Briefing
Ostrołęka C: Enea’s and Energa’s Board Members’
Fiduciary Duties to the Companies and Shareholders
19 December 2018
Introduction
1.

This briefing concerns Enea’s and Energa’s proposed Ostrołęka C coal-fired power
unit (the “Proposed Project”) and follows from ClientEarth’s briefing of 19 September
2018.1 It refers in particular to:a.

Media reports on 21 November 2018 reporting the conclusion of the financing
structure for Ostrołęka C (the “Reported Financing Structure”); andb.

The main capacity market auction due to take place on 21 December 2018, in
which Elektrownia Ostrołęka Sp. z o.o. (the “SPV”) is expected to participate (the“Upcoming Capacity Auction”).

2.

The Reported Financing Structure would significantly increase the financial risk of the
project to Enea, Energa and their shareholders, which in turn would also materially
increase the legal risks to the companies, their Management Boards and Supervisory
Boards of proceeding to the construction stage. This risk is underlined by Fitch’s
specific warning to Enea that an equity contribution of more than PLN 1bn (as would
appear to be contemplated by the Reported Financing Structure) could lead tonegative rating action.

3.

The proposed participation in the Upcoming Capacity Auction also carries significant
risks. Energa itself has acknowledged that the capacity market is “not perfectly suited
for Ostrołęka C”.2 In particular, the plant will not be constructed in time to provide thecontracted capacity, leading to foregone payments and inevitable penalties. If the “verychallenging”3 financial milestone is not met, the capacity contract will be terminated.

4.

The Reported Financing Structure and the risks associated with the SPV’s proposed
participation in the Upcoming Capacity Auction have a further, direct negative impact
on the regulatory and economic context of the Proposed Project. That context has
fundamentally changed since Energa relaunched the project in May 2016 and Enea
announced its participation in September 2016. It is now entirely apparent that the1

ClientEarth, Briefing: Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties to
the Companies and Shareholders, 19 September 2018,https://www.documents.clientearth.org/library/download-info/ostroleka-c-energas-and-eneasboard-members-fiduciary-duties-to-the-companies-and-shareholders/.
Energa, Current Report No. 45/2018, 24 October 2018,https://ir.energa.pl/en/pr/409065/current-report-no-45-2018.
Energa, Current Report No. 45/2018, 24 October 2018,https://ir.energa.pl/en/pr/409065/current-report-no-45-2018.

2
3

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 2018
Proposed Project is not viable. In our view, Enea’s and Energa’s continued pursuit of
the Proposed Project remains in breach of its Management Board and Supervisory
Board members’ duties of due diligence and to act in the best interests of thecompanies and their shareholders. This would include further steps consenting to the
SPV incurring further liabilities by participating in the 21 December 2018 capacity
market auction.

Reported Financing Structure5.

On 21 November 2018, the Polish Press Agency reported that the Minister of Energy,
Krzysztof Tchórzewski, stated that:a.

"Talks about financing the new bloc in Ostrołęka ended, although they were noteasy, many foreign banks and some of our domestic do not want to financeprojects based on coal”4; andb.

“Credit financing will account for 30-35%, which is an unusual solution”, “Equityfrom Energa, Enea and TFI Energia will account for over 60%”.56.

Neither Energa nor Enea have informed the market of the conclusion of financing
discussions, nor the terms of any such financing structure. It is not clear why, or how,
Enea’s and Energa’s controlling shareholder has access to any such information in theabsence of its availability to the companies’ other shareholders. This is of particularconcern because the financing structure referred to by the Minister of Energy on 21
November 2018 would, if confirmed, significantly increase the financial risk of the
project to Enea, Energa and their shareholders.

7.

Energa’s current report dated 4 September 2018 refers to a preliminary financing
structure under which (a) Energa and Enea would contribute share capital of PLN 1
billion each, (b) Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych Energia(“TFI Energia”) would contribute “maximum PLN 1 billion” share capital and (c) the“remaining amount will be contributed by other forms of financing”.6 According toEnerga’s current report, the Memorandum of Understanding that sets out the above
preliminary financing structure is no longer effective, having expired on 30 November
2018, and there has been no further company report since that date, despite theapparent conclusion of financing discussions.

