SOKOLOVSKÁ UHELNÁ Performance Report 2005

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Sokolovská uhelná invests millions in environmental programs

New hi-tech oxygen plant in operation Unique golf course in place of former surface mine 2005

“...the long-term focus of the Company’s business is on mining coal and converting it into value-added forms of energy – electricity and heat in particular...”

energy for you Contents

Performance Reasons for optimism? Report ...supply of solid fuels continued SOKOLOVSKÁ to outstrip demand in 2005 and UHELNÁ the opening of the electricity market to competition took 2005 5 SSUU www.suas.cz another step ...... KEY FIGURES The Company Today ...... 12 Environmental Responsibility . . 50 Facts, data, figures ...... 2 REPORT OF THE BOARD Sokolovská uhelná – Important Moments OF DIRECTORS a stabilizing element in of 2005–2006 ...... 3 Business Environment ...... 22 the Sokolov region ...... 54 Letter from the Chairman . . . 4 Production and Sales ...... 30 THE FUTURE PEOPLE Earnings Analysis ...... 36 Company Vision ...... 56 People in the Management Structure of Assets and APPENDICES of Sokolovská uhelná ...... 6 Sources of Financing ...... 40 Financial Statement ...... 58 COMPANY PROFILE Capital Investment Organization Chart of Company Reorganization in 2005 ...... 44 Sokolovská uhelná as timeline 2002–2005 ...... 10 Potential is in people ...... 45 of 1 January 2006 ...... 60

This Performance Report gives the reader a comprehensive look at Sokolovská uhelná, právní nástupce, a.s. (the “Company” or “Sokolovská uhelná“), including an overview of its performance and business activities over the past several years. For this reason, this Performance Report includes information on past accounting periods which also contain information on the company Sokolovská uhelná, a.s., all of whose capital was taken over in 2005 by Sokolovská těžební, a.s., which was subsequently renamed to Sokolovská uhelná, právní nástupce, a.s.

1 KEY FIGURES Facts, Data, Figures

Units 2005 2004 2003

Production

Coal extracted kt 10,307.1 10,081.1 10,082.9 Overburden extracted kt 32,684.0 32,191.0 26,478.2 Electricity – heat/power plant GWh 1,698.2 1,633.2 1,610.4 Electricity – combined cycle power plant GWh 1,899.7 1,791.0 1,819.5 Coal gas m3 millions 1,187.9 1,141.3 1,171.5

Sales

Coal kt 6,153.2 6,068.6 6,045.4 – of which, e.g.: sorted kt 240.1 258.4 330.3 Briquettes kt 286.8 285.7 300.8 Electricity – heat/power plant GWh 1,007.8 839.5 806.1 Electricity – combined cycle power plant GWh 1,891.9 1,797.6 1,940.4 Heat TJ 2,251.5 2,298.8 2,329.0 Coal gas m3 millions 0.0 3.2 8.4

Financial indicators

Revenues CZK millions 7,437.0 7,172.2 6,569.8 Net income CZK millions 533.3 551.4 481.9 Capital expenditure CZK millions 555.8 808.0 1,376.4 Average number of employees persons 4,888 5,194 5,373 Average monthly wage CZK 21,125 20,000 18,008

2 KEY FIGURES Important Moments of 2005 – 2006

2005 June December

approval of the Mine Opening and January Exploitation Preparation Plans for 2006 – 2010 for the Jiří mine commencement of steps toward take-over of capital of Sokolovská uhelná, a.s., pursuant to Section 69b, 220p and other related provisions of the Commercial Code

Plzeň Regional Court decides to signing of the 2006 Collective strike Sokolovská uhelná, a.s. Agreement from the Commercial Register without liquidation and on 2006 the take-over of all assets, receivables, and liabilities, including employment-related January rights and obligations, by the principal shareholder Division Energetika and Division Sokolovská uhelná, právní Tlaková plynárna merged to nástupce, a.s. (formerly form Division Zpracování March Sokolovská těžební, a.s.) (Processing Division) auditors issue an unqualified March opinion on the Company’s 2004 financial statements auditors issue an unqualified opinion on the Company’s 2005 financial statements

November

approval of the 2006 business plan

3 KEY FIGURES Letter FROM THE CHAIRMAN

DEAR SHAREHOLDERS AND FRIENDS, Allow me to inform you of events that took place at Sokolovská uhelná in a time of change in the Company’s ownership.

4 KEY FIGURES

raditionally, we evaluate “...the accomplishments the development of selected T indicators under Czech were made in Accounting Standards within the wider context of information pre- a manner compatible sented in past annual reports. We also discuss the accomplishments and challenges that are not evi- with the Company’s dent from a mere quantification of selected indicators, yet nonethe- vision and long-term objectives...” less influence the Company’s plans for the near and more remote future. In particular, these became stricter, and there were the Company’s vision and long- are facts that influence the Com- also certain impacts related to the term objectives, the latter were not pany’s health and form the basis new application of rules following compromised and there is no need of its prosperity. our country’s accession to the to adapt them to the changes in the European Union. business environment that could 2005 was not an easy year for not be foreseen so far in advance. our Company. Supply of solid My intention in naming these fuels continued to outstrip factors is to give the reader an idea Although we cannot avoid demand and the opening of the of the difficult economic and social problems that arise outside the electricity market took another environment in which we did company and hence are beyond step, and now over 160 electricity business and dealt with conflicts our control, the performance results traders serve over three quarters of interest that arose with our com- achieved last year give us reason to of eligible customers. Our busi- petitors and some of our business be cautiously optimistic that they ness was impacted by movements partners. At the same time, we will be transformed into further in the prices of certain commodi- addressed the changes taking prosperity for the Company, allow- ties such as natural gas, the place in our Company on many ing us to retain our position in the consumption of which is a major levels. This is the context in which national economy and the region. determining factor in the ability to I judge and appreciate the value quickly regulate the power of our accomplishments, which In conclusion, allow me to generation output of our produc- I consider to be of key importance thank our employees, business tion processes. Environmental for the future of our Company. partners, and other stakeholders requirements applicable to the Because the accomplishments were for the part they played in the Company’s production processes made in a manner compatible with accomplishments of last year.

František Štěpánek Chairman of the Board of Directors

5 PEOPLE People in the Management OF SOKOLOVSKÁ UHELNÁ

BOARD OF DIRECTORS

František Štěpánek Chairman of the Board of Directors and Chief Executive Officer Member of the Boards of Directors of Kinotechnika Praha, a.s., ZMA a.s., Sokolovská obchodní, a.s., Golf Sokolov a.s. Member of the Supervisory Board of Coal Energy, a.s.

Graduate of Ostrava Mining University, Born in 1953, 26 years’ mining industry experience; Production Director in 1994 – 1999, and Member of the Board and CEO of Sokolovská uhelná, a.s. since 1999, Chairman of the Board of Sokolovská těžební, a.s. in 2002 – 2005, Chairman of the Board of Directors of Sokolovská uhelná, a.s. in 2004 – 2005, Chairman of the Board of Directors of Sokolovská uhelná, právní nástupce, a.s. since 2005.

Jaroslav Rokos Vice Chairman of the Board of Directors and Finance Director Statutory representative of Malé Versailles, s.r.o. Member of the Supervisory Boards of Golf Sokolov a.s. and SATER-CHODOV spol. s r.o.

