Annual Report 2006 One Team – One Goal WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 1 team Annual Report ||||| WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e Hundreds of people, tens of jobs, experts and professionals – each employee‘s work is necessary for the success of UNIPETROL, a member of ORLEN GROUP. 3 refineries, 4.3 million tonnes of processed crude oil in 2006, 319 filling stations, almost 6 thousand employees, CZK 41 billion sales revenue from exports and capital expenditure of CZK 4 billion: all this makes UNIPETROL Group one of the largest companies in the Czech Republic and a significant player on the refinery products and petrochemicals market in Central Europe. UNIPETROL, a.s. WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 1 goal Annual Report ||||| WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e We are co-building the strongest petrochemical group in central Europe. UNIPETROL is part of the supranational PKN ORLEN oil Group which operates 7 refineries in Poland, the Czech Republic and Lithuania with a total annual capacity of almost 32 million tonnes and 2,700 filling stations in Poland, the Czech Republic, Germany and Lithuania. In total, PKN ORLEN Group employs more than 20 thousand people. UNIPETROL, a.s. WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 4 Annual Report ||||| WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 5 Contents | 6 Corporate Mission and Goals 100 Ownership Interests 8 Profile 102 Main Subsidiaries 10 Key Financial Indicators of the Group 116 Other Ownership Interests 12 Key Highlights 121 Report on Relations between Interconnected Entities 18 Chairman of Board of Directors’ Letter to Shareholders 128 Auditor’s Report to the Shareholders of UNIPETROL, a.s. 21 Letter from the Chairman of the Supervisory Board 130 Non-consolidated Financial Statements 26 Expected Development, Goals and Plans 130 Balance Sheet 28 UNIPETROL’s Statutory Bodies and Management 131 Income Statement 30 Board of Directors 132 Statement of Major Changes in Equity 32 Supervisory Board 133 Cash Flow Statement 36 Management 134 Notes to Non-consolidated Financial Statements 36 Statement of Compliance 165 Consolidated Financial Statements 38 Rules of Appointment 166 Balance Sheet 38 Rewarding 167 Income Statement 41 Application of Rules of Corporate Governance 168 Statement of Changes in Equity 52 Board of Directors’ Report on the Company’s Business Activities 169 Cash Flow Statement and the State of its Assets 170 Notes to Consolidated Financial Statements 52 Introduction 215 Other Information under the Capital Market Act 54 External Conditions 215 Legal Regulations 56 Commercial Activities 215 Major Contracts 63 Partnership Programme and New Corporate Governance Model 216 Information on Persons Responsible for the Annual Report 65 Asset Portfolio Optimization 217 Audit 68 Capital Expenditure 217 Securities 71 Employment Policy 219 Acquisition of Own Shares and Interim Certificates 73 Research and Development 219 Information on the Issuer’s Share Capital 75 Information Technologies 219 Litigations 76 Financial Situation – Comments on Major Changes 222 Statutes 80 Sources of Capital 237 Terms and Abbreviations Used 80 Risk-management System 238 Identification and Contact Data 81 Risk Factors 84 The Company and the Environment 84 The Environment 92 Sponsorship 93 Structure of the Group UNIPETROL, a.s. WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 6 Corporate Mission and Goals | Mission In our business we strive to ensure a long-term and permanent value growth for our shareholders. We want to achieve this by focusing on three strategic business segments: • Crude oil refinery and wholesale in refinery products • Petrochemical production • Retail in motor fuels We will always offer top-quality products and services to our customers. All of our operations are based on the principles of best available practice of corporate management and operating perfection, with a focus on care for our employees and environmental protection. Annual Report ||||| WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 7 Key goals The company’s key goals in 2006 were: • Continued implementation and utilisation of effects of the integrating Partnership Programme • Restructuring of the Group - Sale of non-essential assets - Optimisation of the Group’s legal structure and management structure (new Corporate Governance model project) - Introduction of management based on business segments • Further integration and harmonisation between UNIPETROL and PKN ORLEN - Harmonisation of organisational structure and human resources policy - Further process alignment (budgeting, financial reporting, production planning etc.) • Introduction of the “two brand” strategy in the network of filling stations