GENERAL INFORMATION
Management Board Ryszard Kunicki Robert Bednarski Marcin Dobrza ński Artur Osuchowski
Supervisory Board Ewa Sibrecht-Ośka Jacek Goszczy ński Krzysztof Salwach Grzegorz Kłoczko Marzena Okła-Anuszewska Sławomir Stelmasiak
Registered office of the Company ul. Puławska 182 02-670 Warsaw Poland
Certified auditor Deloitte Audyt Sp. z o.o. Al. Jana Pawła II 19 00-854 Warsaw Poland
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Dear Sirs and Madams,
For the Ciech Chemical Group 2009 was a period of intense work in very tough market conditions, which proved to be a challenge for us and the chemical sector in general. The consequences of the world-wide financial crisis affected many businesses in Poland as well as the demand for our products at home and abroad. This gives us more reasons to be proud because despite the unfavourable environment, particularly in the chemical industry, Ciech managed to generate an increase in the value of its shares by more than 58% for the company’s shareholders.
The unprecedented macroeconomic conditions required the Company’s Management Board to show flexibility and the ability to make tough decisions on many occasions. To minimise the downturn’s effects on the Group’s activities, we have reduced our operating costs and capital expenditures under a savings programme. Our actions focused on negotiating the terms of refinancing the Ciech Chemical Group’s loan liabilities, which allowed us to determine the terms of consolidation of debt for domestic and foreign companies in 2010. In the course of the entire process, the Group’s liquidity remained at a safe level. We were able to reduce our liabilities by more than 8%.
At the same time, as part of its strategic operating measures, the Group agreed the terms of joint purchase of energy in the TPA system, procured funds from the sale of voids by Soda Deutschland Ciech and implemented modernisation and effectiveness-enhancing projects to increase the efficiency of its production facilities. We managed to finalise some of our investments, which allow the Ciech Chemical Group to make the most of the expected return of economic growth in international markets in 2010. We took full control over Soda Deutschland Ciech, Zachem completed the construction of a TDI facility, which is the largest real investment in Ciech’s history, and Alwernia started the second manufacturing line for granulated compound fertilisers.
Despite the economic down-turn, our strategic processes – aimed at implementing solutions to consolidate the Ciech Chemical Group’s position as a responsible employer – did not slow down. We used EU funds to prepare a project for developing the ability to share know-how and experience: the Corporate Mentoring Academy. Our efforts in promoting the highest management standards were appreciated in the Stock Exchange and our institutional partners. The Ciech Group joined the prestigious group of businesses forming the RESPECT Index, a stock exchange index including socially responsible companies.
Given the conditions present in the market, the Management Board considers maintaining sales at a level near to the record level of 2008 to be a success of the Ciech Chemical Group. The revenues reached nearly PLN 3.7 billion, which is only a 2.7% drop in comparison to the previous year. The Group’s results were affected by a number of unfavourable factors, such as increased pressure on the margins of soda and TDI products, a decrease in demand for fertilisers and the strengthening of the Polish currency in the second half of the year. However, once again our business model based on a diversified product portfolio proved to be successful. It allowed us to generate revenues in 2009 in the Soda Division, which was the strongest division at the time of the crisis, giving Ciech a good position as it waited for the return of positive demand and price trends in other production segments.
I deeply believe that Ciech, together with the whole Group, is well-prepared to face more challenges and continue to strengthen its market position. In the Management Board’s opinion, the resolution of the privatisation procedure – in which we have actively supported the Ministry of State Treasury and Nafta Polska – will provide a new positive stimulus to continue the Group’s development strategy. For Ciech, 2010 will be a period of intense restructuring aimed at strengthening the Group’s financial position and its competitive edge in domestic and international markets.
On behalf of the Management Board I would like to congratulate and thank all employees of the Ciech Chemical Group for their commitment, hard work and professionalism over the tough time in the previous year. I hope that in 2010 we will together continue our efforts to achieve the Group’s strategic goals. Ciech’s Management Board will undertake all efforts necessary to make the most of the Group’s growth potential, guarantee its sustainable development and thus maximise the value of shares for our Shareholders.
Ryszard Kunicki President of the Management Board of Ciech S.A.
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TABLE OF CONTENTS: MANAGEMENT REPORT OF CIECH S.A. FOR 2009 ...... 4 1. CHARACTERISTICS OF CIECH S.A...... 5 2. MAJOR ACHIEVEMENTS OF CIECH S.A...... 6 3. DESCRIPTION OF FACTORS AND EVENTS HAVING SIGNIFICANT INFLUENCE ON THE COMPANY’S ACTIVITIES ...... 10 3.1 SIGNIFICANT RISK AND THREAT FACTORS AND CIECH’ S EXPOSURE ...... 10 4. PRESENTATION OF CIECH S.A’S MAIN ECONOMIC AND FINANCIAL FIGURES...... 11 5. CIECH S.A.’S SALES ACTIVITIES ...... 16 5.1 EXPLANATIONS CONCERNING THE SEASONAL AND CYCLICAL NATURE OF CIECH S.A.’ S BUSINESS ...... 16 5.2 INFORMATION ABOUT BASIC PRODUCTS , GOODS AND SERVICES ...... 16 5.3 INFORMATION ABOUT CHANGES IN SALES MARKETS ...... 23 5.4 INFORMATION ABOUT CHANGING SOURCES OF SUPPLY IN PRODUCTION MATERIALS , GOODS AND SERVICES ...... 23 6. INVESTMENT ACTIVITY AND DESCRIPTION OF THE MAIN CAPITAL INVESTMENTS AND METHODS OF THEIR FINANCING...... 24 6.1 INVESTMENTS IN FIXED AND INTANGIBLE ASSETS ...... 24 6.2 DESCRIPTION OF THE MAIN CAPITAL INVESTMENTS AND METHODS OF THEIR FINANCING ...... 24 6.3 CAPITAL INVESTMENTS AND DIVESTMENTS PLANNED IN THE NEXT 12 MONTHS ...... 25 6.4 FEASIBILITY ANALYSIS OF INVESTMENT PROJECTS ...... 25 7. FUNDS MANAGEMENT IN CIECH S.A...... 25 7.1 LOANS , BORROWINGS , SURETIES AND GUARANTEES ...... 25 7.2 INFORMATION ON THE ISSUE OF SECURITIES ...... 28 7.3 FINANCIAL INSTRUMENTS ...... 28 8. FINANCIAL RISK MANAGEMENT IN CIECH S.A...... 29 8.1 METHODS OF SECURING MATERIAL TYPES OF PLANNED TRANSACTIONS IN RELATION TO WHICH HEDGE ACCOUNTING IS APPLIED ...... 29 9. EXPLANATION OF DIFFERENCES BETWEEN THE FINANCIAL RESULTS AND PREVIOUSLY PUBLISHED FORECASTS...... 29 10. EMPLOYMENT INFORMATION ...... 29 11. CHANGES IN CIECH S.A.’S ORGANISATION, MANAGEMENT AND FINANCIAL ASSETS...... 29 11.1 CHANGES IN THE BASIC PRINCIPLES OF MANAGING CIECH S.A. AND THE CIECH GROUP ...... 29 11.2 CHANGES IN THE ORGANISATIONAL AFFILIATIONS IN THE CIECH GROUP ...... 30 11.3 INFORMATION ABOUT THE ACQUISITION OF EQUITY SHARES OF THE PARENT COMPANY ...... 32 11.4 DESCRIPTION OF THE USE OF ISSUE PROCEEDS BY THE ISSUER ...... 32 12. DEVELOPMENT PROSPECTS FOR CIECH S.A...... 32 12.1 CHARACTERISTICS OF EXTERNAL AND INTERNAL FACTORS MATERIAL FOR THE DEVELOPMENT OF CIECH S.A...... 33 12.2 CIECH S.A.’ S FORECAST FINANCIAL SITUATION ...... 35 12.3 CIECH GROUP ’S STRATEGIC PRIORITIES ...... 35 13. ADDITIONAL INFORMATION...... 37 13.1 INFORMATION ABOUT CONCLUDED AGREEMENTS SIGNIFICANT FOR CIECH’ S BUSINESS ACTIVITY (INCLUDING AGREEMENTS CONCLUDED BETWEEN THE SHAREHOLDERS , INSURANCE AGREEMENTS, PARTNERSHIP AND COOPERATION AGREEMENTS ) ...... 37 13.2 INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT CIECH S.A.’ S FINANCIAL STATEMENTS ...... 37 13.3 TRANSACTIONS WITH ASSOCIATES ...... 37 13.4 INFORMATION ABOUT NATURAL ENVIRONMENT PROTECTION ...... 37 13.5 CIECH S.A.’ S MAJOR RESEARCH AND DEVELOPMENT ACHIEVEMENTS ...... 38 13.6 PROCEEDINGS LINKED TO CIECH S.A.’ S OBLIGATIONS OR DEBT...... 39 13.7 INFORMATION ABOUT OFF -BALANCE SHEET ITEMS ...... 39 13.8 INFORMATION ABOUT THE EMPLOYEE SHARE OWNERSHIP PLAN CONTROL SYSTEM ...... 39 13.9 INFORMATION ABOUT AGREEMENTS THAT MAY AFFECT THE PROPORTIONS OF SHARES HELD BY THE EXISTING SHAREHOLDERS AND BONDHOLDERS ...... 40 13.10 REMUNERATIONS OF CIECH S.A.’ S MANAGEMENT BOARD AND SUPERVISORY BOARD ...... 40 13.11 ESTABLISHMENT OF THE TOTAL NUMBER AND NOMINAL VALUE OF ALL OF THE COMPANY ’S SHARES AS WELL AS SHARES AND HOLDINGS IN ASSOCIATES HELD BY THE MANAGEMENT AND SUPERVISORY STAFF ...... 40 14. STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE ...... 40 14.1 CORPORATE GOVERNANCE PRINCIPLES OBSERVED BY THE ISSUER AND LOCATION WHERE THEIR CONTENTS IS AVAILABLE FOR THE PUBLIC ...... 40 14.2 DESCRIPTION OF THE MAIN FEATURES OF INTERNAL AUDIT AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE PROCESS OF COMPILING FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS ...... 40 14.3 INFORMATION ABOUT HOLDERS OF SECURITIES GRANTING SPECIAL RIGHTS OF CONTROL ...... 42 14.4 INFORMATION ABOUT RESTRICTIONS ON EXERCISING THE RIGHT OF VOTE AND ABOUT PROVISIONS PURSUANT TO WHICH EQUITY RIGHTS CONNECTED WITH SECURITIES ARE SEPARATED FROM HOLDING SECURITIES ...... 42 14.5 INFORMATION ABOUT ANY RESTRICTIONS ON TRANSFERRING OWNERSHIP RIGHTS RELATED TO THE ISSUER ’S SECURITIES AND ANY RESTRICTIONS ON EXERCISING THE RIGHT TO VOTE VESTED IN THE ISSUER ’S SHARES ...... 42 14.6 PRINCIPLES OF APPOINTING AND DISMISSING MANAGERIAL STAFF AND QUALIFICATIONS THEREOF , IN PARTICULAR , THE RIGHT TO MAKE A DECISION ABOUT SHARE ISSUE OR REDEMPTION ...... 42
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14.7 PRINCIPLES FOR INTRODUCING AMENDMENTS TO THE ISSUER ’S STATUTE OR ARTICLES OF ASSOCIATIONS ...... 42 14.8 FUNCTION OF THE GENERAL MEETING OF SHAREHOLDERS AND ITS COMPETENCE ...... 42 14.9 CHANGES IN THE COMPOSITION OF THE MANAGEMENT AND SUPERVISORY BOARDS OF CIECH S.A. IN THE PREVIOUS FINANCIAL PERIOD ...... 44 14.10 ACTIVITY OF THE ISSUER’S MANAGEMENT , SUPERVISORY AND ADMINISTRATIVE BODIES AND THEIR COMMITTEES ...... 45 14.11 INFORMATION ABOUT AGREEMENTS CONCLUDED BETWEEN THE ISSUER AND THE MANAGERIAL STAFF, PROVIDING FOR COMPENSATION IN THE EVENT OF THEIR RESIGNATION OR DISMISSAL FROM THE OCCUPIED POST WITHOUT A VALID REASON OR WHEN THEIR RESIGNATION OR DISMISSAL ARE CAUSED BY A MERGER OF THE ISSUER THROUGH ACQUISITION ...... 48 14.12 INFORMATION ABOUT SHAREHOLDERS HOLDING DIRECTLY OR INDIRECTLY SIGNIFICANT STAKES OF SHARES ...... 48
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FINANCIAL STATEMENTS OF CIECH S.A. FOR THE FINANCIAL YEAR JANUARY 1 ST , 2009 – DECEMBER 31 ST , 2009 ...... 50 PROFIT AND LOSS ACCOUNT OF CIECH S.A...... 51 STATEMENT OF FINANCIAL POSITION OF CIECH S.A...... 53 STATEMENT OF CHANGES IN EQUITY OF CIECH S.A...... 54 CASH FLOW STATEMENT OF CIECH S.A...... 56 NOTES AND EXPLANATIONS TO THE FINANCIAL STATEMENTS ...... 57 1. GENERAL INFORMATION ...... 57 2. LEGAL GROUNDS FOR COMPILING THE FINANCIAL STATEMENTS...... 57 3. INFORMATION ABOUT ACTIVITY SEGMENTS ...... 69 4. OTHER REVENUES /COSTS ...... 75 5. INCOME TAX ...... 77 6. DISCONTINUED ACTIVITIES AND FIXED ASSETS HELD FOR SALE ...... 79 7. EARNINGS (LOSSES ) PER SHARE ...... 79 8. DIVIDEND PAYOUT AND PROPOSED DIVIDEND PAYOUT ...... 80 9. TANGIBLE FIXED ASSETS ...... 81 10. INVESTMENT REAL PROPERTY ...... 84 11. RIGHT OF PERPETUAL USUFRUCT OF LAND ...... 85 12. INTANGIBLE ASSETS ...... 85 13. ASSET IMPAIRMENT ...... 87 14. NON -CURRENT RECEIVABLES ...... 89 15. OTHER LONG -TERM INVESTMENTS ...... 89 16. INVENTORY ...... 94 17. TRADE AND OTHER RECEIVABLES ...... 95 18. SHORT -TERM INVESTMENTS ...... 96 19. CASH AND CASH EQUIVALENTS ...... 96 20. CAPITALS ...... 96 21. NON -CURRENT LIABILITIES DUE TO LOANS , BORROWINGS AND OTHER DEBT INSTRUMENTS ...... 100 21.1 INFORMATION ON CIECH S.A.’ S FINANCIAL STANDING ...... 102 22. PROVISIONS ...... 107 23. EMPLOYEE BENEFITS ...... 107 24. CURRENT LIABILITIES ...... 108 25. OFF -BALANCE SHEET ITEMS ...... 112 25.1 LIABILITIES OF CIECH S.A. (DOMESTIC AND FOREIGN ) CLAIMED IN COURT OR ARBITRATION PROCEEDINGS AS AT ST DECEMBER 31 , 2009...... 112 25.2 INVESTMENT LIABILITIES ...... 114 25.3 GUARANTEES AND SURETIES , AND OTHER OFF -BALANCE SHEET RECEIVABLES AND LIABILITIES...... 118 26. INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT CIECH S.A.’ S FINANCIAL STATEMENTS ...... 120 27. FINANCIAL LEASE ...... 121 28. OPERATING LEASE ...... 121 29. INFORMATION ABOUT ASSOCIATES ...... 121 29.1 LIST OF COMPANIES FORMING THE CIECH GROUP ...... 121 29.2 TRANSACTIONS WITH ASSOCIATES ...... 123 29.3 SIGNIFICANT AGREEMENTS BETWEEN CIECH S.A. AND ITS ASSOCIATES ...... 127 29.4 TRANSACTIONS CONCLUDED BY KEY MANAGERIAL STAFF ...... 127 30. GOALS AND PRINCIPLES IN FINANCIAL RISK MANAGEMENT ...... 128 31. FINANCIAL INSTRUMENTS ...... 133 31.1 FINANCIAL ASSETS AND LIABILITIES ...... 133 31.2 HEDGE ACCOUNTING ...... 141 31.3 EMBEDDED FINANCIAL INSTRUMENTS ...... 144 32. EVENTS OCCURRING AFTER THE BALANCE -SHEET DATE ...... 144 33. ASSETS AND FINANCIAL STANDING OF THE SUBSIDIARY PRZEDSI ĘBIORSTWO CHEMICZNE CHEMAN S.A...... 147 34. PROGRAMME FOR ACHIEVING SUSTAINABLE PROFITABILITY OF S.C. UZINELE SODICE GOVORA – CIECH CHEMICAL GROUP S.A...... 148 35. INFORMATION ABOUT SIGNIFICANT EVENTS FROM PREVIOUS YEARS , RECOGNISED IN THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEARS ...... 149 36. INFORMATION OTHER THAN THAT MENTIONED ABOVE , HAVING A MATERIAL EFFECT ON THE ASSESSMENT OF CIECH S.A.’ S FINANCIAL SITUATION, ASSETS AND FINANCIAL RESULT ...... 149 37. RECONCILIATION OF FINANCIAL DATA PRESENTED IN THE FINANCIAL STATEMENTS FOR 2008 AND DATA CURRENTLY PRESENTED AS COMPARATIVE DATA ...... 149 38. RECONCILIATION OF DATA PRESENTED IN Q4 2009 WITH DATA PRESENTED IN THE FINANCIAL STATEMENTS FOR 2009 150
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Management Report of Ciech S.A. for 2009
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1. Characteristics of Ciech S.A.
Ciech S.A. is the parent company of the Ciech Group, which includes 39 subsidiaries. Ciech S.A. manages the Capital Group, manages the deliveries of raw materials and the sales of products of its subsidiaries and the goods of other manufacturers.
The Ciech Group’s business consists in manufacturing chemical products. Sales are managed mainly by Ciech S.A. as well as domestic and foreign trading and manufacturing companies which are Ciech S.A.’s subsidiaries. Manufacturing companies whose products are sold by Ciech S.A. include Soda Polska Ciech sp. o.o., Zachem S.A., Organika Sarzyna S.A., Fosfory sp. z o.o. Z.Ch Alwernia S.A. and Vitrosilicon S.A.
CIECH sells chemicals on the domestic market and plays a significant role in foreign trade in the export and import of chemical products. The main products sold by Ciech S.A. in 2009 were soda ash, isocyanates (TDI), artificial fertilisers and resins, and the largest sales market included EU countries.
The strategic and operating objectives are accomplished by the Corporate Centre and Divisions. The Corporate Centre concentrates on managing goodwill and finance, controlling, preparing strategies, managing corporate image, etc. Operating activity is managed by four Divisions: Soda, Organic, Agro, Silicates and Glass. The divisions are responsible for strategy operationalisation and financial results. The key processes implemented in the divisions include sale, purchase, supplies, product development and controlling. Production is located in manufacturing facilities/companies.
Figure 1.1. Ciech S.A.’s Divisions Structure
Ciech Chemical Group
Organic Agro Silicates and
Soda Division Division Division Glass Division Agro ?o
Soda Polska CIECH Zachem Group Phosphates Group, Vitrosilicon Companies Uzinele Sodice Govora Organika Sarzyna (O) Alwernia Soda Deutschland Group Transclean Organika Sarzyna (A)
NPK fertilisers, plant Glass blocks, Soda ash, TDI, ECH, PCV, protection chemicals, lanterns and jars, Products baking soda, polyurethane foams, phosphate products, potassium silicates, evaporated salt epoxy and polyester chromium compounds sodium silicates resins
Glass industry, Food industry and Construction industry , cleaning agents Furniture and paint Customers agriculture consumer markets industry industry
Markets European, Global, European, European, domestic European domestic domestic
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CIECH S.A. does not operate any branches.
2. Major achievements of Ciech S.A. • On January 5 th , 2009, the General Meeting of Shareholders of Polskie Konsorcjum Chemiczne Sp. z o.o. (PKCh) passed a resolution on increasing the Company’s share capital by PLN 50 thousand to the amount of PLN 100 thousand and signed a Shareholders’ Agreement, regulating the principles of cooperation between the parties in the process of future acquisition of a controlling stake of shares in Anwil S.A. The information was announced in Current Report no. 1 of January 5 th , 2009 and Current Report no. 10 of February 27 th , 2009.
• On January 14 th , 2009 CIECH S.A. and PKP “Cargo” S.A., with its registered office in Warsaw, signed an agreement concerning the transport of goods of companies forming the Ciech Group on domestic routes. The value of the agreement for 2009 is estimated at approximately PLN 75 million. The information was announced in Current Report no. 2 of January 14 th , 2009.
• On February 10 th , 2009, the Management Board of CIECH S.A. decided to reduce operating costs and capital expenditures for the Ciech Group in 2009. As a part of the savings program, the financial plan for 2009 assumes a reduction in operating costs by PLN 71 million and capital expenditures by PLN 121 million. The decision to reduce operating costs and capital expenditures is due to the need to respond to threats resulting from unfavourable changes in market conditions. The information was announced in Current Report no. 7 of February 10 th , 2009.
• On February 18 th , 2009 CIECH S.A. and Jochen Ohm concluded a settlement under which: • Jochen Ohm, a former minority shareholder of Soda Deutschland Ciech GmbH and the President of German subsidiaries of CIECH S.A., resigns early from all his positions and functions. • The collaboration between CIECH S.A. and its subsidiaries, on the one hand, and Jochen Ohm, on the other hand, is settled and finished conclusively. • CIECH S.A. acquires the remaining 8% of shares in Soda Deutschland Ciech GmbH, thus becoming the sole shareholder of the company. • CIECH S.A. obtains the title of ownership for the land where voids held for sale are located. • CIECH S.A. acquires rights to 100% of profits on the sale and exploitation of voids. The value of the settlement amounts to EUR 12,500 thousand. The information was announced in Current Report no. 8 of February 18 th , 2009. • On March 18 th , 2009, a multilateral agreement was concluded by and between Nafta Polska S.A. and the companies: CIECH S.A., Zakłady Azotowe w Tarnowie-Mo ścicach S.A., with its registered office in Tarnów, Zakłady Azotowe K ędzierzyn S.A., with its registered office in K ędzierzyn-Ko źle, the financial advisor of Nafta Polska S.A., Raiffeisen Investment AG, with its registered office in Vienna, Raiffeisen Investment Polska Sp. z o.o., with its registered office in Warsaw, and the legal advisor of Nafta Polska, Radzikowski, Szubielska i
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Wspólnicy Spółka Komandytowa, with its registered office in Warsaw. The purpose of the agreement is the realisation of the process of selecting an investor or investors who will purchase shares in ZAT, ZAK and CIECH S.A. and who are able at the same time to acquire shares in the increased capital of the aforesaid companies. The financial advisors of Nafta Polska are Raiffeisen Investment AG, with its registered office in Vienna, Raiffeisen Investment Polska Sp. z o.o., with its registered office in Warsaw, and their subcontractors Lazard & Co. Limited, with its registered office in Great Britain, as well as Bank Zachodni WBK SA, with its registered office in Wrocław. The process includes, in particular, the preparatory phase, the announcement of an invitation to negotiations concerning the sale of shares in ZAT, ZAK and CIECH S.A., held by the State Treasury and Nafta Polska, and negotiations with selected potential investors conducted by Nafta Polska. Pursuant to the Agreement, each company authorised Nafta Polska to conduct any and all activities aimed at selecting one or several investors interested in acquiring the companies’ shares as well as in offering financial aid to the companies for the purchase of shares in Anwil S.A. or realisation of the companies’ investment goals. All analyses and source documents will be provided by the companies in accordance with the provisions regulating the disclosure of confidential information within the meaning of the Act on the Offering. The agreement entered into force upon its signing and may be terminated by Nafta Polska at any time with fourteen days’ notice. The agreement is automatically cancelled after 15 months from its signing unless the parties thereto decide to extend it in writing. Nafta Polska may assign its rights and obligations under the Agreement to the State Treasury. The information was announced in Current Report no. 16 of March 19 th , 2009.
• On April 24 th , the District Court for the Capital City of Warsaw, 13 th Commercial Division, registered an increase in the share capital of CIECH FINANCE Sp. z o.o. of PLN 600 thousand. The shares created as a result of the share capital increase will be acquired by CIECH S.A. The capital was increased by way of a resolution of the Extraordinary General Meeting of Shareholders of April 1 st , 2009.
• On April 28 th , 2009, the Management Board of CIECH S.A. obtained information on the decision of the Regional Court in Warsaw (file no. XVI GC 531/07), delivered the same day in a case against PTU S.A. instigated by FSO S.A. The Regional Court declared invalid Resolutions no. 2 and 3, passed on March 19 th , 2003 by the Compulsory Administration (acting in the capacity of the General Meeting). Resolution no. 2 concerned a decrease in the share capital through reducing the nominal value of shares, while Resolution no. 3 concerned an increase in the share capital by way of 10 th , 11 th and 12 th issue of shares with the exclusion of the pre-emptive right of former shareholders. Pursuant to Resolution no. 3 on the increase of share capital, the shares of PTU S.A. (operating under the name “DAEWOO” Towarzystwo Ubezpieczeniowe – Spółka Akcyjna at the moment of passing the resolutions) were acquired, inter alia, by Janikowskie Zakłady Sodowe JANIKOSODA S.A. and Inowrocławskie Zakłady Chemiczne SODA MĄTWY S.A. Both resolutions were challenged by FSO S.A. but the court dismissed the suits twice. As a result of the appeal which was lodged, the Regional Court in Warsaw by way of a decision of April 28 th , 2009 declared Resolutions no. 2 and 3 invalid, for in the opinion of the court these were adopted in breach of the principles of social intercourse. On June 22 nd , 2009, the appeal of Janikowskie Zakłady Sodowe Janikosoda S.A., acting in the capacity of an Intervening Party, was lodged to the Appeal Court in Warsaw, 1 st Civil Department. The appeal was lodged by Polskie Towarzystwo Ubezpiecze ń S.A. and Polskie Towarzystwo Reasekuracji S.A., acting as an Intervening Party. During the trial on March 18 th , 2010, the Appeal Court announced its judgement in the case instituted by FSO against PTU regarding the declaration of invalidity of resolutions passed by the Compulsory Administration of March 19 th , 2003, in which the court changed the ruling of the District Court and dismissed the suit by FSO. Thus, the resolutions of the Compulsory Administration under which FSO, being a majority shareholder holding 87% of PTU’s share capital, became a minority shareholder holding only 2% of shares in PTU’s share capital, and a group of investors including Soda Companies acquired the shares in PTU’s increased share capital, remained in force. The ruling of the Appeal Court is legally binding, allowing the Soda Companies to sell PTU’s shares. However, it should be considered that FSO may appeal against this ruling. The probability that such appeal is accepted and that it is successful is low. • On April 28 th , 2009, the companies: CIECH S.A., Kopalnie i Zakłady Chemiczne Siarki “Siarkopol” S.A. (hereinafter referred to as Siarkopol G), Kopalnie i Zakłady Przetwórcze Siarki “Siarkopol” in liquidation (hereinafter referred to as Siarkopol T) and Comexport Companhia De Comercio Exterior (hereinafter referred to as Comexport) signed a voluntary settlement concerning an amicable solution to the long-term dispute between Comexport, on the one hand, and CIECH S.A., Siarkopol T and Siarkopol G, on the other hand. The dispute resulted from a contract for the delivery of sulphur concluded in the 1990s. Under the concluded settlement, the Polish entities pay Comexport an amount lower than the one adjudicated by way of a decision of the Court of Arbitration at the International Chamber of Commerce in Paris. CIECH S.A. was obliged to pay Comexport USD 828 thousand. The amount was paid in the form of a bank draft for the benefit of Comexport on the date of settlement. Pursuant to the settlement, each party waived any and all claims under the said contract for the delivery of sulphur as well as any and all claims resulting from the conducted proceedings.
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• On May 5 th , the Supervisory Board of CIECH S.A. adopted a resolution in which it gave a positive opinion on the motion lodged by the Management Board of CIECH S.A. on April 28 th , 2009 and concerning recommended allocation of CIECH S.A.’s profit for 2008 amounting to PLN 14,994 thousand for the company’s supplementary capital. The information was announced in Current Report no. 17 of May 6 th , 2009. On June 18th , 2009, the Annual General Meeting of CIECH S.A. passed a resolution on the distribution of profit, which does not anticipate dividend payout for 2008. The decision is compliant with the recommendations of the Supervisory Board and Management Board of CIECH S.A.
• On May 5 th , 2009, the Supervisory Board of CIECH S.A. adopted a resolution on the appointment of Deloitte Audyt Sp. z o.o. as an expert auditor to audit the financial statements of CIECH S.A. and the financial statements of the Ciech Group for 2009. The information was announced in Current Report no. 18 of May 6 th , 2009.
On May 19 th , 2009, the anti-trust procedure, initiated on December 31 st , 2007 by the Polish Office of Competition and Consumer Protection against CIECH S.A. on the charge of abuse of a dominant position on the domestic market for table salt marketing, was dismissed.
• On June 9 th , 2009, Przemysław Cieszy ński resigned from the post of Member of the Supervisory Board of CIECH S.A. as of the date of the Annual General Meeting of CIECH S.A., convened on June 18 th , 2009. On June 18 th , 2009, Zbigniew Jagiełło was appointed Member of the Supervisory Board of CIECH S.A. The information was announced in Current Report no. 25 of June 10 th , 2009 and Current Report no. 28 of June 18 th , 2009.
On August 5 th , 2009, CIECH S.A. reached a settlement revoking the violation of the loan agreement for the purchase of 80% of shares in Z. Ch. “Organika-Sarzyna” S.A. from Nafta Polska S.A. through signing an amending agreement with Bank POLSKA KASA OPIEKI S.A., Bank Handlowy w Warszawie S.A. and Bank Millenium S.A. The information concerning the conclusion of the loan agreement was announced in Current Report no. 81/2006 of December 13 th , 2006. The agreement provides for the following conditions: • establishment of additional loan collaterals in the form of a registered pledge and financial pledge on 7,405,255 shares of SODA M ĄTWY SA, a registered pledge and financial pledge on the new 16,160 shares of JANIKOSODA S.A. and an obligation to establish a registered pledge and financial pledge on 7,715,331 shares in Z. Ch. “Organika-Sarzyna” S.A. on December 31 st , 2011 at the latest, • dividend payout by CIECH S.A., made without the consent of the parties, shall constitute a violation of the loan agreement. The settlement is another stage of the process aimed at ensuring the Ciech Group’s long-term financing. The information was announced in Current Report no. 30 of August 6 th , 2009.
On August 13 th , 2009, CIECH S.A. and the following subsidiaries: “Agrochem” Sp. z o.o., having its registered office in Człuchów, “Agrochem” Sp. z o.o., having its registered office in Dobre Miasto, “Alwernia” SA, Cheman SA, POLFA Sp. z o.o., GZNF “FOSFORY” Sp. z o.o., Z.Ch. “Organika-Sarzyna” SA, Soda Deutschland Ciech GmbH, Soda Polska Ciech Sp. z o.o., Transclean Sp. z o.o., S.C. Uzinele Sodice Govora - Ciech Chemical Group SA, “Vitrosilicon” SA, ZACHEM SA, Chemia.com S.A. and Ciech Service Sp. z o.o. (“Companies”) made a statement (“Statement”) to the following banks offering financing to CIECH S.A. and the Companies (loans, and in the case of some banks, also derivatives): Bank BPH SA, Bank DNB Nord Polska SA, Bank Handlowy w Warszawie SA, Bank Millennium SA, Bank Ochrony Środowiska SA, Bank Polska Kasa Opieki SA, BNP Paribas SA, Branch in Poland, BRE Bank SA, Calyon SA, Branch in Poland, Fortis Bank Polska SA, HSBC Bank Polska SA, ING Bank Śląski SA, Kredyt Bank SA, Nordea Bank Polska SA, Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe Plc, Dublin - Romania Branch (“Banks”). Pursuant to the aforesaid statement, CIECH S.A. and the Companies are obliged not to do any of the following without the Banks’ consent: - establish any collaterals on their assets other than the ones listed in the Statement, - acquire any other companies, - merge with any other companies, - dispose of any assets other than the ones listed in the Statement, - increase their debt through incurring new financial liabilities, - conclude forward contracts other than the ones enlisted in the Statement, and - be in arrears with their liabilities towards the Banks.
Additionally, pursuant to the Statement, CIECH S.A. is obliged to: - submit information on any events concerning CIECH S.A. and the Companies to the Banks; - not to recommend any dividend payout for the benefit of the shareholders of CIECH S.A. by the Management Board, and - establish cooperation between CIECH S.A. and the Banks consisting, in particular, in taking joint actions aimed at refinancing material liabilities of CIECH S.A. and the Companies through granting a new loan for the repayment of existing liabilities towards the Banks.
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In conjunction with the Statement, on August 14 th , 2009, Ciech was informed about the signing by Bank BPH S.A., Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Ochrony Środowiska S.A., Bank Polska Kasa Opieki S.A., BRE Bank S.A., HSBC Bank Polska S.A., ING Bank Śląski S.A., Kredyt Bank S.A., Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe Plc, Dublin - Romania Branch, of a status quo agreement (“Status Quo Agreement”) pursuant to which the aforesaid banks are mutually obliged to abandon the following actions during the term of the Status Quo Agreement: recovery of Ciech’s and the Companies’ financial debt towards the Banks, termination or cancellation of financing documents concluded with the Ciech Capital Group’s entities. The Banks which granted such loans are also obliged to continue providing the Ciech Capital Group with working capital facilities, guarantee facilities and letters of credit. Moreover, on August 14 th , 2009, CIECH S.A. was informed about the signing by: Calyon S.A., Branch in Poland and Nordea Bank Polska S.A. of separate statements to the rest of the Banks, whose contents is generally in compliance with the Status Quo Agreement. On August 14 th , 2009, CIECH S.A. received from BNP Paribas S.A., Branch in Poland, a statement addressed to CIECH S.A. In addition, CIECH S.A. and “Vitrosilicon” S.A. received from Fortis Bank Polska S.A. a statement addressed to CIECH S.A. and “Vitrosilicon” S.A., whose content is analogous to the content of the Status Quo Agreement. In the aforesaid statements the Banks are additionally obliged to: (i) BNP Paribas S.A., Branch in Poland: extend until October 30th , 2009 the line of credit (revolving loan) amounting to PLN 30,000 thousand under Loan Agreement no. 16/2007 of June 27 th , 2008 concluded with CIECH S.A.; (ii) Fortis Bank Polska S.A.: extend until October 30 th , 2009 the line of credit (revolving loan, letters of credit, guarantees) amounting to PLN 50,000 thousand under the Multipurpose Line of Credit Agreement no. WAR/3010/06/346/CB of September 15 th , 2006, with subsequent amendments, concluded with CIECH S.A., suspend principal payments and extend until October 30 th , 2009 the fixed-term loans amounting to PLN 9,000 thousand and PLN 950 thousand and the overdraft facility amounting to PLN 12,000 thousand under the Non-revolving Loan Agreement no. WAR/4060/06/101/CB of June 23 rd , 2006, with subsequent amendments, the Non-revolving Loan Agreement no. WAR/4060/07/287/CB of July 30 th , 2007, with subsequent amendments, and the Multipurpose Line of Credit Agreement no. WAR/4050/05/331/CB of December 12 th , 2005, with subsequent amendments, concluded with “Vitrosilicon” S.A. CIECH S.A. and “Vitrosilicon” S.A. signed their consent for the extension of the availability of the aforesaid loans on August 14 th , 2009. The statement is effective until one of the following dates, whichever is earlier: (i) October 31 st , 2009; or (ii) the expiry date of the Status Quo Agreement, whereby the Status Quo Agreement shall be effective until October 30 th , 2009 unless it is earlier terminated. The aforesaid actions constitute the subsequent stage of a process aimed at ensuring the Ciech Group’s long-term financing and maintaining the involvement of the Banks financing the Group. The Statement does not change any of the loan agreements to which CIECH S.A. or any of the Companies is a party (except for the aforementioned agreements with BNP Paribas S.A., Branch in Poland, and Fortis Bank Polska S.A.), or impose any additional financial obligations on CIECH S.A. and the Companies. The information was announced in Current Report no. 31 of August 14 th , 2009.
On November 2 nd , 2009, a group of 12 banks (Bank BPH S.A., Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Ochrony Środowiska S.A., Bank Polska Kasa Opieki SA, BRE Bank SA, HSBC Bank Polska SA, ING Bank Śląski SA, Kredyt Bank SA, Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe Plc. Dublin – Romania Branch – being parties to the Status Quo Agreement) concluded a settlement extending the said agreement until December 15 th , 2009. Also the separate statements, discussed in Current Report no. 31/2009, were extended to that date by the banks: Calyon S.A. Branch in Poland, Nordea Bank Polska SA, BNP Paribas S.A. Branch in Poland and Fortis Bank Polska S.A., were extended. Prior to signing the aforesaid documents, CIECH S.A. made a statement to the Banks on extending the Statement discussed in Current Report no. 31/2009 until one of the following dates, whichever is earlier: (i) December 16 th , 2009, or (ii) the expiry date of the Status Quo Agreement. On December 16 th , 2009, a group of 12 banks (Bank BPH S.A., Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Ochrony Środowiska S.A., Bank Polska Kasa Opieki SA, BRE Bank SA, HSBC Bank Polska SA, ING Bank Śląski SA, Kredyt Bank SA, Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe Plc. Dublin – Romania Branch – being parties to the Status Quo Agreement) concluded a settlement extending the said agreement until January 15 th , 2010. Also the separate statements, discussed in Current Report no. 31/2009, were extended to that date by the banks: Calyon S.A. Branch in Poland, Nordea Bank Polska SA, BNP Paribas S.A. Branch in Poland and Fortis Bank Polska S.A. Prior to signing the aforesaid documents, CIECH S.A. made a statement to the Banks on extending the Statement discussed in Current Report no. 31/2009 and in Current Report no. 42/2009 until one of the following dates, whichever is earlier: (i) January 16 th , 2010, or (ii) the expiry date of the Status Quo Agreement. The information was announced in Current Report no. 44 of December 16 th , 2009.
On September 14 th , 2009, the Extraordinary General Meeting of Shareholders of CIECH S.A. dismissed Mr Krzysztof Mastalerz and Mrs Alicja Pimpicka from the Supervisory Board of CIECH S.A. and appointed Mrs Ewa Sibrecht-Ośka and Mr Sławomir Stelmasiak as Members of the Supervisory Board of CIECH S.A. The information was announced in Current Report no. 36 of September 15 th , 2009.
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Mr Zbigniew Jagiełło resigned from the post of Member of the Supervisory Board of CIECH S.A. as of September 30 th , 2009. The information was announced in Current Report no. 38 of September 18 th , 2009.
On October 16 th , 2009, CIECH S.A. was delivered the decision of the District Court for the Capital City of Warsaw in Warsaw, 13 th Commercial Division of the National Court Register, on entering to the register of companies on October 6 th , 2009 the amendments to the Statute adopted by the Extraordinary General Meeting of Shareholders of CIECH S.A. on September 14 th , 2009. The information was announced in Current Report no. 41 of October 16 th , 2009.
3. Description of factors and events having significant influence on the Company’s activities
Positive factors
Increase in the value of domestic sales of construction and assembly products during 12 months of 2009 by 3.7% in total in comparison with the previous year (chemical industry generates many raw materials and semi-finished products used for this production), Record prices of soda ash in Q1 2009. Despite the drop in prices in the following periods of 2009, the average price in 2009 was very high, i.e. 15% increase to the level of the average price in 2008 (both in contracts concluded in PLN and other currencies).
Negative factors
Decrease in the domestic sales of chemical products over 2009, excluding pharmaceuticals, in comparison with the previous year (by approx. 3% as per fixed prices, according to the 2007 Polish Classification of Economic Activities), i.e. at the level of an adequate decrease in the entire Polish industry, Decrease in demand for soda ash in Europe (by several percent throughout the whole 2009, compared with 2008) linked mainly to lower demand of the glass industry; in particular, in relation to the production of flat glass, Drop in soda ash prices in European markets (stabilizing trend in Q4 2009 at levels several percent lower than the record-breaking prices at the turn of 2008/2009), Very low or low market prices of organic products manufactured by the Ciech Group in 2009 (compared to the record levels recorded in 2008), Continued increase in the prices of crude oil over 2009, which led to an increase in the prices of raw materials for the organic industry, Significant decrease in domestic production of artificial fertilisers (by 24% by volume over 2009, compared to the previous year), Continued low level of prices in international and European markets of artificial fertilisers (in particular, phosphate and compound fertilisers) in comparison to the record prices of 2008.
3.1 Significant risk and threat factors and CIECH’s exposure
Risk of positive trends reversal with respect to the economic growth in Poland The business of CIECH is connected with many segments of the chemical industry, whose development is directly correlated to the economic situation. In the last few years, Poland’s economic growth was at the level of several percent GDP annually. The forecasts for the following years anticipate a slowdown of the previous high growth dynamics resulting from the global economic crisis (internal demand slowdown, export slowdown and investment slowdown). The deterioration of the economic situation will definitely affect the chemical industry. Lower demand for chemical products may negatively influence the revenues generated by CIECH and lead to worse results.
Risk of a long-term economic stagnation/recession in Europe and around the world CIECH’s business relies heavily on the export of chemical products, whose level and profitability depends on the global economic situation in Europe and around the world. The long-term economic downturn may lead to considerably lower foreign turnover in export and at the same time lower revenues from particular segments of CIECH’s business activity.
Risk of a significant drop in demand in the toluene diisocyanate (TDI) segment CIECH S.A. is the main shareholder of the sole Polish producer of toluene diisocyanate (TDI) – a semi-finished product for the production of polyurethane foam applied mainly in the furniture and automotive industry. CIECH S.A. is also the sole seller of TDI from Zachem S.A. (one of the most important products of the Ciech Group).
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The TDI market is a global market but in practice the turnover is generated mostly within Europe. Taking into account the target customer segments (furniture and automotive industry), the situation in the sector of TDI producers is strongly dependent on the overall economic situation. In the event of a drastic economic downturn, the demand for TDI also drops. Some level of protection against the economic downturn, only on some regional markets, is ensured by the constant presence of customers on many markets around the globe. These actions are taken also by CIECH S.A.
Risk of significant oversupply of TDI on the global markets In the coming years, considerable increases in TDI production capacities are planned around the world (by approx. 40% or more). In the event of a scheduled completion of the planned investments and taking into account the forecast pace of demand growth at the level of several percent per annum, global TDI oversupply may be expected at the beginning of the second decade of this century. This could lead to a significant decrease in TDI prices and lower use of manufacturing facilities. The economic downturn delays some investments increasing production capacity. In order to lessen the negative effects of TDI oversupply, CIECH has taken actions aimed at modernising its manufacturing lines and decreasing manufacturing costs (to enhance the Group’s competitiveness). Also own polyurethane foam production capacity was increased, making it possible to utilise a portion of TDI manufactured in the CIECH Group.
Risk of oversupply of soda ash in Europe At the turn of the first and second decades of this century, plans were made to develop new soda ash production capacities in the countries of Central and Eastern Europe (Russia, Belarus, Romania, Bulgaria, Bosnia and Herzegovina), Turkey and Germany – constituting in total approx. 25% of Europe’s current nominal production capacity. If all these investments are completed according to the schedule (and there is a major growth in supplies to the market within a relatively short period of time), significant periodic product oversupply and price decrease could occur in the region. The economic downturn delays some investments increasing production capacity. The actions already taken by the CIECH Group and aimed at improving the effectiveness and profitability of soda ash facilities should reduce the possible negative impact of the described events on CIECH.
4. Presentation of Ciech S.A’s main economic and financial figures
Sales revenues
CIECH S.A.’s sales revenues in 2009 amounted to PLN 1,901,077 thousand and were lower than those of 2008 by 7%. The revenues were adversely affected by the economic downturn on the chemical market and the decrease in prices in the organic segment. The soda segment recorded an increase in prices at the beginning of the year but in the second half the prices returned to the level of 2008. Combined with the decrease in currency exchange rates (in particular EUR/PLN) over the entire year, these factors resulted in a drop in revenues by PLN 153 million.
Geographical structure of sales revenues
CIECH S.A.’s goods portfolio is characterised by high maturity and the sales are based on stable customer relationships. The main sales market is the domestic market, while Europe remains the main foreign market. Geographical proximity and the absence of trade barriers make EU countries an obvious sales market for CIECH S.A. In 2009, domestic sales made up approx. 46% of overall sales revenue and amounted to PLN 869,967 thousand. Foreign sales amounted to PLN 1,031,110 thousand (of which PLN 679,188 thousand were sales to EU countries).
Goods structure of sales revenues
CIECH S.A.’s revenues structure largely reflects the sales structure in the CIECH Group. A substantial portion of products manufactured by the Group’s companies is sold via CIECH S.A. As a result, the sales of CIECH Group’s main products (soda ash and TDI) are predominant in CIECH S.A.’s revenues structure.
In 2009, the goods structure was dominated by soda products, as had been the case over the previous years. The share of sales of soda ash in revenues in 2009 was 37%. TDI sales generated 27% of the revenues in 2009.
The goods structure in 2009 is presented in the diagram below:
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Dense soda Soda kalcynow ana ash ci28%ęŜ ka 28% Other Pozostałe 24%
Resinsśyw ice 5%
Salt Sól 7%
SodaLight kalcynow soda ash ana 9% TDI lekka 27% 9%
Operating profit (EBIT)
In 2009, operating profit amounted to PLN 147 ,139 thousand and was higher by over PLN 1,361 thousand than that recorded in 2008. As it had been the case in the previous year, the source of the operating profit was the core business activity. EBIT was adversely affected by the negative balance of other operating activities (PLN -15,432 thousand), which was mainly attributable to the establishment of a write-down on investment property amounting to PLN 11,492 thousand in connection with the planned demolition of the building at Pow ązkowska St. The EBIT margin rate amounted to 7.7% (compared to 7.2% in 2008). The margin’s increase is mainly linked to the increase in gross sales profit due to the drop in the sales share of less profitable products in the agricultural chemicals segment and a temporary increase in the prices of soda products in the 1 st half of 2009.
Gross profit
In 2009, the Company disclosed a gross loss of PLN 113,555 thousand, which is a decrease of PLN 48,416 thousand in comparison to 2008. The gross loss was mainly attributable to: (a) interest paid on loans (PLN 64,350 thousand) – the effect of greater use of overdraft facilities, (b) write-down on borrowings US Govora (PLN 137,518 thousand) and (c) negative balance of foreign exchange differences (PLN 139,214 thousand).
The positive contributors to the gross profit were: (a) core business activity (gross sales profit of PLN 335,115 thousand), (b) interest obtained (PLN 23,762 thousand), (c) valuation of financial instruments amounting to PLN 43,775 thousand, while in the previous year the valuation of financial instruments was PLN -234,075 (this amount includes the adjustment of an error linked to improper application of IAS 39, amounting to PLN -70,934 thousand; for details see section 37 of the notes to the financial statements), as well as (d) dividends received (PLN 24,844 thousand).
The decrease in gross profit in comparison to the previous year is mainly the result of a greater negative balance of interest paid and received, amounting to PLN 20,101 thousand, and the negative balance of FX differences in transactions, while in the previous year this balance was positive (a change by PLN -241,561 thousand compared to the previous year).
Net result
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In 2009, CIECH S.A. recorded a net loss of PLN 125,767 thousand , which is a decrease by PLN 69,828 thousand in comparison to 2008.
The table below presents basic information about the financial results and profitability:
Table 4.1. Profit margins of CIECH S.A. Jan. – Dec., Item Jan. – Dec., 2009 2008 Net sales 1,901,077 2,054,150 Gross profit from sales 335,115 324,771 Operating profit 147,139 148,500 Net profit -125,767 -55,939 Return on sales 17.63% 15.81% Operating profit margin 7.74% 7.23% Net return on sales (ROS) -6.62% -2.72% Return on assets (ROA) -6.36% -2.76% Return on equity (ROE) -24.32% -9.49% Source: CIECH S.A. Calculation principles: return on sales – sales profit for a given period / net sales of products, services, goods and materials, operating profit margin – operating profit for a given period / net sales of products, services, goods and materials, return on sales (ROS) – net profit for a given period / net sales of products, services, goods and materials, return on assets (ROA) – net profit / total assets at the end of a given period, return on equity (ROE) – net profit for / total equity at the end of a given period.
Balance sheet
Capital structure
As at December 31 st , 2009, equity amounted to PLN 517,096 thousand, which is a PLN 72,254 thousand decrease in comparison to the balance as at the end of 2008. The decrease in equity is the result of the generated net loss (PLN 125,767 thousand), less the positive effect of including in the equity a valuation of some effective instruments for hedge accounting, amounting to PLN 36,913 thousand, and an increase in revaluation capital of PLN 16,600 thousand.
Assets
As at December 31 st , 2009, the value of CIECH S.A’s assets amounted to PLN 1,977,009 thousand . Within 12 months, the value of assets decreased by PLN 46,801 thousand, i.e. by 2%. The decrease in the value of assets was mainly attributable to the drop in trade and other receivables (PLN 50,381 thousand) and the drop in deferred tax assets (PLN 23,953 thousand).
As in previous years, the assets structure was dominated by fixed assets, whereby its share in total assets remained unchanged and at the end of 2009 it amounted to 74%. The main item in fixed assets were long-term investments amounting to PLN 1,376,023 thousand, whose value increased during the year by PLN 8,999 thousand. The value of current assets decreased by PLN 11,107 thousand and amounted to PLN 521,169 thousand as a result of a drop in the balance of trade and other receivables. Given the Company’s sales-oriented business, the current assets are dominated by trade receivables. As at December 31 st , 2009, they amounted to PLN 276,652 thousand. The balance of trade receivables decreased in comparison to the end of 2008 by over 5%, i.e. by PLN 14,385 thousand, as a result of a decrease in the balance of overdue receivables. Company’s liabilities and debt
As at December 31 st , 2009, CIECH S.A.’s total long-term and short-term liabilities amounted to PLN 1,459,913 thousand, which is an increase in liabilities by 2% in comparison to the previous year’s level. This increase was mainly attributable to higher trade liabilities, in particular those due to companies of the Ciech Group. At the end of 2009, the balance of bank loans, borrowings and other debt instruments amounted to PLN 904,153 thousand and increased by PLN 43,853 thousand in comparison to the previous year. At the same time, the loan structure changed: long-term loans grew by PLN 126,394 thousand to PLN 426,196 thousand.
Net debt (financial liabilities less cash) at the end of 2009 amounted to PLN 857,708 thousand and increased over the year by PLN 29,493 thousand. As at December 31 st , 2009, the financial leverage ratio (defined as net debt in relation to the sum of net debt and equity) reached 62%.
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The debt rate (calculated as the relation of long-term and short-term liabilities to total assets) increased over 12 months of 2009 from 70.9% to 73.8%. This rate indicates that CIECH S.A. made greater use of borrowing, the cost of which is lower than the cost of equity.
The acquisitions conducted in 2006 and 2007 that led to an increase in the assets of CIECH S.A. (in particular, acquisition of Soda Deutschland Ciech Group GmbH) were financed through an investment loan and bond issue. As a result, debt ratios increased. The debt ratios still remain at safe levels.
Table 4.2. Debt ratios Item 31.12.2009 31.12.2008 Debt ratio 73.8% 70.9% Long-term debt ratio 24.6% 21.6% Debt to equity ratio 282.3% 243.4% Equity to assets ratio 26.2% 29.1% Source: CIECH S.A. Calculation principles: debt ratio – current and non-current liabilities / total assets; measure of the share of external funds in financing a company’s activity. long-term debt to equity ratio – non-current liabilities / total assets; measure of the share of non-current liabilities in financing a company’s activity. debt to equity ratio – total liabilities / equity. equity to assets ratio – equity / total assets; measure of the share of equity in financing a company’s activity.
CIECH S.A. managed to negotiate a package of loan agreements (described in detail in section 21.1 of the notes to the financial statements) to stabilise the Company’s and the CIECH Group’s financial situation. CIECH S.A.’s Management Board continues to undertake effectiveness-enhancing measures in the operating as well as investment and non-investment areas to reduce the Group’s debt.
Cash flow statement
Cash flow from operating activities in 2009 was positive and amounted to PLN 66,033 thousand. In 2008, cash flow from operating activities was negative and amounted to PLN -71,869 thousand. The main source of cash in this area in 2009 was the decrease in receivables by PLN 16,711 thousand and the increase in liabilities by PLN 75,076 thousand, as a result of extending the terms of payment for supplies from the Group companies.
In 2009, CIECH S.A. incurred investment expenditures linked to purchasing the shares of Soda Deutschland Ciech GmbH (PLN 70,223 thousand). In addition, the shares of Zachem S.A. and Organika-Sarzyna S.A. were purchased for a total of PLN 11,038 thousand and the capital of Soda Deutschland Ciech GmbH was increased (PLN 65,757 thousand). Borrowings granted amounted to PLN 54,181 thousand. The primary source of inflows were borrowings granted and interest received, amounting to PLN 36,691 thousand. The surplus of investment expenditures over investment inflows in 2009 amounted to PLN 106,776 thousand.