Graduate of Prague Economics University and Prague International Business School, Born in 1963, 21 years’ mining industry experience; Finance Director of Sokolovská uhelná, a.s. since 1995, Chairman of the Supervisory Board of Sokolovská těžební, a.s. in 2002 – 2005, Vice Chairman of the Board of Directors of Sokolovská uhelná, a.s. in 2004 – 2005, Vice Chairman of the Board of Directors of Sokolovská uhelná, právní nástupce, a.s. since 2005.

6 PEOPLE

Jiří Pöpperl Member of the Board of Directors and Technology Director Member of the Boards of Directors of Golf Sokolov a.s. and CHEBIO a.s. Statutory representative of HC Baník Sokolov spol. s r.o. and Member of the Sokolov City Council

Graduate of Ostrava Mining University, Born in 1956, 26 years’ mining industry experience; Technology Director of Sokolovská uhelná, a.s. since October 2004, Member of the Board of Directors of Sokolovská uhelná, právní nástupce, a.s. since 2005.

Jiří Peterka Member of the Board of Directors and Production Director

Graduate of Ostrava Mining University, Born in 1949, 31 years‘ mining industry experience; Production Director of Sokolovská uhelná, a.s. since 1999. Member of the Supervisory Board of Sokolovská uhelná, a.s. elected by the employees in 1994 – 2001. Member of the Board of Directors of Sokolovská uhelná, a.s. in 2004 – 2005, Member of the Board of Directors of Sokolovská uhelná, právní nástupce, a.s. since 2005.

Jiří Radosta Member of the Board of Directors and Personnel Director Member of the Board of Directors of the Ohře River Valley Regional Economic Chamber

Graduate of Žilina Mining University Born in 1948, 33 years’ mining industry experience; Personnel Director of Sokolovská uhelná, a.s. since 1994, Member of the Board of Directors of Sokolovská uhelná, a.s. in 2004 – 2005, Member of the Board of Directors of Sokolovská uhelná, právní nástupce, a.s. since 2005.

7 PEOPLE

SUPERVISORY BOARD

Miroslav Soural Members of the Supervisory Board: Zbyšek Klapka Chairman of the Supervisory Board Head of the Accounting Section Sales Director of Sokolovská Otokar Sojka of Sokolovská uhelná, uhelná, právní nástupce, a.s. Private entrepreneur právní nástupce, a.s. Born in 1947 Born in 1947 Born in 1964

Jan Smolka Jan Birke Jiří Blažek Vice Chairman of the Supervisory Board Representative of the Ministry Member of the Supervisory Member of the Supervisory of Finance (under the terms Board elected by the employees Board elected by the employees of the privatization Chairman of the Družba labor Chairman of the Association of Sokolovská uhelná, a.s.) organization of Sokolovská of Labor Organizations Born in 1969 uhelná, právní nástupce, a.s. of Sokolovská uhelná, Born in 1967 právní nástupce, a.s. Josef Michalský Born in 1949 Head of the Office of the CEO Radovan Třešňák of Sokolovská uhelná, Member of the Supervisory právní nástupce, a.s. Board elected by the employees Born in 1948 Chairman of the Zpracování labor organization Jiří Selvička of Sokolovská uhelná, Head of the Legal Section právní nástupce, a.s. of Sokolovská uhelná, Born in 1954 právní nástupce, a.s. Born in 1948

THIS RENAISSANCE BUILDING on Sokolov’s historic square was built around 1540 and re-built into today’s form after a fire in the 1630s. In the early 19th century its front facade underwent a classicist facelift. In addition to the city tavern, the building used to serve as the town hall. It continued to serve this purpose until the mid-20th century.

8 PEOPLE

SENIOR MANAGEMENT

(as of 1 January 2006)

František Štěpánek Jiří Radosta Chief Executive Officer Personnel Director Until 31 December 2005 the processing operations of Sokolovská uhelná took place Jaroslav Rokos Alojz Neveďal in two divisions: Tlaková Finance Director Director, Division Jiří plynárna (Director: Petr Záruba) and Energetika (Director: Miroslav Mutinský). Jiří Pöpperl František Kastl Technology Director Director, Division Družba On 1 January 2006, the Energetika and Tlaková plynárna Divisions were merged into Division Jiří Peterka Pavel Homola Zpracování (Processing). Production Director Director, Division Zpracování The organization chart appears on page 60. Miroslav Soural Jan Smolka Sales Director Director, Division Služby

THE TOWN HALL’S current appearance dates to its last renovation in 1995. Today it serves as the seat of Sokolovská uhelná.

(lower right) THE SEAT OF THE SUBSIDIARY Malé Versailles and the restaurant of the same name is located in Karlovy Vary.

9 COMPANY PROFILE

Company Timeline

2002 2003 2004

February 25: establishment October – Sokolovská těžební, a.s. March – Government Resolution of Sokolovská těžební, a.s. participates in privatization No. 263 approves direct sale tender for the State’s equity of the State’s equity stake August 23: Sokolovská těžební, a.s. stake in Sokolovská uhelná, a.s. in Sokolovská uhelná, a.s. recorded in the Commercial to Sokolovská těžební, a.s. Register.

10 COMPANY PROFILE

Reorganization 2002 – 2005

2005

June – under the Government August – October – Sokolovská July – Commercial Register Resolution, Sokolovská těžební, a.s. carries out information amended těžební, a. s. purchases shares mandatory take-over of shares (retroactively effective January 1) in Sokolovská uhelná, a.s. of Sokolovská uhelná, a.s. to reflect take-over of capital owned by the National of Sokolovská uhelná, a.s. Property Fund of the Czech pursuant to Section 220p Republic and PAL a.s., as well and related provisions of the as from other minority Commercial Code. Also, the shareholders. Company’s name was changed to Sokolovská uhelná, právní nástupce, a.s. and its registered office was also changed.

11 COMPANY PROFILE

The Company Today THE PRINCIPAL BUSINESS ACTIVITIES OF SOKOLOVSKÁ UHELNÁ ARE the extraction of brown coal and, to a lesser extent, other minerals, and the processing and conversion thereof into value-added forms of energy as well as selling the resulting products, which are gaining in importance from year to year. Furthermore, the Company is involved in reclamation of land affected by coal extraction. Activities in this area include agricul- ture and forestry. Also significant are the Company’s environmental activities, especially in the waste management area. The Company does not have any Research & Development (R&D) activities.

12 COMPANY PROFILE

ONE OF THE MOST EXTENSIVE HISTORICAL ARCHIVES concerning mining in Bohemia, which Sokolovská uhelná has administered since 1994, consists of collections and funds dating from the second half of the 18th century to the present. The most important funds of economic organizations include Dolové a průmyslové závody (formerly Jan David Starck Dolní Rychnov) from 1885-1946, documentation of Karlovy Vary’s Duchcovská-podmokelská Line dating from 1805–1946, and Hnědouhelné doly a briketárny Sokolov from the period 1946–1990.

THE SOKOLOV REGION has always been rich in natural resources. There is no other area in the Czech Republic that can boast practically all possible types of minerals in such a small area. Historically, the Sokolov region’s location predetermined that it would become a major mining center and a crossroads of business and industry.