Code of Conduct The employees of UNIPETROL and the whole Group shall pursue three key principles in all of their internal and external relationships. Their conduct always has to be: Legal Ethical Transparent Since we are a part of PKN ORLEN European business group, we also undertake to comply with the Code of Ethics officially adopted by our majority shareholder in 2006. UNIPETROL, a.s. WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 8 Profile | Introduction UNIPETROL is a group of companies operating in the Czech Republic in the petrochemical business. Specifically the Group is active in production and sale of refinery products, chemicals, petrochemicals, commodity, polymers, fertilisers and specialty chemicals. It also operates its own transport services, as well as research and development. UNIPETROL Group is the leading downstream oil and petrochemical company in the Czech Republic and important player in Central and Eastern Europe. UNIPETROL is a shareholder of ČESKÁ RAFINÉRSKÁ (a joint venture with ENI INTERNATIONAL B.V., ConocoPhillips Central and Eastern Europe Holdings B.V. and Shell Overseas Investment B.V. a processing refinery with total yearly capacity of 8.8 m tonnes) and PARAMO, the biggest Czech producers of bitumens, oils and other refinery products. The holding also owns 100% shares in CHEMOPETROL, engaged mostly in petrochemical products and plastics production, Benzina, the biggest fuel stations network in the Czech Republic, and UNIPETROL RAFINÉRIE, specialising in oil purchasing and sale of oil products. The annual turnover of the companies from the UNIPETROL Group reaches almost CZK 95 billion, which puts the Group among the biggest companies in the Czech Republic, as well as among the country’s biggest exporters. The position of the Group in the Czech Republic corresponds to its registered capital, exceeding CZK 18 billion, and almost 6 thousand employees at the end of 2006. Brief history The joint-stock company UNIPETROL was founded in 1994, which marked the fulfilment of one of the milestones on the path of privatisation of the Czech petrochemical industry. The purpose of UNIPETROL was to write the selected Czech petrochemical firms into an organisation capable of competing against strong multinational corporations. 2005 was a significant turning year for the Group. PKN ORLEN, which mainly specialises in the processing of crude oil, manufacture of oil-intensive products, their storage, transport and distribution, purchased 62.99% of UNIPETROL’s shares that year. The merger of the two groups resulted in the regional consolidation of two major Central European petrochemical corporations, aimed at ensuring their competitiveness not just in Europe, but also globally. The merger led to new strategic goals focused on the growth of operating and business effectiveness within UNIPETROL. A complex development programme called Partnership Programme was set up to utilise the synergies between the corporations; UNIPETROL launched the programme in June 2005, with a view to maximising the effectiveness of operations in the company’s key business areas and ultimately to increasing the value for its shareholders. The programme is expected to have a positive impact on the operating profit, yielding EUR 138 million by 2008 (calculated on the basis of the fixed macroeconomic conditions of the reference year 2004). This result will be achieved especially in the field of crude oil processing and through activities focused on revenue growth. Annual Report ||||| WorldReginfo - 992e0cfe-6a94-44b5-a0a9-f147890f5f2e 9 Breakthrough year 2006 Certain major events occurred in 2006 in line with the core strategic goals and tasks within the framework of the long-term activity plan of UNIPETROL. In October 2006 BENZINA a.s. triggered a new strategy, dividing its network of filling stations into two brands – premium brand BENZINA plus and standard brand BENZINA. BENZINA’s financial results generated that year were the best since 2001. Other key events involved divestments of KAUČUK and SPOLANA. UNIPETROL intends to focus on its key business areas, namely on crude oil processing, petrochemical production and fuel retail. From this point of view KAUČUK and SPOLANA were not strategic enterprises, and UNIPETROL therefore decided to sell them. Both transactions proceeded in line with market expectations. In 2006 UNIPETROL prepared for a new management model, launched within the Group on 1 January 2007. The change in the mode of management is based on three key principles, namely on the separation of manufacture and sales, establishment of a specialised Shared Services Centre and simplification of legal structure. The new model will result in lower bureaucracy, improved coordination, faster decision-making processes and increased