4

PAP, Udział banków w finansowaniu bloku w Elektrowni Ostrołęka wyniesie 30-35 proc., 21
November 2018, https://energetyka.wnp.pl/udzial-bankow-w-finansowaniu-bloku-w-elektrowniostroleka-wyniesie-30-35-proc,334727_1_0_0.html.
Posadzy Magdalena, Banks to finance 30-35% of new power block in Ostroleka; owners, 21
November 2018.
Energa, Current Report No. 42/2018, 4 September 2018,https://ir.energa.pl/en/pr/401224/current-report-no-42-2018.

5
6

2

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 20188.

The market had already reacted with alarm to the preliminary financing structure.
Bloomberg reported on 5 September 2018:7
Concern over PGE’s potential involvement in the contested project helped send
its shares down by 4 percent to 8.69 zloty by 12:35 p.m. in Warsaw. Energa
dropped 3.4 percent, Enea 4.5 percent while Warsaw’s WIG-Energy index
declined 3.5 percent.
“At the first sight, the deal seems to stand for all-positive news to Energa andEnea, as an independent fund support should actually lower two companies’ own
spending, Pawel Puchalski, an analyst at Bank Zachodni WBK SA, wrote in anote. “However, we had never expected that 6 billion zloty investment might
require such amount of equity, as it might further weaken two utilities’ short-term
outlooks.”
FIZAN may demand Energa and Enea to guarantee certain payoffs returned inyearly instalments in exchange for provided equity, which would make reaching
break even on the Ostroleka project even more difficult, according to Puchalski.

9.

In addition, Fitch has since specifically warned Enea that an equity contribution of
more than PLN 1 billion would be negative for the company’s credit profile and could
lead to negative rating action:8
Ostroleka C Project: ENEA will likely participate in the construction of the newcoal-fired block in Ostroleka with Energa S.A. (BBB/Stable). The exact structureof the project is unknown yet, but both ENEA and Energa declared that theirstakes in the project would not exceed PLN1 billion each with another up to
PLN1 billion likely to be provided by a local investment fund managed by TFIEnergia. The remainder (about PLN3 billion) could be provided either in form ofequity or non-recourse debt by investors at the project company level. In Fitch's
rating case we assume that ENEA will contribute PLN1 billion to the project inform of equity. A higher contribution would be negative for ENEA's credit profileand could lead to negative rating action.

10.

The Reported Financing Structure would appear to anticipate a higher equity
contribution from both Enea and Energa (as equal joint venture partners), of up toc. PLN 1.6 billion each if credit financing were only to account for 30% of the total c. 6
billion investment and TFI Energia’s contribution were to remain at PLN 1 billion. This
would significantly increase the exposure of, and therefore the financial risk to, Enea
and Energa in relation to the Proposed Project.

11.

There is a high degree of market concern about Enea’s and Energa’s proposed
investment in Ostrołęka C and the legal risks of Enea’s and Energa’s actions in

7

Konrad Krasuski, Mystery Investor Emerges for Poland’s Last Coal-Power Project, 5September 2018 (emphasis added).
Fitch Ratings, Fitch Affirms ENEA at ‘BBB’; Outlook Stable, 1 October 2018,https://www.investors.enea.pl/file/attachment/1325055/67/_press_release_fitch_affirms_enea_
at_bbb_outlook_stable.pdf (emphasis added).

83

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 2018
relation to it. The legal risks of proceeding to the construction stage of the project areheightened significantly by the terms of the Reported Financing Structure, particularly
in light of Fitch’s specific warning above. We would regard proceeding to theconstruction stage in such circumstances as plainly contrary to board members’ duties
of due diligence and to act in the best interests of the company and its shareholders.
12.

In light of the above, we have requested that Enea and Energa confirm:a.

The status of financing discussions for Ostrołęka C; andb.