BROWN COAL HAS BEEN MINED IN THE SOKOLOV AREA SINCE THE 17TH CENTURY

rown coal has been mined in accessible from the Earth’s surface. merged to form Hnědouhelné doly the Sokolov area since the 17th Starting in the 1945, the industry a briketárny. Bcentury. It reached its first began moving gradually toward peak in the 19th century when inde- more efficient large-scale surface In the early 1990s, state-owned pendent miners began to join togeth- mining. After World War II, all pri- enterprise operations relating to er to form cooperatives and, later, vately-owned mines were national- mining and processing of coal mining companies. The growth of ized by presidential decree. The extracted in the region were spun off the industry got a major boost with construction of coal processing cen- to form Palivový kombinát in the construction of the Buštěhrad ters, first in the western portion of Vřesová, Hnědouhelné doly in Bře- Line, a railway connecting Prague the mining area in Tisová (1955–60) zová and Rekultivace in Sokolov. and Cheb, with further connections and in the eastern portion at Vřesová Subsequently, these three enterprises to Bavaria and Saxony. (1960–70), created conditions for the were merged to form Sokolovská growth of surface mining. Through a uhelná, a.s., which as of 30 June 2005 At the beginning, coal was mined gradual process of integration and continues as Sokolovská uhelná, exclusively underground and in shutting down of inefficient opera- právní nástupce, a.s. Coal mining in small-pit operations in locations tions, ten national enterprises were the Sokolov area takes place in two where the coal seam was directly formed. In 1965, these ten were mines: Jiří and Družba.

13 COMPANY PROFILE

COAL MINING TAKES PLACE IN TWO MINES: JIŘÍ AND DRUŽBA

Division Jiří

f the Company’s two is first crushed to the desired grade been developed and is known as mines, Jiří occupies the and then shipped to the Processing the “Antonín”. Since 1950, the O largest area and is also Section in Vřesová and, through mining operation has been mov- the deepest. Its annual production the Tisová processing and sorting ing in a westwardly direction can reach up to 8.5 million tons. facility in Citice to the Tisová heat/ from the village of Vintířov at power plant, as well as to customers a rate of approximately 90 meters For extraction, the mine is in the form of sorted coal. per year towards the City of equipped with five bucket-wheel Sokolov, where the mine is set to excavators and a 1,400 mm gauge In the Jiří mining field, a 40 shut down its operation in or trunk belt conveyor. Extracted coal meter thick brown coal seam has around the year 2027, depending

14 COMPANY PROFILE

The Company is backed by a long, rich tradition of brown coal mining and processing in the Sokolov region. It is a dynamic fuel-energy complex that mines approximately 10 million tons of brown coal per year.

on the development of actual been worked in the past by the tainted coal will gradually annual extraction volumes. As of underground mines Marie in decrease. Currently, the mining 31 December 2005, the Jiří mine’s Královské Poříčí and Jiří in Lom- operation has progressed to the extractable reserves stood at 170.6 nice. The implication is that, until point that the second coal cut has million tons. the end of the mine’s useful life, begun to produce tainted coal as extraction at the Jiří mine will take well. For this reason, more Since 2000, the mining opera- place in the portion of the coal demands are being placed not tion associated with the first coal seam affected by legacy mining only for selective extraction of cut has been progressing deep operations and, in the next few coal matter from sites of legacy into a portion of the seam that had years, the ratio of virgin coal to “long wall” operations, but also

15 COMPANY PROFILE

Over time, brown coal mining Since 2000, mining activity has From the mine, the coal is conveyed in the Sokolov region has changed been concentrated in the eastern to a loading station, from which it is dramatically. Underground and portion of the mining area. hauled by rail to the Processing small-pit techniques have been The Jiří mine’s gross annual Section in Vřesová and to customers. replaced by large surface mines. coal output is 8.5 million tons. Currently, two such mines are in operation. for the removal of remnants of the machinery complexes, each con- and train cars as well as the belt con- original underground mines and sisting of a bucket-wheel excava- veyors that transport some of the for prevention and extinguishing tor on a caterpillar undercarriage, coal to the Tisová Power Station. of spontaneous fires in the seam. 1,400 mm and 1,600 mm gauge trunk belt conveyors, a track vehi- In addition to the brown coal An integral link in the mining cle and a belt spreader, also dump mine, Division Jiří also operates process chain is the intermediate overburden inside the mine. the Horní Rozmyšl Rock Quarry. product terminal, where a pre- In 2005, the Horní Rozmyšl Rock scribed volume of non-graded The coal extraction and over- Quarry extracted 749,000 tons of brown coal (in 0-400 mm chunks) burden excavation operations are granite, which is used mostly to is kept on hand. This makes it secured by a system of drainage build roads, railways, and drain possible to continue supplying conduits which direct rainwater to fields. customers even during mine out- holding tanks dug into the spoil- ages. bank with the objective of collect- ing rainwater and pumping it out Overburden is excavated using of the mine before it reaches the Division Družba two large machinery complexes, bottom of the pit. each consisting of a bucket-wheel he core activity of Division excavator on a walking truck Division Jiří operates a coal Družba is the extraction of undercarriage, a 1,800 mm gauge crushing facility in Vřesová which Tbrown coal from the Družba trunk belt conveyor, a re-loading includes a process dump and pro- mine, which has a total annual vehicle on tracks and a belt duces finely crushed coal for the capacity of over 2 million tons, spreader. The machinery complex briquette plant and, on four separate and the related extraction and that excavates the overburden lay- production lines, pulverized coal dumping of overburden material. ers nearest to the surface spreads which is used by the Production extracted material on the upper Section to generate electricity. The Družba mine extracts coal levels of the Jiří in-mine spoil- Another part of the division is the from three coal cuts using bucket- bank. The second machinery com- coal sorting facility in Tisová, where wheel excavators. When needed, plex conveys excavated material four types of sorted coal are pro- their reach can be extended using in a southerly direction to an in- duced. The facility is equipped to re-loading vehicles on tracks. mine spoil bank. Two smaller load the sorted coal onto both trucks Overburden is extracted by four

16 COMPANY PROFILE

The Družba mine’s planned useful After the town gas system was life is to expire in 2036. The mine shut down in 1996, Division has 39.9 million tons of extractable Tlaková plynárna gasifies coal coal reserves. to meet the fuel needs of the combined-cycle power plant.

bucket-wheel excavators. Over- The division also operates the agriculture and forestry opera- burden is transported mainly via Erika Sand Quarry. Currently this tions complement its core recla- 1,435 mm gauge rail spur. Some facility is operated on an as-need- mation operations, and the of the overburden material is ed basis only. In 2005, it produced Section is a major breeder of conveyed to a production facility 556 m3 of sand. Charolais cattle. where it is used to make light- weight construction materials. Another part of the division is Large-scale reclamation and The mine’s planned useful life the Reclamation Section. Original- construction projects include, for is to expire in 2036. As of ly a typical agricultural enterprise example, the Michal Water Park 31 December 2005 the mine had that also had extensive forestry and the golf course in Dolní Rych- 39.9 million tons of extractable operations, in the late 1980s its nov, as well as the Boden Reser- coal reserves. focus shifted to reclaiming former voir and the complete reclamation mines using technical and biologi- of the Velký Loket spoilbank with Division Družba operates all cal reclamation methods. Now, an area of over 400 hectares. the Company’s rail tracks, including industrial rail spurs. “UNLIKE OTHER brown coal companies, It is the Company’s a considerable portion of our coal internal transporta- output is processed in-house to tion provider, haul- produce value-added fuels and energy ing coal from the Jiří in the combined-cycle power plant, and Družba surface mines to the Process- which is the only one of its kind in ing Section as well Europe. It makes it possible for us as shuttling back and to generate clean, environmentally forth between Divi- friendly energy. The plant is unique sion Jiří and Division in that its primary fuel is gas Družba (Extraction produced from coal.” Section) loading sta- tions and the Tisová Jiří Peterka, Production Director Power Station.

