Real Estate Committee (“REC”) report
The REC of NWR was established by the Board of NWR at the end of 2007 and held its first meeting in January 2008.
The primary role of the REC is to oversee the assets and liabilities of the Real Estate Division and the interaction between the Mining Division and the Real Estate Division of NWR.
The REC supports and advises the Board in its work by:
- advising the Board on matters regarding the Real Estate Division of NWR (except in relation to audit, accounting and financial disclosure matters which fall within the remit of the Audit and Risk Management Committee);
- advising the Board on transactions between the Mining Division and the Real Estate Division which require the prior approval of the Board;
- developing the Divisional Policy Statements, proposing their amendments, interpreting them, providing guidance on their provisions and overseeing their implementation;
- overseeing the compliance of NWR’s subsidiaries with the Divisional Policy Statements; and
- monitoring the transactions between the Mining Division and the Real Estate Division.
Composition
The REC is wholly composed of Independent Non-Executive Directors appointed by the Board. The REC presently comprises: Barry Rourke (Chairman), Steven Schuit and Paul Everard.
Activities undertaken during the year
During 2008, the REC met five times and the NWR CFO attended all meetings. Occasionally, the meetings were attended by an external legal advisor appointed by the REC to provide an independent view and advice on real estate transactions, interactions between the Real Estate Division and the Mining Division, potential conflicts of roles/interest and other related matters. The members of the REC conducted two site visits in the Czech operations.
In fulfilling its responsibility of monitoring the transactions between the Mining Division and the Real Estate Division, the REC set up a reporting line throughout the NWR Group consisting of monthly reports on all real estate transactions exceeding EUR 1 million, including transactions with third parties. In 2008, no significant transactions were reported.
The REC received regular information about a spin-off of certain non-mining real estate assets (those being 100 per cent share of OKD in Rekultivace, minority interest of OKD in Garáže and the IMGE internal business unit of OKD into four newly created subsidiaries of NWR). In September 2008, the shares in these entities and certain promissory notes belonging to the Real Estate Division having an aggregate accounting value of approx. EUR 90 million was, subsequently distributed (by way of a dividend in specie) to the holders of the B shares.
The REC reviewed and approved the standard terms to be used in lease, sale or other transactions affecting the assets of the Real Estate Division and discussed the accounting methods used for the Real Estate Division. The REC has also asked to review the P&L account of the Real Estate Division.
The REC regularly reports to the Board and the Audit and Risk Management Committee on its activities and findings.
Divisional Policy Statements
The Divisional Policy Statements were adopted by the Board pursuant to the provisions of NWR’s Articles of Association and following approval by its former sole shareholder in December 2007. The statements came into effect on 31 December 2007. During 2008, the document was implemented by NWR’s core operations. The compliance with the Divisional Policy Statements is monitored by the REC through the reports received from the Company Secretary who was designated to act as an intermediary between the REC, NWR and its subsidiaries.
The Divisional Policy Statements refer to the Mining Division and the Real Estate Division that were created within the NWR Group. They operate separately for accounting and reporting purposes. Under the Divisional Policy Statements, OKD, OKD’s subsidiaries and the other subsidiaries of NWR carry out the day-to-day operations of the Real Estate Division. In carrying out such day-to-day operations, they are required to seek the prior approval from the Board, after the REC has provided its advice to the Board, when proposing to enter into transactions which: (i) are not considered by the Board to be in the ordinary course of business of the Real Estate Division; or (ii) relate to assets of the Real Estate Division which have a book value of five per cent or more of the total book value of the assets of the Real Estate Division.
In relation to Real Estate Division transactions, which require prior approval of the Board, the REC acts as an advisory body to the Board. In an advisory capacity, the REC submits reports to the Board setting out its advice in relation to the adoption of the referred transaction. When preparing its report, the REC is required to take into account the policies set out in the Divisional Policy Statements and the advice of an independent valuer or other expert (being nominated and appointed under a procedure set out in the Divisional Policy Statements). Directors of NWR who have a conflict of interest are required, under the Divisional Policy Statements and the Corporate Governance Policy, not to take part in any discussion or decision making on such a transaction, and to abstain from voting upon the adoption of a resolution of the transaction. In making its final decision on a transaction, the Board may, in its sole discretion, decide whether to act upon, or to set aside, the advice of the REC.