Why Enea’s and Energa’s controlling shareholder has apparent access to
information in relation to financing discussions, in the absence of its disclosure to
Enea’s and Energa’s other shareholders.

Upcoming Capacity Auction
13.

The SPV intends to participate in the capacity market auction planned for 21
December 2018.9 This auction relates to capacity provided from 1 January 2023.
Enea has reported that the following steps will require resolutions by the general
meeting of the SPV (and therefore require Enea and Energa, as 50% shareholders in
the SPV, to vote for such resolutions):10

approval of the form of financial collateral or exemption from therequirement to put up such collateral in the meaning of Chapter 8 of the
Act on the capacity market of 8 December 2017,
definition of an auction strategy by 20 December 2018, specifying an exit
price for the main capacity market auction planned for 21 December 2018,14.

Enea has stated that the above “control mechanisms” are to protect the interests ofEnerga and Enea as shareholders.11

15.

However, the SPV’s participation in the capacity market auction planned for 21
December 2018 carries significant risks that do not appear to have been taken
adequately into account. These include:
a.

9

10

11

The construction schedule would mean Ostrołęka C would be unable to provide
capacity when due. This would both limit the capacity payments to which it would

Enea, Extended consolidated quarterly report of the Enea Group for the third quarter of 2018,
20 November 2018, p 37,
https://investors.enea.pl/file/attachment/1346911/1a/extended_consolidated_quarterly_report_o
f_the_enea_group_for_the_third_quarter_of_2018.pdf.
Enea, Extended consolidated quarterly report of the Enea Group for the third quarter of 2018,
20 November 2018, p 37,
https://investors.enea.pl/file/attachment/1346911/1a/extended_consolidated_quarterly_report_o
f_the_enea_group_for_the_third_quarter_of_2018.pdf.
Enea, Extended consolidated quarterly report of the Enea Group for the third quarter of 2018,
20 November 2018, p 37,
https://investors.enea.pl/file/attachment/1346911/1a/extended_consolidated_quarterly_report_o
f_the_enea_group_for_the_third_quarter_of_2018.pdf.

4

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 2018
otherwise be entitled and require it to pay penalties for failure to provide thecontracted capacity. This impact would increase in the event of delays inconstruction.
b.

The "financial milestone" would require proof of very significant expenditure
within 12 months of the final results of the capacity market auction, in theabsence of which the capacity agreement would be terminated.

Ostrołęka C will be unable to provide capacity when due
16.

Ostrołęka C will still be under construction on 1 January 2023, when it would be
required to begin providing capacity should it succeed in the capacity market auction.
The final results of the capacity market auction will be announced on Monday 14
January 2019 (the first working day following the 21st day after the end of theauction).12 Until then, all capacity contracts are conditional. Energa has previously
confirmed to the market that a notice to proceed with construction (“NTP”) will not be
issued until after the capacity market auction.13 GE Power, the lead construction
contractor, stated on 12 July 2018 that “Ostrołęka C will start operating within 56
months after the notice to proceed”.14

17.

On the assumption that Enea and Energa could authorise the SPV to issue the NTP
within two weeks of the final results of the capacity market auction (i.e. by 28 January2019), Ostrołęka C would not start operating until 28 September 2023 on the current
56-month construction schedule, nine months after the date on which it would be
required to begin providing capacity. Energa itself has also confirmed that “the timespan between contracting the capacity and the day the capacity must be actuallyavailable is shorter than the duration of the construction phase”.15

18.

As a result, it would be ineligible for capacity payments for at least the first ninemonths of the contract.

19.