17 COMPANY PROFILE

CONVERSION OF COAL INTO VALUE-ADDED FORMS OF ENERGY

Division Zpracování

he Processing Section of coal charge in the gasworks. Pres- Sokolovská uhelná is surized to 2.7 MPa, the coal is T a complex of industrial gasified using a mixture of oxygen processes focused on converting and steam in sliding-bed genera- brown coal into value-added tors (Lurgi). The resulting raw gas forms of energy. The Processing is purified by a Rectisol process Section of Sokolovská uhelná pro- using cooled-methanol scrubbing. duces value-added forms of ener- The purified coal gas is used as gy through a series of chemical the base fuel in the combined and industrial processes: prepara- cycle power plant. Nowadays the tion and processing of basic raw coal gasification process includes materials, generation of steam, a new unit for gasifying carbo- brown coal gasification, purifica- chemical by-products in a “burner tion of the coal gas, processing generator”. and purification of by-products and waste materials, and, finally, utilization of the purified coal gas Power Plants to generate electricity and heat. The Processing Section includes Electricity and process steam the following three main produc- used by other Processing Section tion processes: facilities are generated in a con- ventional heat/power plant (fired by the finely pulverized coal that Coal Processing Plant falls through the sorting mesh used to prepare coal charge for the Coal Processing Plant pulver- gasworks) and in a combined- izes, dries, and sorts coal to prepare cycle power plant (the “CCPP”). it for gasification and for combus- A portion of the electricity gener- tion in a conventional heat/power ated is used in-house and the rest plant. It includes a briquette plant is provided to the public power where low-sulfur-content coal is grid. Thermal energy is utilized in pressed into briquettes without the the Processing Section as well as use of adhesives. in the district heating systems of the surrounding towns.

Coal Gasification Plant Gas Purification Process After being pulverized, the coal is pre-dried and sorted. The Selective Rectisol scrubbing is finer grains are combusted in the used to purify the gas by removing conventional heat/power plant. all benzenes, all hydrogen sulfide, The rougher component is used as and certain organic compounds as

18 COMPANY PROFILE

19 COMPANY PROFILE

well as residual ash matter. As the which pose a significant threat to Air, which is used for combus- gas generated is used as fuel for the environment. tion and to cool the flow-through gas turbines, most carbon dioxide portion of the turbine, is delivered is left in the gas for two reasons: it After passing through the by a turbocompressor located on performs mechanical work in the purification equipment, the gas is the same driveshaft as the turbine. gas turbine and, as an inert materi- at a high pressure (2.1 – 2.5 MPa), The combustion gas, which has al, it has a favorable effect on the allowing it to be used in the gas a temperature of approximately generation of nitrogen oxides dur- turbine without further compres- 1,100 °C at this point, then enters ing combustion in the gas turbine. sion. The purified gas is practical- the gas turbine proper, which ly sulfur-free and does not contain drives a generator. Upon leaving Desulfurization of expansion any nitrogenous substances. This the turbine the gas, now at a tem- gases from the selective scrubbing makes it appropriate for use as an perature of approximately 540 °C, process gives rise to sulfuric acid environmentally-friendly fuel in goes to the waste heat boiler. To (95% hm). The desulfurization the power plant. reduce the formation of nitrogen process used is based on catalytic oxides in gas combustion, steam is oxidation of hydrogen sulfide to injected into the gas turbine’s produce sulfur trioxide and sub- Production of Coal Gas combustion chamber. sequent condensation into sulfu- ric acid. Coal gas, produced by gasifi- The boiler is a dual-pressure cation of coal under high pres- unit without supplemental heat- The desulfurization unit is the sure, serves as the primary fuel ing. Steam passes into a dual- last stage in the coal gas produc- for the combined cycle power body, dual-pressure condensation tion process. In essence, it serves plant. Natural gas, which makes steam turbine with two regulated to liquidate waste gas from it possible to change generating outputs, which runs its own gen- the Rectisol process, which in output quickly, is used as a back- erator. Prior to reaching the stack, addition to hydrocarbons also up fuel. Natural gas is brought the heat in the flue gases is uti- contains hydrogen sulfide and to the Vřesová power plant via lized to pre-heat water for the organic sulfur compounds. a spur from the transit gas Karlovy Vary district heating sys- After desulfurization, the gases pipeline that supplies the Czech tem. The flue gases produced by released into the atmosphere con- Republic with natural gas from the boiler comply with all envi- tain very small amounts of sulfur Russia. Both fuels are combusted ronmental standards. dioxide, traces of sulfur trioxide in the combustion chamber of and nitrogen oxides, none of the gas turbine. The electricity generated by both generators runs through a transformer and further over a 220 kV power line to the Vítkov substation. The unit’s control sys- tem takes full advantage of the gas turbine’s features and, since opera- tion is highly automated, allows the facility to be used as a peaking plant. The steam portion of the plant’s infrastructure is closely interconnected with the heat/ power plant in Vřesová. The inter- connection of both plants has cre- ated a flexible complex with a high level of operating reliability.

The gas turbine’s connection Coal gasification and power generation at Vřesová form an intriguing example of how conventional coal technology can be combined with modern power to the steam infrastructure and generation techniques. its cutting-edge control system

20 COMPANY PROFILE

make it possible to take full advantage of the combustion tur- bine’s dynamic features to obtain an peaking power plant with acceptable up-front and operating costs.

The gas turbine’s thermody- namic efficiency is 34.8%; the effi- ciency of the generating unit as a whole when the steam turbine is run in condensation mode is 50.5%, and the use of flue gas to pre-heat water for use in district heating increases the plant’s over- all efficiency to 54.5%.

The Company’s future devel- opment and the operation of the Processing Section must be sys- tematically combined with envi- ronmental upgrades and the use of clean coal technologies. This will enable the technologies to be operated for the long term, up until the Sokolov Basin’s coal reserves are exhausted.

Currently, the Company’s plant and equipment is being The heat/power plant generates nearly half of the Company’s overall expanded with the construction of electricity output. Some of the electricity generated is used to cover a unit for gasification of carbo- the Company’s own power needs. chemical products (phenols and tars) generated as waste products by the Lurgi gasification process. Support Section shifting large equipment complexes and other mechanical jobs, sourc- Coal gasification and power n addition to the core products ing materials for repairs, refur- generation at Vřesová form outlined above, the Company bishing spare parts, obtaining and an intriguing example of how Iprovides a number of ancillary setting up telecommunications, conventional coal technology can services and products through its measurement, and regulation be combined with modern power Support Section. equipment. The division also generation techniques. The result includes a fire and rescue brigade. is a highly efficient unit with This is a professional unit that is advantageous regulation features part of the regional integrated that generates clean, environ- Divisions Služby and Správa rescue system. mentally-friendly electricity from brown coal. Modern purification ivision Služby’s primary All white-collar activities of the techniques find wide-ranging roles in the overall Com- Company take place in the application here, reducing the D pany structure are repair- various sections of Corporate environmental impact of gas ing and maintaining production Administration (Správa), which production and power plant equipment and technologies, report to the Company’s specialized operation. providing technical solutions for directors.

21 REPORT OF THE BOARD OF DIRECTORS

Business ENVIRONMENT

22 REPORT OF THE BOARD OF DIRECTORS

IN THE PAST FEW YEARS, coal mining has stabilized in the Czech Republic. The amount of coal extracted in 2005, approximately 62 million tons, was the same as in 2004. Black coal extraction was down slightly (by 0.5%), while brown coal volume increased by 0.6%. In 2005, approximately 49 million tons of brown coal was extracted, which is about 0.3 million tons more than in 2004.

