Management Board Report on the activity of the JSW S.A. Capital Group for 2012

2.5. Assessment of the capacity to execute capital expenditure plans

Capital expenditures in 2012 were financed primarily with own funds. In addition, to a small extent the Group used external financing in the form of investment loans, other forms of loans and leases.

During the next 12 months, the financing structure is not expected to change significantly, provided that cash flows are maintained at similar levels. The amount of cash available to the Group allows it to execute its assumed investment projects. However, it is planned to increase the involvement of third party capital in the process of financing of certain investments.

2.5.1. Material investments in the Group in 2012

In 2012, the Group incurred expenditures on non-current assets in the amount of PLN 1,820.2 million (PLN 1,816.7 million after consolidation adjustments), up by 22.2% from the year before. The following table presents the structure of capital expenditures in 2012:

	2012	2011	Growth
Coal segment
Expenditures on property, plant and equipment, investment property and intangible assets	980.4	1,005.5	97.5%
Expenditures on expensable mining pits	487.2	288.6	168.8%
Total	1,467.6	1,294.1	113.4%
Coke segment
Expenditures on property, plant and equipment and intangible assets	209.6	88.6	236.6%
Total	209.6	88.6	236.6%
Other segments
Expenditures on property, plant and equipment and intangible assets	143	106.7	134.0%
Total	143	106.7	134.0%
Total segments
Expenditures on property, plant and equipment, investment property and intangible assets	1,333.0	1,200.8	111.0%
Expenditures on expensable mining pits	487.2	288.6	168.8%
Total*	1,820.2	1,489.4	122.2%

* The table includes expenditures before consolidation adjustments in the amount of PLN 3.5 million in 2012 and PLN 10.8 million in 2011.

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From the total expenditures incurred in 2012 in the amount of PLN 1,820.2 million, PLN 1,790.5 million was incurred for property, plant and equipment, PLN 7.6 million for investment property and PLN 22.1 million for intangible assets.

Investment projects in the Parent Company’s mines

In 2012, Jastrzębska Spółka Węglowa S.A. incurred expenditures on non-current assets in the amount of PLN 1,467.6 million, up by 13.4% from the year before. The following table presents the structure of capital expenditures in 2012 and in the comparative period:

	2012	2011	Growth
Capital expenditure construction activity	487.3	429.2	113.5%
Purchases of finished capital assets	493.1	576.3	85.6%
Expenditures on expensable mining pits	487.2	288.6	168.8%
Total	1,467.6	1,294.1	113.4%

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From the total expenditures incurred in 2012 in the amount of PLN 1,467.6 million, PLN 1,455.9 million was incurred for property, plant and equipment, PLN 7.6 million for investment property and PLN 4.1 million for intangible assets. The capital expenditures in 2012 were financed from own funds. In the upcoming years, the Parent Company does not plan to change significantly the structure of capital expenditure financing.

The capital expenditures incurred by the Parent Company on property, plant and equipment in 2012 were earmarked for the following tasks:

• development tasks (for vertical and horizontal expansion of mines),
• to ensure current production capacity.

The amounts of expenditures incurred for property, plant and equipment in 2012 and in the comparable period, according to the above breakdown, are as follows:

	2012	2011	Growth
Capital expenditures on development tasks	317.5	277.7	114.3%
Capital expenditures to ensure current production capacity	662.9	727.8	91.1%
Expenditures on expensable mining pits	487.2	288.6	168.8%
Total	1,467.6	1,294.1	113.4%

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As for development investments, in 2012 Jastrzębska Spółka Węglowa S.A. executed the following projects pertaining to vertical expansions of mines and horizontal expansion:

Construction of a new level in the existing Budryk mine

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 operable resources at level 1290m is estimated at 157.8 million tons. The investment project was started in 2007 and will be completed in 2019. The remaining capital expenditures scheduled for project execution associated with construction of level 1290m to 2019 (end of construction) are estimated at PLN 713.9 million.

Development of the Pniówek mine

The Parent Company continued its work on opening and developing 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 remaining capital expenditures scheduled for project execution associated with opening and development of the “Pawłowice 1” deposit till 2045 are estimated at PLN 2,626.2 million.

In addition, in the Pniówek mine, the Parent Company continued the construction of the 1000m mining level. The total size of the operable resources at level 1000m is estimated at 54.2 million tons. The remaining capital expenditures scheduled for project execution associated with construction of level 1000m and maintenance of extraction at this level to 2016 (end of construction) are estimated at PLN 168.6 million.