In addition, Ostrołęka C would face penalties for each month it fails to provide thecontracted capacity at a value of 15% of the unfulfilled capacity obligation, calculatedon the basis of the highest capacity market clearing price for a given delivery year. 16

12

Act on the Capacity Market, Article 39(3).
See Dybińska Katarzyna, “Energa and Enea commence construction works at Ostroleka plant”,
16 October 2018 (“The Notice to Proceed will be formally issued after the capacity market
auction slated for December 21, Energa's acting CEO Alicja Barbara Klimiuk said”). See also
letter BSF to Energa, 19 September 2018, para 14.
GE Power, GE Power signs contract with Elektrownia Ostrołęka to build Ostrołęka C, Poland’s
next Power Plant, 12 July 2018, https://www.genewsroom.com/press-releases/ge-power-signscontract-elektrownia-ostro%C5%82%C4%99ka-build-ostro%C5%82%C4%99ka-cpoland%E2%80%99s-next-power.
Energa, Current Report No. 45/2018, 24 October 2018,https://ir.energa.pl/en/pr/409065/current-report-no-45-2018.
Act on the capacity market, Article 47(2).

13

14

15
16

5

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 201820.

The 56-month construction timeline is also highly optimistic and therefore at clear riskof delay. Such delay could have two important consequences:a.

It could add to the number of months for which Ostrołęka C is not entitled tocapacity payments and is subject to penalties.

b.

The capacity agreement will be terminated if the SPV fails to submit to thetransmission system operator (“TSO”) documents confirming that the unit is able
to deliver at least 95% of the contracted capacity (for at least one hour) by theend of the third delivery year covered by the capacity agreement (at the verylatest). If the capacity agreement is terminated, the SPV will lose or will have to
pay the equivalent of financial collateral at a value of PLN 43 per kilowatt offeredat the capacity market auction.17

Financial milestone
21.

If the SPV fails to submit to the TSO, within 12 months from the announcement of the
final results of the capacity market auction (i.e. by 14 January 2020), documents
confirming incurring financial expenses in the amount of at least 10% of the totalplanned financial outlays and the conclusion of agreements in the amount of at least
20% of the total planned financial outlays, the capacity agreement will be terminated. 18

22.

Energa itself has stated that “the requirement to meet the so called ‘financial
milestone’ is very challenging with regards to the construction schedule”.19

23.

If the capacity agreement is terminated, the SPV will lose or will have to pay theequivalent of financial collateral at a value of PLN 43 per kilowatt offered at thecapacity market auction.20

Legal Risks of Proceeding
24.

ClientEarth regards Enea’s and Energa’s continued pursuit of the Proposed Project asin breach of its Management Board and Supervisory Board members’ duties of due
diligence and to act in the best interests of the companies and their shareholders forthe reasons set out herein and in our briefing of 19 September 2018.21 Potential
breaches include Enea’s and/or Energa’s voting in favour of resolutions at a general
meeting of the SPV consenting to the SPV’s incurring further liabilities by participating

17

Act on the capacity market, Article 47(1) and Regulation of the Minister of Energy on thefinancial collateral provided by capacity providers and participants of preliminary auctions, para2(1).
Act on the capacity market, Article 46(1)(1).
Letter Energa to BSF, 23 October 2018.
Act on the capacity market, Article 47(1) and Regulation of the Minister of Energy on thefinancial collateral provided by capacity providers and participants of preliminary auctions, para2(1).
ClientEarth, Briefing: Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties to
the Companies and Shareholders, 19 September 2018,https://www.documents.clientearth.org/library/download-info/ostroleka-c-energas-and-eneasboard-members-fiduciary-duties-to-the-companies-and-shareholders/.

18
19
20

21

6

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 2018
in the Upcoming Capacity Auction. The proper course is for Enea and Energa towithdraw from the Proposed Project, as each is entitled to do before proceeding to theconstruction stage.
25.

Whatever the merits of Energa’s decision to relaunch the Ostrołęka C project on 24
May 2016 and Enea’s decision to cooperate with Energa on the project from
September 2016, it is clear that circumstances arising since then have made the
Proposed Project unviable. For example, and in addition to the concerns outlined
above:a.

Carbon prices have more than tripled, from a closing price of €5.78 per tonne on
24 May 2016 to €19.35 on 29 November 2018.22

b.

The price of alternative investments in renewable energy sources has sharply
declined.23

c.