23 REPORT OF THE BOARD OF DIRECTORS

BUSINESS ENVIRONMENT IN THE COAL INDUSTRY

Privatization of the Coal try was completed by the sale of the territorial extraction limits. Mining Industry Severočeské doly a.s. to ČEZ, The limits were set by the Govern- a.s. (“ČEZ“) in late 2005. ment in 1991. In 2004, the Govern- ll of the Czech Repub- ment approved the State Energy lic’s coal mining compa- Policy with an outlook to 2030, in Anies have been priva- Territorial Extraction Limits which brown coal was declared tized. Mostecká uhelná a.s. has a strategic resource for ensuring been in private hands since he coal mining companies a long-term, safe supply of energy. 1998, Sokolovská uhelná, a.s. in the North Bohemian The State Energy Policy calls for and OKD, a.s. since 2004. The T brown coal belt await clari- a rational review of the current privatization of the entire indus- fication of the situation relating to limits. At present, the Ústí Region

24 REPORT OF THE BOARD OF DIRECTORS

THE NEW COMBINED-CYCLE POWER PLANT, which expanded the Company’s generating capacity to 620 MWe, made us the largest independent electricity producer in the Czech Republic. As it is operated today, the facility is a waste-free technology that processes 3.5 million tons of brown coal a year without any significant negative environmental impact.

Brown Coal Mining in the Czech Republic

2001 2002

2003 Sokolovská uhelná 2004 Severočeské doly Mostecká uhelná 2005 Other

0 10 20 30 40 50

Master Zoning Plan is undergoing territorial limits and the other per- ná has already resolved this issue public review in two versions, on mitting extraction beyond today’s up to the end of the planned use- calling for extraction within the territorial limits. Sokolovská uhel- ful lifespans of both of its mines.

25 REPORT OF THE BOARD OF DIRECTORS

Situation and Developments As for coal itself, the average Should the territorial extraction in the Power Industry price increase in 2006 is not limits be extended, ČEZ is consid- expected to exceed 5%. ering building another two 600 he electricity market liberal- MW units. This would increase the ization process that began in amount of retrofitted/new capaci- T2002 was finished in 2005 ČEZ’s Decision to Retrofit ty to 5,000 MW and capital expen- and as of 1 January 2006 the mar- Brown-coal Power Plants ditures would rise to approxi- ket is fully open to competition. mately CZK 150 billion. Even households have the option ČEZ decided to retrofit its of choosing their electricity sup- brown-coal power plants Tušimice ČEZ Group (“ČEZ“) is current- plier. However, no large shifts in II, Prunéřov II and three of five ly the number-eight power utility the customer base are expected. generating units at Počerady. in Europe in terms of the number Further, it plans to build two new of customers (6.6 million). The gas market was further lib- 600 MW units at Ledvice and eralized in 2005 and as of 1 Jan- Počerady. The total installed uary 2006 it is fully open to all capacity of the new and retrofitted Significant Changes non-household customers. It will units is to be 3,700 MW and total in the Power Industry be fully liberalized for all cus- capital expenditure is estimated at tomers starting in 2007. CZK 100 billion. The projects are Two legislation-driven process- to be completed over the period es had an impact on the market 2007–20. environment in the Czech electric Energy Prices

Effective 1 January 2006 the prices of electricity, gas, and heat all went up. The price of electrici- ty for households, which is set once per year, increased by an average of 8.9%.

The price of natural gas for protected customers, which is set by the Energy Regulatory Author- ity once per calendar quarter, increased by an average of 4.8% as of 1 January 2006. Overall, the price of natural gas grew by an average of 21.2% during the past year, and the highest growth was seen in October 2005, when natu- ral gas prices rose by an average of 17.4%. In view of the price growth, the Energy Regulatory Authority decided to continue to regulate natural gas prices this year.

The price of heat also rose. The cost of heat generated in gas boiler rooms rose by 10–11% on average, while coal-generated heat rose in price by 1.1–2.9%.

26 REPORT OF THE BOARD OF DIRECTORS

power industry. The separation companies and reorganized (or “unbundling”) of electricity themselves in line with the struc- distribution from electricity sales tures of the newly formed distri- and the ongoing expansion of eli- bution companies. gible customer status to all cus- tomers except households during In terms of regulation, the the year, with the objective of price of electricity supply for all achieving 100% customer eligibili- customers except households ty by 31 December 2005. Both became a market price and ceased processes are to contribute to the to be subject to regulation by the liberalization of the Czech power Energy Regulatory Authority. industry. Electricity distribution prices con- tinue to be regulated by the same The increased numbers of Authority. eligible customers did not lead to 2005 was also to the first year in significant changes in suppliers The past year brought no sig- which greenhouse-gas reduction of electricity, though of course nificant changes in the ownership measures under the Kyoto Protocol the “unbundled” sales units did structure of power plant facilities. were implemented. Within the EU, take over eligible and captive ČEZ continues in its dominance as National Allocation Plans were customers from their parent the largest producer, seller, and drawn up and emission permit regional electricity distribution distributor of electricity. registers were formed. Concurrent- ly, there was a massive onset of trading in emission permits, the impact of which on the strategies of individual Czech power market players can already be felt.

The Czech Republic was allot- ted 292.8 million permits for the 2005–07 period, i.e. 97.6 million per year. 3% and 1.5% of the total projected emissions of all plants, except new participants, is allocat- ed for Early Action and Combined Heat and Power (CHP), respec- tively. The reserve allocation for new participants is 0.5 million permits per year, and any permits from this amount that go unused will be voided. Pooling of opera- tors is allowed.

On 13 October 2005, a National Register for trading in greenhouse gas emission permits was put into operation. The first international transaction followed on 18 Octo- ber 2005.

Nearly 160 electricity traders now serve over three quarters of eligible customers in the Czech Republic.

27 REPORT OF THE BOARD OF DIRECTORS

SOKOLOVSKÁ UHELNÁ – THE SMALLEST BROWN COAL COMPANY WITH SIGNIFICANT POSITION IN ITS MARKET

lthough Sokolovská uhelná 22.51% and in sorted coal our sions in the region and, thereby, is the smallest brown coal market share was 6.93%. Through- to an improvement in the overall Acompany in the Czech out the year, supply of coal was Czech Republic living environ- Republic, and therefore a small higher than demand. With key ment. organization in the European con- contractual customers, prices are text as well, it maintains a signifi- negotiated individually based on As the prices of fuels and cant position in its market. The the amount of coal they purchase. resources for heat generation

The specific qualities of the brown Using the combined-cycle generation coal we mine make it suitable for techniques, the Company generated producing multipowder and 1,900 GWh of power in 2005. briquettes.