The balance of cash flow from financial activities was positive and amounted to PLN 57,240 thousand. To finance the growing demand for working capital and investment expenditures, the overdraft facilities were used to a greater extent. The surplus of loans raised over loans repaid amounted to PLN 57,240 thousand.
Working capital
The financing structure of the Company’s activities is mainly the result of the sales-oriented nature of its business. Trading companies finance the bulk of their current assets through trade liabilities and the remaining portion is financed by short-term loans. The working capital is also affected by CIECH S.A.’s operations as the parent company of the Capital Group.
At the end of 2009, the working capital was negative and amounted to PLN 453,366 thousand, while a year earlier it amounted to PLN -464,039 thousand. The increase in 2009 was primarily the result of a drop in short-term liabilities. The demand for current assets was negative and amounted to PLN 109,737 thousand (PLN -407 thousand a year earlier).
Table 4.3. CIECH S.A.’s working capital (PLN ‘000) Item 31.12.2009 31.12.2008 1. Current assets 521,169 532,276 2. Cash and other short-term investments 134,328 96,866 3. Adjusted current assets (1-2) 386,841 435,410 4. Current liabilities 974,535 996,315 5. Short-term loans and other financial liabilities 477,957 560,498
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6. Adjusted current liabilities (4-5) 496,578 435,817 7. Working capital (1-4) -453,366 -464,039 8. Demand for current assets (3-6) -109,737 -407 9. Net cash (7-8) -343,629 -463,632 Source: CIECH S.A. The shortening of the cash conversion cycle in 2009 was mainly the result of the extended repayment of liabilities due to the Group Companies.
Table 4.4. Turnover of CIECH S.A.’s major working capital components (in days)
Item 2009 2008
Inventory turnover 6 3 Trade receivables turnover 53 52 Trade liabilities turnover 72 49 Operating cycle 59 55 Cash conversion cycle -10 11 Source: CIECH S.A.
Calculation principles: inventory turnover – inventory at the end of a given period / operating expenses in a given period x number of days in a given period, trade receivables turnover – trade receivables at the end of a given period / net sales revenue for a given period x number of days in a given period, trade liabilities turnover – trade liabilities at the end of a given period / operating costs in a given period x number of days in a given period, operating cycle – inventory turnover plus trade receivables turnover, cash conversion cycle – operating cycle less trade liabilities turnover.
Liquidity
The liquidity ratios remained at the level of 2008, which resulted mainly from the similar volume of short-term loans used. In spite of the fact that the quick ratio was below the optimal level (1.0), there are no threats to liquidity.
Table 4.5. Liquidity ratios
Item 31.12.2009 31.12.2008
Current ratio 0.53 0.53 Quick ratio 0.51 0.52 Source: CIECH S.A. Calculation principles: current ratio – current assets / current liabilities at the end of a given period; measure of company’s capability to cover its current liabilities with current assets. quick ratio – current assets less inventory / current liabilities at the end of a given period; measure of a company’s capability to collect in a short period of time cash for the coverage of materially due liabilities.
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5. Ciech S.A.’s sales activities
5.1 Explanations concerning the seasonal and cyclical nature of Ciech S.A.’s business
Seasonality resulting from periodic demand and supply fluctuations has a certain impact on the general sales trends in CIECH. Products clearly influenced by seasonality are agro-chemical products: • chemical fertilisers, • raw materials for the production of fertilisers, • plant protection chemicals.
Fertilisers are sold mainly at the turn of Q1 and Q2 and in Q3 of a year. This is due to intensive field fertilisation in spring and autumn. Similarly, most plant protection chemicals are used in the first half of the year, i.e. the period of intensive plant growth, when approx. 90% of the total sale of these products is realised.
Furthermore, in the soda segment, a seasonal relationship between the volume of some products sold and the progress of winter can be observed. A mild winter is reflected in a decrease in the sale of calcium chloride and other products (anti-ice, salt and chloride mix, waste salt), while the influence on the sale of salt is indirect.
In the case of other products, CIECH’s revenues and financial results are not influenced by any significant seasonal fluctuations during the financial year. On that account, seasonality plays a relatively small role in CIECH’s overall sales.
5.2 Information about basic products, goods and services
Characteristics of CIECH’s main industries and markets
Soda ash
In the global scale, half of the soda ash manufactured is used for the production of glass (mainly flat and packaging), 10% for soap and cleaning agents and 20% for various chemicals. The structure of application of soda ash has not changed significantly over many years. Similarly, no significant changes in the structure of application of soda ash are expected in the coming years.
Structure of global soda ash consumption
Other Flat glas 20% 21%
Packaging glass 23% Chemicals 20% Other types of glass Soap and cleaning 6% agents 10%
In Europe, more soda ash is used for manufacturing glass (mainly packaging glass) but less for producing soap and cleaning agents.
Structure of European soda ash consumption
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Other 11% Flat glass 21%
Chemicals 21% Packaging glass 32% Soap and cleaning agents Other types of glass 6% 9%
Global soda ash production capacities are estimated at approx. 63 million tons: Asia – 31 million tons (49%), Europe – 15 million tons (24%) and North America – 14 million tons (22%).
Global soda ash production capacities
Latin America 0,3%
Europe Middle East 24% 3%
Africa 2%
Asia America 49% 22% Oceania 0,6%
The production of soda ash has been characterised for many years by stable and high growth dynamics on a global scale. The average annual production increase between 2004 and 2008 amounted to approx. 5%. 2009 saw a reversal of the growth trend as result of the global economic crisis. Estimates indicate a fall in global production in 2009 by at least 9-10% in comparison to the previous year.
The European soda ash market is highly concentrated and controlled only by a few manufacturers. The leading producer of soda in Europe is Solvay, with a production capacity of 5.6 million tons per annum. The Ciech Group is the second largest soda manufacturer, with a production capacity of 2.2 million tons, located in Poland (two plants), Romania and Germany. Sisecam/Soda Sanayi ranks third with a total production capacity of 1.6 million tons. After closing its plant in the Netherlands, TATA’s (India) European production capacities amount to 1 million tons of soda ash. Poland is among the leading European manufacturers of soda ash, with a production capacity of over 1.2 million tons per annum. Higher production capacities can only be found in Russia, Germany, France, Bulgaria and Turkey.
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Production capacities of the largest European soda ash manufacturers in 2009
in thousands of tons 6000 5000 4000 3000 2000 1000 0 Solvay Ciech Sisecam TATA Novacap GHCL
The global consumption in 2009 (according to early estimates) decreased by 9.5% in comparison to the previous year. Significant drops have been recorded in Europe and North America and smaller drops in Asia. According to estimates, only 74% of the global production capacities were used in 2009. As a result of falling demand in many local markets, an oversupply of soda ash was recorded. There were significant changes in terms of prices. At the beginning of 2009, as a result of a high demand over the whole of 2008, prices for soda ash remained stable at a high level. However, after Q1 2009 the quotations gradually dropped due to weakening demand and growing production surplus.
The demand for soda ash depends mainly on the demand for flat and packaging glass. Customers for flat glass include the construction and automotive industries. These industries’ high sensitivity to changes in the economic situation is decisive for changes in demand for soda ash. Short-term prospects for the construction market may seem bleak but in the long term Poland and other Central and Eastern European markets still have a significant growth potential. Significant uncertainty is seen in the automotive industry, where despite a boom period in some local European markets in 2009 the coming years will likely see stagnation or a fall in demand resulting from the expiry of schemes promoting the sales of new cars (subsidies schemes). The market for glass packaging is strictly linked to individual consumption. The consumption of packaging glass per capita (30 kg) in Poland is lower than that in Western European countries (45 to 60 kg per capita), which means that this market has great potential in Poland. Experts forecast an increase in the consumption of glass packaging, which will be driven by a growth in consumer markets. The cleaning agents sector proved to be the most resistant sector to the effects of the global crisis as it recorded a mere 3% fall in demand in 2009. American soda may provide a threat to European manufacturers of soda ash. Soda imports from the USA to the European market over 10 months of 2009 increased by more than 50% in comparison to the whole of 2008.
Average annual dynamics of change in demand for soda ash Previous years Long-term forecast World 5% 3-4% Europe 2% 1.5% Poland 3% 1.5-2%
It can be expected that 2010 will bring a slight improvement to the soda ash market globally. However, a major recovery of demand will start in 2011. Experts forecast that in the coming years the global demand for soda ash will continue to grow by 3-4% per annum on average. China will record the highest growth (6%). Somewhat lower dynamics will be recorded in South America (3%) and other Asian countries (2-3%). A weak growth in demand of up to 1% annually is forecast for North America and Western Europe. In Central and Eastern Europe, the demand for soda ash will increase at a rate of at least 2% annually.
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Ciech Group’s European competitors in the soda ash market in 2009 (production capacities in thousands of tons/year)
Solvay (5560)
Ciech (2200)
Sisecam (1600)
TATA (1000) Pikalevo (200)
Inni Berezniki (500)
Bernberg (540) Sterlitamak (1500) Ciech (1200) Northwitch (1000) Rheinberg (600)
BASF(20) Sodawerk ( 600 )
Dombasle (700) BASF (35) Lisichansk (250) GHCL (300) Novacap (600) Crimsoda (7 00 ) USG ( 400 ) Torrelavega (950) Rosignano (1020 ) Devnya* (1350) Sisecam/Lukavac (260) Eti Soda (500)
Povoa (240) Sisecam/Soda Sanayi (1000)
* Devnya – szacunki: Solvay (75% tj.1010 tt) i Sisecam (25% tj.340) tt)
Toluene diisocyanate (TDI) On a global scale approx. 80% of TDI is used for the production of soft polyurethane foam applied in the production of furniture, car equipment, floor lining, mattresses and packaging. Moreover, TDI is used for the production of coatings – paints, adhesives, binders and sealing compounds.
Structure of global TDI consumption
Other (paints, Soft foam (furniture) elastomers, sealing) 31% 23%
Soft foam, other Soft foam 9% (mattresses) 23% Soft foam (cars) 14%
It is estimated that the current global TDI production capacity amounts to approx. 2.2 million tons, of which the largest portion is located in Asia – slightly below 50% (mainly in China). The share of European countries as well as North and South America is similar – approx. 25%. By 2013, the global production capacities may exceed 3 million tons, while Asia’s share will exceed 50%, if all planned investments are completed.
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Struktura geograficzna mocy produkcyjnych TDI w 2009r.
Chiny Azja (bez Chin) 20% 29%
Ameryka Europa 25% 26%
The world’s leading businesses, whose total production capacity amounts to almost 2/3 of the global capacity, are: BASF – 560 thousand tons/year (China, USA, Korea, Germany), Bayer – 400 thousand tons (USA, Germany), MITSUI – 250 thousand tons/year (Japan), DOW Chemical - 170 thousand tons/year (USA, Brazil). The sole Polish producer of TDI is Zakłady Chemiczne Zachem from the Ciech Group (75 thousand tons/year since 2009).
Ciech Group’s (Zachem’s) European competitors in the TDI market in 2009 (production capacities in thousands of tons/year)
Bayer (135)
Bayer (65) Zachem (75) BASF (80)
BorsodChem (90) Perstorp (125)
According to estimates, the global demand for TDI in 2009 fell to slightly over 1.6 million tons and made up only approx. 75% of the existing production capacities. The domestic TDI market is estimated at approx. 45 thousand tons. The leading supplier is the Ciech Group, with a 25-30% share. The remaining quantities are imported mainly from Hungary, France and Germany.
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Average annual dynamics of change in demand for TDI (by quantity) 5 previous years Long-term forecast World 4%-5% 1%-2% Europe 4%-5% 0%-1% Poland 6% 2% Mineral fertilisers The fertilisation structure in Europe is diverse. The greatest share belongs to nitrogen – 71%, then potassium – 15% and phosphorus – 14%. In Poland less nitrogen and more phosphorus and potassium is used. The share of the main fertilising components amounts to 58%, 20% and 22% respectively. The 2008/2009 season saw significant changes in the fertilisation structure in Europe (including Poland). A major growth in the importance of nitrogen fertilisation over other mineral components (phosphorus and potassium) was recorded.
3000 2799 Consumption of fertilisers in selected European countries in thousands of tons of NPK (2008/09) 2500 2262 1904 1870 2000
1500 1252 1078 1000 442 315 500 241 175
0 France Germany UK Czech Denmark Republic
The largest quantities of fertilisers in Europe (per pure component) are consumed in France and Germany (2.8 and 1.9 million tons of NPK respectively). Poland is among the leading consumers with approx. 1.87 million tons of NPK. After several years of strong growth, the last 2008/2009 season brought a change to the previous market trend. There was a significant reduction in demand for mineral fertilisers as a result of the global economic crisis. It is estimated that the aggregated global demand for fertilisers decreased by nearly 7%. The steepest decline was recorded in potassium (20%) and phosphate (10%) fertilisers. The consumption of fertilisers containing nitrogen decreased slightly (by 1.5%). The market downturn had its strongest impact on phosphate and potassium fertilisers because a periodic reduction in these active substances does not affect the crop yield. This is not the case with nitrogen, which is decisive for the fast growth of plants. High diversification in changes in demand for mineral fertilisers was recorded in the individual regions. Southern and Central Asian as well as Eastern European countries had more customers for mineral fertilisers than in the previous season, by 7% and 11% respectively. Demand in Africa remained unchanged, while in other regions it dropped. The relatively mildest decline was recorded in China and other Eastern Asian countries (by 4.7%). The steepest declines were recorded in North America and Latin America (by 15% and 14% respectively) and in Western Asia (by 11%).
The effects of the global crisis were most pronounced in Western and Central European countries, for which the 2008/2009 season proved unfavourable. Total consumption of mineral fertilisers was lower than in the previous season by nearly 23%. There was a steep decrease in demand for potassium (by more than 42%) and phosphate (by 40%) fertilisers. The decline in the consumption of nitrogen fertilisers was milder (by 12%). Some European producers of fertilisers withheld their production due to low demand and considerable stocks of goods in own warehouses and at their dealers. The global fall in demand for fertilisers combined with growing supply and low profitability of plant production resulted in price reductions. Over 12 months of 2009, the prices of fertilisers in global markets were significantly reduced, for various types of fertilisers by more than 50%.
Consumption of mineral fertilisers in Europe (in millions of tons of NPK) 2009/2010 2010/2011 % 2007/2008 2008/2009 % change % change forecast forecast change N 11.6 10.2 -11.7 10.5 2.3 10.6 1.8
P2O5 3.3 2.0 -39.7 1.9 -3.3 2.1 10.4
K2O 3.8 2.2 -42.3 2.0 -8.6 2.3 12.7
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N+P+K 18.7 14.4 -22.9 14.4 -0.2 15.0 4.5
The results of the crisis in the European and global fertilisers markets also affected Polish producers. According to data for 12 months of 2009, fertiliser production was significantly reduced. The steepest reduction was recorded in the production of phosphate (by 54%) and potassium (by 41%) fertilisers. A milder decrease was recorded in nitrogen fertilisers (approx. 11%). According to the data of the Central Statistical Office, in the last season 2008/2009 the consumption of fertilisers in Poland reached 117.9 kg NPK per 1 ha of arable land, which is a decrease of 11% in comparison with the previous season. A drop in consumption was recorded in all groups of fertilisers: nitrogen (by 4%), phosphate (by 19%) and potassium (by 20%).
Experts of the fertiliser industry expect the 2009/2010 season to experience a slight improvement in the fertilisers market. Preliminary forecasts for global consumption show a 1% increase. An upward trend in phosphate fertilisers (+3%) and a continued improvement in nitrogen fertilisers (+1.6%) are expected. Potassium fertilisers, on the other hand, are expected to see another year of decline (-4.5%). Growth will be recorded in North America as well as Western and Southern Asian markets. A major fall is expected in Latin America. Other regions will record varying levels of growth and decline in demand, depending on the type of fertilisers.
Forecasts for the upcoming 2010/2011 season are unclear, although a return of the upward trend is assumed. It is expected that the two-year downward trend in demand for potassium fertilisers will be reversed (increase by 13.5%) and the demand for nitrogen and phosphate fertilisers will grow (by 2.6% and 6.2% respectively). Growth is forecast for all regions and it should be encouraged by the development of the biofuels market and the absence of balance in the food market globally. Ciech Group’s European competitors in the market of phosphate and compound fertilisers in 2009 (production capacities in thousands of tons/year)*
Yara (5300 )
Fertiberia (280 P 2O5)
BASF (275 P 2O5)
Gr. Ciech (360) (1500) (2500) Others
Police (1360) (300) Zuid-Chemie (500) Gr. Ciech (360) (300) Fosfan (130) Luvena (300) Siarkopol (250) Prayon (145 P 2O5)
Rosier (35 P 2O5) Agrolinz Azomure (400) PEC-Rhin (200) Ina Kutina (700 )
(300) Agropolychim (125 P 2O5)
PFI (600) Fertiberia (280 P 2O5) Toros (1400)
* thousands of tons of mass, unless indicated: P 2O5
Table 5.2.1. Ciech S.A.’s sales structure of goods and materials between 01.01.2009 and 31.12.2009 Quantity in Name of product, group of products, goods, services Net sales % share thousand tons TDI 62.5 514,305 27.05% Dense soda ash 653.3 512,949 26.98% Light soda ash 219.2 167,103 8.79% Epoxy resins 21.8 149,950 7.89%
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Dry salt 317.1 93,618 4.92% Raw materials for the production of fertilisers 75.2 71,315 3.75% Baking soda 70.4 66,349 3.49% Other - 325,487 17.12% Total 1,901,077 100.00% Table 5.2.2. Ciech S.A.’s sales structure of goods and materials between 01.01.2008 and 31.12.2008 Quantity in Name of product, group of products, goods, services Net sales % share thousand tons
Dense soda 879.7 541,111 26.34% TDI 49.4 476,441 23.19% Raw materials for the production of fertilisers 285.1 304,128 14.81% Light soda 247.8 154,531 7.52% Epoxy resins 13.6 104,654 5.09% Dry salt 281.3 78,196 3.81% Fertilisers 47.5 67,174 3.27% Baking soda 68,4 48,416 2.36% Other - 279,498 13.61% TOTAL 2,054,150 100.00%
5.3 Information about changes in sales markets
Table 5.3.1. Ciech S.A.’s net sales between 01.01.2009 and 31.12.2009 Market Net sales (PLN ‘000) Goods and materials Products and services domestic 855,003 14,964 export: 981,930 49,180 - European Union 676,160 3,028 - Other European countries 12,313 36,905 - Africa 50,874 9,247 - Asia 184,439 - Other 58,144
Table 5.3.2. Ciech S.A.’s net sales between 01.01.2008 and 31.12.2008 Market Net sales (PLN ‘000) Goods and materials Products and services domestic 1,076,485 18,051 export: 913,521 46,093 - European Union 648,015 8,989 - Other European countries 71,106 3,870 - Africa 22,620 33,234 - Asia 105,042 - Other 66,738
5.4 Information about changing sources of supply in production materials, goods and services
Table 5.4.1. Ciech S.A.’s net purchases between 01.01.2009 and 31.12.2009
Market Goods and materials Products and services domestic 1,426,151 248 import: 139,563 - - European Union 36,229 248 - Other European countries 55,555 -
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- Africa 46,539 - - Asia 1,240 - - Other - -
Table 5.4.2. Ciech S.A.’s net purchases between 01.01.2008 and 31.12.2008
Market Goods and materials Products and services domestic 1,352,910 414 import: 376,055 - - European Union 63,343 414 - Other European countries 140,449 - - Africa 149,885 - - Asia 22,370 - - Other 8 -
Table 5.4.3. Ciech S.A.’s largest suppliers between 01.01.2009 and 31.12.2009
Supplier Net purchase Share Relationship with CIECH S.A.
Soda Polska Sp. z o.o. 572,024 37% Subsidiary ZACHEM S.A. 488,630 31% Subsidiary Other 505,308 32% - Total 1,565,962 100% -
Table 5.4.4. Ciech S.A.’s largest suppliers between 01.01.2008 and 31.12.2008
Supplier Net purchase Share Relationship with CIECH S.A.
Soda Polska Sp. z o.o. 665,893 39% Subsidiary ZACHEM S.A. 454,524 26% Subsidiary Other 608,962 35% - Total 1,729,379 100% -
6. Investment activity and description of the main capital investments and methods of their financing
6.1 Investments in fixed and intangible assets
The total investment expenditure of CIECH S.A. in 2009 amounted to PLN 3,670 thousand. The main investment projects included the Company’s IT development (completion of development of an application for consolidation and controlling) as well as the implementation of solutions to improve data security in CIECH S.A.’s IT systems. In addition to IT expenditures, preparations for the construction of CIECH S.A.’s office at ul. Pow ązkowska were under way.
6.2 Description of the main capital investments and methods of their financing
Capital investments and divestments made in the current reporting period and description of the methods of their financing
The strategy of CIECH S.A. and the Ciech Group defines the main growth directions and capital investment and divestment activities in relation to companies producing and trading in products from the so-called “basic portfolio” classified into groups of goods by divisions operating within CIECH S.A. The actions undertaken in 2009 were aimed at integration within the Soda Division, which significantly contributed to the strengthening of its structure, allowing it to effectively compete with the major market players. In addition, the performance of obligations taken in the previous years within the Organic Division continued – fulfilment of the conditions of privatisation agreements concerning companies forming the Division (ZACHEM S.A. and Z. Ch. „Organika-Sarzyna” S.A.) and integration of the “Dye Business”. In September 2009 a new company – Boruta Zachem Kolor Sp. z o.o. – was
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established as a result of a merger between Boruta-Kolor Sp. z o.o.(acquired company) and Zachem Barwniki Sp. z o.o. (acquiring company), consolidating the Group’s entire dye business, which is planned for divestment. Measures organising the Group’s structure continued, mainly with regard to further divestment of companies not being part of the core business.
Capital divestments in CIECH
• Sales of s stake of shares of Z.Ch. Police S.A. In December 2009, CIEH S.A. sold on the Stock Exchange its stake of 49,197 (forty-nine thousand, one hundred and ninety-seven) shares of Zakłady Chemiczne POLICE S.A., which make up 0.07% of the Company’s share capital. As at December 31 st , 2009, CIECH S.A. held no shares of Z.Ch. POLICE S.A.
6.3 Capital investments and divestments planned in the next 12 months
The investments and divestments planned for the next 12 months will be realised in accordance with the updated Strategy of CIECH Group’s Development, whose objective is to increase the Group’s goodwill. The conducted works are aimed at completing the implemented projects and obtaining new ones, both in Poland and abroad.
The small-scale investment activities are connected with the acquisition of manufacturers who will strengthen the position of CIECH S.A. and of the Ciech Group in the current areas of its activity and will make it possible to develop the Group’s activity in key segments. Divestment activities, on the other hand, are connected with CIECH’s intention to abandon none-core business. As part of implementing projects approved for the next 12 months, CIECH S.A. plans to: • Continue to expand the Silicates and Glass Division by adding a manufacturer of niche glass packaging (HS Wymiarki S.A.) • Sell the providers of services, such as CIECH SERVICE Sp. z o.o., TRANSCLEAN Sp. z o.o. and Transoda Sp. z o.o.
• Realise the process of selling the shareholding in PTU S.A. by the subsidiaries JANIKOSODA S.A. and SODA M ĄTWY S.A. • Sell the stake of shares in POLFA Sp. z o.o. • Realise the process of the sale of shares in Cheman S.A. by a subsidiary, CIECH FINANCE Sp. z o.o. • Realise the process of the sale of shares in ELZAB S.A. by CIECH S.A.’s subsidiary – Polsin Private Limited, Singapore.
6.4 Feasibility analysis of investment projects
CIECH S.A. will finance its investment projects from the funds obtained through operating activity and divestments. The Company will also use other available sources of financing, paying special attention to financial liquidity and the level of external debt.
7. Funds management in Ciech S.A.
7.1 Loans, borrowings, sureties and guarantees
Table 7.1.1. Borrowings granted by Ciech S.A. in 2009 Granted borrowing in PLN Borrower’s Additional Borrower Maturity date according to the Terms of granting relationship with information exchange rate as CIECH S.A. at 31.12.2009 Interest amounting to S.C. Uzinele Sodice EURIBOR 3M + margin, Govora – Ciech EUR 11,000 31.12.2010 45,190 payable at the end of each Subsidiary Chemical Group . quarter, not repaid interest S.A. is capitalised at the end of
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the year
Maturity: December Fixed interest rate, interest Sodawerk Holding 31 st , 2009 (repaid on - payable on the repayment Subsidiary EUR 36. Stassfurt GmbH rd December 23 , 2009) date SODA Maturity: December Fixed interest rate, interest DEUTSCHLAND 31 st , 2009 (repaid on - payable on the repayment Subsidiary EUR 580 CIECH GmbH December 8 th , 2009) date Maturity: February 24 th , Interest amounting to 2010, amended by an WIBOR 1M + margin, Chemia.com S.A. 500 Subsidiary annex to February 24 th , payable within 14 days from 2011 the issue of a debit note
Data according to NBP’s average exchange rate of 31.12.2009.
Table 7.1.2. Borrowings granted to Ciech S.A. in 2009 Amount of borrowing Borrower’s Additional Lender Maturity date including Terms of granting relationship with information capitalised CIECH S.A. interest in PLN Final maturity: September 30 th , 2009 Interest amounting to Z.Ch. Alwernia S.A. 15,633 Subsidiary PLN 15,000 . (compensation in WIBOR 1M + margin September 2009) Z. Ch. “Organika- Maturity under Annex Interest amounting to 15,205 Subsidiary PLN 15,000 Sarzyna” S.A. 5: 15.05.2010 WIBOR 1M + margin
Table 7.1.3. Loan agreements concluded and annexed by Ciech S.A. in 2009 Loan Date of Loan Bank Type of loan currenc Interest rate Maturity agreement/ann amount y ex WIBOR 1M + bank’s Bank Handlowy SA Overdraft 42,000 PLN 30.04.2010* 15.12.2009 margin
WIBOR 1M + bank’s Bank Millenium SA Overdraft 30,000 PLN 30.04.2010* 16.12.2009 margin
WIBOR 1M + bank’s Bank Pekao SA Overdraft 80,000 PLN 30.04.2010* 15.12.2009 margin
Working 800 EURIBOR 3M + bank’s Bank Pekao SA 3,287 30.04.2010* 15.12.2009 capital loan EUR margin
WIBOR 1W + bank’s BNP Bank Polska Overdraft 30,000 PLN 30.04.2010* 15.12.2009 margin
WIBOR O/N + bank’s BRE Bank SA Overdraft 20,000 PLN 30.04.2010* 14.12.2009 margin
10 000 EURIBOR 1M + bank’s Calyon Bank Polska Overdraft 41,082 30.04.2010* 15.12.2009 EUR margin
WIBOR 1M + bank’s DnB Nord S.A. Overdraft 50,000 PLN 30.04.2010* 15.12.2009 margin
WIBOR 1M + bank’s Fortis Bank Polska SA Overdraft 50,000 PLN 30.04.2010* 15.12.2009 margin
WIBOR 1M + bank’s HSBC Bank Polska SA Overdraft 10,000 PLN 20.05.2010* 14.12.2009 margin Agreement WIBOR 1M + bank’s HSBC Bank Polska SA Overdraft 55,000 PLN expired on 22.04.2009 margin 27.10.2009 WIBOR 1W + bank’s ING Bank Śląski SA Overdraft 79,522 PLN 30.04.2010* 15.12.2009 margin
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WIBOR 3M + bank’s Bank Handlowy S.A. Investment 48,077 PLN 13.12.2009 14.10.2009 margin
WIBOR 3M + bank’s Bank Millenium S.A. Investment 48,077 PLN 13.12.2009 14.10.2009 margin
WIBOR 3M + bank’s Bank Pekso S.A. Investment 64,103 PLN 13.12.2009 14.10.2009 margin
* After the signing of an agreement between creditors, the repayment dates for loans will be prolonged by a minimum of 90 days, i.e. until the planned repayment from funds obtained under the loan agreement of 26.04.2010.
Table 7.1.4. Guarantees and sureties granted by Ciech S.A. in 2009
Sureties:
Amount of loans covered Nature of by surety in whole or in Financial terms, including relations Beneficiary’s name specific part Surety period surety fee due to the Principal between CIECH company S.A. and the beneficiary currency in PLN ‘000. ‘000 Payment to CIECH S.A. KREDYT BANK until 30.04.2010 equal to 1% of the surety S.A. Sieradz 3,000 value + PLN 3.5 thousand Cheman S.A. Subsidiary Branch + PLN 2.5 thousand + PLN 62.5 thousand Payment to CIECH S.A. KREDYT BANK until 30.04.2010 equal to 1% of the surety S.A. Sieradz 4,000 value + PLN 3.5 thousand Cheman S.A. Subsidiary Branch + PLN 2.5 thousand + PLN 40 thousand
Payment to CIECH S.A. PKN ORLEN SA 1,200 no fixed term equal to 1% of the surety Cheman S.A. Subsidiary value
Payment to CIECH S.A. equal to 1% of the surety BANK PKO S.A. until 30.04.2010 value (from PLN 2 million) First Branch in 2,000 + PLN 10 thousand on Cheman S.A. Subsidiary Warsaw increase + PLN 4 thousand + PLN 5 thousand on extension S.C. Uzinele Citibank EUR Contract of surety with Sodice Govora – 49,298 until 15.07.2010 Subsidiary HANDLOWY 12,000 Bank Handlowy Warszawa Ciech Chemical Group S.A. BANK PKO S.A. 40,000 until 30.04.2013 Surety for loan ZACHEM S.A. Subsidiary Total Ciech S.A. 99,498
Guarantees:
Total amount of guarantees granted, Nature of backed in whole or in Financial terms, relations Beneficiary’s name specific part Guarantee period including guarantee fee Principal between CIECH due to the company S.A. and the currency PLN beneficiary in ‘000 ‘000.
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Total amount of guarantees granted, Nature of backed in whole or in Financial terms, relations Beneficiary’s name specific part Guarantee period including guarantee fee Principal between CIECH due to the company S.A. and the currency PLN beneficiary in ‘000 ‘000.
S.C. Uzinele Payment to CIECH S.A. Sodice Govora – Citibank Romania EUR 12,325 until 26.05.2010 equal to 0.5% of the Ciech Chemical Subsidiary S.A. 3,000 surety value. Group S.A. - Romania
SG Equipment S.C. Uzinele Leasing Polska Sp .z EUR Sodice Govora – o.o. – Warsaw 6,845 until 30.09.2011 - Ciech Chemical Subsidiary 1,666 Group S.A. -
Romania
The surety was estimated on the basis of semi-annual deliveries under the Air Products, LLC contract concluded by and Air Products USD 109,737 2013 ZACHEM S.A. in 2004, ZACHEM S.A. Subsidiary Chemicals Europe 38,500 and annexed in B.V. October 2007. The value of annual supplies amounts to USD 77 million To the loan agreement Soda EUR rd COMMERZBANK AG 102,705 31.01.2013 of January 23 , 2008 Deutschland Subsidiary 25,000 for EUR 75 million Ciech GmbH Guarantee of payment expired on for liquid chlorine for PCC ROKITA S.A. 4,500 ZACHEM S.A. Subsidiary 30.03.2010 the production of ECH – 0.5% commission S.C. Uzinele Sodice Govora – ING Lease Romania Payment collateral to 2,237 9,189 30.04.2013 Ciech Chemical Subsidiary IFN S.A. lease agreements Group S.A. - Romania Total CIECH S.A. 245,301
In 2009, Ciech S.A. did not receive any guarantees or sureties.
7.2 Information on the issue of securities
In 2009, Ciech S.A. did not issue securities.
7.3 Financial instruments
CIECH’s financial results may be subject to fluctuations due to changing market conditions, in particular, product performance, exchange rates and interest rates. Through risk management the Company optimises the variability of future cash flows and limits potential economic losses arising from changing market conditions.
The sources of currency risk to which the Company was exposed in 2009 included: purchase of raw materials, product sale, loans and borrowings raised and cash in foreign currencies.
In 2009, CIECH S.A.’s portfolio included FX put options on EUR/PLN and the issued call options on EUR/PLN (as a result of restructuring, transformed into synthetic forward transactions), which hedged up to 70% of CIECH’s operating currency exposure. Under the conditions of the status quo agreement of August 14 th , 2009, CIECH S.A. restructured its option transactions, as a result of which payments by CIECH S.A. due to negative value of the concluded option contracts were withheld.
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In CIECH derivatives are measured at fair value with the use of models of financial instrument valuation using generally available data from active markets.
The Company applies hedge accounting in order to limit the variability of revenues generated by the Company, resulting from exchange rate fluctuations on the market. The analysis of the effect of applying hedge accounting is presented in section 31.2 of CIECH S.A.’s financial statements for 2009.
Information about financial instruments has been presented in detail in notes to the financial statements in section 31.1.
8. Financial risk management in Ciech S.A.
CIECH S.A. actively manages operational and financial risk, striving to optimise cash flows and maximise the Company’s goodwill. In order to ensure constant risk monitoring the Management Board of CIECH S.A. appointed a Risk Committee, which is responsible for the implementation of risk management procedures. The Risk Committee in the course of its work identified and estimated operational and financial risks to which CIECH is exposed. In the current activity the individuals responsible for risk management are risk bearers, who submit periodic reports to the Risk Committee. The Risk Committee decides about the strategies of managing particular risks and submits quarterly reports to the Management Board of CIECH S.A. on the effectiveness of the risk management system.
As far as financial risks are concerned, the Company is exposed to the following risks: • loan risk, • liquidity risk, • capital risk, • market risk, including: • currency risk, • interest rate risk, • commodity price risk.
The aforesaid categories of risk have been presented in detail in notes to the financial statements in section 30.
8.1 Methods of securing material types of planned transactions in relation to which hedge accounting is applied
Transactions secured by hedge accounting are defined as highly reliable transactions. Their occurrence is anticipated in the Company’s Financial Plan. Moreover, these are transactions with regular customers, which makes their occurrence probable.
9. Explanation of differences between the financial results and previously published forecasts
Ciech S.A. did not publish forecasts for separate results.
10. Employment information
At the end of 2009, Ciech S.A. employed 285 people. In the comparable period, i.e. at the end of 2008, the company employed 301 people. The decrease in employment by 16 people was the result of changes in CIECH S.A.’s organisational structure in 2009 and the expiry of agreements concluded for a definite time that were not extended.
11. Changes in Ciech S.A.’s organisation, management and financial assets
11.1 Changes in the basic principles of managing Ciech S.A. and the Ciech Group
Management principles of the Company and of the Group in 2009 did not change and it is still centred around four divisions, which operate as production and sales centres based on a specific portfolio of products, and around the
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Corporate Centre focused on managing value, finances, corporate image, financial controlling as well as developing and implementing strategies. The divisions’ management operations are implemented based on operating functions, such as production, facilities maintenance, research and development and sales within a specific product segment. The portfolios of products defined for each division have been classified according to parameters ensuring the achievement of strategic goals with regard to increase in value and the development of a competitive and strong player in the chemical market.
11.2 Changes in the organisational affiliations in the Ciech Group
The investment and divestment activities started in 2008 in accordance with the directions of the Ciech Group’s development and consisting in organising the Ciech Group’s structure were continued in 2009.
Results of investments:
• ZACHEM S.A. CIECH S.A. completed a subsequent phase of share purchase from the employees of Zakłady Chemiczne ZACHEM Spółka Akcyjna. The share purchase transaction concluded on March 30th, 2009 was conducted through Dom Maklerski PENETRATOR S.A. As a result of the aforesaid transaction, CIECH S.A. acquired 331,314 shares for a total amount of PLN 1,680 thousand. The acquired shares represent 2.238% of the share capital. Currently, CIECH S.A. holds 87.34% of shares in the share capital of ZACHEM S.A.
• Z.Ch. “Organika-Sarzyna” S.A. CIECH S.A. completed a subsequent phase of share purchase from the employees of Zakłady Chemiczne “Organika-Sarzyna” Spółka Akcyjna. The share purchase transaction concluded on June 16th, 2009 was conducted through Dom Maklerski PENETRATOR S.A. As a result of the aforesaid transaction, CIECH S.A. acquired 402,948 shares for a total amount of PLN 9,268 thousand. The acquired shares represent 4.74% of the share capital. Currently, CIECH S.A. holds 90.87% of shares in the share capital of Z. Ch. “Organika- Sarzyna” S.A.
Hatra Cement i Beton Sp. z o.o. SODA M ĄTWY S.A. acquired 70 shares in Hatra Cement i Beton Sp. z o.o., constituting 29.17% of the share capital, for a total of PLN 70 thousand. The change of the business name of Hatra, Cement i Beton Sp. z o.o. to Zakład Gospodarki Popiołami Sp. z o.o. was registered by the District Court on October 16 th , 2009. On November 12 th , 2009, the Extraordinary General Meeting of Shareholders of Zakład Gospodarki Popiołami Sp. z o.o., passed a resolution on the increase in the share capital by PLN 11,190 thousand through the creation of 11,190 new shares of a nominal value of PLN 1 thousand each. Soda Polska Ciech Sp z o.o. acquired 3,277 shares and the remaining 7,913 shares were acquired by the Shareholder – Lafarge Cement S.A. The increase in share capital was registered on December 16 th , 2009. Soda Polska CIECH Sp. z o.o.’s share changed from 29.17% to 29.28%.
Results of other changes:
• Polskie Konsorcjum Chemiczne Sp. z o.o. On January 5 th , 2009, the Extraordinary General Meeting of Shareholders of Polskie Konsorcjum Chemiczne Sp. z o.o. passed a resolution on an increase in the share capital by PLN 50 thousand through the establishment of 1,000 new shares of a nominal value of PLN 50 for each. The pre-emptive right of the former Shareholder (CIECH S.A.) was excluded. All new shares were planned to be acquired by new Shareholders, i.e. Zakłady Azotowe Kędzierzyn S.A. and Zakłady Azotowe w Tarnowie-Mo ścicach S.A., in the quantity of 500 shares for each Shareholder. On January 5 th , 2009, the new Shareholders made statements on their entry to a limited liability company and acquisition of new shares in the company. The share capital of Polskie Konsorcjum Chemiczne Sp. z o.o., after registering the resolution on increasing the share capital in the National Court Register, amounts to PLN 100 thousand and is divided into 2,000 shares of a nominal value of PLN 50 each. The shares in the share capital were acquired as follows: • CIECH S.A. – 1,000 shares that account for 50% of the share capital, • ZAK S.A. – 500 shares that account for 25% of the share capital, • ZAT S.A. – 500 shares that account for 25% of the share capital. Before the registration of the share capital increase, the sole Shareholder of Polskie Konsorcjum Chemiczne Sp. z o.o. was CIECH S.A.
• Soda Deutschland Ciech Group On February 18 th , 2009, CIECH S.A. (SDC’s controlling shareholder – 92%) and Jochen Ohm (SDC’s minority shareholder – 8%) reached a settlement pursuant to which CIECH S.A. acquired 8% of shares in Soda Deutschland Ciech GmbH and became the company’s sole shareholder. The settlement also discussed: - resignation of Jochen Ohm from all functions and posts in Soda Deutschland Ciech Group,
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- final settlement and ending of collaboration between CIECH S.A. and its subsidiaries, on the one hand, and Jochen Ohm, on the other hand; - CIECH S.A. obtained the title of ownership to the land where voids held for sale are located; - CIECH S.A. acquired rights to 100% of profits on the sale and use of the voids. The value of the settlement amounted to EUR 12.5 million. The holding of 100% of shares in Soda Deutschland Ciech GmbH by CIECH S.A. and resignation of Jochen Ohm from managerial functions enable full operational control in Soda Deutschland Ciech GmbH, facilitate actions aimed at reducing costs and increasing performance, the process of integrating the Soda Division, the release of synergy effects (especially, in such areas as sales, supply, purchases, technology), starting of new businesses as well as sales of salt voids. Revenues from the sales of salt voids will be allocated to reducing the Group’s debt.
On November 13 th , 2009, the increase in share capital of Soda Deutschland Ciech GmbH to the amount of EUR 15,025 thousand through the creation of a new (fourth) share of a nominal value of PLN EUR 15,000 thousand was registered by the German Register Court. This share was acquired by the sole shareholder of SCD – CIECH S.A. The increase in the share capital was made through the adoption of a resolution of the Extraordinary General Meeting of Shareholders of Soda Deutschland Ciech GmbH of November 4 th , 2009. CIECH S.A. fully covered the liability incurred in connection with acquiring the new share by paying cash obtained from a portion of borrowing repaid by Soda Deutschland Ciech (the borrowing of EUR 95,100 thousand was granted by CIECH S.A. in December 2007).
• CIECH FINANCE Sp. z o.o. In Q1 2009, the share capital of CIECH FINANCE Sp. z o.o. was increased. All shares created as a result of the share capital increase were acquired by CIECH S.A. The share capital of CIECH FINANCE Sp. z o.o. was increased by PLN 1,000 thousand by way of a resolution of the Extraordinary General Meeting of Shareholders of January 21 st , 2009. The increase was registered in the National Court Register on February 25 th , 2009.
On April 1 st , 2009, the Extraordinary General Meeting of Shareholders of CIECH FINANCE Sp. z o.o. increased the company’s share capital by PLN 600 thousand. All shares created as a result of the share capital increase were acquired by CIECH S.A. The share capital increase was registered in the National Court Register on April 24 th , 2009. The 100% owner of the company will still be CIECH S.A. After the increase, the share capital of CIECH FINANCE Sp. z o.o. amounts to PLN 1,750 thousand.
On October 19 th , 2009, the Extraordinary General Meeting of Shareholders adopted a resolution on an increase in the share capital by PLN 250 thousand through the creation of 500 new shares of a nominal value of PLN 500 each. The above shares were acquired by the previous sole shareholder, CIECH S.A., in exchange for cash. CIECH S.A.’s share remains the same. On January 8 th , 2010, the increase in share capital was registered by the District Court.
• AGROCHEM Sp. z o.o. in Człuchów On August 4 th , 2009, the Extraordinary General Meeting of Shareholders of Grochem Sp. z o.o. in Człuchów, by way of Resolution no. 2, increased the company’s share capital from PLN 500 thousand to PLN 10,000 thousand, i.e. by PLN 9,500 thousand, through the creation of 19,000 new shares of the nominal value of PLN 500 each. The shares from the share capital increase were acquired by the former shareholder of GZNF “FOSFORY” Sp. z o.o. and paid up in full in cash. The decision to register the said share capital increase in the National Court Register was made on September 14 th , 2009.
• ZACHEM Barwniki Sp. z o.o. and BORUTA-KOLOR Sp. z o.o. On September 23 rd , 2009, Extraordinary General Meetings of Shareholders took place in the companies: ZACHEM Barwniki Sp. z o.o. and BORUTA-KOLOR Sp. z o.o. Resolutions were passed as to merging ZACHEM Barwniki Sp. z o.o., the acquiring company, and BORUTA-KOLOR Sp. z o.o., the acquired company. The merger was a result of an increase in the share capital of ZACHEM Barwniki Sp. z o.o. to PLN 20,105 thousand, through the creation of 15,677 new shares of the value of PLN 1 thousand each. Another Extraordinary General Meeting of Shareholders on November 20 th , 2009 passed a resolution on adopting amendments to the Articles of Association, including change of the company’s business name, which from the date of registering at NCR has the following wording: Boruta Zachem – Kolor Sp. z o.o. On December 1 st , 2009, the increase in share capital and amendments to the Articles of Association, including change of the company’s business name to Zachem Boruta – Kolor Sp. z o.o., were registered by the District Court. As a result of the merger of the companies, Zachem Boruta – Kolor Sp. z o.o., under article 494 § 1 of the Commercial Companies Code, undertakes all rights and obligations of BORUTA-KOLOR Sp. z o.o. as of the merger date. ZACHEM S.A. became the owner of the new shares without any obligation to acquire or pay for the new shares of ZACHEM Barwniki Sp z o.o. As of December 1 st , 2009, ZACHEM S.A.’s share in the share capital of Zachem Barwniki – Kolor Sp. z o.o. was 95.52%. Additionally, at the date of the merger of the companies, BORUTA-KOLOR Sp. z o.o. held 800 shares in ZACHEM Barwniki Sp. z o.o. Those shares were acquired from BORUTA–KOLOR Sp. z o.o. by ZACHEM Barwniki Sp. z o.o. to be redeemed. As at December 31 st , 2009, Zachem Boruta – Kolor Sp. z o.o. (old name: ZACHEM Barwniki Sp. z o.o.) held 800 equity shares.
• BORUTA-KOLOR Sp. z o.o.
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A motion for the removing BORUTA-KOLOR Sp. z o.o. from the Register of Entrepreneurs was submitted. As at December 31 st , 2009, the company was not removed from the National Court Register.
11.3 Information about the acquisition of equity shares of the parent company
In the financial year 2009, the Company did not acquire equity shares.
11.4 Description of the use of issue proceeds by the Issuer
The issue prospectus of CIECH S.A. was made available on January 6 th , 2005 and on February 10 th , 2005 the shares of CIECH S.A. had their debut on the Warsaw Stock Exchange. The Issuer defined in the prospectus an investment plan covering a range of projects of the total value of expenditures in the amount of PLN 500-600 million, realised in 2005-2006. To finance the investment plan, CIECH S.A. used all its issue proceeds as well as its own and borrowed funds in the form of long-term investment loans. In 2009, issue proceeds were no longer used.
12. Development prospects for Ciech S.A.
The growth prospects of CIECH S.A. and the Ciech Group result from their position on the market and in the chemical industry as well as from the forecast conditions of the Group’s business environment in Poland and around the world.
The Ciech Group has a strong position in many product markets and is: − the second European manufacturer of soda ash; − the second or third European manufacturer of baking soda; − the leading Polish manufacturer of vacuum salt; − the sole Polish producer and main supplier of the domestic market in soda ash and baking soda, calcium chloride, TDI, ECH, epoxy resins, glass blocks, sodium tripolyphosphate and non-fertiliser phosphoric acid; − a major supplier of European markets in soda ash and baking soda, TDI, calcium chloride, ECH, non-fertiliser phosphoric acid, glass blocks and lanterns.
In the short-term prospect (1 year), the main factors influencing CIECH’s and the Ciech Group’s business environment will include: − Slow activity of financial markets after the global crisis (negative influence – difficulties in obtaining capital, slowdown of trade exchange; positive influence – considerable revaluation of goodwill – concerns potential investment objectives of the Ciech Group); − Slow economic activity in highly developed countries (negative influence – pressure on reduction of the prices of chemical products; positive influence – moderate costs of petrochemical raw materials, energy and freight); − Slow recovery of the global food demand (negative influence – low prices of chemical fertilisers; positive effect – slowdown of investments in new fertiliser production capacities, more intense integration in the fertiliser industry); − Very slow growth in Europe’s construction markets (low production in the construction industry – a significant direct or indirect customer for the Ciech Group’s products); − Moderate growth in other customer markets for the Ciech Group (furniture, automobile, paint and varnish industry).
Growth in the TDI market is mainly determined by the furniture, mattresses and automotive sectors. We expect a recovery from the slowdown in these sectors in one year.
In the epoxides sector, we are recording growth in the domestic paints and varnishes market at a rate higher than in Western Europe. The European market is experiencing oversupply as a result of cheap products from Asia due to unfavourable USD/EUR exchange rates for importers.
A slight increase in demand is expected in the polyester resins sector, whose main customers are the construction, transport and paints industries. The wind energy sector has good prospects too.
The growth in domestic demand for polyurethane foams is expected to be at the level of the GDP growth.
In the opinion of CIECH S.A., factors favouring further development and strengthening of CIECH’s position on the present and related markets will dominate in the long-term. These factors include:
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− Visible growth of Poland’s GDP (relatively high in comparison to other EU countries, favouring foreign investments in Poland) − Introduction of the Euro (planned elimination of currency risk connected with export within the EU, vital for CIECH) − Increase in global demand for food and biofuels (increase in the consumption of fertilisers and plant protection chemicals); − Upturn in the construction industry in Central and Eastern Europe (relatively low level of building production per capita in the region; organisation of Euro 2012 in Poland and Ukraine); − High potential of growing demand for chemicals in Poland (where their consumption per capita, amounting to EUR 500, is still approx. 3-4 times lower than in Western Europe).
12.1 Characteristics of external and internal factors material for the development of Ciech S.A.
General external factors Situation in industries that are CIECH’s customers in Poland Poland is the biggest sales market for CIECH. CIECH’s largest domestic customers are the chemical industry, plastics industry, glass industry and agriculture. Development in these economic sectors depends on the economic situation in Poland. Industrial production in fixed price terms within 12 months of 2009 decreased by 3.2%, according to the 2007 Polish Classification of Economic Activities, in comparison with 2008 (in the analogous period of 2008 it increased by 2.5% according to the 2004 Polish Classification of Economic Activities). Respectively, the dynamics of the chemical industry amounted to: in the production of chemicals and chemical products (excluding pharmacy) minus 5.0% and in the production of rubber products and plastics minus 1.9%. In the same period, pharmaceutical production grew by 7.2%. The year 2009 was characterised by a slowdown in Poland’s economic development to 1.7% GDP (5% in 2008, according to the Central Statistical Office). A visible decrease could be observed in the sales of the chemical industry (by approx. 3%), which usually develops in line with the whole economy. A slight economic boost and GDP growth at the level of 2% or slightly higher are expected in 2010.
Economic situation in Europe and around the world CIECH’s business is largely based on the sales of chemical products on foreign markets. The volume and profitability of sales depend on the global economic situation in Europe and around the world. A global economic downturn usually affects the demand for raw materials on international markets, thus reducing CIECH’s export turnover. According to the forecasts of CEFIC – European Chemical Industry Council (published in November last year), in 2009, the global GDP will decrease by 2.5% with the prospect of growth in 2010 of 2.2%. Analogous GDP rates for the European Union (27) will be: minus 4.2% in 2009 and plus 0.6% in 2010. The latest forecasts of other international institutions indicate that even greater growth may be expected on a global scale. CEFIC’s expectations for the chemical sector in the EU anticipate a decrease in the chemical output, excluding the pharmaceutical industry, of 12.4% in 2009 (4.5% in 2008). In 2010, the recovery of positive rates at the level of 4.7% is expected for this branch of industry. This growth is forecast in all chemical sectors identified by CEFIC. Similar dynamics are expected for global chemical production in 2010 (+4.6% according to American Chemistry Council).
Financial situation of agriculture A portion of CIECH’s revenues covering mineral fertilisers and plant protection chemicals is generated by sales to the agricultural sector. In the opinion of CIECH S.A., in the long-term, the volume of demand for mineral fertilisers in Poland and Central and Eastern Europe should continue to grow. The material factors favouring an increase in the consumption of agrochemicals in Poland and thus the demand for products manufactured by the Ciech Group are processes improving the financial situation and profitability of agricultural production, including: production quoting and direct subsidies. It should translate into a growth of CIECH’s revenues. On the other hand, the absence of a significant improvement in the purchasing power of the agricultural sector may mean stagnation in the demand for fertilisers and plant protection chemicals and, as a result, a stagnation in CIECH’s revenues from agrochemical products. According to the data of the Institute of Agricultural and Food Economics, the market conditions in 2009 improved in comparison to the previous year. Those circumstances, however, haven’t yet translated into an improvement of profitability for the farmers, visibly deteriorated in 2008. After some improvement in spring months, H2 2009 brought more worsening of these conditions. The synthetic index of economic situation in agriculture (SWKR) in December 2009 was slightly higher than a year earlier (an increase from 98.8 to 100.4). In the following quarters, no rapid improvement of agriculture production conditions in Poland is expected.
Economic situation in the raw materials market Import of chemical raw materials to Poland constitutes a significant portion of CIECH’s turnover. The raw materials markets are characterised by a cyclical nature connected with fluctuations of the global economy. The growing prices of raw materials cause a decrease in margins of sales intermediaries and a decrease in demand from customers. On the other hand, falling prices are usually a symptom of decreasing demand and the beginning
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of an economic downturn. The maintenance of a stable pace of economic growth and stable prices of chemical raw materials will have a positive effect on CIECH S.A.’s import of raw materials. Considerable fluctuations of demand and prices caused either by a fast economic growth or economic stagnation will have a negative influence on the trade in chemical raw materials by CIECH S.A. PLN/EUR exchange rates CIECH’s export sales are settled mostly in Euros. A strong Euro means higher profitability of exports, both for CIECH and other manufacturers from the chemical industry in Poland. Furthermore, it increases the volume of CIECH S.A.’s sales to other manufacturers. As a result, the PLN/EUR exchange rate influences the profitability of CIECH’s sales. If the Polish zloty becomes stronger against the Euro, the profitability of exports will probably decline and CIECH’s export volume will decrease.
