Details of the Petrokemija contract

Croatian daily Jutarnji list has the contract which defines recapitalization and restructuring of Petrokemija, which is the largest privatization project of the administration of the Prime Minister Andrej Plenković.

The key part of the contract, which has been agreed upon by the Government, INA oil company and PPD natural gast distribution company is: if in 20 years will be discovered that any part of the recapitalization process or Government's actions (such as debt converson into stocks or bonds provided in 2016 and 2017) are not in accordance with EU regulations on State subsidies, the State has the right to take over Petrokemija.

State guarantees were the reason for delaying signing of the recapitalization agreement. If the State does not fulfill its own obligations, INA and PPD are entitled to compensation as main strategic partners, of up to HRK 300 million, which is the amount that the two companies have thus far invested in Petrokemija.

In order to prevent certain outcomes, the State provided guarantees that it will, among other, create conditions which will result in 20 percent annual decline of natural gas transport price by the end of this year. Apart from the natural gas price, this was one of the largest problems for Petrokemija. It is worth mentioning that the Croatian Energy Regulatory Agency (HERA) sets tariffs, which is supposed to be an independent body.

Strategic partners

This presents only a part of the State's obligations that were negotiated and agreed upon in the Petrokemija recapitalization and restructuring contract inked last week by representatives of the Center for Restructuring and Privatization (CERP) and company founded jointly by INA and PPD, Terra mineralna gnojiva, strategic partners that hold more than 50 per cent of the manufacturer in Kutina. Both sides unofficially confirmed that the agreement we have is authentic, which includes interesting rules and obligations that the State and investors agreed to, among other.

The State has more obligations compared to investors, who wanted to protect their position as much as they could because the risk involved is obviously high. In the contract, the State guarantees that Petrokemija does not have additional obligations and agrees to cover any debts from before the end of the restructuring process worth more than HRK 1 million should such obligations crop up. It also agreed to take over all obligations and risks connected with payment of taxes and environmental protection from before the end of the restructuring process as well as secure full compensation.

We already noted the most interesting part - the State has to create conditions for cutting cost of transport of natural gas. Plinacro gas pipeline operator, which invested HRK 30 million in the recapitalization after pension insurance funds withdrew, pointed out that this is within HERA's authority.

- Tariffs went down last year 20 per cent on average, with Plinacro contributing to rationalization of Petrokemija's business by lowering its revenues some HRK 100 million. HERA will decide on any further lowering of tariffs - Plinacro pointed out, convinced that successful operation of Petrokemija and the company's increased production will have multiple positive effects on Plinacro as well as several other companies, including HŽ Cargo railway company, Port of Šibenik and Port of Vukovar, as successful operation of the manufacturer in Kutina affects performance of said companies.

Ministry of Economy did not explain why it agreed to some terms, while INA and PPD briefly answered that Petrokemija's bankruptcy was avoided through privatization.

Priorities

-All terms are aimed at securing continued operation and expansion of production of mineral fertilizer in Petrokemija in a sustainable and market-oriented manner - INA and PPD responded.

The fact that their terms and level of protection the terms guarantee are legitimate can be seen from the very start of the contract, where the results of due diligence investigations in Petrokemija are listed: the mineral fertilizer manufacturer in Kutina owed banks HRK 629 million on 31 December 2017, including 544 million guaranteed for by the State. Analyses showed excessive debts which prevent sustainable operation, especially considering debt of HRK 173 million towards suppliers, which is not included in total debt. Taking this into consideration, net losses in 2018 are projected at HRK 295 million.

With this in mind, several terms were set before the signing of the contract, which had to be fulfilled before signing. Besides standard procedural steps, one of the terms is that Petrokemija has to close reprogramming agreements and restructure obligations towards Hrvatska elektroprivreda (HEP) power utility worth up to HRK 330 million in two and half years. The HEP took over supply of Petrokemija with natural gas as its main suppliers, INA and PPD, did not want the debts to continue piling up. Also, the State was to present an agreement on separation of Petrokemija Agro Trade, which will separate the phosphogypsum dump and management thereof from Petrokemija. The State has to find a long-term solution in five years that will completely sever ties with Petrokemija Agro Trade and/or the phosphogypsum dump that will not demand additional investments from investors or cause changes to existing permits.

Since they are majority owners, INA and PPD set the number of Supervisory Board members and appointed new management. Former Mayor of Kutina Davor Žmegač succeeded Đuro Popijač at the helm of the company, who has many responsibilities. The new management is tasked with securing new sources of financing in cooperation with suppliers, in the form of loans for refinancing debts towards suppliers, as well as restructuring the company. This includes the tricky question - how many jobs will be lost? The company currently employs some 1,600 workers, with unofficial sources revealing that about 500 will be laid off. However, they stressed that workers will be taken care of.

Hands untied

In line with the contract, investors will protect rights of workers so that each worker dismissed for business reasons up to one year after the agreement is closed receives severance not lower than stipulated in the collective bargaining agreement (which came into force on 31 December 2017). The management's hands are not tied as far as restructuring goes, which is in the contract, while the State is not to interfere in business operation and management.

Besides optimizing employee structure, Žmegač will have to implement additional restructuring measures that include expanding production, making cost of operation sustainable, reprogramming short-term financial obligations and optimizing working capital, securing refinancing of existing debts with the aim of stabilizing cash flow, active solvency management as well as optimization of capital expenditures and drawing up a detailed plan for use of funds provided through recapitalization.

INA and PPD agreed to (if finances allow) make sure Petrokemija adopts investment plans worth at least HRK 600 million in 10 years following recapitalization (between 2019 and 2028).

Investments will surely be needed as Petrokemija's market position has been consistently deteriorating over the last 20 or 30 years.

Purpose of the terms is to secure continued operation and expansion of production of mineral fertilizer in Petrokemija in a sustainable and market-oriented manner, stressed INA and PPD, explaining why they inked the contract. The company in Kutina currently employs some 1,600 workers, with unofficial sources announcing some 500 will be laid off. However, according to the contract, the company will take good care of them.