ANNUAL REPORT 2014 ECONOMIC, SOCIAL AND ENVIRONMENTAL PERFORMANCE contents IntrodUction INA Group at a glance 2 INA in the community 2 Key financial and operating data 4 Letter from the President of the Management Board 6 Overview of the environment 8 OUR BUsinesses Exploration and Production 12 Refining and marketing 22 Retail 29 FINANCIAL AND OPERATING PERFORMANCE Management discussion and analysis 34 Key Group operating data 50 SUstainaBiltY Sustainability in numbers 54 Letter from Tvrtko Perković, Corporate Centre Business 60 Function Executive Director Introduction and overview 63 Memberships, external initiatives and public policies 64 Report Parameters and Materiality 65 SD & HSE PERFORMANCE IN 2014 68 IMPRESSUM CORPORATE GOVERNANCE INA - Industrija nafte d.d., Avenija V. Holjevca 10, Corporate governance 116 p.p. 555, 10002 Zagreb Management Board 118 Executive Directors 120 PUBLISHED BY: Corporate and shareholders information 122 INA - Industrija nafte d.d., Quality management 123 IR Department, SD & HSE Expected development 127 Sector FOR THE PUBLISHER: Ivan Kolar, Angelika Brnada EDITOR-IN-CHIEF: Martina FINANCIAL STATEMENS AND Bandula, Ivanka Lebinec AUDITOR’S REPORT FOR 2014 Merzel PHOTOGRAPHY: Ferdo INA-Industrija nafte, d.d. - Independent auditors report 143 Buva, Ina's archive Consolidated and unconsolidated financial statements for year 2014 146 DESIGN AND LAYOUT: Stela Notes to the financial statements 160 Blažok, Zrinka Belošić 03 INA awards INA Group at A glance NA is a medium-sized European oil and gas company. With 12,503 oil products on the domestic and international markets. INA operates employees and Group EBITDA of HRK 2,580 million INA has a leading Croatia’s two refineries located in Rijeka and Sisak. INA has invested over role in Croatian oil and gas business stretching from exploration HRK 5 billion in the development of its refinery systems in the last few and production, oil processing, natural gas trading and oil products years. In Rijeka Refinery three facilities within Hydrocracking complex were Idistribution activities and a strong position in the regional motor fuel built - Mild Hydrocracking, Hydrogen unit and Desulphurization Plant (so- awards market. called Claus), as well as numerous supporting facilities and installations. At the end of 2014, INA had 237 MMboe proven and probable hydrocarbon In February 2014 a contract on basic design for the Delayed Coking Unit reserves and hydrocarbon production of 38.4 Mboe/day on yearly average. for Rijeka Refinery was signed and delivered with the company Bechtel Its refineries in Rijeka and Sisak have a total distillation capacity of 6.7 Mtpa Hydrocarbon Technical Solutions (BHTS). In Sisak Refinery three plants and have produced a total of 2.7 Mt of refined products in 2014. As 31st of have been completed: Desulphurization plant, Hydrodesulphurization of the December, 2014, Retail Services operated a network of 442 petrol stations. of FCC gasoline plant and Isomerization plant. Furthermore, from mid- 2013 Sisak Refinery has the possibility of production of diesel fuels with OUR core activities in A snapsHot bio component and in the same year in September a system of additional Exploration and Production Business Segment is engaged in exploration, wastewater treatment KROFTA was put into operation, while in April 2014 development and production of oil and natural gas in Croatia and abroad. the installation of new coke chambers was carried out at the Coking plant. Since its establishment, INA Group has been involved in oilfield operations Retail Business Segment operates a regional network of 442 petrol in 20 foreign countries, currently in Angola and Egypt. During more than stations, of which 391 stations in Croatia with additional 51 petrol 60 years of existence 45 oil and 30 gas fields were equipped and put into stations in the neighbouring countries: Bosnia and Herzegovina, Slovenia operation, around 4,500 exploration and development wells with total and Montenegro. The extensive retail network development and YEAR depth of about seven million meters, about 1.200 producing oil wells with modernization project "Blue Concept" continued in 2014 throughout more than 4,000 km of various pipelines and more than 200 production Croatia on numerous locations. “Blue Concept” project has been initiated gas wells and oil facilities and installations were built. Until these days, to offer top quality products to our customers, as well as higher level of INA’s hydrocarbon production was and still is between 50 and 60 percent services on our stations, with significant improvement of site appearance, of total domestic primary energy production. efficiency and technical conditions including new Retail Visual Identity. Refining and Marketing