The Divisional Policy Statements are a standard for the duties and responsibilities of the Board and the various other layers of management within the NWR Group in relation to the management of the assets of the Real Estate Division and the interaction between the Divisions. The Divisional Policy Statements have been prepared and adopted on the basis that the Mining Division has the right to maintain:
(i) the undisturbed continuation of its mining, coking and related operations that are conducted on certain of the assets of the Real Estate Division; and
(ii) the unrestricted access to such assets of the Real Estate Division in connection with such mining, coking and related operations.
These rights of the Mining Division and any relevant legal or regulatory obligations, rights or requirements, the requirements of any accounting standard applicable to NWR and the rules and requirements of any stock exchange on which NWR’s shares are traded shall take priority when interpreting and following the policies set out in the Divisional Policy Statements.
All matters in which the Mining Division, or holders of the A shares, and the Real Estate Division, or holders of the B shares, have divergent interests are required to be resolved in a manner that is in the best interests of NWR and all of its stakeholders. The amount allocated or payable by the Mining Division to the Real Estate Division for its use and access to the assets of the Real Estate Division has been fixed at EUR 3.6 million per annum (subject to adjustment for Czech inflation) and shall be, when and if applicable, reduced for the amount of rental or other similar payments by the Mining Division for the use of property transferred to the holders of the B shares, until all assets have been transferred from the Real Estate Division. Practices and procedures to ensure that matters are dealt with on arm’s length terms, as approved by an independent valuer or other expert, shall be applied.
The Real Estate Division shall be treated as bearing its fair proportionate allocation of all internal corporate administrative overhead expenses and costs in relation to the assets of the Real Estate Division (for example, internal administrative and accounting expenses) limited to EUR 100,000 per annum (subject to adjustment for Czech inflation) as well as depreciation (related to the book value of land allocated to the Real Estate Division) and taxes. The Mining Division shall, whilst the assets of the Real Estate Division are owned or held within the NWR Group, bear all other liabilities in relation to the assets of the Real Estate Division (e.g. environmental or maintenance liabilities) and thereafter shall bear only those liabilities arising under leases or agreements granting rights to such assets in favour of the NWR Group and liabilities arising as a matter of law relating to the assets of the Real Estate Division (e.g. re-cultivation liabilities or liabilities incurred through mining activities).
All real estate acquired by NWR after 31 December 2007 will be paid for by, and be held by, the Mining Division rather than the Real Estate Division, with the exception of incidental or minor rights or real estate, where such acquisition shall be paid for by, and shall subsequently be held by, the Real Estate Division.
The Mining Division may not acquire assets of the Real Estate Division from the Real Estate Division, nor swap any such assets of the Real Estate Division with local municipalities in accordance with its prior practices (unless such assets of the Real Estate Division were earmarked for such a swap at or prior to 31 December 2007), except if the transaction is on arm’s length terms as approved by the Board and the meeting of the holders of the B shares. In both such cases, the Mining Division shall pay in cash for the assets of the Real Estate Division acquired or swapped (and any assets or rights received from any municipality are the property of the Mining Division).
Pursuant to NWR’s Articles of Association, the Divisional Policy Statements provide that, in the event of a dissolution, liquidation or winding-up of NWR, the holders of the A shares and the B shares shall then share in the funds of NWR remaining for distribution to NWR’s shareholders in proportion to the respective value of the Mining Division (which will be attributable to the A shares) and the value of the Real Estate Division (which will be attributable to the B shares). Also, pursuant to NWR’s Articles of Association, as minority protection rights, the holders of the B shares have the right to request an investigation into the affairs of NWR and to make a binding nomination for the appointment of one Director of NWR (the right has not been exercised).