Company is also involved in trans- Brown coal mined from grow, brown coal continues to be porting coal and converting it into deposits in the western portion one of the lowest-priced fuels. fuels and energy with higher utili- of the Podkrušnohorská area Throughout 2005, the price of heat ty and market value. This makes along the border with Germany and electricity generated from us a significant energy company at (Saxony) is unique in that it is coal remained far below the the national level. suitable not only for straight equivalent prices for natural gas combustion but also for the pro- and oil. Therefore, we can antici- In 2005, the Company also duction of multi-powder and pate that some of the customers retained its position in the brown briquettes, of which we are the who switched to other fuels for coal market. Our share in the total only producer in the Czech heating in recent years will return amount of brown coal extracted in Republic. Firing of Sokolov coal to solid fuels. the Czech Republic by brown coal in facilities with varying genera- companies was 21.39%. Our share tion capacities, large and small, Price movements in the elec- of the pulverized coal market was contributed to reduced air emis- tricity market have a fundamental

28 REPORT OF THE BOARD OF DIRECTORS

influence on the price of Czech well in the domestic market, plants, heat plants and whole- coal. These movements, no doubt, mainly to heat plants for use as salers. A large portion of solid will impact Sokolovská uhelná’s a fuel. fuel sales goes to other sectors of actual sales of solid fuels. industry, such as chemicals and The Company’s other chemical machinery production. Through Each year, the Company sup- products are produced in relative- wholesale partners, our solid plies approximately 2,300 TJ of ly small volumes and in these fuels are distributed both in the thermal energy to adjoining indus- commodities we are under strong Czech Republic and to export trial and urban areas. With the competitive pressure from both markets. A total of 2.1 million commissioning of the combined domestic and foreign producers. tons of brown coal was supplied cycle power plant in 1996, bring- In order to maintain our share in to our strategic trading partner – ing the Company’s aggregate the markets for these products, ČEZ – in 2005. New customers power generation capacity to 620 product quality is very important. have appeared, buying coal on MWe, Sokolovská uhelná became In sulfuric acid especially, very a trial basis as they explore the the second largest electricity pro- good qualitative parameters were future potential of low-sulfur coal ducer in the country. achieved. as a fuel. Sokolovská uhelná also

“IN THE YEARS TO COME, the Company will continue to reinforce its position as the largest independent electricity producer in the Czech Republic. We will continue to focus our attention on effective utilization of the environmentally friendly power generation facilities built in previous years.” Miroslav Soural, Sales Director

Amount of coal sold in 2005 exceeded 6 millions.

Carbochemical by-products of Customers increased its exports to Hungary the brown coal gasification pro- of Sokolovská uhelná and Slovakia. cess are unique not only in the Czech Republic but in all of he Company trades in its core In carbochemical products, Europe, since similar products products mostly on the basis Sokolovská uhelná sells to both elsewhere are produced exclu- Tof long-term framework foreign customers (Germany, sively from black coal and petro- agreements and one-year purchase Spain, and Austria) and domestic leum. contracts. The customer portfolio in customers. Commercial relations electricity did not see any signifi- with these partners were very Phenol concentrate is in cant changes in 2005. ČEZ contin- good, thanks especially to the demand mainly in the EU market ues to be the largest customer. quality of the Company’s services as a raw material for making and maintenance of high product pure phenol-based products. In solid fuels, the Company’s quality. Brown coal generator tar sells largest customers are power

29 REPORT OF THE BOARD OF DIRECTORS

Production and Sales

30 REPORT OF THE BOARD OF DIRECTORS

SOKOLOVSKÁ UHELNÁ EXTRACTED a total of 10.307 million tons of coal in 2005, up 2.2% from the previous year. Division Jiří and Division Družba accounted for 79% and 21% of this amount, respectively.

31 REPORT OF THE BOARD OF DIRECTORS

Coal extraction increases, On the downside, České dráhy In the domestic market, 128,500 production and sales (Czech Railways) implemented tons of briquettes were sold – this of fuels in 2005 higher a large number of rail transport is in line with 2004. Also, 158,200 than previous year outages and this had a negative tons of briquettes were exported. impact on solid fuel sales. Freight The 2005 performance is actually o gain access to the extracted cars were not always available in higher, however, because the bri- coal, it was necessary to sufficient numbers at the desired quette plant’s summer break was remove a total of 32.684 mil- locations, there were some irregu- one week longer than in 2004. The T 3 lion m of overburden material larities in supplying empty freight situation in sales of packaged bri- from both the Company’s mines. cars, and some track sections were quettes was the same as in 2004 – Of this total amount, Division Jiří operated only at certain times of demand for packaged goods accounted for 73% and Division the day. Especially in April and exceeded production capacity. Družba’s share was 27%. Com- from September to the end of the pared to 2004, overburden extrac- year, this situation disrupted the Sales of dried brown coal multi- tion volume was flat. sales process. powder were in line with plan, with a total of 53,000 tons shipped. The briquette plant produced Solid fuel sales were also a total of 301,000 tons of briquettes impacted by fluctuations in the in 2005, which is in line with quality of coal charge used to pro- 2004’s production volume. Of the duce rougher-grade fuels. Even so, total, 9.7% were packaged bri- sales volumes of these grades rose quettes, which are in high demand. by 10,000 tons compared to 2004. In the past few years, annual pro- Compared to 2004 the sorted coal duction of this commodity has sta- loading situation at the coal sorting bilized at approximately 30,000 plant was slightly improved, but tons. there were still some supply out- ages. Weather conditions last year were favorable to higher solid fuel Briquette sales performance in sales for two reasons: first, they led 2005 was practically identical to to higher consumption and, sec- 2004. After a traditionally weaker ond, customers had a greater need sales period lasting until the end of to form sufficient storage stocks for the briquette plant’s summer this year’s winter. All purchase break, demand for briquettes sky- contracts were filled and some rocketed and in the next four were significantly exceeded. New months (August – November), Electricity and Heat customers accounted for a signifi- 140,000 tons of this commodity cant share in excess sales of pulver- were sold (i.e. 48.8% of total annual he heat/power plant gener- ized coal over plan. production). ated a total of 1,698 GWh of Telectricity. This is a record, and it was achieved largely Solid Fuel Sales (kt) thanks to the plant’s operating reliability. No serious equipment 2001 failure occurred in the entire year 2002 2003 2005. 2004 2005 Generation volume at the CCPP 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 totaled 1,900 GWh in 2005. This

pulverized coal – other plant also exhibited high reliability sorted coal, briquettes and multipowder throughout 2005. The only nega- pulverized coal – supplied to ČEZ tive factor in the plant‘s operation was a modification to the control

32 REPORT OF THE BOARD OF DIRECTORS

system which took longer than expected to complete. Electricity Generation (GWh)

An important change in elec- 2001 2002 tricity supplies took place in 2005. 2003 After several years, reserve capaci- 2004 ty and regulation energy were not 2005 0 500 1,000 1,500 2,000 2,500 3,000 3,500 supplied to ČEPS, a.s. These sup- plies were replaced by provision of heat/power plant regulation capacity and regulation CCPP energy to ČEZ Group.