Poland has strengthened its aims to reduce the share of coal in power
generation. On 3 October 2018, Reuters reported a senior government official
stating that Poland sought to reduce the share of coal in power generation from
80% to 50% by 2040.24 Since then, the Ministry of Energy has published a draft
national energy including an aim to reduce the share of coal to 60% by 2030
(and double the share of renewable energy sources in that time to 27%).
Ostrołęka C would undermine those aims.
The reduced share of coal will also have important consequences for the ability
to pass on the high carbon costs of power from Ostrołęka C. For example,
Bloomberg recently quoted Enea’s and Energa’s competitor Tauron’s Chief
Financial Officer as follows: 25
Key to all investment profitability analysis is the correlation between theCO2 and power price -- once it’s gone in the future, everything will change
in the models,” the CFO said. “The energy mix will change in Poland andthe wholesale electricity price will decline and will be less dependent on
CO2. It won’t happen in two or three years, but surely in a longer
perspective.

22
23
24

25

See https://markets.businessinsider.com/commodities/historical-prices/co2emissionsrechte/euro/24.5.2016_3.12.2018.
See https://www.irena.org/costs.
Nina Chestney, Poland's power from coal seen down at 50 percent by 2040 - government
official, 3 October 2018, https://www.reuters.com/article/us-poland-energy/polands-power-fromcoal-seen-down-at-50-percent-by-2040-government-official-idUSKCN1MC2FM.
Maciej Martewicz, Polluting Giant Turns to Green Energy to Escape EU Carbon Risk, 11
October 2018, https://www.bloomberg.com/news/articles/2018-10-11/polluting-giant-turns-togreen-energy-to-escape-eu-carbon-risk.

7

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 201826.

For all the reasons set out in this briefing, ClientEarth has urged Enea and Energa to
exercise their ability to withdraw from the project before the NTP is issued, thereby
avoiding irreparable damage to the company and its shareholders.

27.

ClientEarth has reserved all of its rights and remedies.

Alice Garton
Head of Climate Programmewww.clientearth.org

Marcin Stoczkiewicz
Senior Lawyer, Head of Central & Eastern Europe
www.pl.clientearth.org/

Peter Barnett
Litigation Lawyer, Climate Programmewww.clientearth.org
This briefing was written for general information based on publicly available sources anddoes not constitute legal, professional, financial or investment advice. Whilst all information
contained in the report is obtained from sources believed to be accurate and reliable,
ClientEarth does not accept responsibility for any errors, omissions, inaccurate informationor any decisions made in reliance on this report. ClientEarth is a shareholder in Enea andEnerga and has commenced legal action against Enea challenging the Ostrołęka C project.

8

Ostrołęka C: Energa’s and Enea’s Board Members’ Fiduciary Duties
to the Companies and Shareholders
19 December 2018

ClientEarth is a charity that uses the power of the law to protect people and theplanet. We are international lawyers, finding practical solutions for the world’s
biggest environmental challenges. We are fighting climate change, protecting
oceans and wildlife, supporting sustainable forestry, greening energy, making
business more responsible and pushing for government transparency. We
believe the law is a tool for positive change. From our offices in London,
Brussels, Warsaw, New York City and Beijing, we work on laws throughout their
lifetime, from the earliest stages to implementation. And when those laws arebroken, we go to court to enforce them.
ClientEarth is funded by the generous support of philanthropic foundations,institutional donors and engaged individuals.

Brussels
60 Rue du Trône
Box 111050 – Ixelles
Bruxelles
BelgiqueLondon274 Richmond Road
LondonE8 3QW
United Kingdom

Warsawul. Żurawia 45
00-680 Warszawa
PolskaClientEarth is a company limited by guarantee, registered in England and Wales, company number 02863827, registeredcharity number 1053988, registered office 10 Queen Street Place, London EC4R 1BE, with a registered branch in Belgium, N°
d'enterprise 0894.251.512, and with a registered foundation in Poland, Fundacja ClientEarth Prawnicy dla Ziemi, KRS
0000364218.

9