Development of the Borynia-Zofiówka mine, Zofiówka Section

The Parent Company continued the opening and utilizing of new resources started in 2005: “Bzie-Dębina 1-Zachód” and “Bzie-Dębina 2-Zachód” from level 1110m. Operable resources planned to be opened from level 1110m amount to 98.6 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 remaining capital expenditures scheduled for project execution associated with opening and developing “Bzie-Dębina 1-Zachód” and “Bzie-Dębina 2-Zachód” deposits till 2042 are estimated at PLN 3,037.5 million.

In addition, in the Zofiówka Section, the Parent Company continued the development of the 1080m mining level started in 2006. The total size of the operable resources at level 1080m is estimated at 47.0 million tons. The deposits at this level contain mainly type 35 (hard) coking coal. The remaining capital expenditures scheduled for project execution associated with construction of extraction level 1080m to 2020 (end of construction) are estimated at PLN 657.1 million.

Development of the Krupiński mine

In 2010, the Parent Company started to open the “Żory-Suszec” deposit and section “E” and “Zgoń” in the Krupiński mine. The total amount of potential operable resources is estimated at 27.3 million tons of coking coal. The remaining capital expenditures scheduled for project execution associated with opening of the “Żory-Suszec” deposit and section “E” and “Zgoń” till 2018 (end of construction) are estimated at PLN 389.8 million.

Development of the Borynia-Zofiówka mine, Borynia Section

As part of its formal and legal activities (execution of a contract for a fee-based use of geological information and receipt of a decision approving the geological documentation of the “Żory-Warszowice” coal deposit) aimed at the provision and utilization of the “Żory-Warszowice” deposit, in 2012 the Parent Company incurred capital expenditures of PLN 2.9 million. The total amount of potential operable resources is estimated at 31.5 million tons. The capital expenditures scheduled for project execution associated with opening and development of the “Żory-Warszowice” deposit are estimated at PLN 575.0 million.

The expenditures incurred in 2012 for property, plant and equipment earmarked for execution of JSW S.A.’s aforementioned key projects are presented in the table below:

	2012	2011	Growth
Vertical development of the mines
Budryk Mine Construction of level 1290m	62.6	36.2	172.9%
Pniówek Mine Construction of level 1000m	95.7	80.5	118.9%
Borynia-Zofiówka Mine, Zofiówka Section Construction of level 1080m	35.3	25.6	137.9%
Total	193.6	142.3	136.1%
Horizontal development and development of potential new mining areas
Borynia-Zofiówka Mine, Zofiówka Section Opening and industrial utilization of the “Bzie-Dębina 2-Zachód” and “Bzie-Dębina 1-Zachód” coking coal deposits	61.9	71.9	86.1%
Pniówek Mine Opening and industrial utilization of the new “Pawłowice-1” coking coal deposit	15.8	19.8	79.8%
Krupiński Mine Opening seams in sections “E” and “Zgoń” and reserves of part of the “Żory-Suszec” deposit	43.3	43.7	99.1%
Borynia-Zofiówka Mine, Borynia Section Utilization of the "Żory-Warszowice” deposit	2.9	-	-
Total	123.9	135.4	91.5%
Total capital expenditures on development tasks	317.5	277.7	114.3%

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Furthermore, as part of expenditures incurred to ensure the current production capacity, works were performed on the construction of infrastructure for the technical and organizational integration of the Borynia-Zofiówka and Jas-Mos mines.

Major investment projects executed in the Capital Group’s subsidiaries

Construction of the Composite Solid Fuels Production Plant in Polski Koks S.A.

This construction project is a result of the implementation of decisions made under the “Clean Air for Silesia” Research and Development Program carried out by Polski Koks S.A., Jastrzębska Spółka Węglowa S.A., the Silesian University of Technology, the Institute for Chemical Processing of Coal and the Boiler Cluster Association. The primary objective of the Program is to combine the scientific and technical potential of the parties to the agreement for the execution of research, development and technological tasks in the field of pro-ecological combustion of products of the JSW Coal and Coke Group. The plant will produce ecological solid fuels intended for public utilities and private consumers. The expected date of completion of the construction project is mid-2013. In 2012, PLN 0.7 million was spent on its execution. The remaining planned capital expenditures under the project are estimated at PLN 18.9 million.