REACH implementation In accordance with REACH regulation, the Ciech Group Companies which produce substances in quantities exceeding 1,000 tons per year will complete full registration of these substances by December 2010, which will allow them to continue to introduce their own products to the market. The companies perform preparatory tasks connected with this project, participate in forums for the exchange of information about substances, set up by entities that register the same substance, and take part in consortia established for the purposes of common submission of registration data. CIECH S.A. keeps track of the progress of those actions.
Internal factors
Maintaining cost and quality competitiveness The competitiveness of CIECH and the Ciech Group concentrates on basic market factors, i.e. costs, quality, marketing, market position. The most important factors are: cost competitiveness based on the effects of the large scale of manufacturing, specialisation, standardisation and effects of experience, quality leadership and quality control systems, competition based on the enterprise’s market power (market leader), cost leadership and diversification. Competitiveness of companies is to a great extent connected with innovations. Therefore, the basis for competition is innovative product and process technologies. Within the framework of the adopted investment strategy, CIECH’s Companies implement a number of innovative process and product solutions.
Liabilities connected with the purchase of ZACHEM S.A., Z.Ch. “Organika-Sarzyna” S.A., S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. and Soda Deutschland Ciech. Pursuant to the purchase agreements regarding ZACHEM S.A., Z.Ch. “Organika-Sarzyna” S.A., S.C. Uzinele Sodice Govora - Ciech Chemical Group S.A., CIECH S.A. is charged with obligations connected mainly with the implementation of investment packages, employee guarantees and minority interest buyout options. The sales agreement concluded by and between NAFTA POLSKA S.A. and CIECH S.A. contains “a restricting condition”. The restricting condition is calculated as the ratio of long-term capital to fixed assets on the basis of the Separate Financial Statements, prepared according to PAS. Pursuant to the agreement, this ratio is to grow as follows: in 2007 by 20 pp in relation to the ratio calculated as at the date of sale of share, i.e. December 20 th , 2006; in every subsequent year by another 10 pp until 2010 (total growth by 50 pp between 2007 and 2010). CIECH S.A. shall pay NAFTA POLSKA S.A. a penalty amounting to PLN 150 thousand for every full percentage point below the required ratio. Every full percentage point in excess of 10 pp deviation from the required ratio shall be followed by a penalty of PLN 500 thousand. Annex No 1, concluded on December 23 rd , 2009 stipulates that the fulfilment date of the “restricting condition” which was set out in the previous Agreement at December 31 st , 2009 (+40 p.p.), shall be December 31 st , 2010, save that if CIECH S.A. fails to meet the new date, Nafta Polska S.A. shall be entitled to receive a contractual penalty due to non-compliance by CIECH S.A. with the “restricting condition” at the end of 2010, as well as a contractual penalty to which it would be entitled due to non-compliance by CIECH S.A. with the condition at the end of 2009. Additionally, it was agreed that the fulfilment date of the “restricting condition” which was set out in the previous Agreement at December 31 st , 2010, shall be December 31 st , 2011. If the “restricting condition” is fulfilled by December 31 st , 2010, as stipulated by the provisions of the original Agreement (i.e. +50 pp), the “restricting condition”, as at December 31 st , 2011, will not be examined anymore and no contractual penalty for non-observance of the restricting condition in 2009 will be charged. When necessary, CIECH S.A. will provide ZACHEM S.A. with financial support to ensure that the restricting condition is fulfilled.
Detailed information on the obligations assumed by CIECH S.A. has been presented in Ciech’s Annual Report for 2008.
Investment projects and actions connected with obtaining funding from available aid funds One of the important factors which may have an impact on the financial results of CIECH S.A. in this and future years is the completion of the investment projects in CIECH’s subsidiaries. These projects include the following: • utilisation of the TDI production capacity (increased to 75 thousand tons/year) – achieving full production capacity of the extended TDI facility – Q3 2009,
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• utilisation of polyurethane foam production capacity, extended to 25 thousand tons/year, and seizing opportunities resulting from extension of the assortment – investment completed in Q1 2009, • reaching production capacity of 1,200 tons/day (400 thousand tons/year) through the completion of investment projects including: construction of a new steam calciner to replace the gas calciner at S.C. Uzinele Sodice Govora, with a capacity of 600 tons/day, construction of a new absorption column with a capacity of 900 tons/day - Q3-Q4, 2009, • using the opportunity to increase epoxy resin production capacity by 1,000 tons/year through investment in the development of liquid resin warehouse facilities – completed in Q4 2009.
Four agreements for funding Ciech Group’s projects with EU funds were singed by the end of Q4 2009. Three projects involve investments connected with the modernisation of Soda Polska Ciech heat and power plants, including the reduction of their environmental impact. The fourth undertaking is a training project titled “Corporate Mentoring Academy”. The two remaining projects were accepted for funding; they are currently at the stage of signing contracts for financing. The total amount of subsidies granted exceeds PLN 110,000 thousand.
Measures aimed at optimising operating costs On December 1 st , 2009 the negotiation stage was completed and the contracts were signed for consolidated purchase of electricity in the TPA system in 2010 by the Group Companies. PGE ZEŁT Obrót Sp. z o.o. was chosen to be the electricity supplier on the free energy market. The total electricity volume will exceed 450 thousand MWh and the total net value of agreements for the Ciech Group Companies will amount to approx. PLN 103,000 thousand (without VAT). The supplies will be supplemented by an in-house electricity generation by heat and power plants owned by a Group company – Soda Polska Ciech – which will contribute around 450 thousand MWh. The negotiated conditions of energy purchase in the TPA system for 2010 will generate about PLN 10,000 thousand of savings in comparison to the current purchase costs. The optimisation of the electricity purchase costs will contribute to improved financial ratios of the Ciech Group Companies.
Additionally, in 2009 the Ciech Group implemented a project aimed at optimising facilities maintenance and renovation costs. An analysis was carried out in order to determine optimal levels of facilities maintenance expenditures, including: • developing internal benchmarks of the most frequently requested services and comparing their parameters • assessment of the organisational structure of the facilities maintenance and repair staff • assessment of the facilities maintenance and repair planning method • assessment of the method for choosing repair contractors.
As a result, an optimal model for the maintenance and repair staff and organisational assumptions for the development of consolidated operating maintenance and repair system for domestic companies of the Group was established and the assumptions for the supervision and settlement of contractors were determined. Planned results of implementing the project include: • implementation of a new, transparent contractor selection system, promoting competition and allowing for the centralisation of ordering these services, • forecast annual savings of PLN 29 million.
12.2 Ciech S.A.’s forecast financial situation
The Management Board of CIECH S.A., pursuant to the assumptions of the applied strategy, expects that in 2010 the results will be better than those produced in 2009, both in terms of revenues, EBITDA and net profit. The improvement of the results will be facilitated by the following: • higher demand in the Soda Division, improved margins expected in the second half of 2010 • better market situation for all major products of the Organic Division • higher demand for fertilisers over the previous year. Ciech’s most important tasks for 2010 will include restructuring, taking into account a further reduction of cost, and divestments. In addition, thanks to a new loan agreement, Ciech’s liquidity should stabilise.
12.3 Ciech Group’s strategic priorities
CIECH Group’s mission statement The Ciech Group’s mission reflects the Group’s strategic goals and potential. The currently pursued mission is reflected in the formula: “We create value in those chemical market segments where we are competent and achieve a strong and sustainable competitive position”. It is the effect of consistent development and a reaction of the Ciech Group to the privilege of competing with the biggest business organisations in Europe.
Key components of the Ciech Group’s vision
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Objective Creating shareholders’ value
Central and Eastern Europe Range and markets Attractive opportunities in Western Europe and other regions
Segments with good growth prospects, where the Group has or may have a strong Key segments and sustainable competitive position Selective acquisitions – compromise between diversification and specialisation Developing new products based on the existing product chain Portfolio management Building know-how in R&D Disposal of assets which do not correspond to the value growth strategy Professional restructuring and full integration of companies Operational excellence Active use of synergy
Contractors Long-term partner relationships with customers and suppliers
Developing human resources – investing in employees and taking on the best Employees professionals in the market
Social responsibility Striving for continuous improvement of environmental protection
Ciech Group’s strategic priorities
The updated strategy of the Ciech Group for 2008-2016 assumes a considerable increase in the Group’s revenues and profit. In order to increase the value for shareholders, the Ciech Group concentrates on attractive markets – where a strong competitive position can be achieved. The basic scenario to be realised by the Management Board of CIECH S.A. assumes development within the existing divisions operating in selected industries. CIECH S.A. operates four divisions (Soda, Organic, Agro, Silicates and Glass) and a Corporate Centre, which will concentrate on the set priorities, including:
1. Integration and development of the Soda Division - Full integration of acquired companies with parallel restructuring - Implementation of the investment plan and synergy release
2. Integration and development of the Organic Division - Focus on the investment programme (including a conversion of electrolysis facilities), development of new technologies (including GTE for the production of ECH); - Further intense integration and restructuring (including diversification of purchase of raw materials and distribution channels) and release of synergy; - Increase in the sales volume, maximising the use of production capacities of the extended facilities (TDI, resins, polyurethane foams), consolidating market position at home and in Europe;
3. Development of the Agro Division - Integration, construction and development of a distribution network (market and cost synergies)
4. Intensification of the activity of the Corporate Centre - Integration at the corporate level (financial policy, performance improvement) - Coordination and management of common areas (supply chain, energy, research and development).
Ciech Group’s competitive strategy
The Ciech Group’s competitive advantages arise from its strong regional position and are connected with foreign acquisitions made after strengthening the Group’s competitive position in Poland, concentration of foreign acquisitions in the region, production and sales know-how, diversified portfolio of products and markets, awareness of the needs of regional industries, close relations with customers as well as a prestigious and strong brand.
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However, the CIECH Group applies different competitive strategies in the individual divisions: • Soda Division – excellent cost position, the second producer in Europe, leadership and focus on selected markets, geographic location • Organic Division – a wide geographic range of sales markets, awareness of the specific nature of the local market, strong position in Poland • Agro Division – a complete offer of chemical products for agriculture, effective distribution system in Poland, awareness of the needs of local customers. • Silicates and Glass Division – leading position in niche segments, favourable cost position, effective marketing and development of products.
The Corporate Centre’s aim is, among other things, to release synergies by using its management skills in the following areas: • Group’s Strategy (business, portfolio, functional) and its implementation (strategic initiatives) • Investments and development funding (sources and forms of financing, balancing needs, financial support, supervision) • Research and development (innovations, new products and technologies, procuring EU funds, energy management in the Group) • Marketing (market analyses, promotion, advertising, segmentation, marketing mix) • Finance and accounting (planning, controlling, flows, accounting systems, consolidation) • Human resources (recruitment, remuneration policy, incentive system, training) • IT systems (system unification, function centralization, integrated management) • Image (visual, internal, external, corporate culture).
Ciech Group’s development scenarios
The Ciech Group is implementing a number of strategic initiatives, including real investments and divestments in non-core businesses, the sale of non-production property and minor acquisitions, which should allow the Group to increase its production potential and, as a result, grow revenues and profits. This development scenario was defined as the Basic scenario . Its implementation will require lower capital expenditure and its result will be a lower growth in revenues of up to approx. PLN 5.6 billion annually.
13. Additional information
13.1 Information about concluded agreements significant for CIECH’s business activity (including agreements concluded between the shareholders, insurance agreements, partnership and cooperation agreements)
• On January 14 th , 2009 CIECH S.A. and PKP “Cargo” S.A., with its registered office in Warsaw, signed an agreement concerning the transport of goods of companies forming the Ciech Group on domestic routes. The value of the agreement for 2009 is estimated at approximately PLN 75 million.
13.2 Information about agreements concluded with the entity authorised to audit CIECH S.A.’s financial statements
Information about agreements concluded with the entity authorised to audit the financial statements was presented in section 26 of the notes to the financial statements.
13.3 Transactions with associates
Ciech S.A. did not conclude any transactions on non-market conditions with its associates. Sales to and purchases from associates are realised at market prices.
A description of transactions concluded by Ciech S.A. with its associates is included in section 29.2 of Ciech S.A.’s financial statements for the period 01.01.2009 – 31.12.2009.
13.4 Information about natural environment protection
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Ciech S.A. is subject to the EU REACH regulation. As part of the measures linked to implementing REACH, Ciech S.A. registered 4 substances with the European Chemicals Agency. A decision was made not to fully register 3 substances, while the registration of the fourth substance will be reconsidered by the second half of 2013. This date marks the end of the second phase of full registration for substances manufactured or imported in quantities of 100-1000 tons/year.
Strategies currently in force or considered to be implemented in the future in CIECH S.A., aimed at compliance with obligations under the REACH regulation and at reduction of registration-related costs:
Purchase of substances only from entities who performed a full registration (from the EU and outside the EU)
Abandoning imports of low-margin substances
Abandoning imports of substances by the end of the interim period, depending on the market situation at a given time.
The works connected with preparing Ciech S.A. and the Ciech Group Companies for the implementation of the REACH system are subject to ongoing control of the REACH Team, appointed pursuant to a Resolution of Ciech S.A.’s Management Board in January 2007.
In June 2009, CIECH S.A.’s Management Board signed the Ciech Group’s Environmental Declaration, which is a key document forming a part of the implemented system for coordinating environment protection measures in the Ciech Group. The Declaration defines the overall direction and methods for implementing measures aimed at managing production processes in an environment-friendly manner.
13.5 Ciech S.A.’s major research and development achievements
In 2009, Ciech S.A. coordinated works in the following areas:
I. Enhancing the Ciech Group’s model of managing innovativeness and R&D to streamline the model’s function and to increase effectiveness of the produced results. 1. In the middle of the year, the organisational structure was simplified and R&D management was consolidated by extending the responsibilities of the corporate R&D Department to include coordination of investment processes. A unified ISO procedure was implemented for planning and monitoring the implementation of investment and R&D measures. 2. At the beginning of the year, framework cooperation agreements were concluded with 7 universities: • Politechnika Warszawska [Warsaw University of Technology], • Politechnika Wrocławska [Wrocław University of Technology], • Politechnika Pozna ńska [Pozna ń University of Technology], • Uniwersytet Technologiczno – Przyrodniczy w Bydgoszczy [University of Technology and Life Sciences in Bydgoszcz], • Zachodniopomorski Uniwersytet Technologiczny [West Pomeranian University of Technology] • Politechnika Rzeszowska [Rzeszów University of Technology], • Uniwersytet Mikołaja Kopernika w Toruniu [Nicolaus Copernicus University in Toru ń]. These agreements aim at achieving more intense collaboration between science and industry, both at a strategic and operating level. So far Ciech S.A. has signed similar agreements with 5 key institutes from the industry. A number of R&D projects linked to the Ciech Group’s business are implemented under these agreements, which is also facilitated by applying the available aid funds.
II. Support for Ciech Group’s business provided by aid funds 1. By the end of 2009, the procured funding exceeded PLN 112 million ( including the project of construction of a facility for channelling and isolating fly-ash, in which Soda Polska Ciech holds a 29% share ), of which PLN 43.5 million is the value of the signed agreements. 2. Two further projects valued at over PLN 68.5 million were declared eligible for funding in 2009 (according to the published ranking lists of projects eligible for funding).
III. Optimising the Companies’ operating costs by using the effect of scale and synergy 1. Project aimed at optimising energy costs in the Ciech Group Companies by using opportunities linked to the deregulation of the energy market.
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A detailed audit as well as analyses and the relevant simulations were conducted in the companies. Work in the Group Companies was coordinated to adjust the measurement and billing systems to the requirements of the TPA system, in consultation with the competent OSD. On December 1 st , 2009 the negotiation stage was completed and contracts were signed for consolidated purchase of electricity in the TPA system in 2010 by the Group Companies. PGE ZEŁT Obrót Sp. z o.o. was chosen to be the electricity supplier on the free energy market. 2. Project aimed at optimising facilities maintenance and renovation costs. In 2009, a detailed analysis of day-to-day facilities maintenance and renovation costs in the Ciech Group’s companies was conducted and covered the following areas: • Effectiveness of the organisational structure and of the management system for facilities maintenance and renovation in all of the Group’s companies • Related expenditures, taking into consideration the trends over the last years (including the costs of own staff and outsourced contractors) • Remuneration for specific works and overall remuneration, planning and monitoring costs, from tender to settlement of works Based on the analyses, it has been recommended to implement in the Group Companies solutions aimed at reducing costs of day-to-day facilities maintenance and renovation by approx. PLN 29 million in 2009.
13.6 Proceedings linked to Ciech S.A.’s obligations or debt
There are no proceedings under way against Ciech S.A. regarding obligations or debt whose value constitutes at least 10% of Ciech S.A.’s equity.
13.7 Information about off-balance sheet items
The table below presents off-balance sheet items, including guarantees and sureties granted by Ciech S.A. to other entities (from outside the Ciech Group). The description of sureties and guarantees granted to associates (within the Ciech Group) has been included in the table “Sureties and guarantees granted”.
PLN ‘000 31.12.2009 31.12.2008 1. Contingent receivables - - 2. Contingent liabilities 344,799 392,682 - guarantees and sureties granted 344,799 392,682 3. Other 27,619 21,460 - other trade liabilities 9,400 21,460 - other 18,219 - Total off-balance sheet items 372,418 414,142 As at December 31st, 2009, contingent receivables did not occur in CIECH S.A.
The value of contingent liabilities and other off-balance sheet liabilities as at December 31 st , 2009 amounted to PLN 372,418 thousand, which signifies a decrease in comparison to December 2008 of PLN 41,724 thousand. The main reasons for this difference are as follows: - granting of new guarantees for liabilities of the subsidiary GOVORA amounting to EUR 12,000 thousand and decreasing participation in the existing guarantees and sureties by EUR 22,726 thousand and PLN 7,560 thousand - decreasing participation in the existing guarantees and sureties securing the liabilities of the subsidiary CHEMAN S.A. by PLN 4,400 thousand and increase by PLN 1,500 thousand. The remaining difference results from the changes in exchange rates applied in the measurement of liabilities. Other contingent liabilities in the amount of PLN 18,219 thousand include: - contingent liability of PLN 1,600 thousand due to non-performance of a trade contract, - contingent liability of PLN 15,000 thousand due to not achieving the ratio required by the agreement for the purchase of ZACHEM S.A.’s shares, - contingent liability of PLN 1,619 thousand due to non-compliance by Ciech S.A. with information obligations under the agreement with AVAS for the purchase of S.C. Uzinele Sodce Govora- Ciech Chemical Group S.A. The aforesaid items do not include the value of suits filed by third parties, described in section 25.1 (off-balance sheet items) of the notes and explanations to the financial statements.
13.8 Information about the employee share ownership plan control system
Ciech S.A. does not operate an employee share ownership plan.
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13.9 Information about agreements that may affect the proportions of shares held by the existing shareholders and bondholders
The company is not aware of any agreements (including agreements concluded after the balance sheet date) which may change the proportions of shares held by the existing shareholders.
13.10 Remunerations of Ciech S.A.’s Management Board and Supervisory Board
This information has been included in section 29.4 of notes and explanations to CIECH S.A.’s financial statements.
13.11 Establishment of the total number and nominal value of all of the Company’s shares as well as shares and holdings in associates held by the management and supervisory staff
From the declarations submitted by the management and supervisory staff, it appears that as at December 31 st , 2009:
• Mr Artur Osuchowski, Member of the Management Board, held 2,100 shares in CIECH S.A.
Other persons holding managerial and supervisory positions did not hold any shares in CIECH S.A. or shares or holdings in associates.
14. Statement on the application of Corporate Governance
14.1 Corporate governance principles observed by the Issuer and location where their contents is available for the public
On May 14 th , 2008, the Management Board of CIECH S.A. adopted corporate governance principles for joint stock companies issuing convertible bonds or senior bonds which are admitted to public trading – included in the document “Code of Best Practice for WSE Listed Companies”, adopted by way of Resolution no. 12/1170/007 of the WSE Supervisory Board of July 4 th , 2007, effective from January 1 st , 2008. The text of the corporate governance principles observed by the Company is available for the public on the following websites:
Warsaw Stock Exchange ( www.gpw.gov.pl ) Polish Association of Stock Exchange Issuers ( www.seg.org.pl ).
From May 14 th , 2008, the Management Board of CIECH S.A. – after submitting declarations on satisfying the conditions specified in Appendix 2 to the Commission Recommendation of February 15 th , 2005 on the role of non- executive or supervisory directors of listed companies and committees of the supervisory board (2005/162/EC) by the Members of the Supervisory Board – adopted all corporate governance principles for joint stock companies issuing convertible bonds or senior bonds, admitted to listing - included in the document “Code of Best Practice for WSE Listed Companies”, adopted by way of resolution no. 12/1170/007 of the WSE Supervisory Board of July 4th , 2007, effective from January 1 st , 2008, and on May 14 th , 2008 (Current Report 30/2008) disclosed information about revising the declaration submitted on January 7 th , 2008.
In 2009, CIECH S.A. applied all corporate governance principles for joint stock companies issuing convertible bonds or senior bonds which are admitted to public trading – included in the document “Code of Best Practice for WSE Listed Companies”, adopted by way of resolution no. 12/1170/007 of the WSE Supervisory Board of July 4th , 2007, effective from January 1 st , 2008.
Due to the fact that the first part of the 2008 Best Practices (recommendations concerning best practices of listed companies) was not excluded from the obligation of publishing reports pursuant to § 29 section 5 RG, the Management Board, referring to this part of the document, declares that the company did not make Internet broadcasts, did not record the sessions and did not publish on its corporate website information on the sessions of the General Meetings of Shareholders convened in 2009.
14.2 Description of the main features of internal audit and risk management systems in relation to the process of compiling financial statements and consolidated financial statements
Ciech S.A.’s Management Board is responsible for the internal audit system in the Company and its effectiveness in the process of compiling financial statements and interim reports, prepared and published in accordance with
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the principles included in the Ordinance of the Minister of Finance of February 19 th , 2009 on Current and Interim Information Submitted by the Issuers of Securities and Conditions of Recognising as Equivalent the Information Required by the Law Provisions of a Country which is not a Member State. The Company’s effective system of internal audit and risk management in the financial reporting process functions through: • preparing procedures defining the principles and responsibility for compiling financial statements, including the responsibility for quality assurance; • determining the scope of reporting based on the binding International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS); • developing, implementing and supervising the application of consistent accounting principles in the Ciech Capital Group’s companies; • half-yearly and annual audits of published financial statements of Ciech S.A. and of the Capital Group by an independent auditor; • financial statement authorisation prior to publication.
A Member of the Management Board responsible for financial matters supervises the process of preparing the Company’s financial statements and interim reports. The Finance Division, directly responsible to a Member of the Management Board of Ciech S.A., is responsible for organising tasks connected with the preparation of financial statements. The uniformity of the standards applied by the Group ensures the application of consistent accounting principles of the Ciech Group and consolidation principles according to IAS/IFRS by all companies.
The scope of the disclosed data published in interim reports results from the Company’s accounting books and additional information submitted by the individual organisational units of Ciech S.A. The Capital Group’s companies deliver the required data in the form of reporting packages in order to prepare the Group’s consolidated financial statements. The scope of data disclosed within the Capital Group is defined and results from the information obligations imposed by IAS/IFRS. Current IAS/IFRS monitoring is conducted to determine the need to update the scope of reporting.
Pursuant to the binding regulations, the Company’s financial statements are reviewed and audited by an independent certified auditor. The review concentrates, in particular, on the adequacy of financial data, scope of the required disclosure and provision calculations. The results of a review or audit are presented by the auditor to the management of the Finance Division and a Member of the Management Board responsible for finances.
A certified auditor is appointed by the Supervisory Board from a circle of reputable auditing companies, ensuring high standards of service and the required independence. Agreements for auditing financial statements by a certified auditor are concluded every year with an auditor appointed by the Supervisory Board. The Audit Committee, appointed within the competences of the Supervisory Board, supervises the financial reporting process, cooperates with an independent auditor and recommends an auditor to the Supervisory Board. The Company operates financial statements authorisation procedures. Interim reports audited by the auditor are submitted to the Members of the Management Board. Annual statements approved by the Management Board, after obtaining the opinion of the Audit Committee and their evaluation by the Supervisory Board, are approved by the General Meeting of Shareholders. After the publication of annual or half-yearly financial statements, the conclusions from the financial statements’ audit are presented to the Audit Committee. Representatives of the Audit Committee analyse the audit’s and the review’s results during closed sessions held with the Company’s auditor. Additionally, the certified auditor presents a Letter to the Management Board, containing recommendations for the Management Boards of the Group’s Companies, based on the results of the audit or the review of financial statements for a given year. The auditor’s recommendations are discussed by the Audit Committee and the managerial staff of the Finance Division with the purpose of implementation.
A vital element of risk management in relation to the process of compiling financial statements is internal control exercised by the Company’s internal audit. Internal audit functions based on the “Rules of supervision and internal audit in CIECH S.A., its subsidiaries and jointly-controlled entities” approved by the Company’s Management Board. The system of internal audit based on independence principles covers all Company’s processes, including the areas having direct or indirect influence on the correctness of financial statements. The tasks of internal audit include auditing and evaluating control mechanisms that serve credibility and consistency of financial data, constituting the basis for compiling financial statements in the Companies.
Financial data forming the basis for financial statements and interim reports come from an accounting and financial system, where all transactions are registered in accordance with the Company’s accounting policy (approved by the Management Board) based on the International Accounting Standards. Accounting books are kept in an integrated ERP IT system. The modular structure of the system ensures clear division of competences, consistency of accounting entries and compliance between the general ledger and sub-ledgers. The properties of the system allow for its ongoing adjustment to the changing accounting principles and other legal regulations. The system contains complete technical and functional documentation, which pursuant to Art. 10 of the Accounting Act dated September 29 th , 1994 is periodically updated.
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The access to information contained in the IT system is limited by relevant authorisations for entitled employees. Employees can only access those system areas on which they work. Access control is implemented at every stage of compiling financial statements, starting from entering source data, through data processing, to generating output information.
A reflection of the effectiveness of the applied procedures for audit and risk management in the process of compiling financial statements in CIECH S.A. and in the Ciech Group are the results in the form of high-quality financial statements, as confirmed by the opinions of certified auditors on the audited statements, positive assessment by recipients of financial statements and top rankings of CIECH S.A. in the competition “The Best Annual Report”, organised by the Institute of Accounting and Taxes under the auspices of the Warsaw Stock Exchange.
14.3 Information about holders of securities granting special rights of control
No securities giving special control rights in relation to the issuer exist in CIECH S.A.
14.4 Information about restrictions on exercising the right of vote and about provisions pursuant to which equity rights connected with securities are separated from holding securities
In CIECH S.A., there are no restrictions as to exercising the right to vote such as the right to vote reserved for holders of a certain share or number of votes, time limits in exercising the right to vote or provisions pursuant to which, in collaboration with the company, equity rights connected with securities are separated from holding securities.
14.5 Information about any restrictions on transferring ownership rights related to the issuer’s securities and any restrictions on exercising the right to vote vested in the issuer’s shares
In CIECH S.A., there are no restrictions as to transferring ownership rights to securities, except for the restrictions provided for in the Act on Trading in Financial Instruments of July 29 th , 2005. There are no restrictions on exercising the right to vote, vested in the shares of CIECH S.A.
14.6 Principles of appointing and dismissing managerial staff and qualifications thereof, in particular, the right to make a decision about share issue or redemption
Pursuant to § 23 section 1 of the Company’s Statute, the Management Board consists of five persons. The joint term of office of the Members of the Management Board lasts three years. Pursuant to the Statute of CIECH S.A., the appointment and dismissal of the Members of the Management Board, including the President thereof, shall be vested in the competencies of the General Meeting of Shareholders. The provisions of the Commercial Companies Code and the Company’s Statute shall define the qualifications of the managerial staff. The Members of the Management Board have no special rights to decide about share issue or redemption.
14.7 Principles for introducing amendments to the issuer’s Statute or Articles of Associations
The Statute can be amended in accordance with the regulations of the Commercial Companies Code.
14.8 Function of the General Meeting of Shareholders and its competence
Pursuant to CIECH S.A.’s Statute, the competences of the General Meeting of Shareholders include: • Examining and approving the Company’s management report, financial statements for the previous financial year, consolidated financial statements and the Capital Group’s management report, where the Company is the parent, if the Company prepares such statements, as well as examining and approving an annual report by the Supervisory Board, acknowledgement of the fulfilment of duties by the members of the Company’s authorities; • Passing resolutions on profit distribution or loss coverage; • Adopting the regulations for the General Meeting of Shareholders; • Amending the Company’s Statute; • Changing the subject of the Company’s business activity; • Selling and leasing the enterprise or its organised part and establishing a limited property right thereon; • Appointing and dismissing Members of the Supervisory Board and determining their remuneration; • Appointing and dismissing Members of the Management Board, including the President of the Management Board;
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• Increasing or decreasing the share capital; • Passing resolutions on the issue of bonds, including convertible bonds; • Merging the Company with other companies, dividing and transforming the Company; • Dissolving the Company; • Approving the purchase of shares by the Company for redemption and passing resolutions on the terms of shares redemption; • Passing other resolutions stipulated by legal regulations or the Statute.
Pursuant to § 21 section 2 item 3) of CIECH S.A.’s Statute, CIECH S.A.’s Supervisory Board examines and gives an opinion on matters brought to the fore at CIECH S.A.’s General Meeting of Shareholders.
Attendance, procedure and execution of the right to vote are regulated by the Regulations of the General Meeting of Shareholders of CIECH S.A., adopted by CIECH S.A.’s Annual General Meeting on June 29 th , 2005 and effective as of February 17 th , 2006.
Pursuant to the Regulations of the General Meeting of Shareholders of CIECH S.A., the participants of the General Meeting include Members of the Management Board and of the Supervisory Board. Absence of a Member of the Management or the Supervisory Board requires an explanation to be presented at the Meeting. The Chairman presides over the Meeting in accordance with the adopted agenda, legal regulations, the Statute and the Regulations of the General Meeting of Shareholders. They supervise the course of the Meeting and ensure respect for the rights and interests of all Shareholders.
The competences of the Chairman of the General Meeting of Shareholders include in particular:
Commencing discussion on particular points of the agenda, giving the floor; Taking the floor away if the speech: • exceeds the limit of time for speeches or replies, or • covers topics not included in the agenda, • is offensive, Closing discussion on particular points of the agenda, Determining – based on the adopted motions – the content of draft resolutions of the Meeting, Ordering and supervising votes, signing all documents containing the results of a vote and announcing the results, Giving instructions to maintain order during the Meeting, Resolving procedural doubts and clarifying legal issues based on the obtained legal opinions, Announcing exhaustion of the agenda, Closing the Meeting after exhausting the agenda.
The Chairman may, at their own discretion, order the adjournment of the Meeting, other than the adjournment ordered by the General Meeting of Shareholders pursuant to Art. 408 § 2 of the Commercial Companies Code. The adjournment should be ordered by the Chairman in such a way that the Meeting can be closed on the day of its opening.
The Chairman may include in the agenda organisational issues such as: proposing motions for changing the order of discussing particular issues on the agenda, appointing committees described in the Regulations, method of additional recording of the course of the Meeting; examining a motion and passing a resolution on convening an Extraordinary General Meeting of Shareholders.
The participants of the Meeting may propose subject-related motions relating to the matters included in the agenda, organisational motions and a motion calling for convening an Extraordinary General Meeting of Shareholders.
The voting is open. Secret voting is ordered: a) in the case of election, b) on motions calling for the dismissal of members of the Company’s authorities, c) on motions calling for the dismissal of the Company’s liquidators, d) on motions calling for bringing the individuals described in points b) and c) to justice, e) in personal matters, f) at the request of at least one of the Meeting’s participants.
The resolutions of the General Meeting of Shareholders of CIECH S.A. are passed by an absolute majority of votes, unless the regulations of the Commercial Companies Code provide otherwise.
Pursuant to the Regulations of the General Meeting of Shareholders of CIECH S.A., the right to demand secret voting is ineffective when passing resolutions on organisational matters. The General Meeting may repeal the secret ballot for election of committees appointed thereby.
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14.9 Changes in the composition of the Management and Supervisory Boards of Ciech S.A. in the previous financial period
Ciech S.A.’s Management Board
On January 1 st , 2009 the Company’s Management Board was composed of: 1. Ryszard Kunicki – President of the Management Board, 2. Robert Bednarski – Member of the Management Board, 3. Marcin Dobrza ński – Member of the Management Board, 4. Artur Osuchowski – Member of the Management Board.
The aforementioned composition of the Management Board did not change by December 31 st , 2009. The composition of CIECH S.A.’s Management Board remained unchanged as at the day of compiling the financial statements.
Ciech S.A.’s Supervisory Board
As at January 1 st , 2009, the Supervisory Board of CIECH S.A. was composed of: 1. Grzegorz Kłoczko – Chairman of the Supervisory Board, 2. Jacek Goszczy ński – Vice Chairman of the Supervisory Board, 3. Krzysztof Salwach – Secretary of the Supervisory Board, 4. Marzena Okła-Anuszewska – Member of the Supervisory Board, 5. Alicja Pimpicka – Member of the Supervisory Board, 6. Przemysław Cieszy ński – Member of the Supervisory Board, 7. Krzysztof Mastalerz – Member of the Supervisory Board.
On June 9 th , 2009, Mr Przemysław Cieszy ński resigned from the post of Member of the Supervisory Board of CIECH S.A., effective as of June 18 th , 2009.
On June 18 th , 2009, Mr Zbigniew Jagiełło was appointed Member of the Supervisory Board by the Annual General Meeting.
As of June 18 th , 2009, the company’s Supervisory Board was composed of: 1. Grzegorz Kłoczko – Chairman of the Supervisory Board, 2. Jacek Goszczy ński – Vice Chairman of the Supervisory Board, 3. Krzysztof Salwach – Secretary of the Supervisory Board, 4. Marzena Okła-Anuszewska – Member of the Supervisory Board, 5. Alicja Pimpicka – Member of the Supervisory Board, 6. Krzysztof Mastalerz – Member of the Supervisory Board, 7. Zbigniew Jagiełło – Member of the Supervisory Board.
On September 14 th , 2009, the Extraordinary General Meeting of Shareholders made the following changes to the composition of the Supervisory Board: Revocation of: 1. Krzysztof Mastalerz, 2. Alicja Pimpicka Appointment of: 1. Ewa Sibrecht-Ośka, 2. Sławomir Stelmasiak.
In consideration of the above, as of September 14 th , 2009, CIECH S.A.’s Supervisory Board was composed of: 1. Grzegorz Kłoczko – Chairman of the Supervisory Board, 2. Jacek Goszczy ński – Vice Chairman of the Supervisory Board, 3. Krzysztof Salwach – Secretary of the Supervisory Board, 4. Marzena Okła-Anuszewska – Member of the Supervisory Board, 5. Zbigniew Jagiełło – Member of the Supervisory Board, 6. Ewa Sibrecht-Ośka – Member of the Supervisory Board, 7. Sławomir Stelmasiak – Member of the Supervisory Board.
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On September 18 th , 2009, Mr Zbigniew Jagiełło submitted resignation from his post on the Supervisory Board of CIECH S.A., effective as of September 30 th , 2009.
On October 22 nd , 2009, Mrs Ewa Sibrecht-Ośka was appointed Chairman of the Supervisory Board of CIECH S.A.
As at December 31 st , 2009, the Supervisory Board was composed of: 1. Ewa Sibrecht-Ośka – Chairman of the Supervisory Board, 2. Jacek Goszczy ński – Vice Chairman of the Supervisory Board, 3. Krzysztof Salwach – Secretary of the Supervisory Board, 4. Grzegorz Kłoczko – Member of the Supervisory Board, 5. Marzena Okła-Anuszewska – Member of the Supervisory Board, 6. Sławomir Stelmasiak – Member of the Supervisory Board.
As at the day of compiling the financial statements, the Supervisory Board’s composition remained unchanged.
14.10 Activity of the issuer’s management, supervisory and administrative bodies and their committees
CIECH S.A.’s Management Board Pursuant to § 23 section 1 of the Company’s Statute, the Management Board consists of five persons. The joint term of office of the Members of the Management Board lasts three years. The Management Board of CIECH S.A. acts based on the regulations adopted by the Management Board and approved by the Supervisory Board.
The competence of the Management Board covers all matters and economic decisions and other matters not reserved by the provisions of the Commercial Companies Code or the company’s Statute to the sole competence of the General Meeting of Shareholders or the Supervisory Board. The President of the Management Board acting independently, two Members of the Management Board or one Member of the Management Board acting jointly with a proxy are authorised to make declarations of will and sign documents on behalf of the company.
CIECH S.A.’s Supervisory Board Pursuant to § 20 section 1 the Supervisory Board consists of five to nine members appointed by the General Meeting. The joint term of office of the Members of the Supervisory Board lasts three years. The Supervisory Board of CIECH S.A. acts based on the regulations adopted by the Supervisory Board and approved by the General Meeting of Shareholders. Appointing and dismissing Members of the Supervisory Board is within the competence of the General Meeting. The Supervisory Board appoints the Chairman of the Supervisory Board and, if necessary, the Vice Chairman and the Secretary of the Supervisory Board. The Supervisory Board supervises the Company’s operations.
The competence of the Supervisory Board includes in particular: • Assessment of the Company’s management report and financial statements for the previous financial year, consolidated financial statements and management report of the capital group, where the Company is the parent, if the Company compiles such statements, for their consistency with accounting books and documents and the actual status, as well as assessment of the Management Board’s motions as to profit distribution or loss coverage and submitting to the General Meeting of Shareholders an annual written report on the results of this assessment; • Giving opinions on the Company’s action plans prepared by the Management Board; • Examining and giving opinions on matters subject to resolutions of the General Meeting of Shareholders; • Approving the regulations of the Supervisory Board; • Approving the regulations of the Management Board; • Determining remuneration rules and remuneration amount for the Members of the Management Board, including the President of the Management Board; • Appointing a certified auditor to audit the Company’s financial statements and the capital group’s consolidated financial statements; • Approving the exercise of rights or incurring liabilities whose value, under a single or under several related legal transactions, exceeds the equivalent of PLN 10,000,000 (in words: ten million), excluding: a) Agreements for the sale of raw materials, semi-finished products and finished products linked to the Company’s business b) Actions which require the consent of the General Meeting of Shareholders
Pursuant to CIECH S.A.’s Statute, the Supervisory Board may pass resolutions without convening a meeting in a written ballot or with the use of means of remote communication, whereby for such a resolution to be effective it is
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necessary to inform all Members of the Board about the draft content thereof. The Members of the Supervisory Board may participate in passing the Board’s resolutions through voting in writing via another Member of the Supervisory Board. It is not possible to vote in writing on matters included in the agenda at the meeting of the Supervisory Board.
Committees of CIECH S.A.’s Supervisory Board Three Committees operate within the Supervisory Board of CIECH S.A.: Audit Committee of the Supervisory Board of CIECH S.A., Remuneration Committee of the Supervisory Board of CIECH S.A. and the Strategy and Investment Committee of the Supervisory Board of CIECH S.A.
Audit Committee The Audit Committee of the Supervisory Board of CIECH S.A. was appointed by way of Resolution no. 57/IV/2005 of February 16 th , 2005. The Committee’s tasks include in particular: • Monitoring the work of the Company’s certified auditors and giving recommendations to the Supervisory Board as to appointing and remunerating the Company’s certified auditors; • Discussing with the Company’s certified auditors, prior to every audit of annual financial statements, the nature and scope of the audit and monitoring the coordination between certified auditors and the Company’s financial staff; • Auditing the Company’s interim and annual financial statements (separate and consolidated), concentrating, in particular, on: o any changes in accounting standards, principles and practices; o main areas to be audited; o significant adjustments resulting from the audit; o statements on continued activity; o compliance with the binding regulations related to maintaining accounting records; • Discussing (with or without the participation of the Company’s Management Board) any problems or reservations that may arise from the audit of financial statements; • Analysing the letter to the Management Board prepared by the Company’s certified auditors, independence and objectiveness of the audit and the Board’s response; • Reviewing the internal audit system of the CIECH Capital Group (including the mechanisms of financial and operational control, compliance with legal regulations, risk assessment and management) and the annual statement; • Reviewing selected agreements, transactions and arrangements between the Company and its subsidiaries on a yearly basis; • Analysing the reports of the Company’s internal auditors and main observations of other internal analysts as well as the Board’s response to these observations, including an evaluation of the degree of independence of the internal auditors; • Reviewing the internal audit plan on a yearly basis, coordinating the work of internal and external auditors, evaluating the conditions of internal auditors’ functioning; • Considering any other issues of interest to the Committee or the Supervisory Board; • Informing the Supervisory Board about all material issues within its competence.
The Audit Committee of the Supervisory Board of CIECH S.A. submits annual reports on its activity, which constitute a part of the Report on the Operations of the Supervisory Board of CIECH S.A., presented to the Shareholders during the Annual General Meeting of CIECH S.A.
As at January 1st, 2009, the Audit Committee was composed of: 1. Alicja Pimpicka, 2. Przemysław Cieszy ński, 3. Krzysztof Salwach.
On June 18 th , 2009, Mr Przemysław Cieszy ński resigned from the post of Member of the Supervisory Board of CIECH S.A.
On July 14 th , 2009, CIECH S.A.’s Supervisory Board appointed Mrs Marzena Okła-Anuszewska to be member of the Audit Committee.
Consequently, as of July 14 th , 2099, the committee was composed of: 1. Alicja Pimpicka, 2. Krzysztof Salwach, 3. Marzena Okła-Anuszewska.
On September 14 th , 2009, Mrs Alicja Pimpicka was dismissed from CIECH S.A.’s Supervisory Board. On February 9 th , 2010, CIECH S.A.’s Supervisory Board appointed Mr Sławomir Stelmasiak to be a member of the Audit Committee.
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As at the day of compiling the financial statements, the Audit Committee of CIECH S.A.’s Supervisory Board was composed of: 1. Krzysztof Salwach, 2. Marzena Okła-Anuszewska, 3. Sławomir Stelmasiak.
Remuneration Committee of CIECH S.A.’s Supervisory Board The Remuneration Committee was appointed by way of Resolution no. 66/IV/2005 of CIECH S.A.’s Supervisory Board. Pursuant to the Regulations of the Remuneration Committee, the main task of the Committee is to advise the Supervisory Board on issues connected with determining remuneration rules and remuneration of the Members of the Management Board of CIECH S.A.
The Committee’s tasks include in particular: • Presenting the Supervisory Board a proposal concerning the rules of remunerating the Members of the Management Board of CIECH S.A., which should take into account all forms of remuneration, in particular, with regard to: Base remuneration, performance-based reward system, pension and severance pay system; • Presenting the Supervisory Board a proposal concerning the amount of remuneration for every Member of the Management Board of CIECH S.A.; • Presenting the Management Board draft agreements regulating the duties of the Members of the Management Board; • Discussing (with or without the participation of the Company’s Management Board) any problems or reservations which may arise in relation to remunerating the Members of the Management Board of CIECH S.A.; • Considering any other issues of interest to the Committee or the Supervisory Board; • Informing the Supervisory Board about all material issues within the scope of its competence.
The Remuneration Committee of the Supervisory Board of CIECH S.A. submits annual reports on its activity, which constitute a part of the Report on the Operations of the Supervisory Board of CIECH S.A., presented to the Shareholders during the Annual General Meeting of CIECH S.A. On January 21 st , 2009, CIECH S.A.’s Supervisory Board appointed the following Board Members to be members of the Remuneration Committee of CIECH S.A.’s Supervisory Board: 1. Jacek Goszczy ński, 2. Krzysztof Mastalerz, 3. Grzegorz Kłoczko.
Due to the dismissal of Mr Krzysztof Mastalerz from CIECH S.A.’s Supervisory Board, the Board’s Remuneration Committee, between September 14 th , 2009 and December 31 st , 2009, operated in the following composition: 1. Jacek Goszczy ński, 2. Grzegorz Kłoczko. As at the day of compiling the financial statements, the composition of the Remuneration Committee of CIECH S.A.’s Supervisory Board remained unchanged.
Strategy and Investment Committee of CIECH S.A.’s Supervisory Board As at January 1 st , 2009, the Strategy and Investment Committee of CIECH S.A.’s Supervisory Board was composed of:
1. Przemysław Cieszy ński, 2. Krzysztof Mastalerz.
On January 21 st , 2009, CIECH S.A.’s Supervisory Board appointed the following members of the Supervisory Board to be members of the Committee:
1. Przemysław Cieszy ński, 2. Krzysztof Mastalerz, 3. Marzena Okła-Anuszewska.
Mr Przemysław Cieszy ński resigned from the post of Member of the Supervisory Board of CIECH S.A., effective as of June 18 th , 2009. On September 14 th , 2009, the Extraordinary General Meeting of Shareholders of CIECH S.A. dismissed Mr Krzysztof Mastalerz from the Supervisory Board.
Thus, the Strategy and Investment Committee of CIECH S.A.’s Supervisory Board, between September 14 th , 2009 and December 31 st , 2009, was composed of one member:
1. Marzena Okła-Anuszewska.
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As at the day of compiling the financial statements, the composition of the Strategy and Investment Committee of CIECH S.A.’s Supervisory Board remained unchanged and the committee was composed of one member.
14.11 Information about agreements concluded between the issuer and the managerial staff, providing for compensation in the event of their resignation or dismissal from the occupied post without a valid reason or when their resignation or dismissal are caused by a merger of the issuer through acquisition
Members of the Management Board dismissed from their posts are entitled to a one-off dismissal payment, not exceeding their twelve months’ remuneration.
The non-competition agreement with the Members of the Management Board after the termination of employment provides for a compensation amounting to 100% of monthly remuneration for a period not exceeding 12 months.
14.12 Information about shareholders holding directly or indirectly significant stakes of shares
As stated in the notifications received under art. 69 of the Act of July 29 th , 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading and Public Companies – Journal of Laws no. 184, item 1539, as amended), the following Shareholders hold at least 5% of the total number of votes at the general meetings of the company:
State Treasury – 10,270,800 shares amounting to 36.68% of CIECH S.A.’s share capital; number of votes: , making up a 36.68% share in the overall number of votes at the General Meeting of Shareholders;
Otwarty Fundusz Emerytalny (Open Pension Fund) PZU “Złota Jesie ń” – 1,712,732 shares amounting to 6.12% of CIECH S.A.’s share capital; number of votes: 1,712,732, making up a 6.12% share in the overall number of votes at the General Meeting of Shareholders;
Pioneer Pekao Investment Management S.A. (PPIM) – 5,498,875 shares amounting to 19.64% of CIECH S.A.’s share capital; number of votes: , making up a 19.64% share in the overall number of votes at the General Meeting of Shareholders;
including the investment fund Pioneer FIO (managed by PPIM) – 5,498,875 shares amounting to 19.64% of CIECH S.A.’s share capital; number of votes: , making up a 19.64% share in the overall number of votes at the General Meeting of Shareholders.
On April 15 th, 2010, Pioneer Pekao Investment Management SA (PPIM), under its agreement for services involving the management of an investment fund portfolio, concluded between Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych SA and PPIM, acting pursuant to Art. 69 section 1 item 1 of the Act of July 29 th , 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading and Public Companies (Journal of Laws of 2005, no. 184, item 1539, with further amendments), informed the Company about an increase in its share to 19.64% of overall number of votes at Ciech S.A.’s General Meeting of Shareholders with regard to financial instruments included in the portfolio of Pioneer Fundusz Inwestycyjny Otwarty (Pioneer FIO) established by Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych SA (Investment Funds Association, Association). The above-mentioned change was the sole result of transforming open investment funds established by the Association into sub-funds of Pioneer FIO:
1. “Pioneer Pieni ęŜ ny Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Pieni ęŜ ny”, a sub-fund of Pioneer FIO; 2. “Pioneer Obligacji Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Obligacji ”, a sub-fund of Pioneer FIO; 3. “Pioneer Obligacji Plus Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Obligacji Plus”, a sub-fund of Pioneer FIO; 4. “Pioneer Stabilnego Wzrostu Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Stabilnego Wzrostu”, a sub-fund of Pioneer FIO; 5. “Pioneer Zrównowa Ŝony Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Zrównowa Ŝony”, a sub-fund of Pioneer FIO”; 6. “Pioneer Aktywnej Alokacji Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Aktywnej Alokacji”, a sub-fund of Pioneer FIO”; 7. “Pioneer Akcji Polskich Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Akcji Polskich”, a sub-fund of Pioneer FIO”; 8. “Pioneer Małych i Średnich Spółek Rynku Polskiego Fundusz Inwestycyjny Otwarty” was transformed into “Pioneer Małych i Średnich Spółek Rynku Polskiego”, a sub-fund of Pioneer FIO.
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The transformations listed above took place on April 9 th , 2010 and as of that date Pioneer FIO acquired all rights and obligations of the transformed funds. Following the change, Pioneer FIO’s portfolio included a total of 5,498,875 shares of the Company, making up 19.64% of the share capital. The shares authorised the holder to 5,498,875 votes, which is a 19.64% share in the overall number of votes at the General Meeting of Shareholders. Before the change, Pioneer FIO’s portfolio included a total of 32,035 shares of the Company, making up 0.11% of the share capital. The shares authorised the holder to 32,035 votes, which is a 0.11% share in the overall number of votes at the General Meeting of Shareholders.
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FINANCIAL STATEMENTS OF CIECH S.A. FOR THE FINANCIAL YEAR JANUARY 1 ST , 2009 – DECEMBER 31 ST , 2009
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PROFIT AND LOSS ACCOUNT OF CIECH S.A.
01.01-31.12.2009 01.01-31.12.2008 Note Continued Discontinued Continued Discontinued PLN ‘000 TOTAL TOTAL operations operations operations operations Net sales of products, goods and materials 1,901,077 - 1,901,077 2,054,150 - 2,054,150 Cost of sales (1,565,962) - (1,565,962) (1,729,379) - (1,729,379) Gross profit/loss on sales 335,115 - 335,115 324,771 - 324,771 Other operating revenues 4 5,979 - 5,979 37,517 - 37,517 Selling costs (100,376) - (100,376) (121,114) - (121,114) General and administrative expenses (72,168) - (72,168) (72,506) - (72,506) Other operating expenses 4 (21,411) - (21,411) (20,168) - (20,168) Operating profit/loss 147,139 - 147,139 148,500 - 148,500 Financial revenues 4 96,412 - 96,412 170,924 - 170,924 Financial expenses 4 (357,106) - (357,106) (384,563) - (384,563) Net financial revenues/expenses (260,694) - (260,694) (213,639) - (213,639) Profit/loss before tax (113,555) - (113,555) (65,139) - (65,139) Income tax 5 (12,212) - (12,212) 9,200 - 9,200 Net profit/loss (125,767) - (125,767) (55,939) - (55,939)
Net profit for the financial year (125,767) - (125,767) (55,939) - (55,939) including: Net profit/loss attributable to controlling shareholders (125,767) - (125,767) (55,939) - (55,939) Earnings per share (in PLN): Basic 7 (4.49) (4.49) (2.00) (2.00) Diluted 7 (4.49) (4.49) (2.00) (2.00)
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STATEMENT OF COMPREHENSIVE INCOME OF CIECH S.A. 01.01.-31.12.2009 01.01.-31.12.2008 Continued operations Continued operations Net profit/loss for the financial year (125,767) (55,939) Other gross comprehensive income 66,066 (33,584) Available-for-sale financial assets (measurement recognised under revaluation reserve) 20,494 (33,584) Hedge accounting (measurement recognised under cash flow hedge) 45,572 - Income tax attributable to other components of comprehensive income (12,553) 6,381 Other net comprehensive income 53,513 (27,203) COMPREHENSIVE INCOME (72,254) (83,142)
The profit and loss account should be analysed only together with notes and explanations, which constitute an integral part of the consolidated financial statements.
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STATEMENT OF FINANCIAL POSITION OF CIECH S.A.
PLN ‘000 Note 31.12.2009 31.12.2008 ASSETS Fixed assets Tangible fixed assets 9 10,957 13,259 Right of perpetual usufruct 11 - - Intangible assets, including: 12 8,750 8,648 Investment real property 10 3,844 15,855 Non-current receivables 14 39,741 46,270 Other long-term investments 15 1,376,023 1,367,024 Deferred income tax assets 5 16,525 40,478 Total fixed assets 1,455,840 1,491,534 Current assets Inventory 16 26,313 17,365 Short-term investments 18 87,883 64,781 Income tax receivables 5,228 12,364 Trade and other receivables 17 355,300 405,681 Cash and cash equivalents 19 46,445 32,085 Total current assets 521,169 532,276 Total assets 1,977,009 2,023,810
EQUITY AND LIABILITIES Equity Share capital 20 164,115 164,115 Share premium 20 151,328 151,328 Revaluation reserve 20 (9,559) (26,159) Other reserve capitals 20 76,199 76,199 Cash flow hedge 20 36,913 - Retained profits 98,100 223,867 Total equity 517,096 589,350 Liabilities Loans, borrowings and other debt instruments 21 426,196 299,802 Other non-current liabilities 21 57,406 136,699 Employee benefits 23 1,776 1,644 Total non-current liabilities 485,378 438,145 Loans, borrowings and other debt instruments 24 477,957 560,498 Trade and other liabilities 24 492,572 428,047 Income tax liabilities - - Provisions (short-term provisions for employee benefits and other 22, 23 4,006 7,770 provisions) Total current liabilities 974,535 996,315 Total liabilities 1,459,913 1,434,460 Total equity and liabilities 1,977,009 2,023,810
The statement of financial position should be analysed only together with notes and explanations, which constitute an integral part of the consolidated financial statements.