The Divisional Policy Statements prohibit loans, mortgages or encumbrances over or with the assets of the Real Estate Division without the consent of the holders of the B shares (except for intra-divisional or treasury management balances which may arise from time to time and incidental loans, mortgages or encumbrances which are for the purpose of benefiting, maintaining or protecting the assets of the Real Estate Division) which have been considered by the REC and approved by the Board and the meeting of the holders of the B shares.
The Divisional Policy Statements also deal with tax matters on the basis that the Mining Division and the Real Estate Division shall allocate the tax liability and the tax benefits of NWR based on there being two hypothetically affiliated groups consisting of the Divisions. The general principle is that the consolidated tax liability of NWR will be allocated between the Divisions based on the contribution of each Division to the consolidated taxable income of NWR, taking into account losses, deductions and other tax attributes (such as capital losses or charitable donations) that are utilised by NWR even if these attributes could not be utilised on a stand-alone basis. To the extent that the tax liability and tax benefits cannot be directly allocated to one Division or the other, such tax liability and tax benefits shall be allocated between the Divisions on a fair and reasonable basis as the Board determines.
The Divisional Policy Statements and NWR’s Articles of Association provide that the Board, subject to the approval of the General Meeting of shareholders of NWR and the holders of the B shares, may amend, rescind or suspend that part of the Divisional Policy Statements in relation to the fundamental and overriding rights of the Mining Division, the payments for use and access to assets of the Real Estate Division and the allocation of costs for overhead and support services or the principles contained in the remainder of the Divisional Policy Statements or make additions or exceptions thereto. The Board shall not seek to make any determinations to amend, rescind or suspend any other aspects of the Divisional Policy Statements, or make exceptions to them or adopt additional policies or exceptions unless there shall have been prior consultation between the Board and the meeting of the holders of the B shares and the Board shall have given due consideration to any representations made. In this regard, the Board shall act in a manner consistent with its duties to NWR and all of NWR’s stakeholders and after giving, among other matters, fair consideration to the potentially divergent interests and all other relevant interests of the holders of the separate classes of shares in NWR.
Self-assessment
The REC believes that it carried out all the responsibilities set out in the REC’s charter and finds the charter adequate.
The charter of the REC and the Divisional Policy Statements are available on NWR’s website at www.newworldresources.eu.
Related party transactions
The following are the related party transactions (being contracts entered into by the NWR Group entities and entities affiliated with them in the last two years and which are in place at the date of this Annual Report).
Cross guarantee
Former OKD was a government controlled enterprise and as a result owned and operated a large number of businesses (including mining businesses, businesses ancillary to mining and unrelated businesses). The restructuring was concerned primarily with disposing of certain such ancillary and unrelated businesses in order to allow the Group to focus upon its coal mining and coke production businesses. In addition, steps were taken to streamline the corporate structure of the Group (removing certain intermediary holding companies from the Group structure). In connection with the restructuring, and pursuant to Czech law, OKD, Green Gas DPB, a.s., OKD, Doprava, RPG Trading, s.r.o., RPG RE Land, s.r.o., RPG RE Commercial, s.r.o. and RPG Byty, s.r.o., the successor entities of former OKD are subject to a statutory cross guarantee. The statutory cross guarantee was given by each successor entity in relation to the liabilities of the demerged entity (former OKD) that were assumed by each successor entity on the date of the demerger. The cross guarantee of each successor entity is limited to the value of the net assets of the guarantor as at the effective date of the demerger.
Similar statutory cross guarantees have arisen as a result of the spin-off of OKK into NWR Coking, a.s., a wholly owned subsidiary of NWR. NWR Coking, a.s. merged with OKK in April 2008, with OKK remaining as the surviving entity. OKK so became the direct subsidiary of NWR being subject to the statutory cross guarantee, too.
Master advisory and service agreement
See section on “Material contracts” for more information.