Modernization of coking batteries in Koksownia Przyjaźń

The coking plant continues its investment program as a part of which in 2001 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 2012, expenditures in the amount of PLN 12.1 million were incurred on modernization of battery no. 4 (formal and legal activities and design activities). The remaining planned capital expenditures under the project are estimated at PLN 301.7 million.

Construction of the power unit in Koksownia Przyjaźń

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 concluded an agreement with the General Investment Contractor for construction of the power unit increasing the production capacity by 71 MWe. The investment will reduce electricity acquisition costs 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 coal derivative segment. The expected date of completion of the construction project is 2014. In 2012, PLN 40.9 million was spent in connection with its execution. The remaining capital expenditures planned after 2012 under the project are estimated at PLN 184.1 million.

Construction of a system for the removal of ammonia and hydrogen sulfide from coking gas and their environmentally friendly and economically justified utilization in WZK Victoria

WZK Victoria continued its work started in 2007 on modernization of the Coal Derivative Unit in respect of the construction of a new system for the removal of ammonia and hydrogen sulfide from coking gas, together with their environmentally friendly and economically justified utilization. The construction project was completed in mid-2012. The new coking gas purification system replaced the previously operated and technologically outdated system. The project will enable long-term operation of the Coking Plant in compliance with more and more stringent environmental protection requirements. In 2012, expenditures of PLN 17.6 million were incurred in connection with the execution of the construction project. The total value of the project was PLN 163.5 million and expenditures on the construction of the Coal Derivative Unit conducted in 2007-2012 amounted to PLN 210.1 million.

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 project execution, the construction of a coal yard with a storage capacity of 30 thousand tons was completed and a final decision on the granting of a construction permit for coking battery no. 6 was obtained. The expected date of completion of the construction project is 2016. In 2012, in connection with the execution of the construction project, expenditures of PLN 6.3 million were incurred. The remaining planned capital expenditures under the project are estimated at PLN 152.1 million.

Modernization of the KK Zabrze coking plants

KK Zabrze continues the investment involving modernization of the Radlin Coking Plant and the Jadwiga Coking Plant. As part of the modernization of the Radlin Coking Plant, the coking battery using the tamping system was developed (and commissioned for use in December 2009) together with accompanying machinery and facilities, the feeding-pushing machine no. 2 was being built and currently, the coal mill is being reconstructed. The investment is expected to be completed in 2013. In 2012 expenditures of PLN 50.2 million were incurred for the project. The remaining planned capital expenditures under the project are estimated at PLN 0.6 million.

Modernization of the Jadwiga Coking Plant 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. The expected date of completion of the construction project is 2016. In 2012, PLN 0.7 million was spent on its execution. The remaining planned capital expenditures under the project are estimated at PLN 56.6 million.

Construction of the CFB 70 MWe 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 starting from 2016 for the next 30 years 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 S.A. mines, and other types of renewable fuels (biomass).

The changing situation in the energy sector and shifts in forecasted energy prices in the long term entail the need for another review of the project with a simultaneous analysis of alternative solutions.

Construction of a gas engine (EC Częstochowa) – executed by SEJ

In 2012, the construction of a gas engine for an electricity generator in the Częstochowa Nowa Coking Plant in Częstochowa was launched. The project involves the construction of a gas engine in the high-efficiency cogeneration system with the electric power of approximately 3MWe using coking gas as the fuel for the gas engine. The gas engine will produce in cogeneration: electricity, process steam and hot water for the coking plant. The project is being executed as part of the acquisition of new sales markets by SEJ and constitutes an innovative solution in Poland in terms of the fuel used for the gas engine. The expected date of completion of the construction project is 2013. In 2012, PLN 10.2 million was spent on its execution. The remaining capital expenditures under the project are estimated at PLN 6.8 million.

2.5.2. Capital investments in 2012

A detailed description of the capital investments made by the Group’s companies in the period from January to December 2012 is presented in Item 1.1.3 of this report. The investments were financed from own funds and in return for in-kind contributions.

In addition to the aforementioned capital expenditures, in 2012 JSW S.A. purchased short-term unsecured registered series B bonds issued by the subsidiary SEJ of a value of PLN 10.0 million. The maturity date of the bonds is 27 December 2013. The total value of SEJ series A and series B bonds subscribed for by JSW S.A. is PLN 154.5 million Their maturity date of the series A bonds is the last business day of 2018. The bonds bear interest at a floating interest rate.