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STATEMENT OF CHANGES IN EQUITY OF CIECH S.A.
Equity components Other Share Equity Share Cash flow Retained Total PLN ‘000 related to Revaluatio reserve capital shares premium hedge profits equity assets held for n reserve capitals sale Equity as at (beginning of period) 01/01/2009 Previously reported 164,115 151,328 - (26,159) (70,934) 76,199 294,801 589,350 Changes in accounting principles - Adjustments of errors from previous periods 70,934 (70,934) - Equity (restated) as at: 01/01/2009 164,115 - 151,328 - (26,159) - 76,199 223,867 589,350 Share issue - Dividend - - Comprehensive income in 2009 16,600 36,913 (125,767) (72,254) Equity as at (end of period) 31/12/2009 164,115 - 151,328 - (9,559) 36,913 76,199 98,100 517,096
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STATEMENT OF CHANGES IN EQUITY OF CIECH S.A.
Equity Other Share Equity Share components Cash flow Retained Total PLN ‘000 Revaluatio reserve capital shares premium related to assets hedge profits equity n reserve capitals held for sale Equity as at (beginning of period) 01/01/2008 Previously reported 164,115 151,328 - 1,044 - 76,199 337,766 730,452 Changes in accounting principles ------Adjustments of errors from previous periods ------Equity (restated) as at: 01/01/2008 164,115 - 151,328 - 1,044 - 76,199 337,766 730,452 Share issue ------Dividend ------(57,960) (57,960) Comprehensive income in 2008 - - - - (27,203) - - (55,939) (83,142) Equity as at (end of period) 31/12/2008 164,115 - 151,328 - (26,159) - 76,199 223,867 589,350
The summary of changes in equity should be analysed only together with notes and explanations, which constitute an integral part of the consolidated financial statements.
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CASH FLOW STATEMENT of CIECH S.A. PLN ‘000 Cash flows from operating activities 01.01-31.12.2009 01.01-31.12.2008 Net profit (loss) for the period (125,767) (55,939) Adjustments Amortisation/depreciation 6,226 5,837 Recognition / reversal of write-downs 153,568 72,829 Foreign exchange profit / loss 20,521 (91,665) Profit / loss on investment activities 255 (29,544) Profit / loss on disposal of tangible assets (148) (33) Dividends and interest (10,631) (1,934) Input income tax 12,212 (9,200) Operating profit / loss before changes in working capital and provisions 56,236 (109,649) Change in receivables 16,711 (51,076) Change in inventory (8,948) (1,280) Change in current liabilities 75,076 (46,755) Change in provisions and employee benefits (3,631) (8,404) Net cash generated from operating activities 135,444 (217,164) Interest paid (32,537) (36,666) Income tax paid 6,901 (46,208) Cash flows from options (98,730) 3,518 Measurement of financial instruments (43,775) 228,169 Other adjustments (including adjustments of cash flows from options) 98,730 (3,518) Net cash from operating activities 66,033 (71,869)
Cash flows from investment activities Inflows (in “+”) 90,466 76,143 Disposal of intangible and tangible fixed assets 266 35,447 Disposal of investments 246 1,758 Dividends received 9,210 8,314 Interest received 36,691 4,470 Disposal of a subsidiary - 17,821 Inflows from borrowings granted 44,053 8,333 Outflows (in “-”) (197,242) (150,044) Acquisition of a subsidiary (after deduction of acquired cash) (138,869) (32,999) Acquisition of intangible and tangible fixed assets (4,192) (11,651) Purchase of other investments - (49,920) Borrowings granted (54,181) (55,474) Net cash from investment activities (106,776) (73,901)
Cash flows from financial activities Inflows (in “+”) 233,768 234,764 Loans and borrowings raised 233,768 234,764 Inflows from issue of bonds - - Outflows (in “-”) (176,528) (92,401) Dividends paid and other payments to controlling shareholders - (57,960) Repayment of loans and borrowings (176,528) (34,441) Net cash from financial activities 57,240 142,363
Total net cash flows 16,497 (3,407)
Cash as at the beginning of period 32,085 33,274 Effect of foreign exchange differences (2,137) 2,218 Cash as at the end of period 46,445 32,085
The cash flow statement should be analysed only together with notes and explanations, which constitute an integral part of the financial statements.
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NOTES AND EXPLANATIONS TO THE FINANCIAL STATEMENTS
1. General information
The presented financial statements of CIECH S.A. for the period between January 1st, 2009 and December 31st , 2009, including comparative data, was approved for publication by the Management Board of CIECH S.A. on April 28 th , 2010. The financial statements have been prepared in accordance with all International Financial Reporting Standards (IFRS) adopted in the European Union.
The accounting principles are published under section 2 of notes and explanations to the financial statements.
Ciech S.A. has its registered office in Warsaw at ul. Puławska 182. Since 1995, Ciech S.A. has been registered in Commercial Register “B” under the number RHB 44665, maintained by the District Court for the Capital City of Warsaw, 16 th Commercial Registry Division. On May 24 th , 2001, the District Court for the Capital City of Warsaw, 19 th Commercial Department of the National Court Register issued a decision about entering Ciech S.A. into the Register of Companies of the National Court Register under the KRS number 0000011687. Currently, after organisational changes in the Court, Ciech S.A. is registered under the number 0000011687 in the District Court for the Capital City of Warsaw, 13 th Commercial Department of the National Court Register.
As at December 31 st , 2009, the State Treasury held a significant share and was able to control Ciech S.A.
According to the Statute, Ciech S.A.’s core business consists in: commercial activity including trade activity, investment activity, manufacturing activity, service activity and financial operations with particular focus on foreign and domestic trade in chemicals and activity connected therewith. The Company is also licensed to act as an agent for Polish and foreign companies.
2. Legal grounds for compiling the financial statements
The Management Board of Ciech S.A. declares to the best of its knowledge that the financial statements as at December 31 st , 2009 and comparative data have been prepared in accordance with the applicable accounting principles and that they are a true, accurate and fair reflection of Ciech’s material and financial condition and its financial result. The Management Board of Ciech S.A. also declares that the financial statements present an accurate account of developments and achievements and the Company’s condition, including the description of major risks and threats.
The Management Board of Ciech S.A. declares that the entity authorised to audit financial statements, auditing the financial statements for the period between January 1 st , 2009 and December 31 st , 2009, was appointed in accordance with the applicable legal regulations and is: Deloitte Audyt Sp. z o.o., having its registered office in Warsaw, entered into the list of entities authorised to audit financial statements under register no. 73, kept by the National Chamber of Statutory Auditors. The aforesaid entity and the certified auditors performing the review satisfy all conditions necessary to issue an unbiased and independent opinion and audit report, pursuant to the applicable legal regulations.
The financial statements were compiled based on accounting books maintained according to the International Financial Reporting Standards.
The accounting year in Ciech S.A. is the calendar year.
The profit and loss account is compiled in a calculation format and the cash flow statement uses the indirect method.
The Polish zloty (PLN) is the measurement and reporting currency of the presented financial statements. Unless provided otherwise, the data in the financial statements has been presented in thousands of Polish zlotys (PLN ’000).
For the purposes of presenting selected financial data, particular assets and liabilities disclosed in the balance sheet were converted into EURO according to the average exchange rate of the National Bank of Poland as at the balance sheet date (December 31 st , 2009), i.e. 4.1082. Individual items of the profit and loss account were converted into EURO according to the exchange rate calculated as the arithmetic mean of the average EURO exchange rates determined by the National Bank of Poland as at the last day of every month, i.e. from January 2009 to December 2009, and amounts to 4.3406.
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The preparation of financial statements in compliance with the IFRS requires the Management Board to exercise professional judgement, estimates and assumptions that impact the adopted accounting principles and the value of assets, liabilities, revenues and expenses presented. All estimates and related assumptions are based on historical experience and various other factors considered reasonable under the given circumstances, and the results of such estimates are the basis for professional judgement of the carrying value of assets and liabilities, which cannot be calculated using other sources. The actual value may differ from the estimated value. The estimates and related assumptions are subject to regular verification. Changes in accounting estimates are recognised in the period in which they are made, if such changes apply solely to that period, or in the current period and future periods, if such changes apply both to the current and future periods.
The presented financial statements have been prepared on a going concern basis.
The Management Board has no information on any circumstances indicating major threats to the Company’s going concern status. The duration of the business activity is indefinite.
Information on the Company’s financial condition is presented in note 21.1.
Statement by Management Board concerning compliance with the International Financial Reporting Standards
The Management Board of CIECH S.A. declares that the financial statements for the presented period and the comparable period have been presented in accordance with all the International Financial Reporting Standards (IFRS) adopted in the European Union and the applicable Interpretations announced as EC regulations.
Standards and interpretations applied for the first time in 2009
• IFRS 8 “Operating Segments” – effective for annual periods beginning January 1 st , 2009 or later, • Amendments to IFRS 1 “First-time adoption of IFRS” and IAS 27 “Consolidated and Separate Financial Statements” – Cost of an investment in a subsidiary, jointly controlled entity or associate – effective for annual periods beginning January 1 st , 2009 or later, • Amendments to IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” – Improving Disclosures about Financial Instruments – effective for annual periods beginning January 1st , 2009 or later, • IFRS (2008) “Amendments to International Financial Reporting Standards” – effective for annual periods beginning January 1 st , 2009 or later, • Amendments to IAS 32 “Financial Instruments: Presentation” and IAS 1 “Presentation of Financial Statements” – Puttable financial instruments and obligations arising on liquidation – effective for annual periods beginning January 1 st , 2009 or later, • Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures” – effective as of July 1 st , 2008, • IAS 1 (revised) “Presentation of financial statements” – Revised presentation, approved by the EU on December 17 th , 2008 (effective for annual periods beginning January 1 st , 2009 or later), • IAS 23 Borrowing Costs – effective for annual periods beginning January 1st , 2009 or later, • Amendments to IFRS 2 “Share-based Payment” – Vesting Conditions and Cancellations – effective for annual periods beginning January 1 st , 2009 or later, • Amendments to IFRIC 9 “Reassessment of Embedded Derivatives” and IAS 39 “Financial Instruments: Recognition and Measurement” – Embedded Derivatives – effective for annual periods beginning January 1 st , 2009 or later, • Interpretation IFRIC 11 “IFRS 2 – Group and Treasury Share Transactions” – effective for annual periods beginning March 1 st , 2008 or later, • Interpretation IFRIC 13 “Customer Loyalty Programmes” – effective for annual periods beginning January 1 st , 2009 or later, • Interpretation IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” – effective for annual periods beginning January 1 st , 2009 or later.
The above-mentioned standards, interpretations and amendments did not have a material effect on the accounting policy previously applied in the entity, with the exception of IFRS, where there has been a change in the presentation of business segments in the consolidated statement.
Standards and interpretations published and approved by the EU but not yet effective
• IFRS 1 (revised) “First-time Adoption of IFRS” – effective for annual periods beginning January 1 st , 2010 or later, • IFRS 3 (revised) “Business Combinations” – effective for annual periods beginning July 1 st , 2009 or later,
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• Amendments to IFRS 2 “Share-based Payment” – Group and Treasury Share Transactions – effective for annual periods beginning January 1 st , 2010 or later, • IFRS (2009) “Amendments to International Financial Reporting Standards” – effective for annual periods beginning January 1 st , 2010 or later, • Amendments to IAS 27 “Consolidated and Separate Financial Statements” – effective for annual periods beginning January 1 st , 2010 or later, • Amendments to IAS 32 “Financial Instruments: Presentation” – Classification of Rights Issues – effective for annual periods beginning February 1 st , 2010 or later, • Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” – Eligible Hedged Items – effective for annual periods beginning July 1 st , 2009 or later, • IFRIC 12 “Service Concession Arrangements” – effective for annual periods beginning March 30 th , 2009 or later, • IFRIC 15 “Agreements for the Construction of Real Estate” – effective for annual periods beginning January 1 st , 2010 or later, • IFRIC 16 “Hedges of a Net Investment in a Foreign Operation” – effective for annual periods beginning July 1 st , 2009 or later, • IFRIC 17 “Distributions of Non-cash Assets to Owners” – effective for annual periods beginning November 1 st , 2009 or later, • IFRIC 18 “Transfers of Assets from Customers” – effective for annual periods beginning November 1 st , 2009 or later.
CIECH S.A. decided not to adopt the above standards and interpretations earlier. According to estimates, the above-mentioned standards, interpretations and amendments would have had no material effect on the financial statements, had they been applied as at the balance sheet date.
Standards and Interpretations adopted by IASB but not yet approved by the EU The IFRS approved by the EU do not differ significantly from the regulations adopted by the International Accounting Standards Board (IASB), except for the following standards, amendments and interpretations, which as at April 30 th , 2010, have not been adopted for application:
• IFRS 9 “Financial instruments” – effective for annual periods beginning January 1 st , 2013 or later, • Amendments to IAS 24 “Related Party Disclosures” – effective for annual periods beginning January 1st , 2011 or later, • Amendments to IFRS 1 “First-time Adoption of IFRS” – Additional Exemptions for First-time Adopters – effective for annual periods beginning January 1 st , 2010 or later, • Amendments to IFRS 1 “First-time Adoption of IFRS” – Limited Exemption from Comparative IFRS 7 for First-time Adopters – effective for annual periods beginning July 1 st , 2010 or later, • Amendments to IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” – Prepayments of a Minimum Funding Requirement – effective for annual periods beginning January 1 st , 2011 or later. • Interpretation IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” – effective for annual periods beginning July 1 st , 2010 or later.
According to the company’s estimates, the above-mentioned standards, interpretations and amendments would have had no material effect on the financial statements, had they been applied as at the balance sheet date. However, the EU still has not regulated hedge accounting for the portfolio of financial assets and liabilities, whose principles have not yet been approved by the EU. According to the company’s estimates, the application of hedge accounting for the portfolio of financial assets or liabilities under IAS 39 “Financial Instruments: Recognition and Measurement” would have had no material effect on the financial statements, had it been applied as at the balance sheet date.
Change in comparative data
Since the new standard IFRS 8 “Operating Segments” comes into force, CIECH S.A., based on internal reports submitted to the Management Board, identified new business segments described in section 3 of CIECH S.A.’s financial statements.
The financial statements for 2008 also changed as a result of adjustment of an error in recognising options designated to hedge accounting. This matter is discussed in detail in section 37 of CIECH S.A.’s financial statements.
Other accounting principles presented below have been applied for all periods presented in the financial statements.
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Accounting principles
In 2009, Ciech S.A. changed its accounting principles with regard to presenting movements in provisions due to changes in the discount rates and the effect of time. Previously, these changes were presented as other revenues or operating costs. Starting from 2009, CIECH S.A. has presented them as financial activities. Since such amounts in 2008 were not material, no changes in comparative data were made.
The financial statements have been prepared in accordance with the concept of historical cost, except for the measurement of some financial instruments. a) Financial instruments
Financial instruments are recognised and measured in compliance with IAS 32 (Financial Instruments: Presentation), IAS 39 (Financial instruments: Recognition and Measurement) and IFRS 7 (Financial Instruments: Disclosures). The principles of measuring and recognising of financial assets described below do not refer to the measurement of shares and holdings in subsidiaries, lease agreements, financial instruments under employee programmes, and financial instruments issued by the entity and constituting its equity instruments.
The most important asset which are subject to the principles of measurement for financial instruments include: 1. holdings in other entities, 2. shares of other entities, 3. bonds issued by other entities, 4. other securities issued by other entities, 5. borrowing receivables, 6. derivatives (options, forwards, futures, swaps, embedded derivatives), 7. other financial assets, subject to the reservation below.
Current trade receivables are measured at the amortised cost with the use of the effective interest rate method and decreased by potential impairment losses.
The most important liabilities which are subject to the principles of measurement for financial instruments include: 1. borrowing liabilities, 2. loan liabilities, 3. liabilities due to bonds issued, 4. other financial liabilities, subject to the reservation below.
Trade liabilities are measured at the amortised cost with the application of the effective interest rate method.
Classification of financial instruments
Financial assets are classified into: 1. financial assets measured at fair value through the financial result, 2. granted borrowings and equity receivables, 3. held-to-maturity financial assets, 4. financial assets available for sale.
Financial liabilities are classified into:
1. financial liabilities measured at fair value through the financial result, 2. other financial liabilities.
(i) Financial assets measured at fair value through the financial result Financial assets measured at fair value through the financial result are classified as short-term assets and disclosed at the fair value, while profits and losses arising from their measurement are recognised directly in the profit and loss account. Financial assets measured at fair value through the financial result consist of the following financial assets: acquired to be sold in a short period of time, accounting for a part of jointly managed portfolio, for which there is a confirmation of earning short-term profits in the future, assigned to this category at the initial recognition. Financial assets measured at fair value through the financial result also include derivatives, provided that the conditions of applying hedge accounting have not been satisfied.
(ii) Held-to-maturity assets
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Held-to-maturity assets are financial assets other than derivatives, with established or possible to establish payment dates and established maturity date, in relation to which the Group has a strong intention and is capable of keeping them until the lapse of the maturity date and which are not borrowings or receivables, and which upon initial recognition were not defined as financial assets measured at the fair value through the financial result or financial assets available for sale.
The Group does not classify any financial assets as held-to-maturity if in the current financial year or in the last two financial years it sold or reclassified more than a non-significant amount of investments maintained until the maturity date, save for sale or reclassification performed: so close to the date of maturity or redemption of a financial asset that the changes of market interest rates would have no major effect on the fair value of this financial asset; upon the recovery of the fundamental part of nominal amount through repayment or prepayment according to the schedule; or as a result of a separate event, which is not subject to control, is not a repetitive event and which could not have been predicted on the basis of reasonable prerequisites. Financial assets held-to-maturity are measured at the amortised cost with the application of the effective interest rate method.
(iii) Borrowings and receivables Borrowings and receivables are financial assets other than derivatives, with established or possible to establish payment dates, not quoted on the active market, other than financial assets, which: the Group intends to sell immediately or in near future, classified as marketable and those which upon initial recognition were defined as financial assets measured at the fair value through the financial result; upon initial recognition were defined by the Group as available for sale; or the Group may not generally recover the full initial investment amount for a reason other than a deterioration of loan service, classified as available for sale. Borrowings and receivables are measured at the amortised cost with the application of the effective interest rate method.
(iv) Financial assets available for sale Financial assets available for sale are financial assets other than derivatives, which have been recognised as available for sale or which are not loans and receivables, investments held-to-maturity and financial assets measured at fair value through the financial result. Financial assets available for sale are measured at fair value, while profits and losses from the measurement are recognised in the revaluation reserve. For interest-bearing debt instruments belonging to this category, the interest established with the application of the effective interest rate method is presented directly in the profit and loss account.
(v) Financial liabilities Marketable financial liabilities, including, in particular, derivatives with negative fair value, which have not been designated as hedging instruments, are recognised at fair value, while profits and losses from their measurement are recognised directly in the profit and loss account. Other financial liabilities are measured at the amortised cost with the application of the effective interest rate method. All financial liabilities are entered into accounting books at the date of the conclusion of a relevant contract.
Principles of measurement and presentation of financial instruments in the financial statements: Group of assets or liabilities Measurement principle Recognition principle Assets measured at fair value At fair value (except for those for which Difference from measurement through the financial result fair value cannot be established) recognised in the financial result of the current reporting period under financial revenues or financial costs Liabilities measured at fair value At fair value (except for those for which Difference from measurement through the financial result fair value cannot be established) recognised in the financial result of the current reporting period under financial revenues or financial costs Other financial liabilities At the amortised cost with the Difference from measurement adjusts application of the effective interest rate the value of a measured liability and is (IRR) recognised in the financial result of the current reporting period. Granted borrowings and equity At the amortised cost with the Difference from measurement adjusts receivables application of the effective interest rate the value of a measured asset and is (IRR) and when the payment term is not recognised in the financial result of the known at the acquisition price (e.g. for current reporting period. loans having no repayment deadline) Held-to-maturity assets At the amortised cost with the Difference from measurement adjusts application of the effective interest rate the value of a measured asset and is (IRR) recognised in the financial result of the current reporting period.
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Group of assets or liabilities Measurement principle Recognition principle Assets available for sale At fair value (except for those for which Difference from measurement at fair fair value cannot be established) value is recognised under revaluation reserve. For debt instruments, the interest is recognised directly in the profit and loss account. Marketable or available-for-sale At the acquisition price adjusted by Asset or liability is recognised at the financial assets and liabilities whose impairment losses acquisition price until its realisation (e.g. fair value cannot be established sale). Impairment losses are entered as financial costs.
Hedge accounting and embedded derivatives
Hedge accounting The aim of derivatives and, in certain circumstances, of other financial assets or liabilities designated as hedging instruments is to hedge the fair value of assets or liabilities, or future cash flows so that the change in their fair value balances in full or in part the change in the fair value of a hedged item or future cash flows related to the hedge item.
The aforesaid derivatives may be considered a hedge and entered into the books in accordance with the principles of hedge accounting after satisfying at least the following conditions stipulated in IAS 39: − Prior to hedging, the entity is in the possession of documentation, including at least: determination of risk management objectives and strategy, identification of a hedging instrument and assets, liabilities or planned transactions hedged by this instrument, characteristics of risk connected with the hedged item or planned transaction, hedging period, description of a selected method of measuring the effectiveness of a fair value hedge or cash flow hedge of a hedged item connected with a specific type of risk.
− Hedging is highly effective in terms of balancing changes in fair value or cash flows. The effectiveness of a hedge is determined through comparing the change in the value of a hedging instrument or cash flows arising therefrom and the change in the value of the hedged item or cash flows arising therefrom. A hedge is considered highly effective, if for the entire hedging period almost the whole amount of changes in fair value of a hedged item or cash flows connected therewith is made good by the changes in fair value or cash flows of a hedging instrument, and the actual effectiveness level is between 80% and 125%.
− The effectiveness of a hedge may be credibly assessed through measuring the fair value of a hedged item or cash flows connected therewith and the fair value of a hedging instrument. The effectiveness of a hedge is assessed retrospectively (so-called ex-post tests), determining whether a given hedge relationship was highly effective in the audited accounting periods, and prospectively (so-called ex-ante tests), determining whether a given hedge relationship is still expected to be highly effective.
− When hedging cash flows from a future transaction, such a transaction must be highly probable.
The adoption of cash flow hedge accounting makes it possible to adjust the influence on the financial result of hedge instrument measurement and the realisation of a hedged item by entering an effective part of the hedge under cash flow hedge. This makes it possible to reduce the fluctuations of the financial result pertaining to derivatives measurement and to achieve a compensation effect in the profit and loss account in one reporting period. Consequently, the economic and accounting effect of a hedge is reflected in the same period.
Gains and losses arising from the change in fair value of a cash flow hedge are recognised under a separate equity item (cash flow hedge) in such a portion in which a given instrument constitutes an effective hedge of a relevant hedged item. The ineffective portion is presented in the profit and loss account (financial costs/revenues).
A derivative designated as a fair value hedge is an instrument used to limit the risk of changes of the fair value of an asset, liability or probable future liability presented in the balance sheet and its influence on the financial result (or its portion) and may be attributed to a specific risk factor connected therewith.
Gains and losses arising from the change in fair value due to the measurement of a fair value hedge as at the balance sheet date are recognised under a separate item of the profit and loss account under financial revenues or costs. A hedged asset/liability will be measured at fair value in the amount hedged only due to a risk factor subject to hedging. The changes in the fair value of hedged items are recognised as financial costs or revenues, depending on the change.
In the event of hedging a probable future transaction, if its realisation turns out to be impossible, the accumulated effective result on hedging transactions recognised under cash flow hedge should be entered as financial revenues or costs.
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The Company should cease to record instruments as hedging instruments if a derivative expires, is sold, terminated or realised, or if the Company ceases to designate a given instrument as a hedging instrument. In such a case, the accumulated gains/losses connected with the hedging instrument, previously recognised under a separate equity item, remain under equity until the transaction is realised.
Embedded derivatives Agreements with an embedded derivative are agreements containing conditions causing that a part of cash flows due to the agreement changes similarly to cash flows arising from independent derivatives. Embedded derivatives are subject to exclusion from a compound instrument and to separate measurement at fair value if all the following conditions are satisfied: 1. the economic nature and risk of the embedded instrument are not strictly related to the economic nature and risk of the agreement in which the instrument is embedded, 2. independent instrument with the same realisation conditions as the embedded instrument would fit the definition of a derivative, 3. it is possible to reliably establish the fair value of an embedded derivative, 4. a compound derivative is not measured and recognised at fair value in the financial statement. The FIFO (first in – first out) method is applied to establish the costs due to the outflow of financial instruments. b) Tangible fixed assets (including the right of perpetual usufruct)
(i) Own tangible fixed assets Tangible fixed assets are recorded in the books according to their acquisition price or manufacturing cost, decreased by depreciation charges and impairment losses. The acquisition price includes the purchase price of an asset (i.e. the amount due to a seller, decreased by deductible taxes: tax on goods and services, excise tax), regulatory liabilities (regards import) and costs directly connected with the purchase and adjustment of an asset for use, including the costs of transport, loading, unloading and storage. Discounts and other similar reductions and recoveries decrease the acquisition price of an asset. The production cost of a tangible asset or tangible asset under construction covers the total of costs incurred by the entity in the period of its construction, assembly, adjustment and improvement until its acceptance for use (or until the balance sheet date if the asset has not been transferred for use), including non-deductible goods and services tax and excise tax as well as the costs of service of liabilities incurred to finance the acquisition (manufacture) of the tangible asset, taking into account currency differences up to the amount of adjustment of interest pertaining to such liabilities.
Tangible fixed asset items which were revaluated to the fair value as at January 1 st , 2004, i.e. the day of first-time application of IFRS by the Group, are measured based on the recognised cost, which is the fair value as at the revaluation date. The effect of the revaluation was recognised under retained profits from previous years.
(ii) Tangible fixed assets used under lease agreements Lease agreements under which the Group bears practically the entire risk and derives practically all benefits arising from the holding of tangible fixed assets are classified as financial lease agreements. Tangible fixed assets acquired through financial lease are initially recognised at fair value or current value of minimum lease charges, whichever is lower, and later decreased by depreciation charges and impairment losses. Payments due to operating lease agreements concluded by the Group’s entities are recognised in the profit and loss account in the lease period.
(iii) Future expenditures The costs incurred in future periods and aimed at replacing separately recognised parts of a tangible fixed asset are subject to activation. Other costs are capitalised only if they may be credibly measured and increase future economic benefits connected with a given tangible asset. Other expenditures are recognised in the profit and loss account as costs on a regular basis.
According to IAS 16 (paragraph 13), a separate part of a tangible asset, requiring replacement at regular intervals, is depreciated in accordance with its useful life. Renovation costs are activated when the amount of outlays is related to parts recognised as a separate component of a tangible asset. If those components are not separated at the time of recognising a tangible assets, it may be done upon incurring subsequent costs.
Pursuant to IAS 16 (paragraph 14), the Group increases the value of tangible assets by the value of outlays for regular overhauls, necessary for the functioning of a given tangible asset. These expenditures are treated as a separate tangible asset and depreciated through the anticipated period to the next planned overhaul. Upon capitalisation of new costs of overhauls, the non-depreciated value of previous renovations is allocated to operating expenses.
Upon the acquisition or creation of a tangible asset, the Group separates from the acquisition price or the manufacturing cost a value equal to the expenditures that need to be made during the next overhaul of a given tangible asset and depreciates it through the anticipated period left until the next planned overhaul.
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(iv) Amortisation Tangible fixed assets, alternatively their material and separate components, are depreciated under the straight- line method through the useful economic life. Lands are not depreciated. The Company assumes the following useful economic lives for the following categories of tangible assets:
Buildings 20 - 40 years Plant and equipment 2 - 20 years
Depreciation period and final value are subject to verification as at every balance sheet date. Any changes resulting from verification are recognised as a change of estimated value pursuant to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.
For tangible assets used under lease agreements, if there is no certainty as to the acquisition of a tangible asset prior to the expiry of the lease agreement, the value of tangible assets is fully depreciated in one of the two periods, whichever is shorter: − term of lease agreement, − useful life. When classifying an agreement as a financial lease agreement, the subject of the agreement is recorded in the Company’s (lessee’s) tangible assets and depreciation charges are made in accordance with general principles.
c) Intangible assets
(i) Other intangible assets Other intangible assets acquired by the Company are disclosed based on their acquisition price, decreased by amortisation charges and impairment losses. The expenses on internally created goodwill and commercial brands are recognised in the profit and loss account upon their incurrence.
(ii) Future expenditures Future expenditures on existing intangible assets are subject to capitalisation only when they increase future economic benefits connected with a given asset. Other expenditures are recognised directly in the profit and loss account as costs.
Costs of registering a substance in the REACH system, such as participation in research, consulting services linked to a specific registration, costs of preparing the registration documents and Chemical Safety Reports and registration fees, are activated as expenditures for intangible assets.
(iii) Amortisation Intangible assets are amortised under the straight-line method through their useful economic life. The Company assumes the following useful economic lives for the following categories of intangible assets:
Patents and licences 2 - 10 years Other 2 - 5 years
Depreciation period and final value are subject to verification as at every balance sheet date. Any changes resulting from verification are recognised as a change of estimated value pursuant to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.
d) Investment real property
Investment real property is maintained to obtain revenue from rent, increase in their value or for both reasons.
Real property investments are measured in accordance with the principles of tangible assets measurement, i.e. at the acquisition prices or manufacturing cost decreased by depreciation charges and impairment losses. Investment real property is depreciated under the straight-line method.
Revenues from property lease to third parties are disclosed in accordance with the principles set forth in section n).
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e) Trade and other receivables
Current trade and other receivables are measured at the amortised cost with the application of the effective interest rate method and decreased by possible impairment losses.
Receivables in foreign currencies are recognised as at the average NBP exchange rate effective for a given currency on the last working day preceding the day of operation, unless another exchange rate was determined in the customs declaration or other document binding for the entity.
At the balance sheet date, receivables in foreign currencies are measured on the basis of the average exchange rate established for a given currency by the National Bank of Poland on that day.
The value of receivables is updated taking into account the level of probability of their payment through creating a write-down. The establishment of a write-down is obligatory for the following receivables: − from debtors put into liquidation or bankruptcy, up to the amount of receivables not covered by a guarantee or other collateral, reported to the liquidator or magistrate in bankruptcy proceedings, − from debtors, when the declaration of bankruptcy is dismissed and the debtor’s assets are insufficient to satisfy the costs of bankruptcy proceedings – in the full amount of receivables, − questioned by debtors (disputed receivables) and those the payment of which the debtor is in arrears with, and, based on the assessment of their material and financial condition, are unlikely to be repaid in the contractual amount – up to the amount of the claim not covered by a guarantee or other collateral, − receivables claimed in court. Furthermore, write-downs on receivables whose maturity date as at the balance sheet date exceeds 180 days are made in the amount of 100%. The amount established as a result of the abovementioned write-downs may be decreased if the Management Board is in possession of reliable documents, indicating that the receivables were secured and their payment is highly probable. The write-downs on receivables are allocated to other operating costs. Write-downs of 100% of accrued interest are created for interest receivables due to outstanding receivables. These write-downs are created upon calculation and allocated to financial costs.
f) Inventory
Goods and materials are measured at the acquisition price constituting the purchase prices increased by the costs directly connected with purchasing and adjusting an asset for use or trading.
Finished goods inventories and work in progress are measured at the manufacturing cost including direct costs and reasonable portion of costs indirectly connected with the manufacturing process.
The Company creates appropriate write-downs recognised under selling costs if the acquisition price and the cost of manufacturing an inventory asset are higher than the price that can be possibly achieved, established in the transaction of sale, performed in the course of regular economic activity and decreased by estimated finishing costs and costs necessary to accomplish sale.
Inventory is presented in the balance sheet in the net value, i.e. decreased by write-downs. Outlays of inventory are determined under the first in – first out method (FIFO).
(i) Standard production capacities Usually, standard production capacities should be at the level of 80% of the maximum production capacity. However, in justified cases the application of another ratio is possible. Standard production capacity may be estimated on the basis of historical data, e.g. for the last two or more years, if the volume of the conducted activity did not change significantly.
If the use of expected (standard) production capacity amounts to at least 85% of standard production capacity, then indirect fixed costs are allocated to manufacturing costs. If this index is lower than 85%, then indirect manufacturing costs are divided into eligible and ineligible ones.
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g) Cash and cash equivalents
Cash and cash equivalents include cash in hand and bank deposits on demand. Short-term investments that are not subject to significant changes of value and may be easily exchanged for a defined amount of cash and constitute a part of the Company’s liquidity management policy are recognised as cash and cash equivalents for the purposes of the cash flow statement. As at the balance sheet date, the currencies collected on bank accounts and in foreign currency funds are measured according to the average exchange rate for a given currency, established by the President of the National Bank of Poland.
h) Impairment losses
The carrying value of the Company’s assets other than inventory and deferred tax assets is subject to an analysis as at every balance sheet date in order to determine whether there exist prerequisites indicating the loss of their value. If such prerequisites exist, the Company estimates the recoverable value of the respective assets.
The recoverable value of goodwill, assets with indefinite useful life and intangible assets which are not useful yet is estimated as at every balance sheet date, irrespectively of the existence of the aforesaid prerequisites.
Impairment losses are recognised when the carrying value of an asset or a centre generating cash is higher than the recoverable value. Impairment losses are presented in the profit and loss account.
The loss of value of a centre generating cash is in the first place recognised as a decrease of goodwill ascribed to such a centre (group of centres) and then as a decrease of the carrying value of other assets of such a centre (group of centres) proportionally.
(i) Calculation of recoverable value Recoverable value in relation to held-to-maturity investments and receivables measured at the adjusted acquisition price is determined as the current value of future cash flows discounted with the application of the effective interest rate (internal rate of return of a given asset). Receivables with a short maturity date are not discounted.
In the case of capital instruments measured at the acquisition price, which are not listed on an active market and whose fair value cannot be otherwise credibly estimated, the current value of future cash flows is determined based on the current interest rate for similar financial assets.
(ii) Reversal of impairment losses In the case of an increase in the value of financial investments, which may be objectively attributed to events occurring after creating an impairment loss, the Company appropriately decreases the impairment loss in correspondence with the profit and loss account, except for capital investments classified as available for sale.
Impairment losses are reversible, if the estimates applied to establish the recoverable value have changed.
Impairment losses are reversible only to the amount of the carrying value of an asset, decreased by depreciation or amortisation charges, which would be disclosed if impairment losses were not recognised.
i) Equity
Ciech S.A.’s share capital is disclosed according to the nominal value adjusted by the effects of hyperinflation in the years 1989-1996.
In the case of purchasing equity shares, the payment amount together with direct transaction costs is disclosed as a change in equity. Purchased shares are recognised as a decrease in equity.
Dividends are recognised as liabilities in the period in which they have been approved.
Net profit (loss) is presented in equity under retained profits. j) Employee benefits
Retirement and annuity gratuities:
The amount of the Company’s liabilities due to retirement and annuity gratuities is calculated by an authorised actuary with the application of the method of projected unit credits discounted to the current value after deducting the fair value of any related assets.
66 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
The creation of such provisions for the first time in the case when the entity was previously obliged to do so is treated as an adjustment of fundamental errors. The creation of such provisions for the first time in the case when the entity was not previously obliged to do so is neither a change in the accounting policy nor an adjustment of fundamental errors.
The use of this type of provisions leads to a decrease in provisions (current encumbrance of operating expenses with amounts of paid out benefits with simultaneous adjustment of provisions at the end of the period is prohibited), while the release of the said provision increases other operating revenues.
k) Provisions
A provision is recognised if the Company is under obligation arising from previous events and it is probable that the fulfilment of this obligation will result in an outflow of economic benefits from the Company. When the effect of money value over time is significant, provisions are established through discounting expected future cash flows based on the pre-tax rate, which reflects the current market estimates of money value fluctuations in time and the risk connected with a given liability.
(i) Restructuring A restructuring provision is recognised if a detailed and official restructuring plan has been approved, and the process has started or was officially announced, and it is possible to estimate the value of future liabilities in a reliable manner.
l) Trade and other liabilities
Trade and other liabilities are divided into current and non-current liabilities, applying the following criteria: − those requiring payment within 12 months from the balance sheet date are considered current liabilities, − all liabilities which are not trade liabilities or do not fulfil the criteria for current liabilities are considered non-current liabilities.
Trade liabilities are measured as at the balance sheet date at the amortised cost (i.e. discounted with the application of the effective interest rate) and increased by possible interest for delay due as at the date of measurement.
All turnovers and balances of accounts should be reconciled, and possible adjustments entered into the books and recorded in the entity’s financial statements. In the event of discrepancies in reconciling the balance between an entity and its partner, the seller’s argument is accepted and, after closing the financial year, an adjustment is entered into the books of the current year.
Liabilities in foreign currencies as at the balance sheet date are measured according to the average exchange rate of the National Bank of Poland established for a given currency and effective on that day.
Liabilities in foreign currencies are disclosed according to NBP’s average exchange rate for a given currency effective on the last working day preceding the day of transaction.
Penalty interest due to late payments of liabilities is not accrued if the authorised entity submits a written declaration obliging not to accrue such interest. Otherwise, interest is calculated and recorded in accordance with the following principles; − on an ongoing basis, pursuant to the received interest notes, − according to the estimated value, whereby the estimate is based on historical data reflecting the amounts of interest calculated by particular contractors in comparison with the debt owed to them.
In every case, when calculating interest, other major risks causing such interest to be calculated should be taken into account. m) Contingent liabilities – off-balance sheet
The Company recognises possible future obligations to perform specific work, which depend on the occurrence of certain events, as contingent liabilities.
n) Revenues
(i) Sale of goods and provision of services
67 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Revenues from the sale of products and goods are recognised in the profit and loss account if the major risk and benefits arising from their ownership have been transferred to the buyer. Revenues from the provision of services are recognised in the profit and loss account proportionally to the level of their realisation as at the balance sheet date. The level of service realisation is evaluated on the basis of the results of a review of works. Revenues are not recognised, when there are serious doubts linked to obtaining due remuneration, reimbursement of costs or potential return of goods and products.
(ii) Lease revenues Revenues from the lease of investment real property are recognised in the profit and loss account with the application of the straight-line method. Granted discounts are recognised together with lease revenues. Lease revenues are recognised in other operating revenues.
(ii) Revenues from interest and dividends Interest revenues are disclosed in the profit and loss account according to the accrual principle with the application of the effective interest rate method. Income due to dividends is recognised in the profit and loss account when the Company acquires the right to a dividend.
o) Costs
(i) Payments due to financial lease Lease payments are divided into those accounting for financing costs and those decreasing the liability. The portion accounting for financing costs is ascribed to particular periods during the term of lease and recognised in the profit and loss account with the use of the effective interest rate method.
(ii) Net financing costs Net financing costs include interest payable due to debt, established on the basis of the effective interest rate, dividends due to preference shares, interest due to cash invested by the Company, due dividends, profits and losses due to currency differences and profits and losses related to hedging instruments, recognised in the profit and loss account.
p) Tax
Income tax disclosed in the profit and loss account includes the current and deferred portion. Income tax is recognised in the profit and loss account, except for the amounts related to items settled directly with equity. In such case, it is recorded in equity.
Current tax constitutes a tax liability due to taxed income for a given year, established with the application of tax rates in effect as at the balance sheet date and adjustment of previous years’ tax.
Deferred tax is calculated with the application of the balance sheet method, based on temporary differences between the value of assets and liabilities established for accounting purposes and the value thereof established for tax purposes. No provision is created for the following temporary differences: initial recognition of assets or liabilities that do not influence accounting and tax profit, differences related to investments in subsidiaries in the scope in which it is not probable that they will be realised in the foreseeable future. The recognised amount of deferred tax is based on the expectations as to the method of realising the carrying value of assets and liabilities, using tax rates effective or adopted as at the balance sheet date.
Deferred tax assets are recognised only when it is probable that future taxable income in relation to which a given asset may be realised will be available. Deferred tax assets are subject to reduction, if it may be stated that it is improbable that the tax benefits represented thereby will be realised.
Current portion of corporate income tax receivables and liabilities as well as deferred tax assets and provisions are compensated and disclosed in total in the financial statements.
q) Estimates adopted in the preparation of the financial statements
The preparation of financial statements in compliance with IFRS requires the Management Board to exercise professional judgements, assumptions and estimates that impact the value of assets, liabilities, revenues and expenses presented in the financial statement and notes thereto. The assumptions and estimates are based on the Management Board’s historical experience and best knowledge of current and future events and actions; however, the actual results may differ from those forecasted. In vital matters the Management board bases its estimates on the opinions of independent experts.
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The estimates and adopted assumptions are subject to regular verification. Changes in accounting estimates are recognised in the period in which they are made or in the current period and future periods (if such changes apply to the current and future periods).
The areas for which the Management Board made estimates include provisions, tangible fixed assets, intangible assets and financial assets. The adopted material assumptions related to making estimates have been presented in relevant notes to the financial statements.
r) Operations to be discontinued and tangible assets held for sale
Tangible assets are classified as assets allocated for sale, if their carrying value will be realised through a transaction of sale and when they are available for sale in the current condition with a high probability of conducting a transaction of sale. Discontinued operations are understood as a part of the Company disposed of or classified as meant for disposal and representing: − a separate main line of business, − a part of the plan of disposal of a separate main line of business or geographical segment, − a subsidiary acquired only for resale. A part of the Company is defined as operations and cash flows that may be distinguished in terms of operations and for the purposes of financial reporting (e.g. centres generating cash or groups thereof). These assets are measured at the lower of the two values: net sales price and net book value. The Company applies the principles of recognising assets allocated for sale in compliance with IFRS 5.
3. Information about activity segments
Ciech S.A.’s leading business classification is the industry segmentation. Risk and rate of return on investments are significantly affected by the differences existing between goods, products and services. The following business segments have been distinguished in Ciech S.A.:
Soda Segment groups together products, in particular soda ash, manufactured by soda companies (JANIKOSODA S.A., SODA M ĄTWY S.A., - currently manufacturing facilities of Soda Polska Ciech Sp.z o.o., since December 31st, 2006 also Uzinele Sodice Govora – Ciech Chemical Group S.A., since December 31st, 2007 also Soda Deutschland Ciech Group) and sold mainly by CIECH S.A. The Ciech Group is the sole producer in this segment in Poland. Organic Segment includes mainly products manufactured by ZACHEM Group – TDI, ECH and plastics. This segment is also involved in selling products of Z.Ch. “Organika-Sarzyna” S.A. and commercial goods bought and sold by CIECH S.A. outside the Ciech Group. The majority of sales of the Organic Segment is realised by CIECH S.A.
Agrochemical Segment provides a full product offer for agriculture. This segment covers fertilisers manufactured by GZNF “FOSFORY” Sp. z o.o. and “Alwernia” S.A. as well as plant protection chemicals. Fertilisers manufactured by GZNF “FOSFORY” Sp. z o.o. and other domestic producers are exported by CIECH S.A. The segment includes also raw materials for the production of fertilisers supplied to GZNF “FOSFORY” Sp. z o.o. and “Alwernia” S.A. Since January 1 st , 2007, the revenues from the sale of plant protection chemicals manufactured by Z.Ch. “Organika-Sarzyna” S.A. have been also attributed to the Agrochemical Segment.
Silicates and Glass Segment includes mainly the products of “VITROSILICON” Spółka Akcyjna and other manufacturers’ products, such as glass and sodium silicate, exported by CIECH S.A.
Other Operations Segment includes goods and services provided outside the Group, mainly by CIECH S.A. and Cheman S.A. and foreign companies outside the field of basic chemistry. Geographical segments of the Group are established on the basis of the location of the Group’s assets.
Transfer prices Transfer prices are established on the basis of market prices or prices based on exchange quotations of goods listed on global commodity exchanges.
The tables below present data concerning profits and losses as well as assets and liabilities of particular business segments of CIECH S.A. in the period covered by the financial statements:
69 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Business segments 01.01. – 31.12.2009 Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Revenues from third parties 874,378 647,606 56,018 111,992 174 1,690,168 Revenues from inter-segment transactions 68,497 27,355 111,269 3,597 191 210,909 Total revenues 942,875 674,961 167,287 115,589 365 1,901,077 Cost of sales (707,991) (610,997) (155,331) (91,634) (9) (1,565,962) Gross profit/loss on sales 234,884 63,964 11,956 23,955 356 335,115 Other operating revenues 1,386 1,196 274 1,231 1,892 5,979 Selling costs (61,640) (22,851) (1,318) (14,567) - (100,376) General and administrative expenses (28,072) (27,499) (8,825) (7,772) - (72,168) Other operating expenses (3,446) (1,990) (311) (220) (15,444) (21,411) Operating profit/loss 143,112 12,820 1,776 2,627 (13,196) 147,139 Financial revenues, including: 67,004 800 16,652 6,196 5,760 96,412 Interest 19,539 2,942 71 568 642 23,762 Measurement of financial instruments 42,037 ,(2,377) (1,223) 5,590 (252) 43,775 Financial costs, including: (272,964) ,(78,561) 673 (6,053) (201) (357,106) Interest FX differences 105,361 ,34,965, (3,197) 2,177 (92) 139,214 Profit/loss before tax (62,848) ,(64,941) 19,101 2,770 (7,637) (113,555) Tax (27,597) ,21,730, (6,342) (900) 897 (12,212) Net profit/loss (90,445) ,(43,211) 12,759 1,870 (6,740) (125,767) Profit/loss on discontinued operations - ,-, - - - - Net profit/loss for the financial year (90,445) ,(43,211) 12,759 1,870 (6,740) (125,767)
Amortisation/depreciation 2,428 2,359 763 676 - 6,226 EBITDA 145,540 15,179 2,539 3,303 (13,196) 153,365
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Business segments 01.01. – 31.12.2008
Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Revenues from third parties 793,809 527,129 131,483 151,777 - 1,604,198 Revenues from inter-segment transactions 86,487 29,448 330,132 3,885 - 449,952 Total revenues 880,296 556,577 461,615 155,662 - 2,054,150 Cost of sales (681,797) (501,424) (441,790) (104,368) - (1,729,379) Gross profit/loss on sales 198,499 55,153 19,825 51,294 - 324,771 Other operating revenues 2,746 1,958 1,557 464 30,792 37,517 Selling costs (63,538) (17,994) (2,012) (37,570) - (121,114) General and administrative expenses (29,073) (28,143) (7,862) (7,427) (1) (72,506) Other operating expenses (7,588) (3,533) (1,153) (1,010) (6,884) (20,168) Operating profit/loss 101,046 7,441 10,355 5,751 23,907 148,500 Financial revenues, including: 114,263 17,093 13,022 8,275 18,271 170,924 Interest 27,269 3,908 667 738 805 33,387 FX differences 77,687 3,537 -9,458 7,481 17,336 96,583 Financial costs, including: (269,640) (108,994) (3,288) (2,649) 8 (384,563) Interest (31,974) (16,229) (3,003) (2,674) 3 (53,877) Measurement of financial instruments (136,862) (91,884) 323 253 1 (228,169) Profit/loss before tax (54,331) (84,460) 20,089 11,377 42,186 (65,139) Tax 3,217 13,775 (1,760) (1,022) (5,010) 9,200 Net profit/loss (51,114) (70,685) 18,329 10,355 37,176 (55,939) Profit on discontinued operations ------Net profit/loss for the financial year (51,114) (70,685) 18,329 10,355 37,176 (55,939)
Amortisation/depreciation 2,276 2,212 716 633 5,837 EBITDA 103,322 9,653 11,071 6,384 23,907 154,337
71 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Business segments 31.12.2009
31.12.2009 Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Segment assets 1,140,433 493,553 258,663 39,199 45,161 1,977,009 Assets held for sale ------Shares in affiliates ------Unattributed assets ------Total assets 1,140,433 493,553 258,663 39,199 45,161 1,977,009
31.12.2009 Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Segment’s liabilities 849,307 465,014 119,179 26,413 - 1,459,913 Liabilities related to assets held for sale ------Unattributed liabilities ------Total liabilities 849,307 465,014 119,179 26,413 - 1,459,913
Business segments 31.12.2008
31.12.2008 Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Segment assets 1,230,330 444,610 280,790 32,547 35,533 2,023,810 Assets held for sale ------Shares in affiliates ------Unattributed assets ------Total assets 1,230,330 444,610 280,790 32,547 35,533 2,023,810
31.12.2008 Silicates And Other operations PLN ‘000 Soda Organic Agrochemical Glass segment TOTAL Segment’s liabilities 822,752 463,862 122,882 24,964 - 1,434,460 Liabilities related to assets held for sale ------Unattributed liabilities ------Total liabilities 822,752 463,862 122,882 24,964 - 1,434,460
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Business segments 01.01.-31.12.2009
Silicates and Glass Other operations PLN ‘000 Soda Segment Organic Segment. Agrochemical Segment TOTAL Segment segment Amortisation/depreciation 2,428 2,359 763 676 - 6,226 Non-cash costs other than depreciation/amortisation ------Recognised impairment losses 122,468 18,189 1,053 2,450 11,515 155,675 Reversed impairment losses 225 40 118 5 171 559
Business segments 01.01.-31.12.2008
Silicates and Glass Other operations PLN ‘000 Soda Segment Organic Segment. Agrochemical Segment TOTAL Segment segment Amortisation/depreciation 2,276 2,212 716 633 - 5,837 Non-cash costs other than ------depreciation/amortisation Recognised impairment losses 91,404 31 48 3 3,195 94,681 Reversed impairment losses 103 93 18,872 9 2,126 21,203
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Geographical segments
The tables below present data concerning revenues and certain assets of particular geographical segments for the periods covered by the financial statements:
01.01.-31.12.2009 Other European PLN ‘000 Poland European Union countries Africa Asia Other regions TOTAL Sales revenues 869,967 679,188 49,218 60,121 184,439 58,144 1,901,077 Segment assets 1,186,588 728,606 22,284 7,304 31,662 565 1,977,009
01.01.-31.12.2008 Other European PLN ‘000 Poland European Union countries Africa Asia Other regions TOTAL Sales revenues 1,094,536 657,004 74,976 55,854 105,042 66,738 2,054,150 Segment assets 1,180,637 809,101 18,114 4,821 7,351 3,786 2,023,810
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
4. Other revenues/costs
Other operating revenues
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 Lease revenues 1,651 3,207 Net profit from disposal of non-financial fixed assets 138 27,521 Write-down on current receivables 62 173 Inventory reconciliation - 29 Penalty fees and compensations received 2 - Payment of previously remitted debts 53 61 Reimbursement of costs of court proceedings 21 43 Release of provision for retirement benefits and service anniversary awards 25 - Release of provision for compensation 3,891 6,310 Other 136 173 Total 5,979 37,517
Other operating expenses
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 Other operating costs related to investment real property generating lease revenues 3,429 3,463 Write-down on current receivables 1,699 532 Write-down on investment real property 11,492 3,195 Depreciation of investment real property 520 592 Creation of provision for compensation 3,352 64 Creation of provision for retirement gratuities and service anniversary awards - 1,888 Unplanned depreciation charges 201 - Donations made 34 667 Costs of court proceedings 27 3 Receivables write-off - 7 Penalty fees, criminal fines and compensations paid 4 28 Inventory differences - 10 Membership fees 259 273 Costs of investment withdrawal - 48 Creation of other provisions - 9,243 Other 394 155 Total 21,411 20,168
Net financial revenues / costs
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 Interest 23,762 33,388 Dividends 24,844 8,314 Positive FX differences - 102,347 Release of write-downs on interest 177 55 Revenues from sale of receivables 118 8 Write-down on long-term investments and other investments 171 19,000 Measurement of financial instruments 43,775 142 Revenues due to guarantees and sureties 839 653 Revenues from discounting receivables 2,726 3,041 Net profit from disposal of financial assets - 3,903 Other - 73
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Total financial revenues 96,412 170,924 Interest 64,350 53,875 Negative FX differences 139,214 - Creation of write-downs on receivables interest 61 446 Write-downs on borrowings interest - - Costs of amortised interest 4,628 - Commission on loans 961 132 Disposal of financial assets 256 - Costs due to sureties and guarantees 1,806 1,861 Provisions for retirement gratuities – change in discount 206 - Costs of using derivatives 906 - Write-down on long-term investments and other investments in affiliates 2,616 38,431 Write-down on short-term investments 139,631 52,050 Measurement of financial instruments - 234,075 Costs due to bond issue 67 67 Costs due to discounting liabilities 2,341 2,667 Other 63 959 Total financial costs 357,106 384,563 Net financial revenues/expenses (260,694) (213,639)
Costs by type
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 a) amortisation 5,706 5,245 b) consumption of materials and energy 1,476 1,766 c) employee benefits 37,633 43,788 d) outsourced services 127,485 140,465 e) taxes and fees 1,139 566 f) other costs 5,219 5,851
Depreciation of tangible fixed assets and intangible assets
Depreciation charges on intangible assets PLN ‘000 31.12.2009 31.12.2008 General and administrative expenses 2,137 2,319 Total 2,137 2,319
Depreciation charges on tangible fixed assets PLN ‘000 31.12.2009 31.12.2008 General and administrative expenses 3,569 2,926 Total 3,569 2,926
Personnel costs
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 Remuneration 31,833 37,730 Social security and other benefits 5,800 6,058 Total employee benefits 37,633 43,788
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Research and development costs
The Company did not incur any R&D expenditures in the reporting period and in the presented comparative period.