Technical consulting agreement
On 15 August 2006, NWR entered into the Technical Consulting Agreement with American Metals & Coal International, Inc (“AMCI”) in respect of the provision of certain advisory services by AMCI to NWR effective as of 1 January 2006. Under the Technical Consulting Agreement, NWR agreed to pay AMCI an annual advisory fee of USD 200,000 in semi-annual payments (commencing for the period July-December 2006) in exchange for certain non-exclusive consulting, advisory and management services relating to NWR’s coal mining and coke production activities. In addition, upon execution of the Technical Consulting Agreement, NWR paid AMCI a signing fee of USD 100,000. The Technical Consulting Agreement provides that AMCI will advise NWR in connection with (i) the identification and evaluation of coal and energy acquisition projects outside of the Czech Republic; (ii) the marketing and sale of coke and coal outside of the Czech Republic; (iii) budgeting and business planning, including coal price forecasting, cost assessment and benchmarking; and (iv) technical and production matters. In addition, NWR shall reimburse AMCI for all of its reasonable out-of-pocket expenses payable annually. The Technical Consulting Agreement may be terminated, with or without cause, by either party giving prior written notice to the other party; provided, that in the event the Technical Consulting Agreement is terminated for any reason other than a material breach, the notice period is three months. The Technical Consulting Agreement includes a one-year post-termination confidentiality clause.
NWRT service agreement
On 9 November 2007, NWR entered into the Service Agreement with New World Resources Transportation B.V. (“NWRT”) for the provision of certain services by NWR to NWRT with effect from July 2007. Under the Service Agreement, NWR is to provide NWRT with certain non-exclusive corporate maintenance services, including co-ordination of tax and audit compliance, preparation of financial statements, corporate governance and HR management. The service fees paid by NWRT to NWR cover expenses incurred by NWR together with a monthly flat fee of EUR 7,500. The costs and expenses of NWR include remuneration for the subcontractors. The Service Agreement may be terminated, with or without cause, by either party upon one month’s prior written notice to the other party. The Service Agreement includes a four-year post-termination confidentiality clause.
GGI service agreement
On 10 December 2007, NWR entered into the Service Agreement with Green Gas International B.V. (“GGI”) for the provision of certain services by NWR to GGI with effect from 1 May 2007. Under the Service Agreement, NWR provided GGI with certain non-exclusive services, including the arrangement of audit and tax compliance, assistance in preparation of financial statements, advice on financing, financing structure and reporting, arranging insurance cover for directors and officers, and services related to corporate governance. Based on an amendment entered into on 26 March 2008, GGI agreed to pay NWR a flat monthly service fee in the amount of EUR 2,000. The costs and expenses of NWR included remuneration for the subcontractors. The Service Agreement was terminated as of 31 December 2008. The Service Agreement includes a four-year post-termination confidentiality clause.
NWR lease agreements
NWR has rented an office space to RPG Real Estate B.V. (“RPGRE”), Green Gas International B.V. (“GGI”) and New World Resources Transportation B.V. (“NWRT”) with effect from 1 January 2009. The total size of the leased offices is 435 sq m. RPGRE, GGI and NWRT received a total credit of EUR 326,172 which will be offset with the rent until the credit is fully utilised. The rent (including utilities) is approximately EUR 172,000 per year. The lease agreements have an indefinite term and may be terminated, with or without cause, by either party upon two months’ prior written notice to the other party.
Agreement for services
Milan Jelinek, a Non-Executive Director, provides certain advisory services to NWR under the Services Agreement, including providing advice in respect of new projects of NWR and cost and quality improvement for NWR. As of 1 November 2006 the Services Agreement may be terminated by either party with thirty days’ notice to the other party. Mr. Jelinek is paid a fixed monthly advisory fee of CHF 100,000. He is also reimbursed by NWR for reasonable expenses in connection with his advisory work.