Business Segment’s key competencies are As a result of the project INA has the biggest modernized filling station processing of crude oil as well as production, distribution and sales of crude network in Croatia. BEST CORPORATE GOVERNANCE IN CROATIA contributed most to the quality of student life student education and INA was the winner of the award „Best Corporate Governance professional training. in Croatia“ given by the World Finance, financial magazine based INA in the community in the UK. The award was presented in the category “The World EMPLOYER PARTNER CERTIFICATE Finance Corporate Governance”, based on the opinion of business For the fourth year in a row INA received the Employer Partner eing among leading Croatian companies, INA Group has a aimed at improving the life quality or with the aim of raising awareness and financial journalists, supported by a research team. The winner Certificate, awarded for excellence in human resources management. significant impact on a wide range of stakeholders. Conscious about the importance of sustainable development such as “Green Belt” is selected based on the efficiency of governance structure, work of of its responsibilities in the context of social awareness, INA is program or “Space for your ideas” project. INA approved 54 donations, company committees and necessary quorums for making decisions, RECOGNITION FOR CONTRIBUTION OF BUSINESS committed to maintaining a good partnership with stakeholders mostly for humanitarian projects (80%), sport, culture, and education. boardroom composition and independence, shareholder rights, risk SECTOR TO THE DEVELOPMENT OF VOLUNTEERING Bthrough openness, constructive dialogue and proactive approach. Apart from funds allocated for flooded areas (My sun for Gunja project), management procedures, disclosure of relevant information about INA Volunteer Club received “Recognition for contribution of business In its everyday activities INA strives to be a desirable partner to the INA’s donations were mostly related to children and the most vulnerable company’s results and transparency, and remuneration and say on sector to the development of volunteering”. The award was given communities in which it operates, remaining open to cooperation social groups in order to improve health care and educational and career pay. There were around 10 nominated companies from Croatia while by Volunteer Centre Osijek with the support of The Council for the and supporting initiatives that contribute to better life quality in local development for the youth. in this category 4 to 6 were shortlisted. Development of Volunteering. communities. To be able to measure the results of these projects, monitoring at the same Contribution to wider social community in 2014 INA Group has shown time the long-term impact on the communities, a new methodology, known GOLDEN INDEX AWARDS AWARD FOR THE QUALITY OF SERVICE AT THE PETROL through participation in public policy development projects, supporting as the LBG (London Benchmarking Group) model, has been introduced. This INA won ”Golden Index“ in three categories: “Participation in student STATIONS local projects, granting donations, and investing volunteers’ hours model takes into account cash payments, time invested, volunteering of the projects organized by students and student organizations”, „Investing The award was given as a part of Mystery shopping days, by Heraklea in community service. INA also initiated new projects and activities employees, donations in kind, as well as management costs. in students' associations" and "The Grand Prix". The Golden Index agency. award is a unique award in Croatia, awarded to companies which have 3 INA INA KEY financial and operating data Net sales ravenues (HRK mln) EBITDA (HRK mln) 2012 2013 2014 2014/2013 HRK mln HRK mln HRK mln HRK mln % 2014 23,759 2014 2,580 Net sales revenues 29,895 27,444 23,759 (13) EBITDA 4,578 3,726 2,580 (31) 2013 27,444 2013 3,726 EBITDA excl. special items 4,966 3,805 2,699 (29) CCS EBITDA excl.spec.items 4,992 3,983 3,329 (16) Operating profit/(loss) 1,359 (1,505) (1,712) 14 2012 29,895 2012 4,578 Operating profit excl. special items 2,866 816 523 (36) Net financial expenses (292) (311) (622) 100 Net profit/loss for the period 681 (1,508) (1,897) 26 Net profit for the period excl. special items 1,887 953 344 (64) Operating cash flow 3,742 4,576 3,859 (15) Operating result (HRK mln) CCS EBITDA excl.spec.items (HRK mln) Capital expenditures with one-off 1,286 2,013 1,691 (16) Earnings per share Basic and diluted earnings per share (kunas per share) 68.1 (150.8) (189.7) 26 2014 (1,712) 2014 3,329 Net gearing % 30.83 26.99 20.41 - (1,505) 2013 3,398 KEY EXPLORATION AND PRODUCTION DATA 2012 2013 2014 2014/2013 2013 Gross crude oil reserves (MM bbl )