5. Income tax
The main components of tax burden include:
PLN ‘000 01.01.-31.12.2009 01.01.-31.12.2008 Current tax Current income tax 814 20,165 Income tax for previous years - - Total 814 20,165 Deferred tax Creation/reversal of temporary differences 11,398 (29,365) Total 11,398 (29,365) Income tax recognised in profit and loss account 12,212 (9,200)
No current tax recognised directly under equity occurred in Ciech S.A. Deferred tax recognised under equity amounts to PLN 12,553 thousand. In the comparative period, deferred tax recognised under equity amounted to PLN (6,381) thousand.
Reconciliation of income tax calculated against gross financial result before tax according to the statutory tax rate and income tax calculated against the Company’s effective tax rate for the period presented in the financial statements is as follows:
01.01.-31.12.2009 01.01.-31.12.2008 EFFECTIVE TAX RATE % PLN ‘000 % PLN ‘000 Profit before tax (113,555) (65,139) Tax based on effective tax rate 19% (21,575) 19% (12,376) Non-tax deductible costs* -82% 87,179 -97% 63,210 Non-taxable revenues* 61% (63,332) 43% (28,125) Tax deductible costs not recognised in profit before tax* 2% (1,863) 4% (2,628) Deferred tax provision (difference in amortisation)* 9% (10,221) -30% 19,747 Taxable revenues not recognised in profit before tax* 0% 404 0% 82 Deferred tax assets -19% 21,620 75% (49,110) Total -11% 12,212 14% (9,200)
*Amounts include tax calculated on particular items
77 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Deferred income tax
Deferred income tax results from the following items:
PLN ‘000 DEFERRED INCOME TAX ASSETS AND DEFERRED INCOME TAX 31.12.2009 31.12.2008 PROVISION Total asset Total provision Net value Total asset Total provision Net value Tangible fixed assets - 949 (949) - 1,314 (1,314) Investment real property 2,790 - 2,790 607 - 607 Other investments 2,242 2,041 201 32,696 2,041 30,655 Inventory 32 - 32 27 - 27 Trade and other receivables - 410 (410) 4,335 (4,335) Employee benefits 361 - 361 379 - 379 FX differences 30,645 17,997 12,648 27,014 15,268 11,746 Liabilities and accruals 1,852 - 1,852 2,713 - 2,713 Deferred tax assets/provision 37,922 21,397 16,525 63,436 22,958 40,478 Write-down on asset ------Deferred tax assets/provision recognised in balance sheet 37,922 21,397 16,525 63,436 22,958 40,478
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
Temporary differences
PLN ‘000 Change of Change of temporary temporary As at As at CHANGE OF TEMPORARY DIFFERENCES IN THE PERIOD differences differences 01.01.2009 31.12.2009 recognised in recognised in P&L equity - Tangible fixed assets (6,918) 1,924 - (4,994) - Investment real property 3,195 11,492 - 14,687 - Other investments 161,344 (94,220) (66,068) 1,056 - Inventory 141 27 - 168 - Trade and other receivables (22,817) 20,661 (2,156) - Employee benefits 1,996 (94) - 1,902 - FX differences 61,821 4,750 - 66,571 - Liabilities and accruals 14,280 (4,534) - 9,746 Total 213,042 (59,994) (66,068) 86,980
PLN ‘000 Change of Change of temporary temporary As at As at CHANGE OF TEMPORARY DIFFERENCES IN THE PERIOD differences differences 01.01.2008 31.12.2008 recognised in recognised in P&L equity - Tangible fixed assets (5,560) (1,358) - (6,918) - Investment real property 1,568 1,627 - 3,195 - Other investments 7,419 120,338 33,587 161,344 - Inventory 241 (100) - 141 - Trade and other receivables (603) (22,214) - (22,817) - Employee benefits 354 1,642 - 1,996 - FX differences 9,023 52,798 - 61,821 - Liabilities and accruals 12,457 1,823 - 14,280 Total 24,899 154,556 33,587 213,042
The Company did not establish deferred tax assets from write-downs on holdings/shares in its subsidiaries: - Uzinele Sodce Govora (negative temporary difference of PLN 38,431 thousand), no deferred tax asset was created because the subsidiary is a strategic business for the Ciech Capital Group and in the foreseeable future Ciech S.A.’s Management Board does not intend to sell it, - Ciech Finance (negative temporary difference of PLN 1,747 thousand), - Ciech America Latina (negative temporary difference of PLN 869 thousand).
6. Discontinued activities and fixed assets held for sale
No discontinuation of activities occurred in the company during the presented reporting period and the comparative period and no fixed assets were classified as held for sale.
7. Earnings (losses) per share
Basic earnings (losses) per share are calculated by dividing net loss for the financial year attributed to ordinary shareholders of the parent company by weighted average number of issued ordinary shares existing during the financial year.
Diluted earnings (losses) per share are calculated by dividing net loss for the financial year attributed to ordinary shareholders of the parent company by weighted average number of issued ordinary shares existing during the financial year and weighted average number of ordinary shares issued upon the exchange of dilutive potential ordinary shares for ordinary shares.
The table below presents data concerning losses and shares, constituting the basis for calculating basic and diluted losses per share:
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Financial statements of Ciech S.A. for 2009
PLN ‘000 31.12.2009 31.12.2008
Net profit (loss) on continued operations attributed to the controlling shareholders (125,767) (55,939)
Net profit (loss) on discontinued operations attributed to the controlling shareholders - - Net profit (loss) attributed to the controlling shareholders, applied to calculate basic earnings per share (125,767) (55,939)
Net profit (loss) attributed to the controlling shareholders, applied to calculate diluted earnings per share (125,767) (55,939)
Number of shares 31.12.2009 31.12.2008
Weighted average number of issued ordinary shares, applied to calculate basic earnings per share 28,000,000 28,000,000
Weighted average number of issued ordinary shares, applied to calculate diluted earnings per share 28,000,000 28,000,000
In the period between the balance sheet date and the date of compiling the presented financial statements, no transactions on ordinary shares or potential ordinary shares occurred.
8. Dividend payout and proposed dividend payout
CIECH S.A.’s Management Board does not plan a payout of dividend for 2009. It plans to cover the generated loss and non-covered loss from previous years as a result of adjustment of a fundamental error with the Company’s supplementary capital.
CIECH S.A.’s Annual General Meeting, by way of a Resolution of June 18 th , 2009 concerning the distribution of profit decided not to pay any dividend from the profit of CIECH S.A. for 2008 and allocate the entire profit to the Company’s supplementary capital.
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9. Tangible fixed assets
31.12.2009 PLN ‘000 Buildings, Tangible assets premises and Plant and Means of Other tangible Total tangible MOVEMENTS IN TANGIBLE ASSETS under civil engineering equipment transport assets assets construction structures a) Gross value of tangible assets at the beginning of period 3,516 14,934 2,429 2,226 1,105 24,210 b) increases (due to) 11 1,193 5 30 181 1,420 - purchase 11 1,193 5 30 181 1,420 c) decreases (due to) - 1,345 1,162 67 - 2,574 - sales - 202 1,162 21 - 1,385 - liquidation - 1,143 - 37 - 1,180 - transfer to real property investment - - 9 9 d) Gross value of tangible assets at the end of period 3,527 14,782 1,272 2,189 1,286 23,056 e) Accumulated amortisation (depreciation) at the beginning of period 117 8,665 1,413 518 - 10,713 f) Amortisation for the period (due to) 705 520 (427) 350 - 1,148 - annual amortisation charge 705 1,848 614 402 - 3,569 - sale of tangible assets - 185 1,041 12 - 1,238 - liquidation of tangible assets - 1,143 - 34 - 1,177 - other (decreases) - - - 6 - 6 g) Accumulated amortisation (depreciation) at the end of period 822 9,185 986 868 - 11,861 h) Impairment losses at the beginning of period - - - - 238 238 i) Impairment losses at the end of period - - - - 238 238 j) Net value of tangible assets at the beginning of period 3,399 6,269 1,016 1,708 867 13,259 k) Net value of tangible assets at the end of period 2,705 5,597 286 1,321 1,048 10,957
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31.12.2008 PLN ‘000 Buildings, Tangible assets premises and Plant and Means of Other tangible Total tangible MOVEMENTS IN TANGIBLE ASSETS under civil engineering equipment transport assets assets construction structures a) Gross value of tangible assets at the beginning of period 15,056 17,161 2,714 765 1,923 37,619 b) increases (due to) 3,516 3,861 204 1,810 (818) 8,573 - purchase 3,516 3,861 204 1,810 (818) 8,573 c) decreases (due to) 15,056 6,088 489 349 - 21,982 - sales - 440 489 132 - 1,061 - liquidation - 1,703 - 173 - 1,876 - transfer to real property investment 15,056 3,914 44 19,014 - shortages identified during inventory taking 31 31 d) Gross value of tangible assets at the end of period 3,516 14,934 2,429 2,226 1,105 24,210 e) Accumulated amortisation (depreciation) at the beginning of period 1,818 10,241 1,338 576 13,973 f) Amortisation for the period (due to) (1,701) (1,576) 75 (58) - (3,260) - annual amortisation charge 166 2,083 408 269 - 2,926 - sale of tangible assets - 439 333 127 - 899 - liquidation of tangible assets - 1,684 - 165 - 1,849 - other (decreases) - 27 - - - 27 - reclassification to investment real property 1,867 1,509 - 35 - 3,411 g) Accumulated amortisation (depreciation) at the end of period 117 8,665 1,413 518 - 10,713 h) Impairment losses at the beginning of period - - - - 238 238 i) Impairment losses at the end of period - - - - 238 238 j) Net value of tangible assets at the beginning of period 13,238 6,920 1,376 189 1,685 23,408 k) Net value of tangible assets at the end of period 3,399 6,269 1,016 1,708 867 13,259
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Ownership structure of tangible fixed assets:
PLN ‘000 BALANCE SHEET TANGIBLE ASSETS (OWNERSHIP STRUCTURE) 31.12.2009 31.12.2008 a) Own 10,957 13,259 b) Used under rental, lease and other agreements, including: - - Total balance sheet tangible assets 10,957 13,259
In the presented period, the Company did not receive compensations due to impairment of tangible fixed assets.
Information on created, released and used impairment losses of tangible fixed assets has been presented in section 13 of notes and explanations to Ciech S.A.’s financial statements. No pledges or mortgages were established on tangible fixed assets to secure loans and borrowings liabilities.
In the current period, changes in book estimates had no material influence and it is expected that they will not exert significant influence in future periods.
Expenditures on tangible fixed assets under construction incurred in Ciech S.A. in 2009 were mainly related to the implementation of the following investment projects:
PLN ‘000 Ciech S.A. Purchase or modernisation of buildings and structures and leasehold improvements 755 Purchase of plant and equipment 630 Purchase of means of transport 5 Purchase of other assets 30 TOTAL 1,420
The amount of future liabilities arising from concluded agreements for the acquisition of tangible fixed assets in 2009 was PLN 6 thousand (PLN 41 thousand in the comparative period 2008).
The table below presents off-balance sheet tangible assets.
PLN ‘000 OFF-BALANCE SHEET TANGIBLE ASSETS 31.12.2009 31.12.2008 Used under rental, lease and other agreements, including: 3,658 3,518 - land in perpetual usufruct 861 861 - operating lease agreement 2,797 2,657
10. Investment real property
PLN ‘000 31.12.2009 31.12.2008 Gross value at the beginning of period 26,821 25,725 - shortages identified during inventory taking - 3 - transfer from tangible fixed assets - 19,469 - liquidation 6 5 - sale of property - 17,770 - other decreases - 595 Gross value at the end of period 26,815 26,821 Accumulated amortisation at the beginning of period 7,771 13,661 - amortisation for the period 520 592 - impairment loss - - reversed impairment losses - 1,568 - transfer from tangible fixed assets - 3,802
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- sale of property - 8,711 - liquidation 7 5 - other decreases - Accumulated amortisation at the end of period 8,284 7,771 h) Impairment losses at the beginning of period 3,195 1,568 - increase 11,492 3,195 - creation of impairment losses allocated to the financial result 11,492 3,195 - decrease - 1,568 - reversal of impairment losses allocated to the financial result - 1,568 i) Impairment losses at the end of period 14,687 3,195 Net value at the beginning of period 15,855 10,496 Net value at the end of period 3,844 15,855
As at December 31 st , 2009, Ciech S.A. disclosed the following under investment property: − Land with the investment linked to the construction of a residential and office complex, located in Warsaw at ul. Krasi ńskiego, on the corner of ul. Pow ązkowska.
As at December 31 st , 2007, the registered office of Ciech S.A. was located in Warsaw at ul. Pow ązkowska 46/50. The value of the building and the right of perpetual usufruct of land connected therewith was presented in the balance sheet under “Tangible assets”. As a result of changing the Company’s registered office (since February 2008, the Company has leased premises in IO-1 building at ul. Puławska 182), the planned use and investment plans related to the land and the building situated thereon, in March 2008, the property was reclassified to “Investment Real Property”. In connection with the planned demolition of the building at ul. Pow ązkowska, the Management Board decided to create a write- down on its value amounting to PLN 11,492 thousand.
11. Right of perpetual usufruct of land
The table below presents the value of the right of perpetual usufruct acquired by Ciech S.A. against payment.
PLN ‘000 31.12.2009 31.12.2008 Gross value at the beginning of period - 456 Transfer to investment real property - 456 Gross value at the end of period - - Accumulated amortisation at the beginning of period - 391 Transfer to investment real property - 391 Accumulated amortisation at the end of period - - Net value – opening balance - 65 Net value – closing balance - -
The right of perpetual usufruct of land acquired through administrative allocation satisfies the criteria for operating lease pursuant to IAS 17 “Leases” and is not recognised in the books but under off-balance sheet items.
12. Intangible assets
31.12.2009 PLN ‘000 Licences, Other patents, CHANGES IN INTAGIBLE ASSETS (BY TYPE GROUPS) intangible TOTAL permits etc. Computer assets obtained software a) Gross value of intangible assets at the beginning of 28,344 28,344 1,701 30,045 period
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b) increases (due to) 2,706 2,706 (456) 2,250 - purchase 2,706 2,706 (456) 2,250 c) decreases (due to) 13 13 - 13 - sales 13 13 - 13 d) Gross value of intangible assets at the end of period 31,037 31,037 1,245 32,282 e) Accumulated amortisation at the beginning of period 20,990 20,990 407 21,397 f) Amortisation for the period (due to) 2,135 2,135 - 2,135 - amortisation (annual charge) 2,137 2,137 - 2,137 - sales 2 2 - 2 g) Accumulated amortisation (depreciation) at the end of 23,125 23,125 407 23,532 period h) Impairment losses at the beginning of period - - - - - increase - - - - - decrease - - - - i) Impairment losses at the end of period - - - - j) Net value of intangible assets at the beginning of period 7,354 7,354 1,294 8,648 k) Net value of intangible assets at the end of period 7,912 7,912 838 8,750
31.12.2008 PLN ‘000 Licences, Other patents, CHANGES IN INTAGIBLE ASSETS (BY TYPE GROUPS) intangible TOTAL permits etc. Computer assets obtained software a) Gross value of intangible assets at the beginning of 24,750 24,750 3,653 28,403 period b) increases (due to) 3,607 3,607 (1,952) 1,655 - purchase 3,607 3,607 - 3,607 - expenditure on intangible assets in realisation - - (1,952) (1,952) c) decreases (due to) 13 13 - 13 - liquidation 13 13 - 13 d) Gross value of intangible assets at the end of period 28,344 28,344 1,701 30,045 e) Accumulated amortisation at the beginning of period 18,685 18,685 400 19,085 f) Amortisation for the period (due to) 2,305 2,305 7 2,312 - amortisation (annual charge) 2,312 2,312 7 2,319 - sales 7 7 - 7 g) Accumulated amortisation (depreciation) at the end of 20,990 20,990 407 21,397 period h) Impairment losses at the beginning of period - - - - - increase - - , - - decrease - - - - i) Impairment losses at the end of period - - - - j) Net value of intangible assets at the beginning of period 6,065 6,065 3,253 9,318 k) Net value of intangible assets at the end of period 7,354 7,354 1,294 8,648 All items of intangible assets belong to Ciech S.A. The most important intangible assets in the Company: − Oracle system with a carrying value of PLN 2,041 thousand (including ERP Oracle System with a net book value of PLN 1,681 thousand and an upgrade of the Oracle system with a net book value of PLN 350 thousand) – these items will be amortised over 3 and 6 years respectively.
Information about created, released and used impairment losses of intangible assets has been presented in section 13 of notes and explanations to the statements. Intangible assets do not constitute collateral for liabilities. In the presented periods, Ciech S.A. did not revalue intangible assets.
In the current period, changes in book estimates had no material influence and it is expected that they will not exert significant influence in future periods.
Future liabilities arising from concluded agreements for the purchase of intangible assets amount to PLN 94 thousand.
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Ciech S.A. does not hold any intangible assets with an indefinite period of use.
Research and development
Detailed information about major achievements in research and development is presented in Ciech S.A.’s Management Report in section 13.5.
Internally generated intangible assets
The Company does not hold any internally generated intangible assets.
13. Asset impairment
The table below presents information about created, released or used impairment losses of particular assets.
PLN ‘000 IMPAIRMENT LOSSES 31.12.2009 31.12.2008 1. Intangible assets Balance as at the beginning of period - - a) creation, including: - - - allocated directly to equity - - b) reversed/released, including: - - - allocated directly to equity - As at the end of period - - 2. Tangible fixed assets Balance as at the beginning of period 238 238 a) creation, including: - - - allocated directly to equity - - As at the end of period 238 238 3. Non-current receivables Balance as at the beginning of period - - As at the end of period - - 4. Investment real property Balance as at the beginning of period 3,195 1,568 a) creation, including: 11,492 3,195 - allocated directly to equity - - b) reversed, including: - 1,568 - allocated directly to equity - - As at the end of period 14,687 3,195 5. Long-term investments and investments in entities measured under the equity method Balance as at the beginning of period 81,876 64,699 a) creation, including: 2,616 38,431 - allocated directly to equity - - b) reversed, including: 171 19,279 - allocated directly to equity - - c) use, including - 1,975 - allocated directly to equity - - e) reclassification 1,975 - As at the end of period 86,296 81,876 6. Deferred tax assets Balance as at the beginning of period - - As at the end of period - -
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Inventory Balance as at the beginning of period 141 241 a) creation, including: 128 27 - allocated directly to equity - - b) reversed, including: 101 127 - allocated directly to equity - - As at the end of period 168 141 7. Current receivables Balance as at the beginning of period 44,151 45,581 a) creation, including: 1,808 978 - allocated directly to equity - - b) reversed, including: 287 229 - allocated directly to equity - - c) use, including 20,671 3,272 - allocated directly to equity - - d) FX differences 99 1,093 As at the end of period 25,100 44,151 8. Short-term investments Balance as at the beginning of period 59,017 4,992 a) creation, including: 139,631 52,050 - allocated directly to equity - - e) reclassification (1,975) 1,975 As at the end of period 196,673 59,017
For the period 01.01.- 31.12.2009
Creation of a write-down on investment property – office building at ul. Pow ązkowska – in connection to the planned demolition.
Write-down on long-term investments was created in connection with the measurement of shares held in subsidiaries, whereas the reversal was the result of selling the shares of Police S.A.
Write-downs on inventory were created in conjunction with impairment of slow moving inventory and of inventory whose value exceeds the net selling price. Reversal of write-downs on inventory was the result of the sale of inventory.
Write-downs on current receivables were created for negotiated, disputed, interest, past due and doubtful receivables and for receivables from companies in bankruptcy. Write-downs on current receivables were reversed as a result of debt repayment. Write-downs on current receivables were used as a result of writing-off the receivables due to ineffective enforcement, bankruptcy of companies on whose receivables the write-downs were created and the remittance of debt.
Write-down on short-term investments was created as a result of a test of involvement in a subsidiary.
Ciech S.A. conducted involvement tests in subsidiaries where premises specified in IAS 36 occurred. Value in use calculated based on the models in effect in the Ciech Capital Group was applied as recoverable value. Value in use was calculated based on five-year plans compiled by the Company. Financial projections included investments connected with the company’s going concern status. Average weighted capital cost after tax, between 13.5% and 16.1% (for the residual period, capital cost amounts to 13.5%), was applied for the company operating in the Romanian market. The involvement tests conducted for the Romanian company, in connection with its current market and liquidity situation, did not take into account the planned development investments. Based on the test and the prudence principle, Ciech S.A.’s Management Board decided to include in its financial statements the value of a write-down on a portion of its involvement in the Romanian company, amounting to PLN 123,260 thousand (of which PLN 43,096 thousand is the amount of a charge on a prepayment, which – for presentation reasons – was disclosed as a borrowing. The Company still awaits the fulfilment of deliveries).
For the period 01.01.- 31.12.2008
The reversal of write-downs on investment property was the result of sale of this property.
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The reversal of a write-down on long-term investments was linked to the sale or measurement (backed by a DCF analysis) of the held shares or holdings.
The creation of a write-down on long-term investments was linked to the measurement (backed by a DCF analysis) of the shares held in a subsidiary.
Write-downs on inventory were created in conjunction with impairment of slow moving inventory and of inventory whose value exceeds the net selling price. The reversal of write-downs on inventory was the result of the sale of inventory.
Write-downs on current receivables were created for negotiated, disputed, interest, past due and doubtful receivables and for receivables from companies in bankruptcy. Write-downs on current receivables were reversed as a result of debt repayment. Write-downs on current receivables were used as a result of writing-off the receivables due to ineffective enforcement, bankruptcy of companies on whose receivables the write-downs were created and the remittance of debt.
Write-down on short-term investments was created as a result of a test of involvement in a subsidiary.
Ciech S.A. conducted involvement tests in subsidiaries where premises specified in IAS 36 occurred. Value in use calculated based on the models in effect in the Ciech Capital Group was applied as recoverable value. Value in use was calculated based on five-year plans compiled by the Company. Financial projections included investments connected with the company’s going concern status. Average weighted capital cost after tax amounting to 10.5% was applied for the domestic company (for the residual period, capital cost amounts to 14.4%) and 14.4%-19.5% for the company operating in the Romanian market. Based on the result of the test conducted for the Polish company, Ciech S.A.’s Management Board decided to reverse the write-down on holdings amounting to PLN 19,000 thousand. The involvement tests conducted for the Romanian company, in connection with its current market and liquidity situation, did not take into account the planned development investments. Based on the test and the prudence principle, Ciech S.A.’s Management Board decided to include in its financial statements the value of a write-down on a portion of its involvement in the Romanian company, amounting to PLN 90,481 thousand (PLN 38,431 thousand – write-down on holdings, PLN 52,050 thousand – write-down on borrowings granted).
14. Non-current receivables
PLN ‘000 31.12.2009 31.12.2008 a) From associates 39,741 46,270 From subsidiaries (due to) 39,741 46,270 - assignment of debt 39,741 46,270 b) From other entities (due to) - - Net non-current receivables 39,741 46,270 Gross non-current receivables 39,741 46,270
15. Other long-term investments
PLN ‘000 31.12.2009 31.12.2008 a) In subsidiaries, jointly-controlled entities and affiliates 1,321,472 1,332,381 - shares and holdings 919,667 783,663 - borrowings granted 401,805 548,718 b) In other entities 54,551 34,643 - shares and holdings 38,118 17,953 - other long-term financial assets (by type): 16,433 16,690 - bank deposits 16,433 16,690 Total long-term financial assets 1,376,023 1,367,024
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The item “borrowings granted” includes a borrowing granted by Ciech S.A. to its subsidiary, Soda Deutschland Ciech GmbH. The repayment terms were laid down in the Subordination Agreement concluded on January 23 rd , 2008 between Ciech S.A., its subsidiaries Soda Deutschland Ciech GmbH and Sodawerk Stassfurt GmbH&Co KG, and the bank COMMERZBANK Aktiengesellschaft. The borrowing can be repaid only after Soda Deutschland has repaid its obligations due to Commerzbank.
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Shares and holdings in subsidiaries
Overall Value of numbe shares/hold r of Net Write- Carrying % share Date of ings votes profit/los Company No Company’s Registered Nature of downs on value of in the Company’s Sales Business assuming according at the s for the ’s total . name office/Address relation acquisitio shares/holdi share equity revenues control to the Genera current assets n value ngs capital purchase l year price Meetin g ul. Puławska Chemia.Com 1. 182, 02-670 IT-related business subsidiary 13.12.2000 1,010 - 1,010 100 100 588 59 3,381 13,977 S.A. Warsaw Rua Diogo Moreira 132 cj. CIECH 2005, trade, import and export of 2. America Latina subsidiary 2007 869 (869) - 100 100 - - - - Pinheiros, chemicals Ltda.* 05423-010 Sao Paulo SP Brasil CIECH ul. Puławska other financial agency 3. FINANCE Sp. z 182, 02-670 subsidiary 16.12.2005 1,750 (1,747) 3 100 100 3 (729) 653 340 services o.o. Warsaw ul. Puławska sale of pharmaceutical CIECH POLFA 4. 182, 02-670 products, packaging subsidiary 23.12.1991 1,912 - 1,912 100 100 9,854 1,959 51,897 59,771 Sp. z o.o. Warsaw services CIECH ul. Puławska transport and brokerage 5. SERVICE Sp. z 182, 02-670 subsidiary 22.07.1996 705 - 705 100 100 1,224 362 2,841 11,097 services o.o. Warsaw intermediary (agency) Speersort 4 services linked to the export Chemiepetrol 20095 of chemicals to the German 6. GmbH (in subsidiary 01.01.1986 43 - 43 60 60 - - - - Hamburg market, purchase of liquidation) petrochemicals and plastics on its own account import of chemicals and oil 94 Hailgate, products derived mainly in Howden nr Poland and their distribution 7. Daltrade Plc. Goole, East in the UK market and other subsidiary 11.1988 3,426 - 3,426 61 61 12,538 (1,655) 15,359 17,987 Yorkshire European markets (oil DN14 7SZ products), providing agency services production of artificial GZNF fertilisers and nitrogen ul. Kujawska 2, 8. "FOSFORY" compounds as well as other subsidiary 28.11.1995 20,888 - 20,888 89 89 114,729 (42,495) 205,723 196,580 80-550 Gda ńsk Sp. z o.o. basic organic and non- organic chemicals,
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providing reloading and storage services production and sale of chemical products and Inowrocławskie ul. Fabryczna compounds, production of 9. Zakłady 4, 88-101 metal and construction subsidiary 28.08.1996 165,838 - 165,838 100 100 292,651 (1,492) 300,114 - Sodowe SODA Inowrocław materials, providing heat, MĄTWY S.A. electricity, drinking and industrial water production and sale of chemical products and Janikowskie compounds, construction ul. Zakłady and installation services, Przemysłowa 10. Sodowe electrical installations, subsidiary 28.08.1996 165,550 - 165,550 100 100 236,766 (1,401) 246,928 10,719 30, 88-160 JANIKOSODA providing heat and Janikowo S.A. electricity, renting out premises, buildings and land import and export of Arstaangsvage miscellaneous products, n 1 A S- Nordiska mainly chemicals, and other 11. 100074, subsidiary 1978 842 - 842 98 98 1,588 (332) 5,799 29,493 Unipol AB industrial materials; acting Stockholm, as a representative and Sweden providing related services intermediary (agency) services linked to the export Bikrothstrasse Polcommerce of chemicals to the Austrian 12. 2/4/44 A-1190, subsidiary 27.06.1988 653 - 653 100 100 1,788 4 4,855 45,239 GmbH market, purchase of Vienna, Austria chemicals on its own account trade business in multiple industries (mainly chemical industry – over 80%) 20 Bendemeer covering South-Eastern Road # 03-11 Asia and Central and 13. Polsin Pte. Ltd. Singapore subsidiary 24.11.1976 5,696 - 5,696 98 98 20,816 (334) 30,225 72,124 Eastern Europe; the 339914 company may hold and
trade in securities and own holdings in other businesses Przedsi ębiorst wo ul. Wojska international transport of Transportowo- Polskiego 65, jointly- 14. liquid chemicals, tank truck 04.1993 2,193 - 2,193 93 93 7,092 496 22,430 36,134 Usługowe 85-820 controlled and rail tank wash facility TRANSCLEAN Bydgoszcz Sp. z o.o. S.C. UZINELE RAMNICU SODICE VALCEA, Str. manufacture of non-organic 15. subsidiary 30.11.2006 72,431 (72,431) - 93 93 ,(228,503) (69,573) 245,665 188,484 GOVORA - Uzinei no. 2, chemicals CIECH Judetul Valcea,
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CHEMICAL Romania GROUP S.A. purchase and holding of shares (in particular in An der businesses operating in the Loderburger Soda soda and soda products Bahn 4a, 16. Deutschland market), extraction and sale subsidiary 19.12.2007 142,404 - 142,404 100 100 (144,112) (23,986) 240,991 2,709 39418 Ciech GmbH of salt lye, limestone, Stassfurt, gravel, lime and other Germany products, drilling for soluble raw materials, sale of voids export, import and wholesale of industrial Nahkahousuniti chemicals, plastics and Suomen Unipol e 3, 00210 other raw materials; the affiliated 17. 1991 52 - 52 25 25 3,992 68 9,889 40,433 Oy Helsiniki company may hold and company Finland trade in securities and own holdings in other businesses production of basic and other non-organic "VITROSILICO ul. śaga ńska chemicals, production of 18. N" Spólka 27, 68-120 industrial and technical subsidiary 03.02.1999 12,302 - 12,302 100 100 66,798 2,258 161,925 153,138 Akcyjna Iłowa glass, manufacture of plastic packaging and other plastic products ul. K. Zakłady Olszewskiego manufacture of non-organic 19. Chemiczne subsidiary 08.03.2000 55,015 - 55,015 74 74 72,927 2,163 108,890 147,432 25, 32-566 chemicals "Alwernia" S.A. Alwernia ul. Wojska production of organic and Zakłady Polskiego 65, non-organic chemicals, 20. Chemiczne subsidiary 20.12.2006 75,018 - 75,018 87 87 305,472 (25,248) 711,502 865,986 85-825 dyes, pigments, paints, ZACHEM S.A. Bydgoszcz varnishes and plastics production of organic and Zakłady ul. Chemików non-organic chemicals, Chemiczne 21. 1, 37-310 technical gasses, artificial subsidiary 20.12.2006 266,064 - 266,064 91 91 293,626 1,089 452,004 367,348 "Organika- Nowa Sarzyna fertilisers, pesticides and Sarzyna" S.A. other agrochemicals Polskie ul. Puławska Konsorcjum 22. 182, 02-670 financial holding subsidiary 23.12.2008 52 - 52 100 100 9 (86) 20 - Chemiczne Warsaw Sp.z o.o.
* The company suspended its business.
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PLN ‘000 CHANGES IN OTHER INVESTMENTS 31.12.2009 31.12.2008 a) balance as at the beginning of period 1,448,900 1,341,825 - shares and holdings 876,017 854,948 - borrowings granted 556,193 472,549 - other 16,690 14,328 b) increases (due to) 160,362 157,561 - shares and holdings 159,022 69,319 purchase 71,252 65,756 capital increase 67,367 4,800 incorporation of a company - 52 positive measurement to fair value 20,403 (1,289) - borrowings granted 1,340 85,880 - other - 2,362 c) decreases (due to) 146,944 50,486 - shares and holdings 409 48,250 sale 409 17,125 negative measurement to fair value - 31,125 - borrowings 146,278 2,236 - other 257 - d) balance as at the end of period 1,462,318 1,448,900 - shares and holdings 1,034,630 876,017 - borrowings granted 411,255 556,193 - other 16,690 16,690 e) write-downs (86,295) (81,876) f) net balance as at the end of period 1,376,023 1,367,024
Shares held in joint stock companies were classified as financial instruments available for sale. Measurement to fair value was recognised under revaluation reserve.
Negative measurement of shares of Zakłady Azotowe Tarnów was recognised under revaluation reserve.
Increase in other long-term investments is mainly due to the purchase of holdings in Soda Deutschland Ciech GmbH from Mr Ohm and the increase of this company’s capital.
Information about created, released and used impairment losses of other long-term investments has been presented in section 13 of notes and explanations to the financial statements. Information about collaterals for liabilities due to loans and borrowings, on long-term financial assets, has been presented in sections 21 and 24 of notes and explanations to the financial statements.
16. Inventory
PLN ‘000 31.12.2009 31.12.2008 Materials (carrying value) - - Goods (carrying value) 26,313 17,365 Total inventory 26,313 17,365 Inventory at the fair value decreased by sales costs 26,313 17,365 Value of restricted availability inventory (pledge) - -
The value of inventory recognised as costs in 2009 was PLN 1,565,935 thousand (PLN 1,729,489 thousand in the comparative period).
Information about created and used impairment losses of inventory has been presented in section 13 of notes and explanations to the financial statements.
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17. Trade and other receivables
PLN ‘000 CURRENT RECEIVABLES 31.12.2009 31.12.2008 a) From associates 45,293 83,461 a1) trade receivables, with repayment period 35,008 27,351 - up to 12 months (net value) 35,008 27,351 a2) dividends receivable - - a3) other receivables 10,285 56,110 b) Receivables from other entities 310,007 322,220 b1) trade receivables, with repayment period 241,644 263,686 - up to 12 months (net value) 241,644 263,686 b2) net advances on inventory - - b3) net advances on tangible assets - - b4) net advances on intangible assets - - b5) prepayments, including 3,943 496 - rents - 5 - insurance 62 - - taxes and fees - 2 - consumption of materials and energy 3 - - outsourced services 3,614 213 - commission on guarantees and sureties received 58 54 - representation and advertising 15 7 - transactions 95 4 - social benefits and other benefits 27 189 - subscriptions 6 12 - other 63 10 b6) due to subsidies, customs duties, social security and health insurance and other 62,158 57,847 benefits (net value) b7) other receivables 2,262 191 Total net current receivables 355,300 405,681 Write-down on receivables 25,100 44,151 Total gross current receivables 380,400 449,832
Allowances for doubtful accounts from associates amounted to: • PLN 788 thousand as at December 31 st , 2009, • PLN 273 thousand as at December 31 st , 2008.
PLN ‘000 PAST DUE TRADE RECEIVABLES, INCLUDING OUTSTANDING RECEIVABLES 31.12.2009 31.12.2008 a) up to 1 month 28,690 39,433 b) between 1 and 3 months 257 3,351 c) between 3 and 6 months 326 1,581 d) between 6 months and 1 year 991 109 e) above 1 year 11,988 12,950 Total (gross) past due trade receivables 42,252 57,424 f) write-downs on past due trade receivables 12,748 13,398 Total (net) past due trade receivables 29,504 44,026
PLN ‘000 DISPUTED CURRENT AND NON-CURRENT RECEIVABLES
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31.12.2009 31.12.2008 a) trade receivables, including: 173 317 - receivables not subject to write-downs - - - receivables not recognised as “Receivables claimed in court” - - b) taxes, customs duties and social security, including: - - c) other - - Total 173 317
The terms of transactions with associates have been presented in section 29.2 of notes and explanations to the financial statements.
Commercial contracts concluded by Ciech S.A. provide for various terms of payment of trade receivables, depending on the type of transaction, market characteristics and commercial conditions. The most common payment terms are: 14, 30, 60 and 90 days.
18. Short-term investments
PLN ‘000 SHORT-TERM INVESTMENTS 31.12.2009 31.12.2008 a) In subsidiaries 87,883 64,639 - borrowings granted 87,883 64,639 b) In jointly-controlled entities - - c) In affiliates - - d) In a significant investor - - e) In the parent company - - f) In other entities - 142 - other current financial assets (by type) - 142 - derivatives - 142 Total net current financial assets 87,883 64,781 - write-downs on current financial assets 196,673 59,017 Total gross current financial assets 284,556 123,798
The item “borrowings granted” includes an advance on the delivery of goods granted to a subsidiary, S.C. Uzinele Sodice Govora - CIECH CHEMICAL GROUP S.A, which has not yet been realised due to the temporary sale- related difficulties in the soda market and is disclosed as a borrowing. The advance will be subject to a write- down. For presentation reasons, the advance was disclosed in short-term investments, although the Company still awaits its realisation by the Romanian company, which is to deliver the goods.
19. Cash and cash equivalents
PLN ‘000 CASH AND CASH EQUIVALENTS 31.12.2009 31.12.2008 Bank accounts (current accounts) 768 4,010 Short-term deposits 45,623 15,968 Cash in hand 54 107 Other cash (hedging deposits) - 12,000 Cash and cash equivalents, value in the balance sheet 46,445 32,085 Cash and cash equivalents, value in the cash flow statement 46,445 32,085
20. Capitals
Share capital
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SHARE CAPITAL 31.12.2009 31.12.2008 Number of shares 28,000,000 28,000,000 Carrying value 164,115 164,115
Share capital 31.12.2009 31.12.2008 pcs. pcs. Ordinary bearer A series shares of the nominal value of PLN 5 each 20,816 20,816 Ordinary bearer B series shares of the nominal value of PLN 5 each 19,775,200 19,775,200 Ordinary bearer C series shares of the nominal value of PLN 5 each 8,203,984 8,203,984 Total 28,000,000 28,000,000
On February 16 th , 2005, the nominal share capital was increased by PLN 41,019 thousand as a result of the issue of 8,203,984 new ordinary shares (C series) of the nominal value of PLN 5 for each. The shares of all series are ordinary shares and are not accompanied by any additional rights, privileges or restrictions as to dividend distribution or capital return.
Ordinary shares – issued and fully paid-up pcs. PLN ‘000. As at January 1st, 2005 19,796,016 123,096 Ordinary shares issued on February 16 th , 2005 8,203,984 41,019 As at December 31 st , 2007 28,000,000 164,115 As at December 31 st , 2008 28,000,000 164,115
Pursuant to IAS 29 “Financial Reporting in Hyperinflationary Economies”, as at the date of adopting the International Financial Reporting Standards, i.e. January 1 st , 2004, the share capital of the parent company Ciech S.A. was recalculated due to hyperinflation between 1989 and 1996. Hyperinflation adjustment decreased the value of retained profits. The value of equity remains unchanged.
The table below presents a calculation of the hyperinflation adjustment: Share capital Recalculated share capital Period Inflation rate PLN ‘000 PLN ‘000 1989 106 3,511 370 1990 370 6,858 2,540 1991 2,540 1,703 4,326 1992 4,326 1,430 6,186 1993 6,186 1,353 8,370 1994 8,370 1,322 11,065 1995 11,065 1,278 14,141 January 1996 14,141 1,034 14,622 February 1996 14,622 1,015 14,842 March 1996 14,842 1,015 15,064 April 1996 15,064 1,022 15,396 May 1996 15,396 1,014 15,611 Issue of ordinary B series shares from the supplementary 21.05.1996 98,876 capital June 1996 114,487 1,010 115,632 July 1996 115,632 0,999 115,516 August 1996 115,516 1,005 116,094 September 1996 116,094 1,019 118,300 October 1996 118,300 1,014 119,956 November 1996 119,956 1,013 121,515 December 1996 121,515 1,013 123,095 01.01.2004 123,095 30.06.2004 123,095 31.12.2004 123,095
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Share capital Recalculated share capital Period Inflation rate PLN ‘000 PLN ‘000 16.02.2005 issue of ordinary C series shares 41,020 31.12.2005 164,115 31.12.2006 164,115 31.12.2007 164,115
Share capital as at December 31 st , 2007 after revaluation 164,115 Share capital as at December 31 st , 2007 before revaluation 140,001
Hyperinflation adjustment 24,114
Share premium Share premium resulted from the surplus achieved upon the issue of C series shares above their nominal value.
Equity shares
The Company did not hold any equity shares in the presented periods.
Other reserve capitals The table below presents the balances of other reserve capitals, consisting of the following items:
PLN ‘000 OTHER RESERVE CAPITALS BY PURPOSE 31.12.2009 31.12.2008 Commercial risk fund 3,330 3,330 Fund for purchasing soda companies 15,200 15,200 Development fund 57,669 57,669 Other reserve capitals 76,199 76,199
PLN ‘000 REVALUATION RESERVE 31.12.2009 31.12.2008 Opening balance (26,159) 1,044 a – increases 16,600 - measurement of long-term investments 16,600 - b – decreases - 27,203 measurement of long-term investments - 27,203 Carrying value – closing balance (9,559) (26,159)
PLN ‘000 CASH FLOW HEDGE 31.12.2009 31.12.2008 Opening balance - - a – increases 36,913 - measurement of financial instruments 36,913 - b – decreases - - measurement of financial instruments - - Carrying value – closing balance 36,913 -
Capital structure management The Group manages its capital in order to ensure that its businesses are able to continue their activity and at the same time maximise profitability for stakeholders by optimising the debt to equity ratio. The Group’s capital structure includes debt composed of loans and bonds, disclosed under sections 21 and 24, cash and cash equivalents as well as capital attributable to controlling shareholders, including the issued shares, reserve capital and profit received, as disclosed in this section.
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Tax effect of every component of other comprehensive income of the CIECH Group 01.01.-31.12.2009 01.01.-31.12.2008 Before Before PLN ‘000 tax Tax After tax tax Tax After tax
20,494 (3,89 16,600 (33,58 (27,203) 6,381 Revaluation of available-for-sale financial assets 4) 4)
45,572 (8,65 36,913 - - - Cash flow hedging 9)
66,066 (12,5 53,513 (33,58 (27,203) 6,381 Other net comprehensive income 53) 4)
Income tax and reclassification adjustments in other comprehensive income
Other gross comprehensive income change in 01.01- change in 01.01- PLN ‘000 the period 31.12.2009 the period 31.12.2008 Revaluation of available-for-sale financial assets - 20,494 - (33,584) - measurement at fair value in the period 20,494 - (33,584) - Cash flow hedging - 45,572 - - - measurement at fair value in the period 83,311 - - - - reclassification adjustment of profit/loss presented in the profit (37,739) - - - and loss account Income tax attributable to other components of comprehensive - (12,553) income - 6,381 - for the current period (19,723) - - - reclassification adjustment to the profit and loss account 7,170 - - - Other net comprehensive income - 53,513 - (27,203)
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21. Non-current liabilities due to loans, borrowings and other debt instruments
PLN ‘000 31.12.2009 31.12.2008 a) Liabilities due to loans, borrowings and other debt instruments 426,196 299,802 - loans and borrowings 126,327 - - due to issue of debt securities 299,869 299,802 b) Other non-current liabilities 57,406 136,699 - assignment of debt 40,914 47,841 - other financial liabilities, including: 16,492 88,858 - liabilities due to other financial instruments 16,492 88,858 TOTAL 483,602 436,501
PLN ‘000 NON-CURRENT LIABILITIES WITH THE REMAINING REPAYMENT PERIOD
CALCULATED FROM THE BALANCE SHEET DATE 31.12.2009 31.12.2008 a) 1 to 3 years 376,936 105,241 b) 3 to 5 years 106,666 314,405 c) over 5 years - 16,855 Total 483,602 436,501
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NON-CURRENT LIABILITIES DUE TO LOANS AND BORROWINGS
as at 31.12.2009 Amount of Contractual amount of Interest rate Maturity Company name and legal form Registered office loan/borrowing to be Collateral loan/borrowing conditions date repaid PLN ‘000 currency PLN ‘000 currency ul. Grzybowska - registered and financial pledges on the shares of Janikosoda Bank Pekao S.A. 80/83 S.A. and Soda M ątwy SA WIBOR 3M + 2014-12- 216,000 PLN 126,327 PLN - obligation to establish a pledge on the shares of ZCH Bank Handlowy S.A. ul. Senatorska 17 bank margin 13 Organika Sarzyna SA after the restriction on the disposal of Bank Millennium S.A. St. śaryna 2a shares expires TOTAL 126,327
As at December 31 st , 2008, Ciech S.A. had a long-term loan amounting to PLN 148,503 thousand, which due to the failure to satisfy the following conditions was reclassified to “Current liabilities due to loans, borrowings and other debt instruments”.
In the Loan Agreement amounting to PLN 216,000 thousand, dated December 13 th , 2006, concluded with Bank Polska Kasa Opieki S.A., Bank Handlowy w Warszawie S.A. and Bank Millennium S.A., the following conditions were violated in 2008:
• obligation to maintain financial debt/EBITDA ratio Value in the Agreement below 3.00, Value recognised at the end of 2008: 4.43. • Some information obligations towards the Lending Banks connected with establishing collateral and incurring new loan liabilities were violated.
As at December 31 st , 2009, the prohibition to grant new sureties and the condition for establishing a pledge on 16,160 shares of Janikosoda SA. were violated. The violations ceased after the balance sheet date as a result of the bank consortium’s consent of March 11 th , 2010 to the granted surety and as a result of establishing the required pledge on Janikosoda S.A.‘s shares on April 20 th , 2010.
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21.1 Information on Ciech S.A.’s financial standing
Profitability in 2009
Return on sales and operating activities in 2009 improved in comparison to the same period of the previous year. This was the result of a change in the sales structure of products, involving a decrease in less profitable products in the agricultural chemicals segment, and a temporary increase in the prices of soda products in the 1 st half of 2009. In addition, the improvement of return on sales was affected by the low base effect. In Q4 2008, a major downturn in the organic and agrochemical segments was recorded. These sectors improved in the middle of 2009. The recovery was also affected by a drop in the costs of sales, which was disproportionately high in relation to sales revenues. Profitability of operating activities also improved but to a lesser extent, which was attributable to a negative balance generated on operating activities, mainly resulting from the creation of a write-down on investment property of PLN 11,492 thousand (in connection with the planned demolition of the building at ul. Pow ązkowska). A sudden deterioration of returns on assets and equity was caused by an increase in net losses by PLN 69,828 thousand in comparison to the previous year, resulting from an increase in net financial costs due to the following factors: increase in interest balance by PLN 20,101 thousand, negative FX differences balance (PLN 139,214 thousand) and creation of a write-down on borrowings and interest in US Govora (PLN 137,518 thousand).
The table presents the return ratios:
Return ratios of CIECH Item Jan – Dec. 2009 Jan – Dec, 2008 Gross return on sales 17.6% 15.8% Return on sales 8.6% 6.4% Operating profit margin 7.7% 7.2% EBITDA Profitability 8.1% 7.5% Net return on sales (ROS) (6.6)% (2.7)% Return on assets (ROA) (6.4)% (2.8)% Return on equity (ROE) (24.3)% (9.5)%
CIECH S.A.’s return ratios Calculation principles: gross return on sales – gross sales profit for a given period / net sales of products, services, goods and materials, return on sales – sales profit for a given period / net sales of products, services, goods and materials, operating profit margin – operating profit for a given period / net sales of products, services, goods and materials, return on sales (ROS) – net profit for a given period / net sales of products, services, goods and materials, return on assets (ROA) – net profit / total assets at the end of a given period, return on equity (ROE) – net profit for / total equity at the end of a given period.
CIECH’s liquidity and working capital
The liquidity ratios in 2009 remained at the level of the end of 2008 (the current ratio remained unchanged, while the quick ratio decreased by 1%). On August 5 th , 2009, CIECH S.A. concluded an amending (waiver) agreement, cancelling the violation of the loan agreement for the purchase of 80% of the shares in Z. Ch. “Organika-Sarzyna” S.A. from Nafta Polska S.A., resulting in a cancellation of selected financial ratios provided for in loan agreements. As at the date of compiling the financial statements, none of the agreements was terminated.
CIECH’s liquidity ratios Item 31.12.2009 31.12.2008 Current ratio 0.53 0.53 Quick ratio 0.51 0.52
Calculation principles: current ratio – current assets / current liabilities at the end of a given period; measure of company’s capability to cover its current liabilities with current assets. quick ratio – current assets less inventory / current liabilities at the end of a given period; measure of a company’s capability to collect in a short period of time cash for the coverage of materially due liabilities.
In the last two years, CIECH S.A. did not generate positive free cash flows (i.e. there was a demand for borrowing), although a significant improvement (by PLN 105,027 thousand) was recorded in 2009. In 2008, this was affected by negative operating cash flows combined with a negative balance of investment activities and in 2009 by a negative balance of investment activities (in particular the purchase of holdings in Soda Deutschland Ciech GmbH). In 2009, the Company generated positive operating cash flows.
Ability to generate cash flows
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Item 31.12.2009 31.12.2008 Financial surplus (net profit + amortisation) (119,541) (50,102) Other net profit adjustments 102,735 77,344 Adjusted financial surplus (16,806) 27,242 Change in working capital 82,839 (99,111) Cash flows from operating activities 66,033 (71,869) Cash flows from investment activities (106,776) (73,901) Free cash flows (40,743) (145,770)
The working capital, defined as the difference between current assets and current liabilities, as at the end of December 2009 was negative and improved by PLN 10,673 thousand in comparison with the end of 2008. Net cash (i.e. cash decreased by short-term loans and other financial liabilities) improved by PLN 137,770 thousand. The demand for working capital dropped, mainly due to a decrease in current assets. CIECH S.A. is expecting net cash to improve significantly as a result of debt restructuring and maturity structure arrangement.
CIECH’s working capital Item 31.12.2009 31.12.2008 1. Current assets, including: 521,169 532,276 Inventory 26,313 17,365 Trade receivables 276,652 291,037 2. Cash and other short-term investments 134,328 96,866 3. Adjusted current assets (1-2) 386,841 435,410 4. Current liabilities, including: 974,535 996,315 Trade liabilities 342,219 259,278 5. Short-term loans and other financial liabilities 601,223 701,531 6. Adjusted current liabilities (4-5) 373,312 294,784 7. Working capital (1-4) (453,366) (464,039) 8. Demand for current assets (3-6) 13,529 140,626 9. Net cash (7-8) (466,895) (604,665)
Indebtedness
Acquisitions in 2006 and 2007 which led to an increase in CIECH’s assets were financed through an investment loan and bonds issue. Additionally, the investments made in 2008 were financed with a short-term loan. These actions contributed to an increase in the debt ratio and in the long-term debt ratio.
CIECH is expecting an improvement of the debt structure in favour of long-term loans upon the completion of the process of refinancing.
CIECH’s Debt ratios Item 31.12.2009 31.12.2008 Debt ratio 73,8% 70,9% Long-term debt ratio 24,6% 21,6% Debt to equity ratio 282,3% 243,4% Equity to assets ratio 26,2% 29,1% Net debt/EBITDA (annual) 5,59 5,37
Calculation principles: debt ratio – current and non-current liabilities / total assets; measure of the share of external funds in financing a company’s activity. long-term debt to equity ratio – non-current liabilities / total assets; measure of the share of non-current liabilities in financing a company’s activity. debt to equity ratio – total liabilities / equity. equity to assets ratio – equity / total assets; measure of the share of equity in financing a company’s activity. Net debt - liabilities from loans and borrowings raised and other debt securities less cash and cash equivalents.
- Information about the ratios included in loan agreements
No conditions of repaying capital or interest due to financial liabilities were violated in the period covered by this statement and until the day of its publication. No loan agreement was called in.
Significant events influencing CIECH’s financial standing
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- Debt refinancing
During negotiations between banks and Ciech S.A., short-term standstill agreements were in force, followed by the signing of a loan agreement, which is described in more detail below. Debt consolidation will have a positive impact on CIECH’s and the Ciech Group’s liquidity; it will also change debt structure, decreasing the share of short-term financing. Greater encumbrance of net profit with interest is expected due to the current level of margins; however, the new structure of liabilities will significantly facilitate liquidity management.
- Loan agreement
On April 26 th , 2010, a loan agreement was signed between Ciech S.A., being the borrower, and its subsidiaries, being the guarantors (Agrochem sp. z o.o., with its registered office in Człuchów, Agrochem sp. z o.o., with its registered office in Dobre Miasto, JZS Janikosoda S.A., IZCh Soda M ątwy S.A., Soda Polska Ciech sp. z o.o., ZCh Alwernia S.A., Przedsi ębiorstwo Chemiczne Cheman S.A., GZNF Fosfory sp. z o.o., ZCh Organika Sarzyna S.A., Polfa sp. z o.o., Ciech Service sp. z o.o., Vitrosilicon S.A., Transclean sp. z o.o. and ZCh Zachem S.A. – later referred to as the “Companies), and a bank consortium (Bank Polska Kasa Opieki S.A., Bank Handlowy w Warszawie S.A., BRE Bank S.A., Powszechna Kasa Oszcz ędno ści Bank Polski S.A., ING Bank Śląski S.A., Bank Millennium S.A. and DNB Nord Polska S.A. – later referred to as “Organising Banks”). The agreement provides that S.C. US Govora – Ciech Chemical Group S.A. shall join the agreement as a guarantor and borrower – later referred to as the “Company”.