The customer change for regu- energy, while the heat/power plant 2004. The shortfall was caused pri- lation services also made it neces- supplied 1,007 GWh in the form of marily by stockpiling of this com- sary to change how we do business electric power. In the customer modity to serve as fuel for the with the Czech Republic market portfolio, ČEZ is in the number-one planned operation of the new operator (OTE). In 2005, electricity position by electrical work supply burner generator. was supplied to a primary electrici- volume, with 74%. In terms of rev- ty customer (ČEZ) and regulation enues, ČEZ’s position is even Phenol concentrate – total 2005 pro- responsibility was shifted to that stronger, since it also purchased duction was 14,000 tons. All of this customer. Sokolovská uhelná regulation energy from us in 2005. amount was shipped to customers, ceased being a settlement entity and the largest quantity – 9,080 and became an electricity trader. The vast majority of electricity tons – was exported to Germany. This new arrangement was neces- supplies take place under long-term The rest was divided equally sary in order to provide regulation bilateral agreements; short-term between Spain and the domestic services to the primary customer of contracts account for less than 2%. market. electrical work. The changes also temporarily blocked our access to The Company supplies heat to Liquid ammonia was sold, mainly to electricity spot markets. district heat systems in the Karlovy domestic customers, in a total vol- Vary Region, especially in the cities ume of 7,000 tons. Like phenol con- Another important change was Karlovy Vary, Chodov, Nejdek, and centrate, the amount produced the commencement of electricity Nové Sedlo. relates directly to the higher coal supplies to an external process gas gas generation volume. supplier. This changed both the customer base and the volume of Sulfuric acid – 18,000 tons shipped. supplies from the heat/power Coal Gas and Production of this commodity is plant due to lower in-house con- Carbochemical Products not directly dependent on coal gas sumption. generation, but rather on the sulfur roduction of chemical prod- content in the coal gasified in the The overall business plan figure ucts is dependent on pro- generator station. for electricity revenues was exceed- Pduction of coal gas, the ed by a slight margin. The revenues primary fuel used in the com- were achieved on significantly bined cycle power plant. In 2005, increased supplies of electrical 1.188 billion m3 of coal gas was work from both the heat/power produced. plant and the CCPP (total supplies exceeded plan by 7.4%), which Sales plans for 2005 were met for resulted in higher variable electrici- all chemical product commodities. ty generation costs. A total of 1,892 GWh was supplied to outside cus- Brown coal generator tar – 85,000 tomers from the CCPP in the form tons of this commodity was of electric power and regulation shipped, down 6,000 tons from

33 Come with us The first hockey matches in Karlovy Vary were placed on a small pond in front of the “Malé Versailles” restaurant.

In 1948, a skating rink with artificial ice was built in the city center.

Today, Karlovy Vary boasts an Extraleague hockey team. for hockey REPORT OF THE BOARD OF DIRECTORS

Earnings Analysis Sokolovská uhelná IN 2005, THE COMPANY POSTED after-tax earnings of CZK 533 million. This earnings result was achieved on revenues of CZK 15.4 billion and expenses of CZK 14.9 billion.

36 REPORT OF THE BOARD OF DIRECTORS

REVENUES

Sales of the Company’s own goods sales contributed CZK 0.4 billion and services totaled CZK 7.4 bil- to the overall figure. lion and account for 48% of over- all revenues. The two most Sokolovská uhelná also gener- significant sources of these sales ated revenues from sales of revenues were: sales of energy chemicals and other products (CZK 3.4 billion) and sales of sol- (agricultural products, process id fuels (CZK 2.8 billion); thus, gases, etc.). the Company again succeeded in converting a major portion of its Another revenue component coal into value-added energy is services, which consist in par- products at or near the extraction ticular of sales of pre-invoiced sites. solid fuels transport fees, cafete- ria services, and rents. The largest components in energy sales revenues were sales In 2005, the Company contin- of electricity and ancillary power ued to sell off superfluous real system services (CZK 3.1 billion) property, machinery, and equip- and heat sales revenues (CZK 0.3 ment. Also, an amount of CZK billion). Of the Company’s two 2.9 billion was charged to other plants, the combined cycle power operating revenues to account for plant accounted for the largest emission permits used. share of these revenues (68.4%), while the remaining 31.6% corre- Financing revenues consisted of sponds to the heat/power plant. proceeds from sales of securities, returns on short-term financial Coal sales revenues, at CZK assets, and interest revenues, all 2.4 billion, comprised the bulk of of which were generated by the solid fuel revenues. Briquette Company’s treasury function.

37 REPORT OF THE BOARD OF DIRECTORS

COSTS

osts of materials, energy and outside services, per- Csonnel costs, and deprecia- tion and amortization account for a major portion of overall costs.

Consumption of fuels, energy, and natural gas reached nearly CZK 0.6 billion. The increase from last year was due in part to purchasing of process gases from the oxygen plant run by Linde Sokolovská s.r.o. (until June 2005 gases were produced in the Com- The amount spent by Sokolov- Other operating costs in the pany’s own oxygen plant) and, ská uhelná for shipping and other year in question totaled CZK 3.1 further, to year-on-year increases services in 2005 was CZK 1.5 billion. Here, the most significant in prices of fuels and natural gas billion. The most significant com- item, at CZK 2.9 billion, was con- by 13% and 21.2%, respectively. ponents of other services, as in sumption of emission permits. previous years, were costs of The second most significant item Consumption of materials and operating cafeterias, buildings was property and casualty insur- repair costs totaled CZK 1.1 billion and grounds security, and out- ance premiums. in 2005. Major repairs conducted sourced clean-up and reclama- in the period included a spreader tion work. Depreciation and amortization and locomotives in the Extraction totaled CZK 1 billion. Section and steam ducts and a gas Personnel costs totaled CZK turbine in the Processing Section. 1.8 billion last year, and wages Net provisioning in 2005 totaled Also, gale-force winds in late July accounted for CZK 1.3 billion of CZK 0.3 billion (i.e., creation of 2005 necessitated extensive roof the total. The average monthly provisions exceeded their release repair work. wage grew to CZK 21,125. by that amount). As usual, the most significant items are the cre- ation and release of statutory pro- Structure of 2005 Operating Costs (%) visions for repairs, clean-up, and reclamation, as well as creation and reversal of provisions relat- 1 costs of materials, energy and services 33.39 ing to impaired assets. 4 1 2 personnel costs 18.56 3 depreciation 10.48 Financing and tax costs consisted 4 other 37.57 in particular of the value of secu- 3 2 rities sold, interest on borrow- ings, foreign currency losses, and income tax (due and deferred).

38 Sales of the Company’s own goods and services totaled CZK 7.4 billion and account for 48% of overall revenues. The two most significant sources of these sales revenues were: sales of energy (CZK 3.4 billion) and sales of solid fuels (CZK 2.8 billion); thus, the Company again succeeded in converting a major portion of its coal into value-added energy products at or near the extraction sites. REPORT OF THE BOARD OF DIRECTORS

Structure of Assets and Sources of Financing

PROFIT BROUGHT FORWARD TOTALED CZK 5.1 billion. Earnings for the accounting period reached CZK 0.5 billion.

40 REPORT OF THE BOARD OF DIRECTORS

are plant and equipment (CZK 4.7 ment in good working order, billion), and real property (CZK totaled CZK 0.4 billion at year end 4.4 billion). 2005.

Current assets consist of inven- At 31 December 2005, receiv- tories, long- and short-term ables stood at CZK 1.1 billion. receivables, and short-term finan- cial assets. Short-term financial assets totaled CZK 2.5 billion. During Inventories, which consist in 2005 they were used to finance the particular of materials and spare Company’s operating and capital parts necessary to keep extraction spending needs and meet the and production plant and equip- Company’s financial obligations.

Structure of Assets as of 31 December 2005 (%)

3 4 5 1 fixed assets 71.21 2 2 financial assets 17.61 3 receivables 7.71 1 4 inventories 2.96 Sokolovská uhelná assets 5 prepayments and accruals 0.51 as of 31 December 2005 (net, CZK billions):

Fixed assets 10.3 Structure of Fixed Assets as of 31 December 2005 (%) Current assets 4.1 Prepayments and accruals 0.1 Total 14.5 4 5 3 1 movables 46.07

1 2 buildings and structures 39.59 he largest component of 3 other assets 6.67 fixed assets was tangible 2 4 land 3.67 Tfixed assets, whose total net 5 long-term financial assets 4.00 book value was CZK 9.8 billion. Here the most significant items

41 Come enjoy yourself at the Michal Water Park!

A former mine that just ten years ago was in operation has been reclaimed and turned into a modern water park. REPORT OF THE BOARD OF DIRECTORS

Sokolovská uhelná liabilities and equity as of 31 December 2005 (CZK billions):

Equity 5.7 Liabilities 8.8 Total 14.5

As of 31 December 2005, the share capital was CZK 2 million and the statutory reserve fund had a balance of CZK 0.4 million.

