aforementioned agreement, an investment commitment was made, under which the Buyer (JSW S.A.) 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. At the same time, in connection with the acquisition of the WZK Victoria shares, JSW S.A. submitted a Statement of submitting to enforcement up to the amount not exceeding PLN 300.0 million.
   As at 31 December 2012, capital expenditures of PLN 36.8 million have been made, which represented 16.7% of the total commitment amount mentioned above.
6. other contingent liabilities
   In 2012, Polski Koks S.A. received an interest note for years 2009-2011 from ArcelorMittal Poland S.A. for the amount of EUR 1.0 million (PLN 4.6 million). After analysis, the note was not recorded in Polski Koks' ledgers since it was not consistent with contractual provisions and it was returned to AMP. Provisions of the cooperation agreement stated that the term of payment for coke is automatically extended if the payments due to Polski Koks S.A. from its buyers, i.e. ArcelorMittal Group companies are delayed. In such a situation, the due and payable date was set by the parties as the date of receipt of cash from the buyer to the bank account of Polski Koks S.A. or the following day. Until the date of these consolidated financial statements, the Group received no information from ArcelorMittal Poland about the cancellation of that note. As at 31 December 2012, the value of the foregoing interest note was updated to PLN 2.9 million, as part of the interest was prescribed.
   WZK Victoria has a contingent liability resulting from a guarantee bond issued by insurance companies which secures the correct performance of the contract with ThyssenKrupp Metallurgical Products GmbH. As at 31 December 2012, the amount of the guarantee bond issued by insurance companies is EUR 15.0 million. The guarantee bond is secured with a blank promissory note, assignment of receivables, ownership transfer of property, plant and equipment, pledge on coal.