Terms of the agreement:
Loan tranches:
The total maximum amount of loans is the equivalent of PLN 1,340,000,000.
The loans will be made available in four tranches: − tranche A – to be disbursed in EUR and PLN, intended for refinancing Ciech S.A.’s existing obligations and the Companies’ obligations under loan agreements concluded with Organising Banks (overdraft facilities, working capital facilities and investment loans), − tranche B (multipurpose facility, made available as a revolving – renewable – loan or guarantees and letters of credit) and an auxiliary guarantee loan; (total amount of tranche A, tranche B and auxiliary guarantee loan amounts to the Organising Bank’s commitment due to refinancing loans and will amount to a maximum of PLN 1,100,000,000), − tranche C – to be disbursed in PLN, intended for the repayment of Ciech S.A.’s obligations due to option transactions concluded with Bank Handlowy w Warszawie S.A. and ING Bank Śląski S.A. (tranche C depends on the valuation of options in the case of an earlier termination of option transactions; valuation of refinanced options, as at the day of compiling the financial statements, amounted to PLN 140,401,000), − tranche D – to be disbursed in PLN, intended for refinancing Ciech S.A.’s existing obligations and the Companies’ obligations under loan agreements concluded with banks other than the Organising Banks (maximum amount of tranche D: PLN 100,000,000).
Loan interest rate conditions:
Variable interest rate based on WIBOR / EURIBOR plus margin; the margin is different for each tranche, it is variable and depends on the ratio of net debt.
Main terms of loan repayment:
− Minimum quarterly amortisation of loans of PLN 10,000,000 from the date when the loans are made available until March 1 st , 2011, − Total reduction of loans by PLN 400,000,000 (taking into account quarterly amortisation and earlier loans repayment) by March 31 st , 2011, subject that the absence of funds on Ciech S.A.’s reserve account amounting to a minimum of PLN 400,000,000 by December 30 th , 2010 is a violation of the agreement, which the Organising Banks may cancel by a majority of votes laid down in the agreement, − Obligatory early repayment of loans is required under the following circumstances: o Change of control, occurring in the following circumstances: (i) State Treasury no longer holds at least 10,270,800 of Ciech S.A.’s shares, (ii) party other than State Treasury becomes Ciech
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S.A.’s largest shareholder and holds at least 50% of the issued share capital of Ciech S.A., or (iii) party other than State Treasury or a group of parties acting jointly gain control over Ciech S.A., subject that a change in control approved by a majority of Organising Banks laid down in the agreement or the fulfilment of additional conditions, such as the required level of debt, do not incur the obligation to repay the loans earlier, o Share capital increase; earlier repayment of loans amounting to funds obtained from public offering or other share capital increase in Ciech S.A. or in other Material Members of the Ciech Group (i.e. guarantors, selected Ciech Group’s companies and Ciech Group’s companies consolidated with a net asset value exceeding PLN 25,000,000), subject that after the repayment of PLN 400,000,000 this obligation depends on the net debt ratio and, depending on the individual circumstances, may pertain to 100%, 50% or 0% of the funds obtained in the manner described above, o Surplus of cash flows; if any quarterly financial statements of Ciech S.A., beginning from statements for the period ending on March 31 st , 2011, discloses a surplus of cash flows (i.e. surplus of consolidated cash flows over cash flow linked to debt service), an earlier repayment of loans shall be due, amounting to at least 75% of such surplus; the first earlier repayment under such circumstances shall be made on June 30 th , 2011, o Disposal of assets, sale of holdings or shares by Ciech S.A. and Material Members of the Ciech Group – allocation of 100% of the total net inflows from sales in a given quarter to earlier repayment of loans (except for specific circumstances laid down in the agreement), o Significant inflows under any insurance policy due to loss or damage of assets or business property, o Disposal and sale and lease back of assets of Ciech S.A. and of Material Members of the Ciech Group, depending on the circumstances, may pertain to 100% or 75% of the funds obtained in such a manner; o Illegality on part of the lenders. − Total one-off repayment of the due loan amounts shall be made on December 31 st , 2011 at the latest or after 20 months from signing the agreement.
Loan collateral:
− Mortgages established on the Companies’ and Ciech S.A.’s real property, − Pledge established on the Companies’ and Ciech S.A.’s business, − Assignment of rights under insurance policies issued for assets which are the collateral, − Financial pledges on the Companies’ and Ciech S.A.’s bank accounts, − Financial pledges on certain blocked bank accounts of Material Members of the Group (except Soda Deutschland Ciech Group), − Financial pledge and registered pledge on the Companies’ shares and holdings and on Soda Deutschland Ciech GmbH‘s holdings, − Sureties granted by the Companies and Ciech S.A., − Companies’ and Ciech S.A.’s declaration on submission to enforcement, − Contingent assignments of rights under material commercial contracts of the Companies and Ciech S.A., − Contingent transfer of ownership of all Companies’ and Ciech S.A.’s movable assets, − Contingent assignments of rights under in-group borrowings or other types of loan instruments which will be used to distribute the funds obtained from the loans to the Companies, − Power of attorney to access the Companies’ and Ciech S.A.’s bank accounts, − Once S.C. US Govora – Ciech Chemical Group S.A. has joined the loan agreement, some of the above- mentioned collateral will be established according to terms and dates provided for by the agreement.
Other terms under the agreement:
Ciech S.A. and the Companies made the following obligations: − To maintain their financial ratios at levels laid down in the agreement; the ratios are measured for the Ciech Group, excluding Soda Deutschland Ciech Group, and tested quarterly: o debt to operating results ratio (total consolidated net debt to consolidated EBITDA), o balance sheet debt ratio (consolidated total net debt to consolidated net tangible assets), o interest coverage ratio (consolidated EBITDA to consolidated net financial costs), o guarantors’ coverage ratio (guarantors’ gross turnover and assets to Ciech Group’s gross turnover and assets, except Soda Deutschland Ciech Group), − Not to establish new collateral, except for those specified in the agreement of authorised collateral, − Not to make use of the assets, except for allowed dispositions specified in the agreement (including the sale of a specific catalogue of assets held for sale and dispositions provided for in the Group’s business plan and restructuring plan), − Not to announce or pay dividend, except for companies in which Ciech S.A. holds, directly or indirectly, a controlling stake of at least 75% and ZCh Alwernia S.A.,
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− Not to incur financial debt, except for the allowed financial debt, − Limit capital expenditures to the level and extent provided in the agreement, − Establish registered pledges on individual items of Ciech S.A.’s and the Companies’ real property whose value exceeds PLN 5,000,000 according to the dates and circumstances provided in the agreement, − Not to conclude derivative transactions, except for the transactions approved by the agreement of hedge transactions, and − To appoint a restructuring adviser and present a restructuring plan for the Ciech Group within 10 weeks from signing the loan agreement.
Condition precedents:
The Organising Banks shall make available the loans, if the Loan Agent informs Ciech S.A. that they have received all documents and proof listed in an attachment to the agreement (or cancelled the obligation to deliver them). At that time, Ciech S.A.’s and the Companies’ declarations under the agreement shall be genuine and no violation of the contractual provisions shall occur (or last). Conditions precedent for the disbursement of loans include: obtaining all required corporate permits by Ciech S.A. and by the Companies, S.C. US Govora – Ciech Chemical Group S.A.‘s joining of the loan agreement and conclusion (within 14 days from signing the loan agreement) an agreement between the creditors; the parties to the agreement shall be Ciech S.A., the Companies (except S.C. US Govora – Ciech Chemical Group S.A., which shall join the agreement later), Organising Banks, BNP Paribas S.A. Branch in Poland, Fortis Bank Polska S.A. and Credit Agricole Corporate and Investment Bank S.A. Branch in Poland.
At the earliest, the loans shall be made available after 2 months from signing documents which establish collateral and submission of applications for the registration of collateral with the respective records and land and mortgage registers.
Management Board’s opinion on performing the terms of the loan agreement
In the opinion of Ciech S.A.’s Management Board, Ciech S.A. and the Companies being parties to the loan agreement are able to fulfil the contractual provisions and repayment terms.
The levels of financial ratios required under the agreement were determined based on current financial forecasts for the Group’s results, which were verified by a market adviser and the lenders. The financial forecasts show that loan service and quarterly amortisation at the levels provided in the agreement are feasible.
With regard to the reduction of debt by PLN 400,000,000, the Management Board plans to obtain this amount from the following sources: − divestment of financial and fixed assets in Ciech S.A. and the Group’s companies, − share capital increase, − issue of convertible bonds, − procurement of new funding approved by the Organising Banks. Signing the loan agreement ensures stable funding for the Ciech Group’s business for the period of the loan and offers the opportunity to enter negotiations on mid-term financing.
- Signing of amending (waiver) agreements On August 5 th , 2009, the Company reached a settlement revoking the violation of the loan agreement for the purchase of 80% of the shares in Zakłady Chemiczne Organika-Sarzyna S.A. from Nafta Polska S.A. through signing an amending agreement with Bank POLSKA KASA OPIEKI S.A., Bank Handlowy w Warszawie S.A. and Bank Millenium S.A. (the information was announced in Current Report no. 30/2009). CIECH S.A. obliged to establish additional loan collateral and agreed to treat dividend payout without the consent of the parties as an instance of loan agreement violation. In Q4, this debt was presented as short-term debt due to the violation of terms of the agreement. Currently, this violation is revoked. As a result of these settlements, the aforesaid loan does not have to be presented under current liabilities.
- EU subsidies By the end of 2009, the amount of EU funds approved for funding activities within the Ciech Chemical Group amounted to PLN 112 million. Agreements have been concluded with regard to the projects to be implemented in the Soda Division (Soda Polska Ciech Sp. z o.o.). In addition, the initiatives of ZCh Organika-Sarzyna S.A. (Construction of an Innovative System for MCPA and MCPP-P Production – PLN 40 million) and of ZACHEM S.A. (Implementation of an Innovative Technology of Producing Epichlorohydrine from Glycerine and Construction of a Manufacturing System – PLN 27 million) have been approved for funding. Subsequent applications, exceeding PLN 82 million, are being drafted.
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The described situation may give rise to doubts among the recipients of the statements as to the ability to maintain adequate levels of liquidity ratios, working capital, obtain and maintain mid-term stable sources of funding.
However, the Company’s Management Board trusts that the granting of a consortium loan and the measures described in this section will improve the Company’s financial situation and safeguard its going concern status. Therefore, the Management Board believes that the risks linked to CIECH S.A.’s uncertain financial situation will be diminished.
22. Provisions
PLN ‘000 CHANGE IN THE BALANCE OF OTHER SHORT-TERM PROVISIONS (BY
TYPES) 31.12.2009 31.12.2008 a) Balance as at the beginning of period 7,418 17,219 - provision for compensation 7,418 17,171 - provision for liabilities - 48 b) Increases (due to) 3,247 64 - provision for compensation 3,182 64 - provision for liabilities 65 - c) Use (due to) 2,894 3,555 - payments under provision for compensation 2,894 3,507 - payments under provision for liabilities - 48 d) Release (due to) 3,891 6,310 - provision for compensation 3,891 6,310 e) Balance as at the end of period 3,880 7,418 - provision for compensation 3,815 7,418 - provision for liabilities 65 -
Provisions for court proceedings
As at December 31 st , 2009, the balance of provisions for compensation in the Company’s books amounted to PLN 3,815 thousand. It is connected to a potential claim (main amount plus interest liabilities and costs of court proceedings) pertaining to court cases described in section 25.1 of these financial statements.
23. Employee benefits
PLN ‘000 CHANGE IN THE BALANCE OF LONG-TERM RETIREMENT AND RELATED
BENEFITS PROVISION (BY TYPE) 31.12.2009 31.12.2008 a) Balance as at the beginning of period 1,644 336 - provision for retirement benefits and service anniversary awards 1,644 336 b) Increases (due to) 132 1,308 - provision for retirement benefits and service anniversary awards 132 1,308 c) Use (due to) - - d) Release (due to) - - e) Balance as at the end of period 1,776 1,644 - provision for retirement benefits and service anniversary awards 1,776 1,644
PLN ‘000 CHANGE IN THE BALANCE OF SHORT-TERM RETIREMENT AND RELATED
BENEFITS PROVISION (BY TYPE) 31.12.2009 31.12.2008 a) Balance as at the beginning of period 352 18 - provision for retirement benefits and service anniversary awards 352 18 b) Increases (due to) 74 580
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- provision for retirement benefits and service anniversary awards 74 580 c) Use (due to) 275 246 - payment of benefits 275 246 d) Release (due to) 25 - - provision for retirement benefits and service anniversary awards 25 - e) Balance as at the end of period 126 352 - provision for retirement benefits and service anniversary awards 126 352
Provisions for employee benefits include provisions for retirement and annuity gratuities. Employee benefits are measured on the basis of actuarial valuations. Annual financial discount rate at the level of 5.9% was applied in order to calculate the current value of future liabilities due to employee benefits. In accordance with the recommendations included in IAS 19, the applied discount rate is established in the nominal value. At the same time, future inflation in the amount of 2.5% per annum was taken into account.
Staff turnover is established based on historic data, adjusted for employment restructuring plans. Ciech S.A. offers no employee share programmes, retirement benefits and other benefits after termination of employment. Information about employee benefits for the key managerial staff has been included in section 29.4 of notes and explanations to Ciech S.A.’s financial statements.
24. Current liabilities
PLN ‘000 CURRENT LIABILITIES DUE TO LOANS, BORROWINGS AND OTHER DEBT
INSTRUMENTS 31.12.2009 31.12.2008 a) Due to other entities 477,957 560,498 - loans and borrowings, including: 477,233 559,457 - long-term, under repayment 36,611 - - due to issue of debt securities 724 1,041 TOTAL 477,957 560,498
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CURRENT LIABILITIES DUE TO LOANS AND BORROWINGS
as at 31.12.2009 CURRENT LIABILITIES DUE TO LOANS AND BORROWINGS Company name and legal Registered Contractual amount of Amount of loan/borrowing Interest rate conditions Maturity date Collateral form office loan/borrowing to be repaid PLN PLN ‘000 currency currency ‘000 Assignment of claims under commercial Warsaw, ul. contracts amounting to 125% of the loan EURIBOR 3M + bank Bank Pekao S.A. Grzybowska 32,866 EUR 8,000 3,287 EUR 800 2010-04-30* amount, declaration on submission to margin 55/57 enforcement, power of attorney to manage bank accounts granted to the bank. Warsaw, ul. Registered and financial pledges on the Bank Pekao S.A. Grzybowska shares of Janikosoda S.A. and Soda M ątwy 55/57 S.A. Warsaw, ul. Bank Handlowy S.A. 216,000 PLN 33,324 PLN WIBOR 3M + bank margin 2014-12-13 Obligation to establish a pledge on the Senatorska 16 shares of ZCH Organika Sarzyna SA after Warsaw, Al. the restriction on the disposal of shares Bank Millennium S.A. Jerozolimskie expires 123a Warsaw, ul. Bank Handlowy S.A. 42,000 PLN 39,917 PLN WIBOR 1M + bank margin 2010-04-30* Statement on submission to enforcement Senatorska 16 Warsaw, St. Bank Millennium S.A. 30,000 PLN 29,432 PLN WIBOR 1M + bank margin 2010-04-30* Power of attorney to the borrower’s accounts śaryna 2a Warsaw, ul. Power of attorney to the bank account, Bank Pekao S.A. Grzybowska 80,000 PLN 78,294 PLN WIBOR 1M + bank margin 2010-04-30* declaration on submission to enforcement 55/57 Warsaw, Pl. BNP Bank Polska 30,000 PLN 29,956 PLN WIBOR 1M + bank margin 2010-04-30* none Piłsudskiego 1 Power of attorney to the bank account, Warsaw, ul. BRE Bank S.A. 20,000 PLN 19,637 PLN WIBOR O/N + bank margin 2010-04-30* declaration on submission to enforcement, Królewska 12 unconfirmed assignment Warsaw Rondo EURIBOR 1M + bank Calyon Bank Polska - EUR 10,000 40,883 EUR 9,918 2010-04-30* Blank bill ONZ 1 margin Warsaw, DnB Nord S.A. 50,000 PLN 49,868 PLN WIBOR 1M + bank margin 2010-04-30* Power of attorney to bank accounts Post ępu 15 c Warsaw, Pl. Power of attorney to the bank account, HSBC Bank Polska 10,000 PLN 8,035 PLN WIBOR 1M + bank margin 2010-05-20* Piłsudskiego 1 declaration on submission to enforcement Warsaw, Fortis Bank Polska S.A. 50,000 PLN 49,890 PLN WIBOR 1M + bank margin 2010-04-30* Blank promissory note Suwak 3 Warsaw, Plac Declaration on submission to enforcement, ING Bank Śląski S.A. Trzech Krzy Ŝy 79,522 PLN 79,503 PLN WIBOR 1M + bank margin 2010-04-30* power of attorney to the bank account 10/14 Organika Sarzyna SA., 15,000 PLN 15,207 PLN WIBOR 1M + margin 2010-05-31 none TOTAL 477,233
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* After the signing of an agreement between creditors, the repayment dates for loans will be prolonged by a minimum of 90 days, i.e. until the planned repayment from funds obtained under the loan agreement of 26.04.2010.
as at 31.12.2008 CURRENT LIABILITIES DUE TO LOANS AND BORROWINGS Company name and legal Registered Contractual amount Amount of loan/borrowing Interest rate Maturity date Collateral form office of loan/borrowing to be repaid conditions
31.12.2008 PLN ‘000 currency PLN ‘000 currency
Assignment of claims under commercial Warsaw, ul. contracts amounting to 125% of the loan EUR EURIBOR 3M + Bank Pekao S.A. Grzybowska 33,379 6,676 EUR 1,600 2009-12-31 amount, declaration on submission to 8,000 bank margin 55/57 enforcement, power of attorney to manage bank accounts granted to the bank. Warsaw, ul. Bank Pekao S.A. Grzybowska 55/57 Registered pledge on holdings in Janikowskie Bank Handlowy w Warszawie Warsaw, ul. WIBOR 3M + bank 216,000 PLN 170,678 PLN 2014-12-13 Zakłady Sodowe Janikosoda S.A. of the nominal S.A. Senatorska 16 margin value of PLN 44,344 thousand Warsaw, Al. Bank Millennium S.A. Jerozolimskie 123a Bank Handlowy w Warszawie Warsaw, ul. WIBOR 1M + bank Power of attorney to the bank account, 42,000 PLN 39,522 PLN 2009-06-09 S.A. Senatorska 16 margin declaration on submission to enforcement Warsaw, ul. WIBOR 1M + bank Power of attorney to the bank account, BRE Bank S.A. 20,000 PLN 19,106 PLN 2009-06-09 Królewska 12 margin declaration on submission to enforcement
Warsaw, ul. WIBOR 1M + bank Blank promissory note, declaration on Fortis Bank Polska S.A. 50,000 PLN 49,283 PLN 2009-06-09 Suwak 3 margin submission to enforcement
Warsaw ul. WIBOR 1M + bank Declaration on submission to enforcement, Bank Millennium S.A. 30,000 PLN 29,306 PLN 2009-07-30 śaryna 2a margin power of attorney to the bank account
Warsaw, ul. WIBOR 1M + bank Right to deduct outstanding amounts from the NORD/LB Bank Polska S.A. 50,000 PLN 48,740 PLN 2009-07-30 Post ępu 15c margin bank account.
Warsaw, ul. WIBOR 1M + bank Power of attorney to the bank account, Bank Pekao S.A. Grzybowska 80,000 PLN 75,104 PLN 2009-11-30 margin declaration on submission to enforcement 55/57
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Warsaw, Plac WIBOR 1M + bank Declaration on submission to enforcement, ING Bank Śląski S.A. Trzech Krzy Ŝy 30,000 PLN 29,528 PLN no fixed term margin power of attorney to the bank account 10/14
Warsaw, Pl. WIBOR 1M + bank Declaration on submission to enforcement, HSBC Bank Polska S.A 10,000 PLN 2,864 PLN 2009-11-06 Piłsudskiego 1 margin power of attorney to the bank account
EONIA + bank Declaration on submission to enforcement, Calyon S.A. Rondo ONZ 41,724 EUR 41,724 EUR 2009-06-30 margin power of attorney to the bank account
Warsaw, Pl. WIBOR 1M + bank Declaration on submission to enforcement, HSBC Bank Polska S.A 55,000 PLN 17,000 PLN 2009-10-27 Piłsudskiego 1 margin power of attorney to the bank account
Warsaw, Pl. WIBOR 1M + bank Declaration on submission to enforcement, BNP PARIBAS S.A. 30,000 PLN 29,926 PLN 2009-06-27 Piłsudskiego 2 margin power of attorney to the bank account
TOTAL 559 457
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The terms of transactions with associates have been presented in section 29.2 of notes and explanations to the financial statements. Trade liabilities are not charged with interest. Commercial contracts concluded by Ciech S.A. provide for various terms of payment of trade liabilities, depending on the type of transaction, market characteristics and commercial conditions. The most common payment terms are: 14, 30, 60 or 90 days.
CURRENT LIABILITIES – OTHER FINANCIAL LIABILITIES, TRADE AND OTHER LIABILITIES PLN ‘000 31.12.2009 31.12.2008 a) Due to subsidiaries 335,636 233,797 Due to trade, with repayment period: 327,590 232,891 - up to 12 months 327,590 232,891 Other (by type) 8,046 906 - bails - 5 - down payments received for supplies 7,377 - - other 669 901 b) Due to jointly-controlled entities - - c) Due to affiliates - 228 Due to trade, with repayment period: - 228 - up to 12 months - 228 d) Due to a significant investor - - e) Due to the parent company - - f) Due to other entities 156,936 194,022 Other financial liabilities, including: 123,266 141,033 - liabilities due to financial instruments 123,266 141,033 Due to trade, with repayment period: 14,629 26,159 - up to 12 months 14,629 26,159 Other (by type) 19,041 26,830 - customs duties and social security 1,182 1,345 - consumption of materials and energy 49 58 - provision for holidays 881 1,171 - provision for employee bonuses 2,285 9,602 - down payments received for supplies 1,551 - - bails - 215 - advertising and representation 180 40 - liabilities due to employees 47 40 - down payments received - 2,081 - social security and employee benefits 312 409 - rents and leases 540 - - outsourced services 1,066 1,595 - assignment of debt 8,692 8,828 - other 2,256 1,446 g) Special funds - - TOTAL 492,572 428,047
25. Off-balance sheet items
25.1 Liabilities of Ciech S.A. (domestic and foreign) claimed in court or arbitration proceedings as at December 31 st , 2009
Action by Enapharm In June 2004, the Liquidator for Enapharm in Algeria filed a claim, which now amounts to USD 222 thousand (equivalent of PLN 633 thousand), as damages concerning deliveries of expired medications by CIECH S.A. between 1985 and 1991. According to the claimant, CIECH S.A. did not replace the expired medications which the customer had not sold, in violation of the contract between the parties. CIECH S.A. claims that it was exempt from the replacement
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provision in light of the claimant failing to make the payments due from its sales of medications on the Algerian market; what is more, CIECH S.A. raised an objection that Enapharm’s claims fall under the statute of limitations. In June 2007, an opinion of a court expert was delivered to CIECH S.A., notifying an increase in the value of the medications subject to complaint to USD 372 thousand (equivalent of PLN 1,060 thousand). The opinion was reviewed by CIECH S.A. for credibility and compliance with the purchase-sales contract. CIECH S.A. questioned the findings of the expert’s report on formal and material grounds, claiming that the value of medications as promptly reported by Enapharm in line with the contractual provisions, accounts only for approx. 10% of the amount claimed by Enapharm. In November 2007, the Algerian court announced the judgement in favour of CIECH S.A., in which it rejected the existing expert’s report, declaring infringement of laws applicable to civil proceedings. At the same time, the court ordered a new expert opinion to be prepared and appointed a new expert, recommending that a representative of the defendant attends the next examination. So far the Liquidator for Enapharm has not requested the expert to set the date for examination of the medicines. The case is pending before the Algerian Court. CIECH S.A. is represented by a local attorney, supervised by a reputable Paris law office. The case is pending.
Provision in the amount of PLN 633 thousand was created in CIECH S.A. for the above liabilities.
Action by AVAS In 2009, AVAS (a state-owned Romanian privatisation agency) claimed that Ciech S.A. failed to fulfil its information obligations under the Agreement for the purchase of shares in S.C. Uzinele Sodice Govora – Ciech Chemical Group SA (Privatisation Agreement) and imposed contractual penalties on Ciech S.A. AVAS filed a petition against Ciech S.A. in the said case. Salans – Ciech S.A.’s legal representative – estimated the probability of the first instance court recognising AVAS’ claims (two instances of appeal are considered currently):
• For Ciech S.A.’s failure to fulfil its information obligations under paragraph 13.2.1 of the Privatisation Agreement with regard to claims incurring potential penalties in USD (USD 376 thousand + USD 10 thousand = USD 386 thousand) – medium to high probability;
• For Ciech S.A.’s failure to fulfil its information obligations under paragraph 13.11 of the Privatisation Agreement with regard to claims incurring a potential penalty of RON 1,669,334.23 – low to medium probability;
• For Ciech S.A.’s failure to fulfil its information obligations under paragraph 15.4 of the Privatisation Agreement with regard to claims incurring a potential penalty of RON 1,669,334.23 – low probability.
In the light of the above, another attempt was made to resolve the disputes with AVAS in an amicable manner. On March 5 th , 2010, a meeting took place between the representatives of Ciech S.A./Salans and AVAS. AVAS expressed its readiness to resolve the disputes and contractual penalties with Ciech S.A. in an amicable manner, subject to certain legal restrictions. So far, these matters have not been resolved.
Provision in the amount of PLN 1,100 thousand was created in CIECH S.A. for the above liabilities and contingent liabilities amounting to PLN 1,619 thousand were disclosed.
CIECH S.A. claims (domestic and foreign)
Claims submitted to court or arbitration proceedings CIECH S.A. is currently conducting six cases against its trade and other debtors under Polish civil law for a total of PLN 335 thousand. The Company created a write-down in the full amount.
Claims for bankruptcy proceedings A total of PLN 8,882 thousand is being claimed in twenty eight domestic bankruptcy proceedings. For foreign bankruptcy proceedings, CIECH S.A. allocated claims in the amount of USD 315 thousand (equivalent of PLN 898 thousand) and EUR 508 thousand (in total equivalent of PLN 2,087 thousand), whereof the largest portion includes the following bankruptcy proceedings: • Chemapol – Prague (PLN 1,025 thousand), • Euroftal N.V. Belgium (PLN 858 thousand).
The forecasts as for the bankruptcy proceedings are unfavourable due to the fact that the claims of CIECH S.A. are not preferential. The Company has created a write-down for all pending proceedings.
Claims due to enforcement and conciliatory proceedings
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CIECH S.A. is claiming PLN 9,460 thousand from domestic debtors in seventeen enforcement proceedings. The forecasts as for these proceedings vary depending on the debtor’s assets. In foreign enforcement proceedings, there is one case worth EUR 27 thousand (equivalent of PLN 111 thousand). The Company has created a 100% write-down for the aforesaid receivables.
The following rates of the National Bank of Poland as at December 31 st , 2009 were adopted for the conversion of debts in foreign currencies.
USD = 2.8503 EUR = 4.1082
Other cases with CIECH S.A.’s participation
Cases concerning the charge for the perpetual usufruct of the plot of land no. 41, precinct 7-02-09, located in Warsaw at ul. Pow ązkowska 46/50
1. Case concerning the update of charge for the perpetual usufruct of the plot of land no. 41, precinct 7-02-09, located in Warsaw at ul. Pow ązkowska for 2009 and the subsequent years. Case is currently pending before the Local Government Appeals Court in Warsaw. By virtue of the letter of December 22 nd , 2008, the President of the Capital City of Warsaw cancelled the former annual charge paid by CIECH S.A. for the perpetual usufruct of land located in Warsaw at ul. Pow ązkowska 46/50, being the property of the State Treasury, marked as plot no. 41, precinct 7-02-09, and determined the new charge as of January 1 st , 2009 amounting to PLN 590 thousand. In conjunction with the aforesaid new charge, on January 28 th , 2009, CIECH S.A. lodged a petition to the Local Government Appeals Court in Warsaw for declaring invalid the revised annual charge for the perpetual usufruct of land. According to the information at hand, the Local Government Appeals Court is not taking any actions in order to resolve this case. In the course of the above proceedings, CIECH S.A. requested an analysis of the appraisal study, being the basis for the increase of the charge for the perpetual usufruct of the plot.
Provision in the amount of PLN 394 thousand has been created in CIECH S.A. for the above case. 2. Case concerning the update of charge for the perpetual usufruct of the plot of land no. 41, precinct 7-02-09, located in Warsaw at ul. Pow ązkowska for 2004 and the subsequent years. Case is currently pending before the Regional Court in Warsaw, 25 th Civil Division. By virtue of a letter of December 17 th , 2003, delivered to CIECH S.A. on January 6 th , 2004, the President of the Capital City of Warsaw cancelled as of December 31 st , 2003 the previous charge for the perpetual usufruct of land located in Warsaw at ul. Pow ązkowska 46/50, being the property of the State Treasury and marked as plot no. 41, precinct 7-02-09. The new charge as of January 1 st , 2004 amounted to PLN 500 thousand (previously PLN 25,834.35). As a result of an appeal lodged by CIECH S.A., the Local Government Appeals Court in Warsaw, pursuant to the decision of January 9 th , 2009, declared that CIECH S.A., being a perpetual lessee of the plot no. 41, is obliged to pay an annual charge amounting to PLN 409 thousand starting from January 1 st , 2005. On January 29 th , 2009, CIECH S.A. appealed against the aforesaid decision via the Local Government Appeals Court in Warsaw to the District Court in Warsaw, 25 th Civil Division. According to the information at hand, the first hearing on the above case was conducted on January 13 th , 2010. Due to the absence of State Treasury’s attorney, the case was adjourned without scheduling another hearing.
Provision in the amount of PLN 1,687 thousand has been created in CIECH S.A. for the above case.
25.2 Investment liabilities
Ciech S.A. has the following tasks and obligations arising from share purchase agreements:
a) Z.Ch ORGANIKA SARZYNA S.A. and Z.Ch ZACHEM S.A.
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No. Item ZCH ORGANIKA SARZYNA ZCH Zachem Company’s implementation of Company’s implementation of Guaranteed Investments totalling PLN Guaranteed Investments totalling PLN 176,120 thousand within 5 years from 130,000 thousand within 5 years from the date of purchase the date of purchase
1 Investment liabilities st st As at December 31 , 2009, As at December 31 , 2009, Guaranteed Investments in ZCH Guaranteed Investments for the ZACHEM S.A., in accordance with amount of PLN 56,794.7 were the Purchaser’s interim statement, implemented. amounted to PLN 93,617.1
thousand.
Payment for the benefit of the Seller of a penalty amounting to 50% of the difference between the required and realised amount of increases made in the Company within 5 years from the date of purchase. In the case of failure to satisfy the Restricting Condition (1 in the amount of: At least 107% of fixed assets – Ciech Payment for the benefit of the Seller of S.A. shall be obliged to pay a penalty of a penalty amounting to 50% of the PLN 150 thousand difference between the required and At least 100% but not more than 107% realised amount of increases made in – Ciech S.A. shall be obliged to pay a the Company within 5 years from the penalty of 20% of the difference date of purchase. between the value corresponding to In the case of failure to satisfy the 110% of the Company’s fixed assets Restricting Condition (1 , Ciech S.A. shall Contractual penalties due to failure 2 and the value of long-term capital at the be obliged to pay a penalty of PLN 150 to realise Guaranteed Investments end of a given reporting period. thousand for every percentage point of If the value of long-term capital is less the difference between the ratio of than 100% of fixed assets, Ciech S.A. long-term capital and fixed assets shall be obliged to pay a penalty defined for a given reporting period to amounting to the sum of the following: the actual ratio. Should this difference 100% difference between the value of exceed 10 pp, the penalty amounts to long-term capital and the value PLN 500 thousand for every full pp in corresponding to 100% of fixed assets excess of 10%. at the end of a given reporting period, and 20% of the difference between the value corresponding to 110% of the Company’s fixed assets at the end of a given reporting period and the value of long-term capital at the end of a given financial year.
Payment for the benefit of the Seller of Payment for the benefit of the Seller of Contractual penalties due to non- a penalty amounting to 50% of the a penalty amounting to 50% of the fulfilment of the obligation to 3 Company’s sales revenues for 2005 but Company’s sales revenues for 2005 maintain the Company’s Core not more than 50% of the purchase but not more than 100% of the Activity price. purchase price. Payment for the benefit of the Seller of Payment for the benefit of the Seller of Contractual penalties due to a penalty amounting to 100% of the a penalty amounting to 100% of the performing prohibited decrease of decrease or, in the case of share decrease or, in the case of share 4 the Company's share capital and redemption, of the remuneration paid to redemption, of the remuneration paid redemption of shares shareholders in conjunction with the to shareholders in conjunction with the redemption. redemption. Payment for the benefit of the Seller of Payment for the benefit of the Seller of Contractual penalties due to a penalty amounting to 100% of the a penalty amounting to 100% of the 5 performing prohibited disposal or product of the number of sold or product of the number of sold or encumbrance of shares encumbered shares and the share encumbered shares and the share price. price.
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Contractual penalties due to Payment for the benefit of the Seller of Payment for the benefit of the Seller of 6 performing prohibited division or a penalty equal to the purchase price. a penalty equal to the purchase price. merger of the Company Payment for the benefit of the Seller of Contractual penalties due to non- Payment for the benefit of the Seller of a penalty equal to the dividend paid out 7 fulfilment of the obligation to retain a penalty amounting to 80% of the by the Company to shareholders other profit in the Company dividend paid out by the Company. than the Seller. Payment for the benefit of the Seller of Payment for the benefit of the Seller of Liability for violating the State a penalty amounting to the product of a penalty amounting to the product of Treasury’s right to appoint one PLN 30 thousand and the number of PLN 30 thousand and the number of 8 person as a member of the days on which the Company’s Statute days on which the Company’s Statute Company’s Supervisory Board did not contain the discussed right of did not contain the discussed right of the State Treasury. the State Treasury. Payment of a penalty of: Liability for non-compliance with the PLN 1 thousand for every day of delay Payment of a penalty of PLN 30 9 obligation to provide the up to 14 days, thousand for every day of delay Purchaser’s Report PLN 50 thousand for every day of delay exceeding 14 days 1 Restricting Condition: • The agreement for the sale of shares in ZCh Zachem S.A. contains a “restricting condition”. The “restricting condition” is calculated as the ratio of long-term capital to fixed assets on the basis of the Separate Financial Statements of the Company, prepared according to PAS. Pursuant to the agreement, this ratio is to grow as follows: in 2007 by 20 pp in relation to the ratio calculated as at the date of sale of shares, i.e. December 20 th , 2006; in every subsequent year by another 10 pp until 2010 (total growth by 50 pp between 2007 and 2010). Ciech shall pay Nafta Polska S.A. a penalty amounting to PLN 150 thousand for every full percentage point below the required ratio. Every full percentage point in excess of 10 pp deviation from the required ratio shall be followed by a penalty of PLN 500 thousand. When necessary, CIECH S.A. will provide ZACHEM S.A. with financial support to ensure that the restricting condition is fulfilled.
Annex No 1, concluded on December 23 rd , 2009 stipulates that fulfilment date of the “restricting condition” which was set out in the previous Agreement at December 31 st , 2009 (+40 p.p.), shall be December 31 st , 2010, save that if Ciech S.A. fails to meet the new date, Nafta Polska S.A. shall be entitled to receive a contractual penalty due to non-compliance by Ciech S.A. with the “restricting condition” at the end of 2010, as well as a contractual penalty to which it would be entitled due to non-compliance by Ciech S.A. with the condition at the end of 2009. Additionally, it was agreed that the fulfilment date of the “restricting condition” which was set out in the previous Agreement at December 31 st , 2010, shall be December 31 st , 2011.
If the “restricting condition” is fulfilled by December 31 st , 2010, as stipulated by the provisions of the original Agreement (i.e. +50 pp), the “restricting condition”, as at December 31 st , 2011, shall not be examined anymore and no contractual penalty for non-observance of the restricting condition in 2009 shall be charged.
• Z. Ch. ORGANIKA – SARZYNA – obligation to maintain for the entire period of guaranteed investments realisation, i.e. from the date of purchase until the date of submitting the Purchaser’s Final Report, such a structure of liabilities that the value of the company’s long-term capital equals at least 110% of fixed assets.
Pursuant to the agreement concerning the acquisition of 80% of the shares in Zachem S.A., on December 20 th , 2006, Ciech S.A. made an irrevocable offer to the State Treasury concerning the purchase of all shares (put option) from the State Treasury, valid from the date of making the offer until its expiry. As at December 31 st , 2006, the State Treasury held 740,000 shares in Zachem S.A., constituting 5% of equity and this quantity may be increased by shares that will remain in the holding of the State Treasury after the distribution of shares to authorised employees in accordance with Art. 36 of the Act dated August 30 th , 1996 on Commercialisation and Privatisation of Public Enterprises. The option is valid for 10 years, whereby the acceptance of the purchase offer may take place not earlier than 180 days from the date of the agreement concerning the purchase of 80% of the shares in Zachem S.A., i.e. June 20 th , 2007. The realisation price is subject to revaluation from the date of submitting the offer to December 20 th , 2010, according with the Decision of January 5 th , 2010. The basis of adjustment is the share price designated in the agreement concerning the acquisition of 80% of the shares in Zachem S.A., while the revaluation ratio is the arithmetic mean of interest rates in the scale of one year, for twelve-month PLN loans on the Warsaw inter-bank market (WIBOR 12M).
Additionally, pursuant to § 13 of Appendix 14 to the agreement concerning the acquisition of 80% of the shares in Zachem S.A., Ciech S.A. obliged to repurchase shares distributed free of charge to individuals authorised in accordance with Art. 36 of the Act dated August 30 th , 1996 on Commercialisation and Privatisation of Public Enterprises. The motion for share repurchase may be lodged within 60 days from the second, third and fourth anniversary of the acquisition of shares in Zachem S.A. by Ciech S.A. Authorised individuals shall hold not more
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than 2,220,000 shares in Zachem S.A. The guaranteed share repurchase price amounts to 75% of the price provided in the agreement concerning the acquisition of 80% of the shares in Zachem S.A.
In 2008, Z. Ch. ZACHEM S.A. purchased the aforesaid employee shares (one year earlier than stipulated in the agreement). The total of 754,581 (seven hundred and fifty-four thousand, five hundred and eighty-one) shares were acquired for PLN 3,825,725.67 (three million, eight hundred and twenty-five thousand, seven hundred and twenty-five 67/100 Polish zlotys).
In 2009, Ciech S.A. concluded the 2 nd phase of purchase of employee shares in ZCh ZACHEM S.A. It purchased 331,314 (three hundred and thirty-one thousand, three hundred and fourteen) shares in Zakłady Chemiczne ZACHEM S.A. for PLN 1,679,761.98 (one million, six hundred and seventy-nine thousand, seven hundred and sixty-one zloty and 98/100 grosz).
The equity interest of Ciech S.A. in ZCh Zachem S.A. increased to 87.337%.
Pursuant to the agreement concerning the acquisition of 80% of the shares in Organika-Sarzyna S.A., on December 20 th , 2006, Ciech S.A. made an irrevocable offer to the State Treasury concerning the purchase of all shares (put option) from the State Treasury, valid from the date of making the offer until its expiry. As at December 31 st , 2006, the State Treasury held 424,500 shares in Organika-Sarzyna S.A., constituting 5% of equity and this quantity may be increased by shares that will remain in the possession of the State Treasury after the distribution of shares to authorised employees in accordance with Art. 36 of the Act dated August 30 th , 1996 on Commercialisation and Privatisation of Public Enterprises. The option is valid for 10 years, whereby the acceptance of the purchase offer may take place not earlier than 180 days from the date of the agreement concerning the purchase of 80% of the shares in Organika-Sarzyna S.A., i.e. June 20 th , 2007. The realisation price is subject to revaluation from the date of submitting the offer to December 20 th , 2010, according with the Decision of January 5 th , 2010. The basis of revaluation is the share price provided in the agreement concerning the acquisition of 80% of the shares in Organika-Sarzyna S.A., while the revaluation ratio is the arithmetic mean of interest rates in the scale of one year for twelve-month PLN loans on the Warsaw inter-bank market (WIBOR 12M). Additionally, pursuant to the provisions of Chapter 10, Appendix 13 to the agreement concerning the acquisition of 80% of the shares in Sarzyna S.A., Ciech S.A. obliged to repurchase shares distributed free of charge to individuals authorised in accordance with Art. 36 of the Act dated August 30 th , 1996 on Commercialisation and Privatisation of Public Enterprises. The request for share repurchase may be lodged after the expiry of statutory restrictions between April 1 st and April 30 th every year. Authorised individuals shall hold not more than 1,273,500 shares in Sarzyna S.A. The guaranteed share repurchase price amounts to: • after April 30 th , 2008 – PLN 20 per share, • after April 30 th , 2009 – PLN 23 per share, • after April 30 th , 2010 – PLN 26 per share, • after April 30 th , 2011 – PLN 29 per share, • after April 30 th , 2012 – PLN 32 per share, • after April 30 th , 2013 – PLN 35 per share.
On June 16 th , 2009, Ciech S.A. completed the second stage of (employee) share repurchase in ZCh Organika- Sarzyna S.A. and acquired 402,948 ordinary registered series A shares (constituting 4.746% of the Company’s shares) for the total of PLN 9,267.8 thousand. Equity interest of Ciech S.A. in ZCh Organika-Sarzyna S.A. increased to 90.875%.
The applied IAS 39 stipulates that derivatives are to be measured and recognised at fair value, except for investments in capital instruments not listed on the active market. The shares of Zachem S.A. and Sarzyna S.A. are not traded on any active market. Therefore, the fair value of the issued put options cannot be credibly estimated. In consideration of this fact, they have not been recognised in the presented balance sheet but only disclosed with a detailed description of the realisation terms. The Company periodically verifies the possibility to conduct such a measurement and when such possibility appears, the measurement will be recognised in the financial statements.
b) US Govora
Penalty for non-performance No. Obligation arising under the US Govora share purchase agreement
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Obligation not to suggest, support or decide about any changes in the subject of
activity described in the Statute. There is a possibility to supplement the subject 10% of share purchase price 1 of activity. Obligation to obtain min. 70% of annual turnover from the Company’s business 5% of unrealised difference in turnover 2 included in the subject of its activity on the date of signing the agreement. up to the level of 70%
3 Obligation to maintain posts held by existing employees for 5 years from the 5% of share purchase price date of transferring share ownership. Obligation not to make decisions about mergers, divisions, liquidation, 4 10% of share purchase price dissolution, voluntary liquidation, legal reorganisation and/or bankruptcy. 5 Obligation to convince USG not to sell assets under annex 1.12 without AVAS’ market value of asset sold written consent. Obligation to protect, promote and not to sell USG’s brand names, trade marks, 6 10% of share purchase price service marks, patents and licenses. Obligation to inform AVAS about any changes in the registered office, name, 7 10% of share purchase price division or merger of Ciech S.A. Obligation not to dispose of all or some of the acquired shares until fulfilling all 8 cancellation of agreement obligations under the agreement without the seller’s written consent. Obligation to obtain AVAS’s written consent for the assignment of the 9 cancellation of agreement privatisation agreement. Obligation not to use the acquired USG’s shares as a guarantee of other own 10 cancellation of agreement liabilities until realising all obligations under the agreement.
Ciech S.A. also obliged to perform investment obligations from its own funds amounting to USD 2.5 million (in the opinion of the Company, the obligation was fulfilled but as at the balance sheet date was not confirmed by AVAS – National Privatisation Agency in Romania) and to provide free of charge production know-how, technological methods (save for licenses), marketing data, selling market access, qualification methods, design methods (save for licenses), human resources methods, IT systems methods, economic and financial methods, etc. to the extent set out in the Romanian legal regulations.
25.3 Guarantees and sureties, and other off-balance sheet receivables and liabilities
The table below presents off-balance sheet items, including guarantees and sureties granted by Ciech S.A. to other entities (from outside the Ciech Group). The description of sureties and guarantees granted to associates (within the Ciech Group) has been included in the table “Sureties and guarantees granted”.
PLN ‘000 31.12.2009 31.12.2008 1. Contingent receivables - - 2. Contingent liabilities 344,799 392,682 - guarantees and sureties granted 344,799 392,682 3. Other 27,619 21,460 - other trade liabilities 9,400 21,460 - other 18,219 - Total off-balance sheet items 372,418 414,142 As at December 31 st , 2009, contingent receivables did not occur in CIECH S.A.
The value of contingent liabilities and other off-balance sheet liabilities as at December 31 st , 2009 amounted to PLN 372,418 thousand, which is a decrease in comparison to December 2008 by PLN 41,724 thousand. The main reasons for this difference are as follows: - granting of new guarantees for liabilities of the subsidiary GOVORA amounting to EUR 12,000 thousand and decreasing participation in the existing guarantees and sureties by EUR 22,726 thousand and PLN 7,560 thousand - decreasing participation in the existing guarantees and sureties securing the liabilities of the subsidiary CHEMAN S.A. by PLN 4,400 thousand and increase by PLN 1,500 thousand. The remaining difference results from the changes in exchange rates applied in the measurement of liabilities. Other contingent liabilities in the amount of PLN 18,219 thousand include: - contingent liability of PLN 1,600 thousand due to non-performance of a trade contract, - contingent liability of PLN 15,000 thousand due to not achieving the ratio required by the agreement for the purchase of ZACHEM S.A.’s shares,
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- contingent liability of PLN 1,619 thousand due to non-compliance by Ciech S.A. with information obligations under the agreement with AVAS for the purchase of S.C. Uzinele Sodice Govora- Ciech Chemical Group S.A.
Sureties and guarantees granted in 2009
Amount of loans covered by surety in Nature of Financial terms, relations Beneficiary’s whole or in specific Surety period including surety fee due Principal between CIECH name part to the company S.A. and the borrower currency in PLN ‘000. ‘000
CIECH S.A. Payment to CIECH S.A. KREDYT BANK until 30.04.2010 equal to 1% of the surety S.A. Sieradz 3,000 value + PLN 3.5 thousand Cheman S.A. Subsidiary Branch + PLN 2.5 thousand + PLN 62.5 thousand Payment to CIECH S.A. KREDYT BANK until 30.04.2010 equal to 1% of the surety S.A. Sieradz 4,000 value + PLN 3.5 thousand Cheman S.A. Subsidiary Branch + PLN 2.5 thousand + PLN 40 thousand Payment to CIECH S.A. PKN ORLEN S.A. 1,200 no fixed term equal to 1% of the surety Cheman S.A. Subsidiary value Payment to CIECH S.A. equal to 1% of the surety BANK PKO S.A. until 30.04.2010 value (from PLN 2 million) First Branch in 2,000 + PLN 10 thousand on Cheman S.A. Subsidiary Warsaw increase + PLN 4 thousand + PLN 5 thousand on extension S.C. Uzinele Citibank EUR Contract of surety with Sodice Govora – 49,298 until 15.07.2010 Subsidiary HANDLOWY 12,000 Bank Handlowy Warszawa Ciech Chemical Group S.A. BANK PKO S.A. 40,000 until 30.04.2013 Surety for loan ZACHEM S.A. Subsidiary Total CIECH S.A. 99,498
Total amount of guarantees granted, Nature of Financial terms, Beneficiary’s backed in whole or in relations betwe en Guarantee period including guarantee fee Principal name specific part CIECH S.A. and due to the company currency PLN the beneficiary in ‘000 ‘000.
S.C. Uzinele Payment to CIECH S.A. Sodice Govora – Citibank Romania EUR 12,325 until 26.05.2010 equal to 0.5% of the Ciech Chemical Subsidiary S.A. 3,000 surety value. Group S.A. - Romania
SG Equipment S.C. Uzinele Sodice Govora – Leasing Polska Sp EUR 6,845 until 30.09.2011 - Ciech Chemical Subsidiary .z o.o. – Warsaw 1,666 Group S.A. -
Romania
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Total amount of guarantees granted, Nature of Financial terms, Beneficiary’s backed in whole or in relations betwe en Guarantee period including guarantee fee Principal name specific part CIECH S.A. and due to the company currency PLN the beneficiary in ‘000 ‘000. The surety was estimated on the basis of half-yearly deliveries under the contract Air Products, LLC concluded by ZACHEM and Air Products USD 109,737 2013 S.A. in 2004, and ZACHEM S.A. Subsidiary Chemicals Europe 38,500 annexed in October B.V. 2007. The value of annual supplies amounts to USD 77 million To the loan agreement Soda COMMERZBANK EUR rd 102,705 31.01.2013 of January 23 , 2008 Deutschland Subsidiary AG 25,000 for EUR 75 million Ciech GmbH Guarantee of payment for the delivery of liquid PCC ROKITA S.A. 4,500 30.03.2010 chlorine for the ZACHEM S.A. Subsidiary production of ECH – 0.5% commission S.C. Uzinele Sodice Govora – ING Lease Payment collateral to 2,237 9,189 30.04.2013 Ciech Chemical Subsidiary Romania IFN S.A. lease agreements Group S.A. - Romania Total CIECH S.A. 245,301
These items do not include the value of suits filed by third parties, described in section 25.1 (off-balance sheet items) of notes and explanations to the financial statements.
26. Information about agreements concluded with the entity authorised to audit CIECH S.A.’s financial statements
List of agreements concluded with Deloitte Audyt Sp. z o.o. in 2009
Date/duration of Entity Contents Value agreement
CIECH S.A.
Deloitte Audyt Review and audit of the financial statements and 1. 19.06.2009/ 1 year PLN 412.5 thousand Sp. z o.o. consolidation package for 2009
Deloitte Audyt Verification of Sarzyna’s and Zachem’s 4 th periodic 2. 20.11.2009/ 1 year PLN 109.45 thousand Sp. z o.o. statements for 2009
List of agreements concluded with Deloitte Audyt Sp. z o.o. in 2008 Date of Contents Value agreement
Accounting advisory services related to recognising Soda 1. 02-01-2008 EUR 12,000 + VAT Deutschland Group in the consolidated statements
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Review and audit of the separate and consolidated financial PLN 440,000 + VAT + cost 2. 03-07-2008 statements reimbursement (max. 10%)
Additional activities related to the audit of financial statements 3. 03-07-2008 EUR 50,000 + VAT for 2008
Advisory services related to changes in IAS, optimising 4. 30-10-2008 periodic reports and recognising unusual economic PLN 65,000 + VAT transactions in the financial statements
Verification of financial statements of Zachem S.A. and ZCh PLN 99,500 + VAT + cost 5. 05-12-2008 Organika-Sarzyna S.A. reimbursement (max. 10%)
27. Financial lease
Ciech S.A. does not apply financial lease.
28. Operating lease
Pursuant to the adopted accounting principles, operating lease in Ciech S.A. includes the right of perpetual usufruct of land for a period of 89-99 years obtained through administrative allocation by the State Treasury as well as passenger cars. Operating lease is renewable lease, making it possible to acquire an asset at its estimated market value at the end of its use. The Company is not obliged to redeem the leased assets. No conditions of extending lease agreements or purchasing the subject of lease have been included in administrative decisions concerning the right of perpetual usufruct of land. Price indexation may occur in conjunction with land revaluation.
In the financial year 2009, the costs of lease fees were as follows: - due to the tight of usufruct of land – PLN 1,354 thousand, - due to lease of passenger cars – PLN 651 thousand.
Total amounts of future minimum lease charges due to the use of passenger cars are presented in the table below:
PLN ‘000 31.12.2009 31.12.2008 - up to 1 year 648 657 - 1 to 5 years 154 734 - over 5 years - - Total 802 1,391
No sublease agreements have occurred in Ciech S.A. Ciech S.A. does not act as a lessor.