Consultancy agreement
In October 2006, NWR entered into the Consultancy Agreement with BXL Consulting Ltd (”BXL”) in respect of certain consultancy services provided by BXL to NWR commencing on 1 October 2006. Pavel Telička, a Non-Executive Director, is the co-founder and Director in charge of the Brussels office of BXL. Under the Consultancy Agreement, NWR agreed to pay BXL a monthly consultancy fee of EUR 25,000 in exchange for consultancy services in the field of policies and legislation of the European Union and European Communities. In addition, NWR shall reimburse BXL for all of its reasonable out-of-pocket expenses. The Consultancy Agreement also provides for the payment, from time to time as agreed between NWR and BXL, of a “success fee” for the successful completion of certain tasks. The Consultancy Agreement may be terminated, with or without cause, by either party upon one month’s prior written notice to the other party. The Consultancy Agreement includes a confidentiality clause that survives the termination of the Consultancy Agreement.
Donation agreements
In June 2008, NWR donated EUR 1 million, OKD, Doprava donated CZK 300,000 and RPG RE Management, s.r.o. donated CZK 1.4 million to the OKD Foundation established by OKD. The foundation engages in the field of social responsibility, such as the support of health and social care, public sector, environment protection and regional development. The one-off donation of NWR was made to achieve the foundation’s objectives. The donation may also be used to cover the organisation and administration costs of the foundation.
Dominance agreement
There is a Dominance Agreement between OKD (as controlling party) and OKK (as controlled party). To maintain consistent strategic management of businesses of OKD and OKK, the Dominance Agreement was established so that OKD could control OKK. Under Czech law, when a dominance agreement is in place, the board of directors of the controlled party is bound by the instructions issued by the controlling party. The controlling party is required to compensate the controlled party for any loss arising in the annual financial results of the controlled party.
BCRP advisory and service agreement
On 29 September 2006, OKD entered into the Advisory Agreement with Bakala Crossroads Partners a.s. (“BCRP”) (previously RPG Advisors, a.s.) for the provision of certain advisory services by BCRP to OKD with effect from 1 October 2006. Under the Advisory Agreement, BCRP (or any subcontractors engaged by BCRP with the consent of OKD) is to provide OKD with certain non-exclusive advisory services, including in connection with the realisation of strategic projects, any initial public offering, financing and refinancing, services in connection with the Group restructuring, acquisition and divestiture of OKD assets and corporate finance and business matters. The advisory fees being paid by OKD to BCRP covers costs and expenses incurred by BCRP together with an amount equal to a 9 per cent margin. The costs and expenses of BCRP include remuneration for the subcontractors and wages and bonuses paid by BCRP to its employees (including directors) participating in the provision of advisory services calculated on a pro rata basis according to the time spent. The Advisory Agreement may be terminated, with or without cause, by either party upon one month’s prior written notice to the other party. The Advisory Agreement includes a one-year post-termination confidentiality clause.
RPG RE management advisory and service agreement
On 20 December 2006, OKD entered into the Advisory Agreement with RPG RE Management, s.r.o. (“RPGREM”), a Czech-based indirect subsidiary of RPG Partners Limited, for the provision of certain advisory services by RPGREM to OKD with effect from 1 December 2006. Under the Advisory Agreement, RPGREM (or any subcontractors engaged by RPGREM with the consent of OKD) was to provide OKD with certain non-exclusive advisory services, including services in connection with the acquisition and divestiture of fixtures, the initiation of development projects at OKD’s current mining sites and the identification and preparation of possible development projects. The advisory fees paid by OKD to RPGREM should cover costs and expenditures incurred by RPGREM together with an amount equal to a 9 per cent margin. The Advisory Agreement was terminated in November 2007. The Advisory Agreement included a one-year post-termination confidentiality clause.
Agreements on transport
See section “Material contracts – agreements on transport” for more information.
Agreements on use of factory railway and assurance of railway transport on factory railway
OKD entered into the Factory Railway Agreements with OKD, Doprava, to provide factory railway transport at OKD mines for an indefinite period of time. The fees to be paid by OKD to Doprava are set out in accordance with each respective Factory Railway Agreement or in a separate pricing agreement for each calendar year amending the Factory Railway Agreements. The Factory Railway Agreements may be terminated, with or without cause, by either party giving prior written notice to the other party, whereby the notice period is 18 months.