29. Information about associates
29.1 List of companies forming the Ciech Group
The list below presents the companies forming the Ciech Capital Group:
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As at 31.12.2009 As at 31.12.2008 Registered Company name (direct and indirect share (direct and indirect share in office in total) total) SODA M ĄTWY Group Inowrocławskie Zakłady Chemiczne SODA Inowrocław 99.85% 99.85% MĄTWY Spółka Akcyjna Soda Polska Ciech Spółka z ograniczon ą Warsaw 99.74% 99.74% odpowiedzialno ści ą TRANSODA Spółka z ograniczon ą Inowrocław 99.74% 99.74% odpowiedzialno ści ą Polskie Towarzystwo Ubezpiecze ń Spółka Warsaw 45.29% 45.29% Akcyjna JANIKOSODA Group Janikowskie Zakłady Sodowe JANIKOSODA Janikowo 99.62% 99.62% Spółka Akcyjna Polskie Towarzystwo Ubezpiecze ń Spółka Warsaw 45.29% 45.29% Akcyjna PHOSPHATES Group Gda ńskie Zakłady Nawozów Fosforowych ”FOSFORY” Spółka z ograniczon ą Gda ńsk 89.46% 89.46% odpowiedzialno ści ą “AGROCHEM” Spółka z ograniczon ą Dobre Miasto 89.46% 89.46% odpowiedzialno ści ą – in Dobre Miasto “AGROCHEM” Spółka z ograniczon ą Człuchów 89.46% 89.46% odpowiedzialno ści ą – in Człuchów ZACHEM Group Zakłady Chemiczne ZACHEM Spółka Akcyjna Bydgoszcz 87.34% 85.10% ZACHEM UCR Spółka z ograniczon ą Bydgoszcz 87.34% 85.10% odpowiedzialno ści ą Soda Deutschland Ciech Group Stassfurt, Soda Deutschland Ciech 100.00% 92.00% Germany Stassfurt, 100.00% 92.00% Sodawerk Holding Stassfurt GmbH Germany Stassfurt, 100.00% 92.00% Sodawerk Stassfurt Verwaltungs GmbH Germany Stassfurt, 100.00% 92.00% Sodawerk Stassfurt GmbH&Co.KG Germany Stassfurt, 100.00% 92.00% KWG GmbH Germany Zakłady Chemiczne “Organika-Sarzyna” Nowa Sarzyna 90.88% 86.13% Spółka Akcyjna “CIECH POLFA” Spółka z ograniczon ą Warsaw 100.00% 100.00% odpowiedzialno ści ą CIECH FINANCE Group CIECH FINANCE Spółka z ograniczon ą Warsaw 100.00% 100.00% odpowiedzialno ści ą Przedsi ębiorstwo Chemiczne Cheman Spółka Warsaw 100.00% 100.00% Akcyjna ALWERNIA Group Zakłady Chemiczne “Alwernia” Spółka Akcyjna Alwernia 73.75% 73.75% S.C. Uzinele Sodice Govora – Ciech Romania 92.91% 92.91% Chemical Group S.A. POLSIN PRIVATE LIMITED Singapore 98.00% 98.00% DALTRADE PLC. United Kingdom 61.20% 61.20% “VITROSILICON” Spółka Akcyjna Iłowa 99.96% 99.96% Przedsi ębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczon ą Bydgoszcz 93.67% 92.55% odpowiedzialno ści ą “Chemia.Com S.A.” Warsaw 100.00% 100.00% Polcommerce Handel- und Austria 100.00% 100.00% Vertretungssesellschaft m.b.H., Austria CIECH SERVICE Sp. z o.o. Warsaw 100.00% 100.00% “BORUTA-KOLOR” Sp. z o.o. Zgierz 87.34% 85.10% Nordiska Unipol Aktienbolag Sweden 97.78% 97.78% Ciech Amercia Latina LTDA* Brazil 99.99% 99.99%
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As at 31.12.2009 As at 31.12.2008 Registered Company name (direct and indirect share (direct and indirect share in office in total) total) CHEMIEPETROL Aussenhandelsgesellschaft mit Germany 60.00% 60.00% beschrankter Haftung, in liquidation CIECH POLFA GROUP Polfa Hungaria Ltd. Hungary 100.00% 100.00% ALWERNIA GROUP "ALWERNIA-FOSFORANY” Alwernia 73.75% 73.75% Spółka z ograniczon ą odpowiedzialno ści ą. SOC-AL Spółka z ograniczon ą Alwernia 70.15% 70.15% odpowiedzialno ści ą Soda Deutschland Ciech Group Sodachem GmbH Germany 100.00% 92.00% KPG Kavern-Projekt-Beteiligungsgesellschaft Germany 100.00% 92.00% mbH ORGANIKA SARZYNA GROUP Zakład Do świadczalny “ORGANIKA” Sp. z o.o. Nowa Sarzyna 46.35% 43.93% * By way of decision of CIECH S.A.’s Management Board of June 29 th , 2009, the company suspended its operations.
In 2009 and in the comparative period, the Ciech Group was not subject to any restrictions as to the ability of subsidiaries to transfer funds to the parent company Ciech S.A., e.g. in the form of dividends or borrowings repayment, except for the duration of the standstill agreement.
Pursuant to IAS 24 “Related Party Disclosures”, other entities related to the State Treasury were recognised as associates of Ciech S.A., being a company controlled by the State Treasury.
Additionally, Ciech S.A. holds shares and holdings in entities where its control has been limited or lost: – ZAO - Polfa Ciech, Russia – in bankruptcy, 65.00 % holdings/votes held directly by Ciech S.A. – Polsin-Karbid Sp. z o.o. – in bankruptcy, 22.76% holdings/votes held by Ciech S.A., holdings/votes (direct and indirect) through Ciech S.A. and Polsin Pte. Ltd. – Polfa Nigeria – loss of control, no contact with the company, 20% share held directly by Ciech S.A. – Zach-Ciech Sp. z o.o. – 35.65% holdings/votes held directly by Ciech S.A., on January 24 th, 2006 the District Court in Katowice declared the Company’s bankruptcy.
29.2 Transactions with associates
The table below presents the amounts of transactions concluded with associates for the periods presented in the financial statements:
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Revenues Costs Balance sheet items Revenues Purchases from Revenues Write-downs Other of Other Receivables Created in the Liabilities, 01.01.-31.12.2009 sales of from Financial Purchases Financial on operating products operating , borrowings current reporting borrowings products sales of revenues of goods expenses receivables, revenues and expenses granted, etc. period received, etc. and goods including: services services GK Janikosoda - 10,719 - 979 - - - - 2,112 - - - Cheman - 25,703 1 739 663 - - 5 14,407 11,455 5 30 Vitrosilicon 1,044 20,601 - 632 - 45,480 - 162 12,583 - - 6,063 GK Alwernia 1,164 67,034 - 17,703 32 9,367 - 633 1,009 - - 441 Polsin - 21,607 ------2,700 - - - GK Fosfory 1,425 43,207 - - 3,894 3,820 - 4 - - - 7,681 GK Soda M ątwy 3,773 - 44 963 19,769 708,740 19 1,775 614 - - 194,143 Daltrade - 6,455 - 241 - - - - 384 - - - Ciech Polfa 83 - 5 460 147 - - - 8 - - 13 Organika Sarzyna 2,266 - - - 270 93,757 - 1,471 150 - - 76,407 Z.U.P. "Gumokor-Organika" Sp. z o.o. - 1 ------GK Zachem 4,479 1,337 - 2,055 284 497,696 - - 42,853 - - 62,500 Natural Chemical Products Sp. z o.o. - 3,214 ------1,279 1 - - Przedsi ębiorstwo Transportowo- UsługoweTransclean Sp. z o.o. - - - - 10,684 ------1,807 USG - 1 - 6,374 646 2,242 771 6,541 136,140 192,264 140,204 - Ciech Finance 14 - 93 22 - - - 1,947 264 200 200 - Soda Detschland Ciech Group - - - 15,013 - 24 - - 352,177 - - - Polskie Konsorcjum Chemiczne 5 37 , - - - - 8 - - - Chemiepertol (in liquidation)* - - 1,682 ------Ciech Service 79 442 - 2,358 - - - 4 - - 284 Nordiska Unipol - 28,821 - - 778 - - - 4,505 - - 217 Polcommerce, Vienna - 31,428 - 89 322 - - - 1,898 - - 203 Chemia.com 152 - 967 25 4,609 - - - 541 - - 1,175 Calanda Polska ------1,243 - - CIECH AMERICA LATINA LTDA - - - - 12 ------11 Suomen Unipol - 27,669 - 116 666 - - - 1,654 - - 79 Polfa Hungaria Ltd - 359 - - 42 - - - 41 - - 10 Total 14,484 288,156 3,271 45,411 45,134 1,361,126 790 12,538 575,290 205,163 140,409 351,054 * On March 15 th , 2010, the company was removed from the Commercial Register.
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Revenues Costs Balance sheet items Revenue Receivab Purchas Other Write- s from Revenue Other les, Created in Liabilities, es of Purchas operatin Financial downs on 01.01.-31.12.2008 sales of s from operatin Financial borrowin the current borrowings products es of g expense receivable products sales of g revenues gs reporting received, and goods expense s s, and goods revenues granted, period etc. services s including: services etc. GK Janikosoda - 12,115 ------1,810 - - - Cheman 22 29,145 66 1,068 - - - 271 21,250 11,721 271 20 Vitrosilicon 1,025 21,649 - 584 10 42,845 - - 10,416 - - 4,768 GK Alwernia 1,422 60,029 - 19,000 47 18,098 - - 890 - - 824 Polsin 14,910 - 281 - - - - 43 - - - GK Fosfory 1,781 270,310 - 3,129 4,749 29,862 - - 105 - - 489 GK Soda M ątwy 4,779 - 3 - 19,378 621,288 - - 468 - - 145,790 Daltrade 16,322 ------439 - - - Ciech Polfa 616 37 - 178 - - - 19 - - 17 Organika Sarzyna 2,829 3,412 - 5,120 75 2,521 - 36 202 - - 26,835 Z. Ch. "Silikony Polskie" Sp. z o.o. - 6 ------1 - - - Bud-Org Sp. zo.o ------2 - - - Z.U.P. "Gumokor-Organika" Sp. z o.o. ------2 - - - Zachem 4,738 4,109 - 5,080 85 456,177 - - 42,524 - - 51,996 Natural Chemical Products Sp. z o.o. 2,881 - 26 - - - 2 670 2 2 - Przedsi ębiorstwo Transportowo- UsługoweTransclean Sp. z o.o. - - - - 7,059 ------766 USG - 725 15 11,698 - 5,923 - 142 297,465 - - 417 Ciech Finance 6 - (79) 54 19 - - - 1,022 - - - Soda Deutschland Ciech Group - - - 17,991 - 977 - - 418,487 - - 80 Boruta Kolor 66 64 - 2,500 44 - - 2,288 1 - - 10 Polskie Konsorcjum Chemiczne ------6 - - - Ciech Service 53 352 - 3,135 - - - 6 - - 205 Nordiska Unipol - 18,821 - - 689 - - - 4,952 - - 129 Polcommerce, Vienna - 22,509 - - 201 - - - 2,223 - - 74 Polcommerce, Budapest ------7 Chemia.com 127 - 807 146 3,006 - - - 150 - - 1,323 Soda Med. - - - - 6 ------Calanda Polska ------1,243 1,243 - - CIECH AMERICA LATINA LTDA - - - - 212 ------47 Suomen Unipol - 42,185 - 77 1,444 - 48 - 3,706 - - 228
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1,177,69 Total 17,464 519,192 1,201 66,754 40,337 1 48 2,739 808,102 12,966 273 234,025
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Terms of transactions with associates Sales to and purchases from associates are realised at standard market prices. Overdue liabilities and receivables are not secured and settled in cash or by compensation. Receivables from associates have not been covered by any guarantees granted or received. Information about write-downs on receivables from associates has been presented in section 13 of notes and explanations to the financial statements.
29.3 Significant agreements between Ciech S.A. and its associates
No significant agreements were concluded between associates in 2009.
29.4 Transactions concluded by key managerial staff
In 2009, no transactions were concluded by key managerial staff in Ciech S.A.
Remuneration of the key managerial staff
Remuneration of Ciech S.A.’s Management Board
PLN ‘000
Remuneration due to Base membership in First name and Semi-annual Non- Annual remunerati Sick pay supervisory Total surname bonus competition bonus on boards of the Ciech Group’s companies Robert Bednarski 612 - 227 - 197 102 1,138 Marcin 602 16 306 - 133 206 1,263 Dobrza ński Ryszard Kunicki 948 - 431 - 302 206 1,887
Artur Osuchowski 612 - 306 - 82 206 1,206
Mirosław Kochalski - - - 1,776 - - 1,776
Rafał Pasieka - - - 794 - 21 815 Kazimierz - - - 153 - 4 157 Przełomski Marek Trosi ński - - - 686 - 21 707
Wojciech Wardacki - - - 835 - 21 856
TOTAL 2,774 16 1,270 4,244 714 787 9,805
Members of the Management Board are employed based on employment contracts. According to a resolution of Ciech S.A.’s Supervisory Board, the Members of the Management Board are entitled to: • monthly remuneration determined in individual employment contracts; • semi-annual bonus amounting up to 100% of six-month remuneration in the amount determined by the Supervisory Board; • annual bonus determined in individual employment contracts.
Remuneration of Ciech S.A.’s Supervisory Board
PLN ‘000 First name and surname Remuneration Przemysław Cieszy ński 37 Jacek Goszczy ński 99 Zbigniew Jagiełło 23 Grzegorz Kłoczko 111 Krzysztof Mastalerz 56 Marzena Okła-Anuszewska 79
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Alicja Pimpicka 56 Krzysztof Salwach 79 Ewa Sibrecht-Ośka 31 Sławomir Stelmasiak 24 TOTAL 595
Members of the Supervisory Board, pursuant to a resolution of the Extraordinary General Meeting of Shareholders, receive monthly remuneration amounting to: • Chairman of the Supervisory Board – 300% • Vice Chairman of the Supervisory Board – 250% • Other Members of the Supervisory Board – 200% of average monthly remuneration in the sector of enterprises, including profit distribution in the month preceding the calculation.
30. Goals and principles in financial risk management
Identifying risks
The Ciech Group is exposed to the following financial risks: • market risk, including: o currency risk, o interest rate risk, o products, raw materials and goods price risk. • loan risk, • liquidity risk.
Interest rate risk
Ciech S.A. is exposed to interest rate risk resulting from the existing indebtedness. In 2009, the Company did not hedge against interest rate risk.
The table below presents a summary of financial instruments exposed to changes in interest rates (balance sheet values):
31.12.2009 31.12.2008 PLN ‘000. Total carrying value Total carrying value Fixed interest rate instruments Financial assets - - Financial liabilities - - Floating interest rate instruments Financial assets 489,688 613,357 Financial liabilities 904,180 860,300
The table below shows the effects of a change in the interest rate by 100 base points over the floating interest rate instruments disclosed in the balance sheet.
Profit and loss account Equity PLN ‘000. increase by 100 decrease by 100 increase by 100 decrease by 100 bp bp bp bp 31.12.2009 Floating interest rate instruments (4,145) 4,145 - - Interest rate swap transactions - - - - Exposure of net cash flows (4,145) 4,145 - -
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Profit and loss account Equity PLN ‘000. increase by 100 decrease by 100 increase by 100 decrease by 100 bp bp bp bp 31.12.2008 Floating interest rate instruments (2,469) 2,469 - - Interest rate swap transactions - - - - Exposure of net cash flows (2,469) 2,469 - -
Based on an exposure analysis, it has been estimated that a change in market interest rates by 1 percentage point would have no material effect on the Company’s financial result for 2009 and its future cash flows.
Currency risk
Currency risk is an intrinsic component of running commercial activity denominated in foreign currencies. Due to the nature of conducted import and export operations, CIECH is subject to currency exposure connected with considerable surplus of exports over imports. The sources of currency risk to which the Company was exposed in 2009 included: purchase of raw materials, product sales, loans raised and borrowings granted and cash in foreign currencies.
CIECH applies natural hedging consisting in balancing inflows and outflows in foreign currencies and uses derivatives in order to reduce currency risk.
CIECH S.A. applied hedging transactions in order to limit the influence of currency fluctuations on the income statement. In 2009, option transactions were used to realise cash flow hedging transactions.
The table below presents maximum currency risk exposure of financial instruments.
31.12.2009, Nominal value PLN ‘000 EUR, including: USD, including: Trade receivables 86,769 37,916
Borrowings granted 439,395 - Trade liabilities (42,434) (40,546) Liabilities due to loans and borrowings (44,120) - Value of derivatives (delta equivalent) (572,055) - Nominal value (132,445) (2,630)
31.12.2008, Nominal value PLN ‘000 EUR, including: USD, including: Trade receivables 114,941 13,165 Borrowings granted 614,542 - Trade liabilities (21,714) (19,608) Liabilities due to loans and borrowings (48,400) - Value of derivatives (delta equivalent) (1,030,858) - Nominal value (371,489) (6,443)
The table below presents the effects of a PLN weakening by 10% over receivables and liabilities in EUR in USD disclosed in the balance sheet.
PLN ‘000. Equity Profit and loss account 31.12.2009 USD - (263) EUR (4,557) (8,687)
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PLN ‘000. Equity Profit and loss account 31.12.2008 USD - (644) EUR - (37,149)
A strengthening PLN would have a symmetrical effect on the profit and loss account. The following exchange rates were applied for the conversion of assets and financial liabilities in foreign currencies: - USD = PLN 2.8503 - EUR = PLN 4.1082
Loan risk
Carrying value of financial PLN ‘000. assets 31.12.2009 31.12.2008 Cash and cash equivalents 46,445 32,085 Financial assets measured at the fair value through the financial result - - Financial assets available for sale 38,118 17,953 Borrowings and trade receivables 766,342 904,394 Accumulated receivables 56,788 66,503 Other receivables - 55,389 Financial assets held until maturity - - Total 907,693 1,076,324
The table below presents maximum loan risk exposure for trade receivables as at the balance sheet date.
31.12.2009 31.12.2008 PLN ‘000. Total value of receivables Total value of receivables Poland 126,101 137,204 Other European Union countries 94,419 125,472 Other European countries 22,284 18,114 Africa 7,304 3,108 Asia 25,966 3,352 Other regions 580 3,787 Total 276,654 291,037
The table below presents a classification of trade receivables by overdue periods.
31.12.2009 PLN ‘000. Total gross value of receivables Impairment loss Not overdue 250,464 3,314 Up to 1 month 28,690 - 1 to 3 months 257 3 3 to 6 months 326 6 6 months to 1 year 991 751 Over 1 year 11,988 11,988 Total 292,716 16,062
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31.12.2008 PLN ‘000. Total gross value of receivables Impairment loss Not overdue 250,892 3,880 Up to 1 month 39,433 - 1 to 3 months 3,350 - 3 to 6 months 1,581 339 6 months to 1 year 109 109 Over 1 year 12,950 12,950 Total 308,315 17,278
The table below presents maximum loan risk exposure for borrowings granted as at the balance sheet date.
PLN ‘000. 31.12.2009 31.12.2008 Poland 50,293 50,865 European Union 439,395 562,492 Total 489,688 613,357
PLN ‘000. 31.12.2009 31.12.2008 Organic Segment 41,667 41,667 Silicates and Glass Segment 8,000 8,000 Soda Segment 439,395 562,492 Other operations segment 626 1,198 Total 489,688 613,357
Classification of borrowings granted by overdue periods:
Total gross value of Total gross value of Impairment loss Impairment loss PLN ‘000. borrowings borrowings 31.12.2009 31.12.2008 Not overdue 692,791 203,131 640,096 63,500 Up to 1 month 28 - 36,761 - Over 1 year 1,243 1,243 1,243 1,243 Total 694,062 204,374 678,100 64,743
In 2009, the Company granted borrowings amounting to PLN 48,271 thousand (including negative FX differences due to valuation, amounting to PLN 5,916 thousand). S.C. Uzinele Sodice Govora Ciech Chemical Group S.A. received a borrowing amounting to PLN 45,190 thousand (EUR 11,000 thousand). In 2009, the method of presenting the advance granted in 2008 to the Romanian company for the delivery of goods amounting to PLN 43,096 thousand was changed (including FX difference due to valuation, PLN 571 thousand), which, as at December 31 st , 2009, amounted to EUR 10,490 thousand. CIECH S.A. still awaits the realisation of the advance for the delivery of goods by the Romanian company.
In the comparative period, the Company granted borrowings amounting to PLN 69,567 thousand (including FX differences due to valuation, amounting to PLN 59,982 thousand). In the comparative period, the Company granted borrowings amounting to PLN 386,790 thousand, of which PLN 340,996 thousand (EUR 95,100 thousand) were borrowed to a subsidiary, Soda Deutschland Ciech GmbH.
CIECH S.A. is exposed to loan risk connected with the credit rating of customers being parties to product and goods sales transactions. This risk is reduced through internal procedures for determining loan limits for customers and through management of trade receivables (the Company mainly applies letters of credit, bank guarantees, mortgages and insurance as collateral). Customers’ credit rating is assessed and appropriate collateral is obtained from the borrowers, allowing for a reduction of potential losses in the case of failure to repay the debt. Loan risk assessment for customers is performed prior to concluding an agreement and cyclically at subsequent supplies of goods, in accordance with the binding procedures. The risk of the receivables portfolio is assessed weekly. On selected
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markets, where more risky terms of payment are applied, the Company uses services provided by companies specialising in insuring receivables. A vital factor limiting loan risk is a considerable diversification of customers for goods sold by the Company.
In the Company’s opinion, non-overdue assets and assets not subject to write-downs have a high credit quality.
In 2009, the Company did not acquire assets established as collateral against claims.
As at the balance sheet date, no material financial assets were disclosed as overdue in connection to renegotiating repayment terms.
Maximum exposure to loan risk for other financial assets is similar to their carrying value.
Liquidity risk
CIECH S.A. is exposed to liquidity risk due to a high portion of short-term borrowing (overdraft facilities and working capital loans), limited opportunities to obtain new funding given the high level of existing debt as well as the risk of failure to maintain existing long-term funding as a result of violation of obligations laid down in the loan agreement.
The following measures are applied to reduce liquidity risk: - regular monitoring of the Company’s liquidity, - monitoring and optimising working capital, - adjusting the level and schedule of capital expenditures, - in-group borrowings and sureties of the Group companies’ liabilities.
Surplus is allocated to safe financial instruments with high liquidity (short-term bank deposits) and used to fund operating activities.
In 2009, CIECH S.A.’s investment requirements were financed from the company’s own funds.
To reduce the risk linked to smaller availability of borrowing, in 2009, the process aimed at refinancing and consolidating debt continued. In August 2009, a status quo agreement was concluded with the banks financing CIECH and the Ciech Group, under which the banks obliged to maintain their involvement with CIECH and the Ciech Group over the agreement’s duration.
The table below presents financial liabilities at nominal value, grouped by maturity.
31.12.2009 Contractua Nominal Under 6 6-12 3-5 Over 5 PLN ‘000. l cash 1-2 years 2-3 years value months months years years flows Other financial liabilities 1,246,371 1,246,371 808,896 11,148 16,723 109,604 300,000 - - trade liabilities 342,218 342,218 342,218 ------loans and borrowings 603,560 603,560 466,085 11,148 16,723 109,604 - - - bonds 300,593 300,593 593 - - - 300,000 - Financial lease liabilities ------Hedging derivatives with 139,759 139,759 93,061 30,206 16,492 - - - negative value* Total financial liabilities 1,386,130 1,386,130 901,957 41,354 33,215 109,604 300,000 -
* The designation of options to hedge accounting changed in 2009. As at December 31 st , 2009, all options were of a hedging nature.
31.12.2008
Nominal Contractual Under 6 6-12 2-3 3-5 Over 5 PLN ‘000. 1-2 years value cash flows months months years years years
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Financial liabilities measured at the fair value through the 229,891 229,891 70,517 70,516 88,858 - - - income statement, including: - held for trading, including 229,891 229,891 70,517 70,516 88,858 - - - - derivatives with 229,891 229,891 70,517 70,516 88,858 - - - negative value 344,59 Other financial liabilities 1,119,578 1 119 578 529,269 141,199 22,297 22,297 59,922 4 - trade liabilities 259,278 259,278 259,273 5 - - - - - loans and borrowings 559,457 559,457 269,153 141,194 22,297 22,297 44,594 59,922 300,00 - bonds 300,843 300,843 843 - - - - 0 344,59 Total financial liabilities 1,349,469 1,349,469 599,786 211,715 111,155 22,297 59,922 4
Price risk
Price risk is the result of price fluctuations affecting goods traded by Ciech S.A. Price risk occurs in the soda, organic and agrochemical segments; given the adopted business model, changes in the prices of soda have the greatest effect on CIECH S.A.’s results. This correlated with the condition of global economy, current demand and supply situation of final customers, the level of prices of basic raw materials and energy. Given the absence of derivatives for goods traded by CIECH S.A., the company does not operate an active hedging policy in this respect.
Risk management principles
CIECH S.A. actively manages operational and financial risk, striving to reduce the fluctuation of cash flows and maximise the Company’s goodwill.
CIECH S.A.’s policy assumes natural hedging of imports and exports and hedging of up to 70% of net exposure to currency risk. The instruments used in hedging the aforesaid exposures in 2009 were FX forwards and option-related strategies.
31. Financial instruments
31.1 Financial assets and liabilities
As at December 31 st , 2009, the Company held unsettled derivatives.
The tables below present selected information on unsettled transactions on the FX market: The total value of unsettled transactions as at December 31 st , 2009 was PLN -115,188 thousand. This amount includes: - measurement of currency hedges: (PLN 115,188.2 thousand) including: liabilities due to Citi Bank Handlowy S.A. (PLN 45,083 thousand) liabilities due to ING Bank Śląski S.A. (PLN 70,105 thousand)
Nominal value of “call” Nominal value of “put” Settlement Conclusion Date Maturity options sold options purchased rate EUR 1,154 14-08-2009; EUR 1,154 thousand/week 18.01.2010 to 29.03.2010 thousand/week EUR 1,026 02-11-2009; EUR 1,026 thousand/week 01.04.2010 to 28.06.2010 3.2400 thousand/week EUR 1,467 16-12-2009 EUR 1,467 thousand/week 01.07.2010 to 02.08.2010 thousand/week 06-08-2008; EUR 10,662 thousand EUR 10,662 thousand 15.01.2010 3.2870 18-02-2009; EUR 5,815 thousand EUR 5,815 thousand 15.01.2010 3.3297 21-05-2009; EUR 4,846 thousand EUR 4,846 thousand 15.01.2010 3.3529
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Nominal value of “call” Nominal value of “put” Settlement Conclusion Date Maturity options sold options purchased rate 13-08-2009 05-11-2009 EUR 969 thousand/week EUR 969 thousand/week 21.01.2010 to 19.05.2011 3.3731 15-12-2009 14-08-2009; EUR 577 thousand/week 577 thousand EUR/week 21.01.2010 to 25.03.2010 02-11-2009; EUR 513 thousand/week EUR 513 thousand/week 01.04.2010 to 24.06.2010 3.3300 16-12-2009 EUR 694 thousand/week EUR 694 thousand/week 01.07.2010 to 05.08.2010 Total: 05-08-2008 – 16- 3,2400 – EUR 139,708 thousand EUR 139,708 thousand 15.01.2010 – 19.05.2011 12-2009 3,3731
Liabilities due to closed transactions maturing within the term of realisation of standstill agreement: 05-08-2008 – 16- EUR 26,461 thousand EUR 26,461 thousand 18.01.2010 3,2400-3,3300 12-2009
In 2009, the result on the settlement of derivatives (cash flows from the realisation of derivatives) amounted to PLN - 98,730 thousand.
In addition to derivatives, the main financial instruments applied by Ciech S.A. include bank loans, overdraft facilities as well as cash and short-term deposits. Their main aim is to obtain funds for the Company’s activities. Ciech S.A. also holds other financial assets and liabilities, such as trade receivables and liabilities arising in the course of doing business, as well as holdings and shares in non-related entities.
Reclassification of assets
In 2009 and 2008, the Company did not reclassify financial assets measured at cost or amortised cost to items measured at fair value. Similarly, no reclassification of financial assets measured at fair value to items measured at cost or amortised cost was made.
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Items of revenues, costs, profits and losses recognised in the profit and loss account, grouped into categories of financial instruments
Financial liabilities measured at amortised cost
Financial assets or liabilities measured at fair value through P&L, Borrowings Current Other (loans, Total financial For the period 01.01.- 31.12.2009 Cash Current receivables classified as held for (granted) liabilities bonds) instruments trading, according to IAS 39
Interest revenues/costs, including revenues/costs calculated - - 16,340 432 (2,784) (61,500) (47,512) by using the effective interest rate method
Revenues/costs due to fees other than those considered 43,775 1,343 - - - (1,028) 44,090 when determining the effective interest rate
Foreign exchange profit/loss - 60,934 (17,398) (170,863) (10,580) (1,307) (139,214)
Creation of write-downs - - (139,631) (60) - - (139,691)
Reversal of write-downs - - - 172 - - 172
Total net profit/loss 43,775 62,277 (140,689) (170,319) (13,364) (63,835) (282,155) other ------21,461
Net financial revenues/expenses 43,775 62,277 (140,689) (170,319) (13,364) (63,835) (260,694)
*Other financial revenues/costs which do not relate to financial instruments include mainly created and reversed write-downs on shares held in subsidiaries, dividends received, costs due to discount of liabilities and receivables, and created and released provisions for retirement gratuities related to the change in discount. .
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Items of revenues, costs, profits and losses recognised in the profit and loss account, grouped into categories of financial instruments
Financial liabilities measured at amortised cost
Financial assets or liabilities measured at fair value through Borrowings Current Current Other (loans, Total financial For the period 01.01.- 31.12.2008 Cash P&L, classified as (granted) receivables liabilities bonds) instruments held for trading, according to IAS 39
Interest revenues/costs, including revenues/costs calculated - - 30,653 1,093 (47) (53,584) (21,885) by using the effective interest rate method
Revenues/costs due to fees other than those considered (233,933) 1,212 - - - (421) (233,142) when determining the effective interest rate
Foreign exchange profit/loss - 37,144 89,229 32,030 (52,925) (2,888) 102,590
Creation of write-downs - - (52,050) (391) - - (52,441)
Reversal of write-downs - - - 229 - - 229
Total net profit/loss (233,933) 38,356 67,832 32,961 (52,972) (56,893) (204,649)
Other financial revenues/costs not related to financial ------(8,990) instruments* Net financial revenues/expenses (233,933) 38,356 67,832 32,961 (52,972) (56,893) (213,639)
* Other financial revenues/costs which do not relate to financial instruments include mainly created and reversed write-downs on shares held in subsidiaries and dividends received.
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The following tables present financial assets and liabilities grouped into revaluation terms.
PLN ‘000. 31.12.2009 Effective Total nominal Under 6 6-12 2-3 Over 5 Non-interest Portfolio interest 1-2 years 3-5 years value months months years years bearing rate Cash 6 46,445 46,445 ------Financial assets available for sale, including: 38,118 ------38,118 Shares and holdings n/a 38,118 ------38,118 Borrowings and receivables, including: 839,563 506,121 - - - - - 333,442 Trade receivables n/a 276,654 ------276,654 Borrowings granted 3.47 489,688 489,688 ------Accumulated debt n/a 56,788 ------56,788 Bank deposits over 3 months 0.41 16,433 16,433 ------Total financial assets 924,126 552,566 - - - - - 371,560 Other financial liabilities 1,304,364 604,153 - - - 300,000 - 400,211 Trade liabilities 342,218 ------342,218 Loans and borrowings 7.95 603,560 603,560 ------Bonds 5.68 300,593 593 - - - 300,000 - - Other 57,993 ------57,993 Hedging derivatives with negative value 139,759 ------139,759 Total financial liabilities 1,444,123 604,153 - - - 300,000 - 539,970
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PLN ‘000. 31.12.2008 Effective Total nominal Under 6 6-12 Over 5 Non-interest Portfolio interest 1-2 years 2-3 years 3-5 years value months months years bearing rate Cash 6 32,085 32,085 ------Financial assets available for sale, including: 17,953 ------17,953 - shares and holdings n/a 17,953 ------17,953 Borrowings and receivables, including: 987,587 630,047 - - - - - 357,540 - trade receivables n/a 291,037 ------291,037 - borrowings granted 6 613,357 613,357 ------accumulated debt n/a 66,503 ------66,503 - bank deposits over 3 months 16,690 16,690 ------Financial assets measured at the fair value through the 142 142 ------income statement, including: - held for trading, including 142 142 ------derivatives with positive value 142 142 ------Total financial assets 1,037,767 662,274 - - - - - 375,493 Financial liabilities measured at the fair value through the 229,891 ------229,891 income statement, including: - held for trading, including 229,891 ------229,891 - derivatives with negative value n/a 229,891 ------229,891 Other financial liabilities 1,186,081 859,457 - - - - 326,624 - trade liabilities n/a 259,278 ------259,278 - loans and borrowings 6 559,457 559,457 ------bonds 7 300,843 300,000 - - - - - 843 - other n/a 66,503 ------66,503 Total financial liabilities 1,415,972 859,457 - - - - - 556,515
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The tables below present carrying values of individual categories of financial assets and liabilities, grouped by maturity. PLN
‘000. 31.12.2009 Total Under 6 6-12 1-2 2-3 3-5 Over 5 Portfolio carrying months months years years years years value Cash: 46,445 46,445 - - - - - Financial assets available for sale, including: 38,118 38,118 - - - - - Shares and holdings 38,118 38,118 - - - - - Borrowings and receivables, including: 831,208 286,002 87,227 16,190 7,572 82,079 352,138 Trade receivables 276,654 276,654 - - - - - Borrowings granted 489,688 656 87,227 8,000 - 41,667 352,138 Accumulated debt 48,433 8,692 - 8,190 7,572 23,979 - Bank deposits over 3 months 16,433 - - - - 16,433 - Total financial assets 915,771 370,565 87,227 16,190 7,572 82,079 352,138 Other financial liabilities 1 297,182 818,307 11,148 324,991 117,805 24,931 - Trade liabilities 342,218 342,218 - - - - - Loans and borrowings 603,560 465,599 11,148 16,723 110,090 - - Bonds 300,593 593 - 300,000 - - - Other 50,811 9,897 - 8,268 7,715 24,931 - Hedging derivatives with negative value 139,759 93,061 30,206 16,492 - - - Total financial liabilities 1 436,941 911,368 41,354 341,483 117,805 24,931 -
PLN ‘000. 31.12.2008 Total Under 6 6-12 Over 5 Portfolio carrying 1-2 years 2-3 years 3-5 years months months years value Cash: 32,085 32,085 - - - - - Financial assets available for sale, 17,953 17,953 - - - - - including: - shares and holdings 17,953 17,953 - - - - - Borrowings and receivables, 976,183 332,379 32,125 68,919 25,851 484,233 32,676 including: - trade receivables 291,037 291,037 ------borrowings granted 613,357 32,514 32,125 60,601 18,014 470,103 - - accumulated debt 55,099 8,828 - 8,318 7,837 14,130 15,986 - bank deposits over 3 months 16,690 - - - - 16,690 Financial assets measured at the fair value through the income statement, 142 71 71 - - - - including: - held for trading, including 142 71 71 - - - - - derivatives with positive 142 71 71 - - - - value Total financial assets 1,026,363 382,488 32,196 68,919 25,851 484,233 32,676 Financial liabilities measured at the fair value through the income 229,891 70,517 70,516 88,858 - - - statement, including: - held for trading, including 229,891 70,517 70,516 88,858 - - - - derivatives with negative 229,891 70,517 70,516 88,858 - - - value Other financial liabilities 1,176,247 538,097 141,199 30,694 30,283 359,197 76,777 - trade liabilities 259,278 259,273 5 - - - - - loans and borrowings 559,457 269,153 141,194 22,297 22,297 44,594 59,922 - bonds 300,843 843 - - - 300,000 - - other 56,669 8,828 - 8,397 7,986 14,603 16,855 Total financial liabilities 1,406,138 608,614 211,715 119,552 30,283 359,197 76,777
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The table below presents the fair value of financial instruments. It does not include those financial instruments which are disclosed in the balance sheet at fair value (e.g. derivatives).
PLN ‘000. 31.12.2009 31.12.2008
Borrowings and receivables, including: 839,563, 987,587 - trade receivables 276,654 291,037 - borrowings granted 489,688 613,357 - bank deposits 16,433 16,690 - accumulated debt 56,788 66,503 Other financial liabilities 1,304,364 1,186,081 - trade liabilities 342,218 259,278 - loans and borrowings 603,560 559,457 - bonds 300,593 300,843 - other 57,993 66,503
CIECH S.A. does not hold any instruments whose initial transactional value differs from the fair value determined as at that day by using the measurement method applied. The fair value of shares listed on the active market is determined based on these shares’ market quotations (level 1). CIECH S.A. measures derivatives to the fair value by using measurement models for financial instruments and applying generally available interest rates, currency exchange rates, etc. (level 2).
The table below lists securities grouped by maturity. Ciech S.A. does not hold bills or bonds issued by the State Treasury, Central Banks or other entities.
31.12.2009
Up to 3 3 months 1 to 5 Over 5 months to 1 year years years Total Shares and holdings (other than those measured by the equity method): 38,118 - - - 38,118 > listed on the stock exchange 38,118 - - - 38,118 > not listed on the stock exchange - - - - - Participation units in investment funds - - - - - Total securities 38,118 - - - 38,118
31.12.2008
Up to 3 3 months 1 to 5 Over 5 months to 1 year years years Total Shares and holdings (other than those measured by the equity method): 17,953 - - - 17,953 > listed on the stock exchange 17,953 - - - 17,953 > not listed on the stock exchange - - - - - Participation units in investment funds - - - - - Total securities 17,953 - - - 17,953
The table below presents financial instruments held for trading.
31.12.2009 Carrying value of instruments with maturity: Fair value
Up to 3 3 months to 1 Over 5 Liabiliti months year 1 to 5 years years Total Assets es Interest rate instruments ------CIRS transactions ------
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FX instruments ------FX forward ------FX options purchased ------(115 - FX options sold (40,972) (57,724) (16,492) - (115,188) - 188) (115,18 Total derivatives (40,972) (57,724) (16,492) - (115,188) - 8)
31.12.2008 Carrying value of instruments with maturity: Fair value
Up to 3 3 months to 1 Over 5 Liabiliti months year 1 to 5 years years Total Assets es Interest rate instruments 35 107 - - 142 142 - - CIRS transactions 35 107 - - 142 142 - FX instruments ------FX forward ------FX options purchased ------(229 89 - FX options sold (47,011) (94,022) (88,858) - (229,891) - 1) (229,89 Total derivatives (46,976) (93,915) (88,858) - (229,749) 142 1)
31.2 Hedge accounting
In October 2008, the Management Board of CIECH S.A. approved the Financial Risk Management Policy. At the same time, the Company started the process of restructuring option structures, concluded in August 2008, hedging future revenues from sales denominated or indexed to the EUR rate.
As a result of the restructuring process in February and August 2009, option structures were converted into a derivative transaction, covering put options purchased and call options issued, resulting in synthetic currency forwards.
The following instruments were designated to be used in hedge accounting:
• Synthetic currency forwards
The table below presents a summary of specific groups assigned for hedge accounting:
Hedged risk Type of hedge Hedged item Hedging instrument - A series of synthetic forwards created through Future cash flows due to the identification among the option structures realisation of revenues Currency risk described in the table above of instruments Cash flow hedging from sales denominated EUR/PLN being a combination of put options purchased or indexed to the EUR (plain vanilla) and call options issued (plain rate vanilla) of the same nominal value and identical strike rates on specific dates
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Detailed information concerning instruments assigned for hedge accounting is provided in the table below:
FINANCIAL TRANSACTION DETAILS CASH FLOW HEDGING INSTRUMENTS Nominal value of currency options (-) Amount Cash flow occurrence No. of issued (+) purchased Fair value Amount derecognised in Transactions Inefficiency relation as at 31.12.2009 as at the recognised in equity and assigned for hedge Nature of hedged risk recognised in P&L reporting Expected date equity (after recognised in accounting Forecast period account date** of impact on income tax) P&L account put call of cash flow the financial (after income tax) occurrence result EUR ‘000 PLN ‘000 PLN ‘000 Relation cancelled together with CIECH S.A. Currency risk 1 adjustment - - - - - Forward – EUR sales (PLN/EUR) of value in opening balance Relation cancelled together with CIECH S.A. Currency risk 2 adjustment - - - - - Forward – EUR sales (PLN/EUR) of value in opening balance Relation cancelled together with CIECH S.A. Currency risk 3 adjustment - - - - - Forward – EUR sales (PLN/EUR) of value in opening balance CIECH S.A. synthetic Cancelled Currency risk after 21-24 19.05.2011 33,401 31,838 - forward – EUR sales relation (PLN/EUR) 19.05.2011 CIECH S.A. synthetic Currency risk after 25 67 846 (67 846) 19.05.2011 3,215 - - forward – EUR sales (PLN/EUR) 19.05.2011 CIECH S.A. synthetic Cancelled Currency risk after 26-27 02.08.2010 (1,356) (839) - forward – EUR sales relation (PLN/EUR) 02.08.2010 CIECH S.A. synthetic Currency risk after 28 32 782 (32 782) 02.08.2010 1 553 - - forward – EUR sales (PLN/EUR) 02.08.2010 CIECH S.A. synthetic Cancelled Currency risk after 29-30 05.08.2010 (686) (429) - forward – EUR sales relation (PLN/EUR) 05.08.2010 31 16 603 (16 603) CIECH S.A. synthetic Currency risk 05.08.2010 after 786 - -
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FINANCIAL TRANSACTION DETAILS CASH FLOW HEDGING INSTRUMENTS Nominal value of currency options (-) Amount Cash flow occurrence No. of issued (+) purchased Fair value Amount derecognised in Transactions Inefficiency relation as at 31.12.2009 as at the recognised in equity and assigned for hedge Nature of hedged risk recognised in P&L reporting Expected date equity (after recognised in accounting Forecast period account date** of impact on income tax) P&L account put call of cash flow the financial (after income tax) occurrence result EUR ‘000 PLN ‘000 PLN ‘000 forward – EUR sales (PLN/EUR) 05.08.2010 Total 36,913
* Nominal value as at the measurement date. ** Fair value in relation to derivatives, nominal value in relation to financial instruments other than derivatives. *** Closing date of the hedge relation
The aim of the Group when taking the decision concerning the implementation of the principles of cash flow hedging was to limit the influence of changes to the fair value of derivatives on the profit and loss account through reflecting their hedging nature in financial statements.
The result of the measurement of effective derivative transactions assigned for hedge accounting is entered under equity into the profit and loss account upon the execution of the hedged item and its influence on the profit and loss account. The result of the measurement of the aforesaid effective derivative transactions is recognised under the same item where the hedged item influences the income statement, i.e. revenues from sales (in relation to synthetic forwards concluded).
In the reporting period, there was no instance of a failure to realise a future transaction subject to cash flow hedging. The relations described in sections 21-24, 26-27 and 29-30 were closed due to restructuring of option structures.
The hedge relations described in sections 1-3 were cancelled as a result of abandoning the application of hedge accounting in this respect. Detailed information on this matter can be found in section 37, discussing errors in previous periods.
The revenues from sales assigned for hedge accounting are described as highly probable. Their occurrence is anticipated in the Group’s Financial Plan. These are also transactions with regular customers of the Group’s companies, which make their potential occurrence probable.
The influence of cash flow hedging in the effective part was presented in the statement of changes in equity of the Ciech Group.
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31.3 Embedded financial instruments
The Company did not issue liabilities or capitals including embedded derivatives.
32. Events occurring after the balance-sheet date
• On January 5 th , 2010, an Agreement was signed between Ciech S.A. and the State Treasury regarding the amendment of terms of purchase of the Remaining Shares held in ZCh Organika Sarzyna S.A. and ZCh ZACHEM S.A. by the State Treasury, as specified in the Offering. Under the Agreement, the revaluation period was extended by another 12 months and it ends on December 20 th , 2010, whereby the revaluation rate in the extended period was increased by an additional 2 percentage points. • On January 22 nd , 2010, a group of 8 banks (Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Polska Kasa Opieki SA, BRE Bank SA, ING Bank Śląski SA, Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe Plc. Dublin – Romania Branch – being parties to the Status Quo Agreement) concluded a settlement extending the said agreement until February 28 th , 2010. By this date, also the separate statements, discussed in Current Report no. 31/2009, were made by the banks: Calyon S.A. Branch in Poland, BNP Paribas S.A. Branch in Poland and Fortis Bank Polska S.A. Maturity date of the financing obtained by CIECH S.A. and Ciech Group companies from Bank Ochrony Środowiska S.A., HSBC Bank Polska S.A., Kredyt Bank S.A. and Bank BPH S.A. has been kept to February 28 th , 2010 at the earliest. On January 20 th , 2010, CIECH SA submitted to 15 banks the Statement of analogous wording as the statement described in Current Report no. 31/2009 dated August 14 th , 2009. The submitted Statement will be valid until: (i) March 1 st , 2010, or (ii) expiry of the Status Quo Agreement, whichever is earlier. Extension of the Statement and of the Status Quo Agreement will allow the continuation and completion of the works related to establishing a new financing structure. The information was announced in Current Report no. 3 of January 22 nd , 2010. • On February 25 th , 2010, information was received about the fulfilment of all conditions precedent for the agreement amending the loan agreement of January 23rd , 2008 between Soda Deutschland Ciech GmbH (“SDC”), Sodawerk Staßfurt GmbH &Co. KG (hereinafter: “SWS KG, “Spółka”) and Sodawerk Staßfurt Holding GmbH, and the bank COMMERZBANK Aktiengesellschaft. The amended agreement was concluded on December 10 th , 2009 and it comes into force as of February 26 th , 2010. The value of the loan agreement currently in force amounts to EUR 63 million. To secure a portion of the loan, CIECH S.A. issued a corporate guarantee of up to EUR 25 million and a Sponsor’s Letter of Undertaking was signed, which includes CIECH S.A.’s obligations to: cover potential deficits of cash in SWS KG and Sodawerk Staßfurt Holding GmbH over the entire duration of the loan, convert EUR 70 million of the subordinated borrowing granted to SDC by CIECH S.A. to capital within 6 months of signing the Sponsor’s Letter of Undertaking (the obligation may be waived, if CIECH S.A. discloses negative tax effects from the conversion for the SDC Group). The final loan repayment date was extended from December 31 st , 2012 to September 30 th , 2014. SWS KG is CIECH S.A.’s subsidiary, controlled by a special- purpose company, Soda Deutschland Ciech GmbH, in which CIECH S.A. holds 100% of the capital. SWS KG manufactures light and dense soda ash and baking soda. • CIECH S.A.’s Management Board, in connection with Current Reports no. 31/2009 of August 14 th , 2009, no. 42/2009 of November 2 nd , 2009, no. 44/2009 of December 16 th , 2009 and no. 3/2010 of January 22 nd , 2010, states that on March 5 th , 2010 it received information about the signing of an extension to the Status Quo Agreement of March 15 th , 2010 by a group of 8 banks (Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Polska Kasa Opieki S.A., BRE Bank S.A., ING Bank Śląski S.A., Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe plc. Dublin – Romania Branch). Also the separate statements, discussed in Current Report no. 31/2009, were extended to that date by the banks: Calyon S.A. Branch in Poland, BNP Paribas S.A. Branch in Poland and Fortis Bank Polska S.A. Maturity date of the financing obtained by Ciech S.A. and the Ciech Group companies from Bank Ochrony Środowiska S.A., HSBC Bank Polska S.A., Kredyt Bank S.A. and Bank BPH S.A. has been kept to March 15 th , 2010 at the earliest. On March 4 th , 2010, CIECH SA submitted to 15 banks the Statement of analogous wording as the statement described in Current Report no. 31/2009 dated August 14 th , 2009. The submitted Statement will be valid until: (i) March 16 th , 2010, or (ii) expiry of the Status Quo Agreement, whichever is earlier. Submission of the Statement and signing of the Status Quo Agreement by the banks allow for completing works related to establishing a new financing structure in the Group. In relation to the above, on March 16 th , 2010, the Status Quo Agreement was extended until March 31 st , 2010, and on April 1 st it was extended again until April 16 th , 2010. This information was provided in Current Reports no. 6 of March 5 th , 2010, no. 7 of March 16 th , 2010 and no. 10 of April 1 st , 2010. • On April 1 st , 2010, CIECH S.A. received a letter from the District Court in Hamburg, dated March 15th , 2010, stating that its subsidiary, Chemiepetrol GmbH (in liquidation), with its registered office in Hamburg, registered under the number HRB 33084 in Commercial Register “B”, was cancelled from the Commercial Register by way of decision of the District Court in Hamburg of March 15 th , 2010. This information was announced in Current Report no. 9 of April 1 st , 2010. • On March 30 th , 2010, CIECH S.A. signed an annex to a long-term contract for the years 2002-2010, concluded on September 6 th , 2002 between CIECH S.A. and a Moroccan customer, Maroc Phosphore S.A., regulating the sale terms for sulphur in 2010. In 2010, the contractual value is approx. USD 35,000 thousand (approx. PLN 100,000
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thousand). KiZChS Siarkopol S.A. is the domestic supplier. This information was announced in Current Report no. 11 of April 2 nd , 2010. • On April 22 nd , 2010, CIECH S.A. sold in block transactions 2,560,000 series B shares in Zakłady Azotowe w Tarnowie-Mo ścicach S.A. The loss on the sale of the shares amounted to PLN 8,320 thousand. After completing the aforesaid transactions, CIECH S.A. did not hold any shares in Zakłady Azotowe w Tarnowie-Mo ścicach S.A. On April 26 th , 2010, a loan agreement was signed between CIECH S.A., being the borrower, and its subsidiaries, being the guarantors (Agrochem sp. z o.o., with its registered office in Człuchów, Agrochem sp. z o.o., with its registered office in Dobre Miasto, JZS Janikosoda S.A., IZCh Soda M ątwy S.A., Soda Polska CIECH sp. z o.o., ZCh Alwernia S.A., Przedsi ębiorstwo Chemiczne Cheman S.A., GZNF Fosfory sp. z o.o., ZCh Organika Sarzyna S.A., Polfa sp. z o.o., CIECH Service sp. z o.o., Vitrosilicon S.A., Transclean sp. z o.o. and ZCh Zachem S.A. – later referred to as the “Companies), and a bank consortium (Bank Polska Kasa Opieki S.A., Bank Handlowy w Warszawie S.A., BRE Bank S.A., Powszechna Kasa Oszcz ędno ści Bank Polski S.A., ING Bank Śląski S.A., Bank Millennium S.A. and DNB Nord Polska S.A. – later referred to as “Organising Banks”). The agreement provides that S.C. US Govora – CIECH Chemical Group S.A. shall join the agreement as a guarantor and borrower – later referred to as the “Company”.
Terms of the agreement Loan tranches: The total maximum amount of loans is the equivalent of PLN 1,340,000,000. The loans will be made available in four tranches: • tranche A – to be disbursed in EUR and PLN, intended for refinancing CIECH S.A.’s existing obligations and the Companies’ obligations under loan agreements concluded with Organising Banks (overdraft facilities, working capital facilities and investment loans), • tranche B; (multipurpose facility, made available as a revolving – renewable – loan or guarantees and letters of credit) and an auxiliary guarantee loan; (total amount of tranche A, tranche B and auxiliary guarantee loan amounts to the Organising Bank’s commitment due to refinancing loans and will amount to a maximum of PLN 1,100,000,000), • tranche C – to be disbursed in PLN, intended for the repayment of CIECH S.A.’s obligations due to option transactions concluded with Bank Handlowy w Warszawie S.A. and ING Bank Śląski S.A. (tranche C depends on the valuation of options in the case of an earlier termination of option transactions; valuation of refinanced options, as at the day of compiling the financial statements, amounted to PLN 140,401,000), • tranche D – to be disbursed in PLN, intended for refinancing CIECH S.A.’s existing obligations and the Companies’ obligations under loan agreements concluded with banks other than the Organising Banks (maximum amount of tranche D: PLN 100,000,000). Loan interest rate conditions Variable interest rate based on WIBOR / EURIBOR plus margin; the margin is different for each tranche, it is variable and depends on the ratio of net debt. Main terms of loan repayment • Minimum quarterly amortisation of loans of PLN 10,000,000 from the date when the loans are made available until March 1 st , 2011, • Total reduction of loans by PLN 400,000,000 (taking into account quarterly amortisation and earlier loans repayment) by March 31 st , 2011, subject that the absence of funds on CIECH S.A.’s reserve account amounting to a minimum of PLN 400,000,000 by December 30 th , 2010 is a violation of the agreement, which the Organising Banks may cancel by a majority of votes laid down in the agreement, • Obligatory early repayment of loans is required under the following circumstances: o Change of control, occurring in the following circumstances: (i) State Treasury no longer holds at least 10,270,800 of CIECH S.A.’s shares, (ii) party other than State Treasury becomes CIECH S.A.’s largest shareholder and holds at least 50% of the issued share capital of CIECH S.A., or (iii) party other than State Treasury or a group of parties acting jointly gain control over CIECH S.A., subject that a change in control approved by a majority of Organising Banks laid down in the agreement or the fulfilment of additional conditions, such as the required level of debt, do not incur the obligation to repay the loans earlier, o Share capital increase; earlier repayment of loans amounting to funds obtained from public offering or other share capital increase in CIECH S.A. or in other Material Members of the CIECH Group (i.e. guarantors, selected CIECH Group’s companies and CIECH Group’s companies consolidated with a net asset value exceeding PLN 25,000,000), subject that after the repayment of PLN 400,000,000 this obligation depends on the net debt ratio and, depending on the individual circumstances, may pertain to 100%, 50% or 0% of the funds obtained in the manner described above, o Surplus of cash flows; if any quarterly financial statements of CIECH S.A., beginning from statements for the period ending on March 31 st , 2011, discloses a surplus of cash flows (i.e. surplus of consolidated cash flows over cash flow linked to debt service), an earlier repayment of loans shall be due, amounting to at least 75% of such surplus; the first earlier repayment under such circumstances shall be made on June 30 th , 2011, o Disposal of assets, sale of holdings or shares by CIECH S.A. and Material Members of the CIECH Group – allocation of 100% of the total net inflows from sales in a given quarter to earlier repayment of loans (except for specific circumstances laid down in the agreement),
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o Significant inflows under any insurance policy due to loss or damage of assets or business property, o Disposal and sale and lease back of assets of CIECH S.A. and of Material Members of the Ciech Group, depending on the circumstances, may pertain to 100% or 75% of the funds obtained in such a manner; o Illegality on part of the lenders. • Total one-off repayment of the due loan amounts shall be made on December 31 st , 2011 at the latest or after 20 months from signing the agreement.
Loan collateral: • Mortgages established on the Companies’ and CIECH S.A.’s real property, • Pledge established on the Companies’ and CIECH S.A.’s business, • Assignment of rights under insurance policies issued for assets which are the collateral, • Financial pledges on the Companies’ and CIECH S.A.’s bank accounts, • Financial pledges on certain blocked bank accounts of Material Members of the Group (except Soda Deutschland CIECH Group), • Financial pledge and registered pledge on the Companies’ shares and holdings and on Soda Deutschland CIECH GmbH‘s holdings, • Sureties granted by the Companies and CIECH S.A., • Companies’ and CIECH S.A.’s declaration on submission to enforcement, • Contingent assignments of rights under material commercial contracts of the Companies and CIECH S.A., • Contingent transfer of ownership of all Companies’ and CIECH S.A.’s movable assets, • Contingent assignments of rights under in-group borrowings or other types of loan instruments which will be used to distribute the funds obtained from the loans to the Companies, • Power of attorney to access the Companies’ and CIECH S.A.’s bank accounts, • Once S.C. US Govora – CIECH Chemical Group S.A. has joined the loan agreement, some of the above- mentioned collateral will be established according to terms and dates provided for by the agreement.
Other terms under the agreement: CIECH S.A. and the Companies made the following obligations: • To maintain their financial ratios at levels laid down in the agreement; the ratios are measured for the CIECH Group, excluding Soda Deutschland CIECH Group, and tested quarterly: o debt to operating results ratio (total consolidated net debt to consolidated EBITDA), o balance sheet debt ratio (consolidated total net debt to consolidated net tangible assets), o interest coverage ratio (consolidated EBITDA to consolidated net financial costs), o guarantors’ coverage ratio (guarantors’ gross turnover and assets to CIECH Group’s gross turnover and assets, except Soda Deutschland CIECH Group), • Not to establish new collateral, except for those specified in the agreement of authorised collateral, • Not to make use of the assets, except for allowed dispositions specified in the agreement (including the sale of a specific catalogue of assets held for sale and dispositions provided for in the Group’s business plan and restructuring plan), • Not to announce or pay dividend, except for companies in which CIECH S.A. holds, directly or indirectly, a controlling stake of at least 75% and ZCh Alwernia S.A., • Not to incur financial debt, except for the allowed financial debt, • Limit capital expenditures to the level and extent provided in the agreement, • Establish registered pledges on individual items of CIECH S.A.’s and the Companies’ real property whose value exceeds PLN 5,000,000 according to the dates and circumstances provided in the agreement, • Not to conclude derivative transactions, except for the transactions approved by the agreement of hedge transactions, and • To appoint a restructuring adviser and present a restructuring plan for the CIECH Group within 10 weeks from signing the loan agreement.
Conditions precedent: The Organising Banks shall make available the loans, if the Loan Agent informs CIECH S.A. that they have received all documents and proof listed in an attachment to the agreement (or cancelled the obligation to deliver them). At that time, CIECH S.A.’s and the Companies’ declarations under the agreement shall be genuine and no violation of the contractual provisions shall occur (or last). Conditions precedent for the disbursement of loans include: obtaining all required corporate permits by CIECH S.A. and by the Companies, S.C. US Govora – CIECH Chemical Group S.A.‘s joining of the loan agreement and conclusion (within 14 days from signing the loan agreement) an agreement between the creditors; the parties to the agreement shall be CIECH S.A., the Companies (except S.C. US Govora – CIECH Chemical Group S.A., which shall join the agreement later), Organising Banks, BNP Paribas S.A. Branch in Poland, Fortis Bank Polska S.A. and Credit Agricole Corporate and Investment Bank S.A. Branch in Poland. At the earliest, the loans shall be made available after 2 months from signing documents which establish collateral and submission of applications for the registration of collateral with the respective records and land and mortgage registers.
Criteria for considering an agreement to be a significant agreement: An agreement is considered significant, if the total maximum amount of loans exceeds 10% of CIECH S.A.’s equity.
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In addition, CIECH S.A.’s Management Board, in connection with Current Reports no. 31/2009 of August 14 th , 2009, no. 42/2009 of November 2 nd , 2009, no. 44/2009 of December 16 th , 2009, no. 3/2010 of January 22 nd , 2010, no. 6/2010 of March 5 th , 2010, no. 7/2010 of March 16 th , 2010, no. 10/2010 of April 1 st , 2010 and no. 13/2010 of April 20 th , 2010, informs that on April 26 th , 2010 it received information about the signing of an extension to the Status Quo Agreement until April 30 th , 2010 by a group of 8 banks (Bank DNB Nord Polska S.A., Bank Handlowy w Warszawie S.A., Bank Millennium S.A., Bank Polska Kasa Opieki S.A., BRE Bank S.A., ING Bank Śląski S.A., Powszechna Kasa Oszcz ędno ści Bank Polski S.A. and Citibank Europe plc. Dublin – Romania Branch). Also the separate statements, discussed in Current Report no. 31/2009, were extended to that date by the banks: Calyon S.A. Branch in Poland, BNP Paribas S.A. Branch in Poland and Fortis Bank Polska S.A.
The maturity of the funding granted to CIECH S.A. and to the CIECH Group companies by Bank Ochrony Środowiska S.A., HSBC Bank Polska S.A., Kredyt Bank S.A. and Bank BPH S.A. has been maintained until April 30 th , 2010 at the earliest. On April 26 th , 2010, CIECH S.A. submitted a Statement to 15 banks, whose wording is analogous to the statement specified in Current Report no. 31/2009 of August 14th , 2009.
The Statement is effective until one of the following dates, whichever is earlier: (i) May 4 th , 2010, or (ii) the expiry date of the Status Quo Agreement. All terms written in capital letters in this report have meanings specified in Report 31/2009, unless defined otherwise. Submission of the Statement and signing of the Status Quo Agreement by the banks allow for the fulfilment of formal requirements.
33. Assets and financial standing of the subsidiary Przedsi ębiorstwo Chemiczne Cheman S.A.
Cheman S.A. is a subsidiary in which CIECH S.A. holds directly 100% of the shares. The company has been operating on the chemical market since 1987, while since 1989 it has been specialising in the distribution of chemicals. It has been a part of the Ciech Group since 2000. In July 2004, Ciech Petrol and Cheman, in which CIECH S.A. held 100% of the shares, merged. In December 2006, the Company’s shares were sold to Ciech Finance Sp. z o.o., whose task is to restructure the Company.
Cheman S.A.’s financial situation was affected by many factors; the major factor was the acquisition in the middle of 2004 of Ciech Petrol, which recorded losses and whose activity was asset-intensive at low profitability. The acquisition of Ciech Petrol was an element of the Ciech Group’s strategy of divestment of its fuel business. After the merger, Cheman’s sales structure changed as the share of unprofitable petrochemical goods increased. As a result of taking over the non-current liabilities of Ciech Petrol, Cheman S.A. continued the unprofitable fuel business between 2005 and 2007, while simultaneously negotiating a withdrawal from long-term liabilities due to its partners. The company closed its fuel business definitely in 2007. Storage and packaging of chemicals started in the existing fuel base in Błaszki. The rapid sales increase in 2005, resulting from the merger with Ciech Petrol and taking over the business of distributing plastics and chemical agents from CIECH S.A. with extended payment dates, was caused by increased demand for working capital. This factor, coupled with problems involving customers not paying on time and ineffective recovery of debt, directly contributed to difficulties in maintaining the Company’s liquidity.
Between 2006 and 2009, the Company’s Management Board implemented a Recovery Plan. Its assumptions included reducing the Company’s redundant assets, fixed costs, employment, withdrawing unprofitable products and abandoning collaboration with unprofitable customers. The Recovery Plan also assumed CIECH S.A.’s financial support. Therefore, in 2006 CIECH S.A. converted its trade receivables into two long-term borrowings amounting to PLN 4,800 thousand due on March 31 st , 2011, extended until March 31 st , 2012, and PLN 4,650 thousand due on June 30 th , 2011, extended until June 30 th , 2012. This led to an improvement in Cheman S.A.‘s balance sheet structure and provided additional funds for continuing business. In 2006, CIECH S.A. granted a short-term borrowing to Cheman S.A. for funding its continuing operations, in the amount of PLN 2,000 thousand, whose maturity was extended until December 31 st , 2008 and later extended again until December 31 st , 2009. Between 2005 and 2007, Ciech S.A. remitted Cheman S.A.’s debt totalling PLN 11,754 thousand (PLN 6,754 thousand in 2006 and PLN 5,000 thousand in 2007).
[PLN ‘000] 31.12.2005 31.12.2006 31.12.2007 31.12.2008 31.12.2009 Sales revenues 164,056 138,680 91,794 102,468 79,274 Net sales profit (1,704) (6,164) (4,489) (3,014) (1,461) Net profit (9,776) (9,971) (345) (5,251) (3,432) Working capital 4,551 15,728 16,728 12,888 3,846 Equity 8,050 (1,071) (1,435) (6,682) (10,111)
As at December 31 st , 2009, trade receivables of Ciech S.A. due from Cheman S.A. amounted to PLN 9,000 thousand and were related in full to current settlements. Apart from trade receivables, Ciech S.A. holds long-term receivables
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due to borrowings granted, amounting to PLN 9,450 thousand, and short-term receivables amounting to PLN 2,000 thousand, covered in full by a write-down. Ciech S.A. also guaranteed the loans raised by Cheman S.A. for the financing of its continuing operations up to PLN 13,100 thousand. Cheman S.A. has no material trade liabilities due to other companies of the Ciech Group and is not a borrower in relation to any of the Ciech Group’s companies.
In 2009, as part of implementing the key assumptions of the Recovery Plan for 2006-2009, the Company reduced the fixed costs of its business, downsized employment and started restructuring its commercial structure and business model. These measures are planned to continue as part of implementing the financial plan for 2010.
Key objectives for 2010 included in the financial plan:
• Generating a positive net sales margin by focusing on higher margin products, in particular by collaborating with the Group’s companies in the soda and organic segments, • Continue to reduce fixed costs until a sustainable operating profitability is achieved, • Employment reduction – adjusting the Company’s staff numbers and structure to a new business model, • Selling non-essential fixed assets, • Reducing interest debt, • More effective debt collection and recoverability of overdue receivables.
In response to negative equity and the presented financial plan for 2010, which assumes further restructuring of the Company, CIECH S.A.’s Management Board has declared its support for the company in the period between March 2010 and March 2010 to the extent allowing for further operation.
34. Programme for achieving sustainable profitability of S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A.
Ciech continues to consolidate its position as runner-up in soda ash production. This becomes a growing challenge at times of tougher competition in the market, continuing globalisation and consolidation of industries of the main customers for the Soda Division’s products. The Romanian plant (Uzinele Sodice Govora) significantly contributes to maintaining and further developing Ciech’s market position.
Thanks to the Romanian company, Ciech’s Soda Division can effectively maintain and defend its market position in terms of geographical aspects, which is vital for a business involving high logistics costs. The Company is also vital in terms of attractiveness of the Soda Division’s offer for large international customers from the glass and cleaning agents industries. The comprehensive product offer, in terms of geographical aspects, and the possibility to negotiate large volumes of deliveries with a single supplier are important competitive advantages in this market.
In 2009, S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. recorded a net loss amounting to PLN 69,573 thousand and, as at December 31 st , 2009, it disclosed negative equity amounting to PLN 228,503 thousand. The company’s results in 2009 were mainly affected by the unfavourable market situation linked to the decisive phase of the global economic crisis. Macroeconomic data for the Ukrainian market shows a drop in gross national product by approx. 8%. This is one of the most serious declines recorded in European countries. A direct result of the crisis was an unprecedented destabilisation of demand in the soda market. In Q1 2009, a rapid reduction in demand was recorded, leading virtually to a zero demand situation in Romania and ports of the Black Sea basin. Weak demand was further accompanied by declining market prices, caused by a strong pressure from large, medium-sized and small customers alike. This pressure was facilitated by a very tough competitive environment in the soda ash market, resulting from European companies’ failure to optimise their production capacities. The situation was further aggravated by imports of American and Chinese soda to the European market, the latter supported by export subsidies. The situation in the Black Sea basin was made even tenser by a full opening of the markets and the debut of a Turkish producer of natural soda on the European markets.
Given the objectively difficult market situation affecting the Company’s finances, the recovery plan was continued in 2009. The plan’s main focus was on the following elements: • Improving current cost effectiveness of production, • Improving long-term production effectiveness and stability by implementing investment measures, • Aggressive negotiations with trade partners and developing an advantageous starting position for 2010.
As a result of the measures implemented in 2009, the Company managed to achieve some results affecting its situation: • Reducing the prices of main production components, such as limestone, brine and electricity • Maintaining lower the prices of these raw materials in 2010 • Successfully negotiating major reductions in the prices of steam for 2010 • Full implementation of a steam calciner with a high daily production capacities and eliminating ineffective gas calciners
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• Significant reduction in steam consumption in the production process – visible result over Q1 2010 • Major increase in contracting water quantities for 2010, positive effects on sales and production by stabilising production quantities • Obtaining new significant sales contracts with international partners for 2010.
The strategic assumptions presented above and further restructuring in commercial, production and activities supporting the plant’s operations, as well as continued implementation of the investment plan adjusted to the company’s financial potential, should enable S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. to generate positive results in the coming years.
When preparing the financial statements for 2009, CIECH S.A. verified the test concerning its involvement in S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. from the point of view of the value of shares and granted borrowings. Taking into account the current economic situation, CIECH S.A. updated the cost of equity and loan margin level. Additionally, in conjunction with the current market situation and liquidity of S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A., the involvement tests did not account for the planned growth investments. The test prepared according to the aforesaid principles has shown a loss of value of the involvement. Thus, applying the prudence principle, CIECH S.A.’s Management Board decided to include in its financial statements for 2009 a write- down on the value of its involvement in S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A., amounting to PLN 123,260 thousand (of which PLN 43,096 thousand is the amount of a charge on a prepayment, which – for presentation reasons – was disclosed as a borrowing. The Company still awaits the fulfilment of deliveries). The total write-down on involvement in the separate statements amounts to PLN 264,695 thousand.
The aforementioned write-downs have no influence on the consolidated financial statements of the Ciech Group.
The Management Board of CIECH S.A. declared its financial support for S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. and promised not to withdraw its involvement with this company, because in the Management Board’s opinion the financial standing of S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A. should improve gradually in the following years as a result of the incurred capital expenditures and other measures.
35. Information about significant events from previous years, recognised in the financial statements for the financial years
No events from previous years that were disclosed in the financial statements for 2009 occurred in the presented period.
36. Information other than that mentioned above, having a material effect on the assessment of Ciech S.A.’s financial situation, assets and financial result
No such events occurred.
37. Reconciliation of financial data presented in the financial statements for 2008 and data currently presented as comparative data
In 2008, the CIECH S.A. concluded derivative transactions, including option structures, consisting of the put options acquired and call options issued, in order to hedge future incomes denominated or indexed in EUR.
Taking into account the hedging nature of those instruments, the Management Board of CIECH S.A. decided to designate a portion of derivative transactions as hedging instruments in the meaning of hedge accounting. Therefore, the Company fragmented them into component instruments, and distinguished among them a portion of derivative transactions constituting an option structure (placing put options acquired and call options issued at equal values and identical exchange rates at particular execution dates), which, as a synthetic forward contract, was subject to hedge accounting principles. Those transactions which were not included in the option structure, constituting a hedging instrument, are treated as derivative instruments held for trading.
According to IAS 39, despite their hedging nature in terms of economy, the synthetic forward contracts, resulting from the decomposition, could be assigned as a hedge of the Capital Group’s future sales revenue if they had been concluded as identical in relation to parameters but as separate with respect to law provisions. The Management Board recognised the effects of this transaction’s measurement in the financial statements for 2008, in the amount of PLN 70,934.0 thousand under “Cash flow hedge” instead of “Net result for 2008”. The Auditor’s opinion regarding the financial statement for 2008 included the Auditor’s reservations regarding this matter.
In the financial statements for 2009, CIECH S.A.’s Management Board re-examined the concluded transactions for compliance with IFRS and decided to adjust them with regard to the derivatives transactions described above. The
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error resulting from improper application of IAS 39 resulted in distortions of the financial result and capitals in the financial statements for 2008, in the amounts presented above. The Management Board’s decision on the interpretation of IAS 39 was aimed at eliminating such irregularities and adjusting the consolidated financial statements for 2008 in accordance with IAS 8.
In 2009, CIECH S.A. restructured the option structures concluded in 2008, which allowed for designating those instruments to hedge accounting in accordance with IAS 39. The effect of the adjustment of errors in previous periods resulting from improper application of IAS 39 to option structures, originally designated to hedge accounting in 2008, on the financial statements presented so far is presented below:
31.12.2008 31.12.2008 presented in Hedge presented in Ciech’s Annual Data in PLN ‘000 accounting Ciech’s Annual Report for 2009 adjustment Report for 2008 (as comparative data) Share capital 164,115 - 164,115 Equity shares - - - Share premium 151,328 - 151,328 Equity components related to assets held for sale - - - Cash flow hedge (70,934) 70,934 - Financial asset revaluation reserve (26,159) - (26,159) Tangible fixed assets revaluation reserve - - - Other reserve capitals 76,199 - 76,199 Retained profits 294,801 (70,934) 223,867 Equity attributable to controlling shareholders 589,350 - 589,350 Minority interest - - - Total equity 589,350 - 589,350
Net profit, including: 14,995 (70,934) (55,939) Net profit attributable to controlling shareholders 14,995 (70,934) (55,939)
38. Reconciliation of data presented in Q4 2009 with data presented in the financial statements for 2009
Adjustment 1 – Creation of a write-down on real property located at ul. Pow ązkowska, amounting to PLN 11,492 thousand
Adjustment 2 – Adjustment of estimates of provisions for remunerations calculated based on the results generated, amounting to PLN 2,528 thousand
Adjustment 3 – Cancellation of the provision for liabilities resulting from a surety granted to a subsidiary, S.C. UZINELE SODICE GOVORA, amounting to PLN 1,338 thousand
Adjustment 4 – Creation of a write-down on holdings in Ciech Finance Sp. z o.o., amounting to PLN 295 thousand
Adjustment 5 – Creation of a write-down on borrowings granted to Ciech Finance Sp. z o.o., amounting to PLN 200 thousand
Adjustment 6 – Calculation of deferred and current income tax, amounting to PLN 2,083 thousand
Adjustment 7 – other
01.01- 01.01- 31.12.2009 31.12.2009 according to according to Adjust Adjust Adjust Item IFRS, Adjust Adjust Adjust Adjust IFRS, ment 2 ment 5 ment 7 presented in ment 1 ment 3 ment 4 ment 6 presented in the statements the statements for Q4 2009 for 2009 Share capital 164,115 ------164,115 Equity shares ------
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Share premium 151,328 ------151,328 Equity components related to ------assets held for sale Revaluation reserve (9,559) ------(9,559) Cash flow hedge 36,913 ------36,913 Other reserve capitals 76,199 ------76,199 (11,49 Retained profits 104,379 2,528 1,338 (295) (200) 2,083 (241) 98,100 2)
Equity attributable to 523,375 (11,49 2,528 1,338 (295) (200) 2,083 (241) 517,096 controlling shareholders 2) (11,49 Total equity 523,375 2,528 1,338 (295) (200) 2,083 (241) 517,096 2) Net profit/loss for the (11,49 (119,488) 2,528 1,338 (295) (200) 2,083 (241) (125,767) financial year 2)
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STATEMENT BY THE MANAGEMENT BOARD
These financial statements of Ciech S.A. have been approved by the Company’s Management Board in the Company’s registered office, on April 28 th , 2010.
Warsaw, April 28 th , 2010
……………………………...... Ryszard Kunicki, President of the Management Board of Ciech Spółka Akcyjna
………………………………………………………………… Robert Bednarski, Member of the Management Board of Ciech Spółka Akcyjna
………………………………………………………………… Marcin Dobrza ński, Member of the Management Board of Ciech Spółka Akcyjna
……………………………………………………………….. Artur Osuchowski, Member of the Management Board of Ciech Spółka Akcyjna
………………………………………………………………. Katarzyna Rybacka, Chief Accountant of Ciech Spółka Akcyjna n
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a CIECH RS
□ adjusted FINANCIAL SUPERVISION AUTHORITY
Consolidated Annual Report RS 2009 (year)
(in accordance with section 82 paragraph 2 of the Ordinance of the Minister of Finance of February 19th, 2009 – Journal of Laws No. 33, item 259) for the issuers of securities conducting manufacturing, building, commercial or service activity
for the financial year 2009, covering the period between January 1st, 2009 and December 31st, 2009, containing consolidated financial statements prepared in compliance with the International Financial Reporting Standards
presented in the Polish zloty
date of submission: 2010-04-30
CIECH Spółka Akcyjna (full name of the issuer) CIECH Chemical (che) (abbreviated name of the issuer) (sector according to the classification of the Warsaw Stock Exchange) 02-670 Warsaw (zip code) (city) Puławska 182 (street) (number) 022 6391000 022 6391451 (telephone) (fax) [email protected] www.ciech.com (e-mail) (www) 1180019377 011179878 NIP (tax identification number) REGON (state statistical number) Deloitte Audyt Sp. z o.o. Al. Jana Pawła II 19. 00-854 Warszawa (entity authorised to audit)
SELECTED FIGURES PLN ‘000 ‘000 EUR 2009 2008 2009 2008 I. Net sales of products, goods and materials 3,684,225 3,787,072 848,782 1,072,187 II. Operating profit (loss) 134,986 246,683 31,098 69,840 III. Profit (loss) before taxes (88,041) (7,251) (20,283) (2,053) IV. Total net profit (loss) (92,4 2 2 ) (31,582) (21,292) (8,941) V. Net profit (loss) attributable to controlling shareholders (85,511) (41,939) (19,700) (11,874) VI. Net profit (loss) attributable to minority shareholders (6,911) 10,357 (1,592) 2,932 VII. Net cash flows from operating activities 393,616 33,000 90,682 9,343 VIII. Net cash flows from investment activities (318,378) (426,246) (73,349) (120,678) IX. Net cash flows from financial activities (64,157) 337,584 (14,781) 95,576 X. Total net cash flows 11,081 (55,662) 2,553 (15,759) XI. Total assets 4,024,128 4,346,618 979,535 1,041,755 XII. Non-current liabilities 1,179,661 1,117432 287,148 267,815 XIII. Current liabilities 1,984,283 2,330,394 483,005 558,526 XIV. Total equity 860,184 898,792 209,382 215414 XV. Equity attributable to controlling shareholders 822,952 849, 380 200,319 203, 571 XVI. Minority interest 37,232 49,412 9,063 11,843 XVII. Share capital 164,115 164,115 39,948 39,333 XVIII. Earnings (loss) per share (in PLN/EUR) (3.05) (1.50) (0.70) (0.42)
Financial Supervision Authority 1 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a CIECH RS
CONTENT OF THE REPORT
File Description Certified auditor’s opinion and report on the audit of consolidated st. Certified auditor’s opinion and report on the audit of the consolidated financial statements of the Ciech Group for 2009 Consolidated Annual Report of the Ciech Group for 2009 pdf Consolidated Annual Report of the Ciech Group for 2009
SIGNATURES OF ALL BOARD MEMBERS Date Name and surname Title/function Signature 2010-04-28 Ryszard Kunicki President of the Management Board of CIECH Spółka Akcyjna 2010-04-28 Robert Bednarski Member of the Management Board of CIECH Spółka Akcyjna 2010-04-28 Marcin Dobrza ński Member of the Management Board of CIECH Spółka Akcyjna 2010-04-28 Artur Osuchowski Member of the Management Board of CIECH Spółka Akcyjna
SIGNATURE OF INDIVIDUAL ENTRUSTED WITH BOOKKEEPING Date Name and surname Title/function Signature 2010-04-28 Katarzyna Rybacka Chief Accountant of CIECH Spółka Akcyjna
Financial Supervision Authority 2 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a
CIECH CAPITAL GROUP WARSAW, UL. PUŁAWSKA 182
CONSOLIDATED FINANCIAL STATEMENTS FOR 2009 AND CERTIFIED AUDITOR’S OPINION AND AUDIT REPORT
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Ciech Capital Group
TABLE OF CONTENTS
OPINION OF AN INDEPENDENT CERTIFIED AUDITOR ...... 3
SUPPLEMENTARY REPORT TO THE OPINION ON THE AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS OF THE CIECH CAPITAL GROUP FOR THE FINANCIAL YEAR 2009...... 6
I. GENERAL INFORMATION...... 6 1. Identification data of the audited controlling company ...... 6 2. Information about the consolidated financial statements for the previous financial year...... 11 3. Identification data of the authorised entity and the certified auditor, conducting the audit on its behalf ...... 12 4. Data accessibility and the Management Board’s statements ...... 12 5. Financial and economic position of the Capital Group...... 13
REPORT ON THE GROUP’S ACTIVITIES IN 2009
CONSOLIDATED FINANCIAL STATEMENTS OF THE CIECH GROUP FOR 2009 1. Consolidated Profit and Loss Account of the Ciech Group 2. Consolidated Statement of Comprehensive Income of the Ciech Group 3. Consolidated Statement of Financial Position of the Ciech Group 4. Statement of Changes in Consolidated Equity of the Ciech Group 5. Consolidated Statement of Cash Flows of the Ciech Group 6. Additional Notes to the Consolidated Financial Statements of the Ciech Group
Deloitte Audyt Sp. z o.o. 2
WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a
Deloitte Audyt Sp. z o.o. with its registered office in Warsaw Al. Jana Pawła II 19 00-854 Warszawa Polska
Tel.:+48 22 511 08 11, 511 08 12 Fax: +48 22 511 08 13 www.deloitte.com/pl
OPINION OF AN INDEPENDENT CERTIFIED AUDITOR
To the Shareholders and Supervisory Board of CIECH S.A.
We have audited the attached consolidated financial statements of the Ciech Capital Group for which CIECH S.A., with its registered office in Warsaw, at ul. Puławska 182, is the controlling entity; the financial statements include: the consolidated statement of financial position as at December 31st, 2009, the consolidated profit and loss account, the consolidated statement of comprehensive income, the statement of changes in consolidated equity, the consolidated statement of cash flows for the financial year starting on January 1st, 2009 and ending on December 31st, 2009 and additional notes, including information about the adopted accounting policy and other notes.
The Management Board of the Controlling Company is responsible for the preparation of the consolidated financial statements and of the report on the capital group’s activities in accordance with the binding regulations.
The Management Board of the Controlling company and the Members of its Supervisory Board are obliged to ensure that the consolidated financial statements and the report on the capital group’s activities satisfy the requirements stipulated in the Accounting Act dated September 29th, 1994 (Journal of Laws of 2009, No. 152, item 1223, as amended), hereinafter referred to as the “Accounting Act”.
Our task was to audit and express our opinion on the conformity of the consolidated financial statements with the accounting principles (policy) adopted by the capital group as well as to evaluate whether the statements are a reliable and transparent reflection of the capital group’s asset and financial situation and its financial result in all major aspects.
The audit of the financial statements was planned and conducted in accordance with: - chapter 7 of the Accounting Act, - national standards for certified auditors, published by the National Council of Statutory Auditors in Poland. We believe that the audit was a sufficient basis for expressing our opinion.
3 District Court for the Capital City of Warsaw KRS 0000031236, NIP: 527-020-07-86, REGON: 010076870 Share capital: PLN 100,000
Member of Deloitte Touche Tohmatsu WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a
The audit of the consolidated financial statements was planned and conducted in a manner allowing us to obtain reasonable certainty and express our opinion on the statements. In particular, the audit assessed the correctness of the accounting principles (policy) applied by the Controlling Company and the subsidiaries, and the grounds for figures and information included in the consolidated financial statements (random assessment). The audit included also comprehensive evaluation of the consolidated financial statements. In our opinion, the audited financial statements in all major aspects: a) presents all information vital for the assessment of the capital group’s asset and financial situation as at December 31st, 2009 as well as of its financial result for the financial year starting on January 1st, 2009 and ending on December 31st, 2009 in a reliable and transparent manner, b) has been prepared in accordance with the International Accounting Standards, the International Financial Reporting Standards and related interpretations published in the form of regulations of the European Commission, and in all matters not regulated by these standards – in accordance with the provisions of the Accounting Act and secondary legislation thereto, c) is in conformity with the legal regulations binding for the capital group and having an impact on the content of the consolidated financial statements.
Having no qualifications concerning the truth and fairness of the audited consolidated financial statements, we pay attention to:
I. Item 24.2 of the notes to the consolidated financial statements in which the Management Board of the Controlling Company informed about the financial position of the Ciech Capital Group as at December 31st, 2009, explaining the reasons for the decrease of profitability and liquidity, the level of working capital and of the Group’s debt. The Management Board believes that the fact of obtaining the consortium loan and the activities described therein will ensure improvement of the Capital Group’s financial standing and going concern of the Companies operating within the Group at the same or similar level in the foreseeable future. Consequently, in the opinion of the Management Board of the Controlling Company, the risk connected with the uncertain financial situation of the Ciech Capital Group will be reduced.
II. Item 44 of the notes to the consolidated financial statements in which the Management Board informed about the error made in the consolidated statements for 2008. The error resulted from incorrect application of IAS 39, leading to the distortion of the financial result and of the cash flow hedge. In the financial statements for 2009, the Management Board re-examined the concluded derivative transactions for compliance with the International Financial Reporting Standards and decided to adjust the consolidated financial statements in accordance with the principles included in IAS 8.
III. Item 16 of the notes to the consolidated financial statements in which the Management Board of the Controlling Company informed about the legal situation of the affiliate PTU S.A., in particular, about the dispute instituted by FSO S.A. against PTU S.A. and regarding the validity of resolutions adopted by the Compulsory Administration acting in the capacity of the general shareholders’ meeting as a result of which FSO S.A. was deprived of its controlling shareholding.
JANIKOSODA S.A., being a subsidiary of CIECH S.A., acts as an Intervening Party in this dispute. As a result of the said dispute, the acquisition of shares in PTU S.A. by SODA M ĄTWY S.A. and JANIKOSODA S.A. is being questioned. On April 28th, 2009, the court issued a decision in the case instituted by FSO S.A. against PTU S.A. The decision was dismissed by the Court of Appeal on March 18th, 2010. As at the date of this opinion, no written statement of reasons to the decision was provided. The consolidated financial statements do not include any adjustments that would be necessary in the case of a court decision unfavourable for CIECH S.A.’s subsidiaries.
The report on the capital group’s activities for the financial year 2009 is complete within the meaning of Article 49
4 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a section 2 of the Accounting Act and the Ordinance of the Minister of Finance dated February 19th, 2009 on Current and Interim Information Provided by Issuers of Securities and the Conditions of Recognising as Equivalent Information Required by the Law Provisions of a Country which is not a Member State; the information included in the report is compliant with the audited consolidated financial statements from which it was directly taken.
Maria Rzepnikowska Chief certified auditor responsible for the audit Reg. no. 3499
representatives entity authorised to audit financial statements, entered onto the list of authorised entities kept by the National Council of Statutory Auditors under no. 73
Warsaw, April 28th, 2010
5 WorldReginfo - 452b033f-e4e8-4f54-9de7-1cbc6e94f65a Ciech Capital Group
SUPPLEMENTARY REPORT TO THE OPINION ON THE AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS OF THE CIECH CAPITAL GROUP FOR THE FINANCIAL YEAR 2009
I. GENERAL INFORMATION
1. Identification data of the audited controlling company
The Controlling Company of the Capital Group operates under the business name CIECH SA. The Company’s registered office is in Warsaw, at ul. Puławska 182 The Company conducts its activity as a joint stock company, formed with a notarial deed on May 30th, 1995 in the presence of the notary public Paweł Błaszczak in Warsaw (Register A No. 7513/95). The Company was entered into the Commercial Register kept by the District Court for the Capital City of Warsaw, 16th Commercial Registry Division in Warsaw, in section B under the RHB (Commercial Register) number 44655. Currently, the Company is entered in the register of entrepreneurs kept by the District Court for the Capital City of Warsaw, 13th Commercial Division of the National Court Register under the KRS (National Court Register) number 0000011687. The Controlling Company was assigned the NIP (tax identification number) 118-00-19-377 by the Tax Office Warsaw śoliborz on June 15th, 1993. On December 19th, 2001 the Statistical Office granted the Controlling Entity its REGON (state statistical number): 011179878. The Controlling Company operates on the basis of the Commercial Companies Code. The basic scope of the Controlling Company’s activity is the sale of chemicals on the domestic market, as well as the export and import of chemical industry products. The scope of the subsidiaries’ activity is related to the Controlling Company’s activity and concerns the production of chemicals and their sale in the domestic market, as well as the export and import of chemical industry products. The Ciech Capital Group’s initial capital is the Controlling Company’s (CIECH S.A.) share capital, which as at December 31st, 2009 amounted to PLN 140,001 thousand, and was divided into 28,000,000 ordinary shares of the nominal value of PLN 5.00 for each. The initial capital, recognised in the consolidated financial statements, as at December 31st, 2009 amounted to PLN 164,115 thousand and differed from the registered one by the results of hyperinflation. As at December 31st, 2009, the Company’s shareholders holding at least 5% of shares in the share capital included: - State Treasury – 36.68% of shares, - Otwarty Fundusz Emerytalny (Open Pension Fund) PZU “Złota Jesie ń” – 6.12% of shares, Pioneer Pekao Investment Management S.A. (PPIM): – 18.77% of shares. In the audited period as well as after the balance sheet date, no changes in the Controlling Company’s share capital occurred. The Group’s equity as at December 31st, 2009 amounted to PLN 860,184 thousand. The financial year for the Capital Group is the calendar year. As at the date of giving the opinion, the Management Board of the Company comprised: - Ryszard Kunicki - President of the Management Board, - Marcin Dobrza ński - Member of the Management Board, - Artur Osuchowski - Member of the Management Board, - Robert Bednarski - Member of the Management Board.
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In the audited period, no changes in the composition of the Company’s Management Board occurred. As at December 31st, 2009, the Capital Group Ciech comprised: • controlling entity – CIECH S.A., and • subsidiaries:
- SODA M ĄTWY S.A., - TRANSODA Sp. z o.o., - Soda Polska CIECH Sp. z o.o., - JANIKOSODA SA, - GZNF “FOSFORY” Sp. z o.o., - “AGROCHEM” Spółka z ograniczon ą odpowiedzialno ści ą in Człuchów, - “AGROCHEM” Spółka z ograniczon ą odpowiedzialno ści ą in Dobre Miasto, - “Alwernia” S.A., - Cheman S.A., - “VITROSILICON” Spółka Akcyjna, - POLFA Sp. z o.o, - POLSIN PRIVATE LIMITED, - DALTRADE PLC, - Przedsi ębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczon ą odpowiedzialno ści ą, - Z. Ch. “Organika-Sarzyna” SA, - ZACHEM S.A., - ZACHEM UCR Spółka z ograniczon ą odpowiedzialno ści ą, - BORUTA-ZACHEM KOLOR Sp. z o.o., - S.C. Uzinele Sodice Govora – Ciech Chemical Group S.A., - Ciech Finance Sp.z o.o., - Soda Deutschland Ciech GmbH, - Sodawerk Holding Stassfurt GmbH, - Sodawerk Stassfurt Verwaltungs GmbH, - Sodawerk Stassfurt GmbH&Co.KG, - KWG GmbH, - Polcommerce Handels-und Vertretungsgesellschaft m.b.H., - Nordiska Unipol Aktiebolag, - CIECH SERVICE Sp. z o.o., - “Chemia.com S.A.”, - POLFA Hungaria, - “ALWERNIA-FOSFORANY” Spółka z ograniczon ą odpowiedzialno ści ą – no activity undertaken, - SOC-AL. Spółka z ograniczon ą odpowiedzialno ści ą - Zakład Do świadczalny “ORGANIKA” Spółka z ograniczon ą odpowiedzialno ści ą, - Calanda Polska Sp. z o.o. in liquidation, - CIECH AMERICA LATINA LTDA, - Sodachem GmbH, - KPG GmbH&Co. KG, - Polskie Konsorcjum Chemiczne Sp. z o.o., • affiliated companies: - Polskie Towarzystwo Ubezpieczeniowe Spółka Akcyjna, - Suomen Unipol Oy, - Zakłady Chemiczne “Silikony Polskie” Spółka z ograniczon ą odpowiedzialno ści ą, - “Komunalna Biologiczna Oczyszczalnia Ścieków - Spółka z ograniczon ą odpowiedzialno ści ą”,
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- “Bud-Org” Sp. z o.o., - “Gumokor-Organika” Sp. z o.o., - “ORGANIKA-PROJEK.T” Sp. z o.o., - “DREWREM-ORGANIKA” Sp. z o.o., - “EL-CHEM” Sp. z o.o., - “WOD-REM” Sp. z o.o., - “NS Automatyka” Sp. z o.o., - “BUDPUR” Spółka z ograniczon ą odpowiedzialno ści ą, - Przedsi ębiorstwo Transportowo Spedycyjne “TRANSCHEM” Spółka z ograniczon ą odpowiedzialno ści ą, - Zakład Remontowo-Produkcyjny “Metalpur” Spółka z ograniczon ą odpowiedzialno ści ą, - Natural Chemical Products Spółka z ograniczon ą odpowiedzialno ści ą, - Polsin Overseas, - Zakład Gospodarowania Popiołami Sp. z o.o., • jointly-controlled company: - Kaverngesellschaft Stassfurt mbH. As at the balance sheet date, the Group included also the company CHEMIEPETROL Aussenhandelsgesellschaft mit beschraonkter Haftung in liquidation, presented as a subsidiary, which was deleted from the Commercial Register on March 15th, 2010 and thus is no longer a subsidiary as of the date of this opinion. The consolidated financial statements as at December 31st, 2009 covered the following companies: a) Controlling Company – CIECH S.A., We have audited the financial statements of the Controlling Entity CIECH S.A. for the period from January 1st, 2009 to December 31st, 2009. As a result of the conducted audit, on April 28th, 2010, we issued our opinion with particular focus on: I. Item 21.1 of the notes to the financial statement in which the Management Board informed about the financial position of the Company as at December 31st, 2009, explaining the reasons for the decrease of profitability and liquidity, the level of working capital and of the debt level. The Management Board believes that the granting of a consortium loan and the measures described in this item will ensure improvement of the Company’s financial situation and its going concern at the same or similar level in the foreseeable future. Therefore, the Management Board believes that the risks linked to CIECH S.A.’s uncertain financial situation will be diminished. II. Item 37 of the notes to the financial statement in which the Management Board informed about the error made in the statement for 2008. The error resulted from incorrect application of IAS 39, leading to the distortion of the financial result and of the cash flow hedge. In the financial statement for 2009, the Management Board re-examined the concluded derivative transactions for compliance with the International Financial Reporting Standards and decided to adjust the financial statement in accordance with the principles included in IAS 8. b) Fully consolidated entities:
Share in Company name and Entity auditing financial statements and type of the capital Opinion date registered office opinion given (%) SODA-MĄTWY S.A., Inowrocław 99.85% In relation to the separate financial statements: March 9th, 2010
Deloitte Audyt Sp. z o.o. – opinion without qualifications, attention paid to the fact that the financial statements of SODA-MĄTWY S.A. may not be the only basis for the assessment of the financial and economic position of the company, which is the controlling entity in the SODA-MĄTWY S.A. Capital Group, and to the situation connected with the affiliate PTU S.A.
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In relation to the consolidated financial statements: Deloitte Audyt Sp. z o.o. – opinion without qualifications. April 12th, 2010 JANIKOSODA S.A., Janikowo 99.62% In relation to the separate financial statements: March 9th, 2010 Deloitte Audyt Sp. z o.o. – opinion without qualifications, attention paid to the situation connected with the affiliate PTU S.A. GZNF FOSFORY Sp. z o.o., 89.46% In relation to the separate financial statements: February 26th, Gda ńsk Deloitte Audyt Sp. z o.o. – opinion without qualifications, attention 2010 paid to the fact that the financial statements of GZNF FOSFORY Sp. z o.o. may not be the only basis for the assessment of the financial and economic position of the company, which is the controlling entity in the GZNF FOSFORY Sp. z o.o. Capital Group. In relation to the consolidated financial statements: April 8th, 2010 Deloitte Audyt Sp. z o.o. – opinion without qualifications. CIECH FINANCE Spółka z 100% In relation to the separate financial statements of the company: ograniczon ą działalno ści ą, Warsaw The company’s separate financial statements was not subject to the audit by a certified auditor. The shareholders’ meeting of CIECH FINANCE Spółka z ograniczon ą odpowiedzialno ści ą adopted a resolution not to prepare any consolidated financial statements by the company. CIECH FINANCE, as a lower-level controlling entity, and all its subsidiaries were consolidated by CIECH S.A., starting from the financial statements for the financial year 2006. In relation to the separate financial statements of the subsidiary March 19th, 2010 Cheman S.A.: Deloitte Audyt Sp. z o.o. – opinion without qualifications, attention paid to the poor financial condition of the entity and the obligation to adopt a resolution in accordance with the requirements of Article 397 of the Commercial Companies Code. “Alwernia” S.A., Alwernia 73.75% In relation to the separate financial statements: March 5th, 2010 Deloitte Audyt Sp. z o.o. – opinion without qualifications. “VITROSILICON” Spółka Akcyjna, 99.96% In relation to the separate financial statements: February 26th, 2010 Iłowa Deloitte Audyt Sp. z o.o. – opinion without qualifications. Polfa Sp. z o.o., Warsaw 100% In relation to the separate financial statements: February 19th, 2010 Deloitte Audyt Sp. z o.o. – opinion without qualifications. ZACHEM S.A., Bydgoszcz 100% In relation to the separate financial statements: February 26th, 2010
Deloitte Audyt Sp. z o.o. – opinion without qualifications, attention paid to the fact that the financial statements of ZACHEM S.A. may not be the only basis for the assessment of the financial and economic position of the company, which is the controlling entity in the ZACHEM S.A. Capital Group.
In relation to the consolidated financial statements: April 8th, 2010
Deloitte Audyt Sp. z o.o. – opinion without qualifications. Z. Ch. “Organika-Sarzyna” S.A., 100% In relation to the separate financial statements: February 26th, 2010 Sarzyna Deloitte Audyt Sp. z o.o. – opinion without qualifications. Przedsi ębiorstwo 100% In relation to the separate financial statements: February 28th, 2010 Transportowo- Usługowe Transclean Sp. z o.o., KORPEX-AUDYTOR Sp. z o.o. Bydgoszcz
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S.C. Uzinele Sodice Govora S.A., 92.91% In relation to a separate shareholding for consolidation purposes: April 14th, 2010 Rm. Valcea Deloitte Audit SRL – opinion with a qualification concerning the lack of impairment loss for a total of RON 8,185. POLSIN PRIVATE LIMITED, 98.00% In relation to the separate financial statements: March 4th, 2010 Singapore Deloitte & Touche LLP, Singapore – opinion without qualifications. Soda Deutschland Ciech Group, 100% In relation to a consolidated shareholding for consolidation March 30th, 2010 Stassfurt purposes: Deloitte & Touche GmbH, Berlin – opinion without qualifications. DALTRADE PLC, London 61.20% In relation to the separate financial statements: March 1st, 2010 COVENEY NICHOLLS Chartered Accountants & Registered Auditors – opinion without qualifications. c) Companies consolidated under the equity method:
Company name and Share in Entity auditing financial statements and type Opinion date registered office capital (%) of the opinion given PTU S.A., Warsaw 45.30% In relation to the separate financial statements: April 9th, 2010
KPMG Audyt Sp. z o.o. – opinion without qualifications, attention paid to the fact that as at December 31st, 2009 the Company recognised a deficit of own funds for the coverage of the solvency margin in the amount of PLN 7,740 thousand.
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2. Information about the consolidated financial statements for the previous financial year
The Capital Group’s activity in 2008 presented a net profit amounting to PLN 54,845 thousand (prior to error adjustment for 2008). The consolidated financial statements of the Capital Group for the financial year 2008 were subject to audit by a certified auditor. The audit was conducted by the authorised entity Deloitte Audyt Sp. z o.o. On April 28th, 2009, the certified auditor gave an opinion on these statements, containing the following qualification: “The Controlling Entity CIECH S.A. concluded derivative transactions, covering option structures, consisting of put options acquired and call options issued. Due to the fact that the option structures concluded by the Company constitute an economic hedge of the Capital Group’s future sales revenue, and in connection with the restructuring of these instruments, which was ongoing and completed before the date of preparing the financial statements, the Controlling Entity designated a part of the derivative transactions concluded as the hedge of this revenue within the meaning of hedge accounting. Therefore, the Controlling Entity fragmented them into component instruments, and distinguished among them a portion of derivative transactions, constituting an option structure, which, as a synthetic forward contract, was subject to hedge accounting principles. The transactions which were not included in the option structure, constituting a hedging instrument, are treated as derivative instruments of commercial character. In our opinion, despite their hedging character in terms of economy, the synthetic forward contracts, resulting from the disintegration conducted by the Controlling Entity, could be assigned as a hedge of the Capital Group’s future sales revenue if they had been concluded as transactions identical in relation to parameters but separate with respect to law provisions. This is connected with the fact that, despite the non-inferiority of the economic result, IAS 39 does not allow assigning only a part of a derivative instrument as a hedging instrument in hedge accounting which means that the Controlling Entity should have considered the application of hedge accounting principles for the concluded option structures after completing the process of their restructuring. Detailed information concerning the concluded derivative instruments and the applied principles of hedge accounting is included in item 36 of the notes to the consolidated financial statements of the Ciech Capital Group.” We also paid attention to: I. “Item 17 of the notes to the consolidated financial statements in which the Management Board of the Controlling Company informed about the completed process of settling Soda Deutschland Ciech GmbH acquisition. The adjustments of initial settlement were recognised in accordance with the International Accounting Standard No. 8, which means that comparable data presented currently in the consolidated financial statements is different from the data presented in the approved consolidated financial statements as at December 31st, 2007. II. Item 25.1 the notes to the consolidated financial statements in which the Management Board of the Controlling Company informed about the financial position of the Ciech Capital Group as at December 31st, 2008, explaining the reasons for the decrease of liquidity ratios and increase of the Group’s debt rate. Moreover, the Management Board presented debt restructuring plans, aimed at providing long-term and stable sources of financing for the Controlling Company and the Ciech Capital Group. In the opinion of the Management Board, the activities described in the item mentioned above shall result in an improvement related to liquidity ratios, debt rate and the level of working capital of the Capital Group in the foreseeable future. III. Item 38 of the notes to the consolidated financial statements in which the Management Board of the Controlling Company informed about the court decision issued on April 28th, 2009 in a case instituted by FSO S.A. against PTU S.A. Due to the fact that the decision lacks the force of law, the Management Board of the Controlling Entity is not able to estimate the financial results and influence of the court’s decision on further control over PTU, and, what follows, the influence on the consolidated financial statements as at December 31st, 2009. Therefore, the consolidated financial statements do not include any related adjustments, which would be necessary in the case of an unfavourable valid court judgement.”
The General Meeting of Shareholders, approving the consolidated financial statements for the financial year 2008, was held on June 18th, 2009.
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Pursuant to the provisions of law, the consolidated financial statements for the financial year 2008 was filed with the National Court Register on July 1st, 2009 and submitted for publishing in the official gazette Monitor Polski “B” on July 1st, 2009. The statement was published in Monitor Polski B no. 1596 on September 10th, 2009.
3. Identification data of the authorised entity and the certified auditor, conducting the audit on its behalf
The audit of the consolidated financial statements was conducted based on the agreement dated June 19th, 2009 concluded between CIECH S.A. and the company Deloitte Audyt Sp. z o.o., with its registered office in Warsaw, al. Jana Pawła II 19, entered in the register of entities authorised to audit financial statements, kept by the National Council of Statutory Auditors, under the number 73. On behalf of the authorised entity, the audit of the consolidated financial statements was conducted under the supervision of a certified auditor Maria Rzepnikowska (reg. no. 3349) between April 6th, 2010, i.e. the date of receiving the financial statements, and the date of signing hereof.
The entity authorised to audit the financial statements was chosen by the Supervisory Board by way of a resolution as of May 5th, 2009 based on the authorisation included in Article 21 of the Articles of Association of the Controlling Company.
Deloitte Audyt Sp. z o.o. and the chief certified auditor Maria Rzepnikowska confirm that they are authorised to audit financial statements and satisfy the requirements defined in Article 56 of the Act on Certified Auditors, Their Self- government, Entities Authorized to Audit Financial Statements and Public Supervision (Journal of Laws of 2009, No. 77, item 649) related to expressing a fair and independent opinion on the consolidated financial statements of the Ciech Capital Group.
4. Data accessibility and the Management Board’s statements
No restrictions or limitations related to the scope of our audit occurred.
All the required documents and data were made available to the authorised entity and the chief certified auditor during the audit; moreover, they were provided with exhaustive information and explanations, which was confirmed by the Management Board of the Controlling Company in its written statement of April 28th, 2010.
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5. Financial and economic position of the Capital Group
Below, we present the basic item values from the consolidated profit and loss account, as well as financial ratios, describing the Capital Group’s financial result, its financial and economic position in comparison with the analogous values for the previous years. The figures concerning the years 2008 and 2007 result from the adjusted comparative data. Differences as to the approved financial statements have been described in respective consolidated financial statements.
Basic values from the profit and loss account (in PLN ‘000) 2009 2008 2007
Sales revenue 3,684,225 3,787,072 3,414,982 Operating costs 3,593,161 3,542,560 3,105,475 Other operating income 179,282 129,589 68,919 Other operating costs 135,360 127,409 335,443 Finance income 62,973 105,947 28,625 Finance costs 282,193 356,619 58,607 Income tax 4,381 24,331 48,096 Net profit (loss) (92,422) (31,582) (30,033)
Return ratios 2009 2008 2007 - return on sales (net profit (loss) on operating activities/sales revenue) 3.66% 6.51% 1.26% - net profit margin (net profit (loss)/sales revenue) -2.51% -0.83% -0.88% - net return on equity (net profit (loss)/(equity-net profit (loss)) -9.70% -3.39% -2.63%
Efficiency ratios - asset turnover ratio 91.55% 87.13% 86.10% (sales revenue/total assets) - receivables turnover in days 60 59 64 (average net trade receivables *365 days/ sales revenue) - turnover of liabilities in days 45 41 43 (average trade liabilities *365 days/ operating costs) - inventory turnover in days 38 37 31 - (average inventory *365 days/operating costs)
Liquidity/ Net working capital - debt rate (total liabilities/total equity and liabilities) 78.62% 79.32% 71.95% - equity to assets ratio (equity/total assets) 21.38% 20.68% 28.05% - net working capital (in PLN ‘000) (total current assets-current liabilities) -718,213 -750,049 18,704 - liquidity ratio (total current assets/current liabilities) 0.64 0.68 1.01 - quick ratio - (total current assets-inventory)/current liabilities) 0.48 0.49 0.83
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The analysis of the aforementioned values and ratios indicates the following tendencies in 2009: - decrease in return on sales ratios in comparison with 2008, - increase in asset and inventory turnover ratios in days, - increase in receivables and liabilities turnover ratios in comparison with 2008, - unchanging level of the debt rate, - unchanging negative value of working capital, - decrease in liquidity ratios.
In item 24.2 of the notes to the consolidated financial statements, the Management Board of the Controlling Company informed about the financial position of the Ciech Capital Group as at December 31st, 2009, explaining the reasons for the decrease in the ratios presented above and the reasons for the Capital Group’s debt. The Management Board believes that the fact of obtaining the consortium loan and the activities described therein will ensure improvement of the Capital Group’s financial standing and going concern of the Companies operating within the Group at the same or similar level in the foreseeable future. Consequently, in the opinion of the Management Board of the Controlling Company, the risk connected with the uncertain financial situation of the Capital Group will be reduced.
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