Agreements on manipulation of substrates
OKD entered into the Manipulation Agreements with OKD, Doprava, in respect of the extraction and manipulation of certain materials and substrates at its mines. The fees to be paid by OKD to Doprava are as set out in accordance with each respective Manipulation Agreement or in a special price agreement for each calendar year amending the Manipulation Agreements based on the weight of manipulated substrates. The Manipulation Agreements may be terminated, with or without cause, by either party giving three months’ prior written notice to the other party.
Agreements on sale of methane
On 20 December 2006, OKD entered into the Master Agreement on the Sale of Methane with Green Gas DPB, a.s. (“DPB”) and in connection therewith into individual purchase agreements with respect to particular OKD mines (the “Agreements on the Sale of Methane”) relating to purchase of methane by DPB from OKD. There are five Agreements on the Sale of Methane for 2007 concluded between OKD and DPB and relating to OKD mines, in particular to ČSA, ČSM, Paskov, Lazy and Darkov.
The Master Agreement on the Sale of Methane was concluded for a period of nine years ending 31 December 2015. The price was set at a fixed amount for 2007 and then calculated for each calendar year thereafter using the formula in the agreement. DPB shall purchase all available methane production not used by OKD.
Either party may rescind the agreement if the production of methane stops due to a decrease in coal mining activities or if such circumstances of technical nature appear that disallow performance of this agreement whereby either party was not aware of such circumstances when entering into this agreement.
The Master Agreement on the Sale of Methane has been amended to (i) extend the effectiveness of the agreement for the life of the relevant mines and (ii) grant DPB an exclusive right to purchase methane from OKD (excluding methane for OKD’s own use) while the price formula will remain substantially the same.
Agreements on gaseous and liquid nitrogen delivery and tubing operation
OKD entered into four Agreements on Central Nitrogen Economy with Green Gas DPB, a.s. (“DPB”) in relation to the delivery of gaseous and liquid nitrogen to OKD mines, namely Darkov, ČSA, ČSM and Lazy, and the CNE. The price to be paid by OKD to DPB shall be set out in accordance with each respective Agreement on Central Nitrogen Economy or its amendment. In addition OKD shall pay a fixed monthly fee for the lease, maintenance and control of the gas tubing and surface equipment of the CNE. The agreements were concluded for a definite period of time ending on 30 June 2008 (Lazy) or 31 December 2008 (Darkov, ČSA and ČSM) with the possibility of extension.
Master services agreement related to mines’ safety
On 13 March 2007, OKD and Green Gas DPB, a.s. entered into the Master Services Agreement Related to Mines’ Safety. The Master Services Agreement Related to Mines’ Safety was concluded for a definite period of time ending on 31 December 2015. The fee to be paid by OKD for 2007 was set at CZK 1,670,000 per month. Individual agreements shall be concluded with respect to each particular OKD mine.
Energy trading agreements
In connection with the reorganisation of the Group energy assets, energy assets of OKD, including its stake in Czech Karbon, were transferred to NWR Energy, a.s. which is a direct subsidiary to NWR. The spin-off became legally effective as of 1 July 2008. Consequently, a Framework Agreement on Supplies and Services and some other related agreements were entered into by OKD, NWR Energy, a.s., and Czech Karbon. The main purpose of these agreements is to ensure supply of electricity, heat and compressed air and related services to OKD.
OKD lease agreements
OKD is a party to several real estate leases, including OKD’s headquarters building in Ostrava, which is leased from RPG RE Commercial, s.r.o., a Czech-based indirect subsidiary of RPGI. The total size of the leased offices is 4,633 sq m and the rent (including utilities) is approximately CZK 11.9 million per year. The lease agreement has an indefinite term and may be terminated, with or without cause, by either party upon three months’ prior written notice to the other party.
Ivona Ročárková
Company Secretary
25 March 2009