The social fund balance was CZK 5 million. This fund was sions for cleaning up and December wages payable to used by the employees, among reclaiming land affected by min- employees and related social other purposes, to pay for cafete- ing activity, and provisions for security payables, and employ- ria meals, recreation, purchase of repairs of assets. ees‘ deposits in the Company health aids not covered by health savings bank. insurance, children’s recreation, The Company’s payables are and cultural and social events. divided into long-term and short- Bank loans at 31 December Profit brought forward totaled CZK term payables. Long-term pay- 2005 had an aggregate balance of 5.1 billion. Earnings for the account- ables consist of the CZK 0.8 CZK 3.3 billion. ing period reached CZK 0.5 billion. billion deferred tax liability. Short-term payables were com- Late in the year, as planned, As of 31 December 2005, the prised mainly by trade payables the Company restructured its Company had provisions totaling (CZK 0.8 billion). None of the largest bank loan. CZK 3.2 billion. A significant por- trade payables were overdue. tion of these are statutory provi- Another major item consists of Sokolovská uhelná’s obliga- tions to the State, banks, employ- ees, and business partners were Structure of Liabilities and Equity as of 31 December 2005 (%) met on time and in full during 2005. 5 4 1 equity 39.10 The financial performance 2 provisions 22.42 1 was not affected by any material, 3 payables 15.70 unexpected movements in Czech 3 4 bank loans 22.66 Crown exchange rates against 2 5 accruals and deferred income 0.12 principal currencies. Movements in Czech Crown interest rates, too, were relatively minor.

43 REPORT OF THE BOARD OF DIRECTORS Capital Investment in 2005

A NUMBER OF CAPITAL PROJECTS were undertaken in 2005 to develop both the Processing and Extraction Sections. Capital expenditures exceeded CZK 0.5 billion for the year.

Another significant project Sections, 2005 saw the comple- completed in the Processing Sec- tion of construction and interior tion was the connection to the new decoration and furnishing of oxygen plant which interconnect- a group of buildings at the ed the new plant’s media inputs Michal Water Park site. This lake- and outputs and other infrastruc- side complex was built in previ- ture with the Company’s existing ous years as part of the reclama- piping and infrastructure, includ- tion of the decommissioned ing the installation of new oxygen Michal mine. The main purpose piping in the Processing Section. of the current project was to The new oxygen plant is owned enable the facility to be used for by Linde Sokolovská s.r.o. sports and recreation. In the near future, a year-round water park In addition to capital projects will be added to the complex. in the Processing and Extraction

“THE INTRODUCTION he most significant project of effective in the Processing Section is and environmentally friendly Tthe new burner generator technologies continues to be the which will be used to break Company's principal strategy for down liquid by-products from the future. We will focus on further the current coal gasification reducing the environmental burden process based on sliding-bed generators. Construction work on on the region and improving the the project was completed and environment by reclaiming spoilbanks extensive functional testing com- and other areas affected by mining menced in late 2005. The tests are activity.” Jiří Pöpperl, Technology Director to be completed in 2006.

44 REPORT OF THE BOARD OF DIRECTORS

Potential is in people

IN 2005, SOKOLOVSKÁ UHELNÁ conducted its human resources management activities to maintain a constant ratio of personnel costs to sales revenues, increase the quality of personnel in all positions at the Company, and maintain proper relations between the Company and its employees.

45 REPORT OF THE BOARD OF DIRECTORS

The Company’s average monthly wage in 2005 The growth in the average wage was fully reached CZK 21,125. Compared to 2004 this covered by growth in labor productivity is an increase of 5.6%. from sales of the Company’s own goods and services.

he Company continued to new employees. In 2005, there All changes to the Sokolovská implement a gradual reduc- were 134 new hires. The Company uhelná work force are made to Ttion in work force levels. selects new employees from its improve the employee qualifica- The average adjusted number of own database of past applicants, tion structure and limit growth in employees for the year was 4,888 from Labor Office records, and the average employee age, which (down by 306). The Company’s from graduates of schools such at year end 2005 had fallen slight- long-standing and sole method as the Integrated Technical and ly to 45.72 years. for reducing the work force is nat- Economic Secondary School in ural attrition, i.e. retirement and Sokolov. unplanned employee resigna- tions. Employees for whom the Company no longer has work are “OUR WORK TEAM offered the option of transferring is our greatest asset, to a different vacant position for guaranteeing that we will which they are qualified, and pass the tests the future these employees are given the has in store for us. opportunity to gain additional training and education to increase Sokolovská uhelná is their qualifications. one of the fundamental elements stabilizing the Because the number of un- development of the region planned resignations and retire- as a whole.” ments is higher than the planned work force reduction, the Compa- Jiří Radosta, Personnel Director ny had the opportunity to hire

46 REPORT OF THE BOARD OF DIRECTORS

EMPLOYEE EARNINGS at Sokolovská uhelná are one of the top drivers of wage growth in the Karlovy Vary region. That said, however, the region is at the bottom of the income ladder among regions of the Czech Republic.

The Company provides Supplemental Pension Insurance contributions to 89% percent of its employees.

The Company enjoys labor tive Agreement were fulfilled. In dren’s recreation, employee insur- peace that ensues not only from addition, an extraordinary bonus ance, cultural and sports activities, the long-term human resources was paid to express Company and health expenses not covered strategy but also from high-quali- management’s appreciation for by national health insurance. This ty collective agreements that are the excellent 2005 performance. In type of social plan is not the norm negotiated and signed on a timely terms of employee earnings, and exceeds the standard within basis. As is customary for the Sokolovská uhelná is a leading the region. CZK 25 million, or over Company, the Collective Agree- driver of wage growth in the CZK 5,100 per employee, was allo- ment for the next five-year period Karlovy Vary region. That said, cated to the fund in 2005. was signed in late 2005. The agree- however, our region is at the bot- ment defines the framework of tom of the income ladder among In addition to wages and social employee benefits. Each year, regions of the Czech Republic. fund distributions, the Company a collective bargaining process helps employees to secure their takes place to negotiate their spe- Another benefit of being retirement by providing them cific amounts. a Company employee is the a supplemental pension insurance opportunity to draw from the contribution. In 2005, the monthly The Company’s average social fund the Company creates contribution was CZK 300 and all employee monthly wage in 2005 from its earnings. Most of this employees that had completed was CZK 21,125, which is 5.62% fund is distributed to employees their three-month trial period higher than in 2004. The growth in through their personal accounts. were eligible to receive it, provid- the average wage was fully cov- Employees choose for themselves ed they had a signed agreement ered by growth in labor produc- how to use these funds by select- with a pension fund. At year end tivity from sales of the Company’s ing from a variety of offerings 2005, 4,250 employees, or 89% of own goods and services. By this, such as employee meal plan, recre- the work force, were receiving the all wage provisions of the Collec- ational sojourns including chil- contribution.

47 Come and play

The newly completed golf course on Sokolovská uhelná land is located at the site of the former Silvestr surface mine near Dolní Rychnov. What used to be a monotonous “moonscape” is now a golf course whose parameters, design, and quality make it one of the top master courses in the Czech Republic. golf REPORT OF THE BOARD OF DIRECTORS Environmental Responsibility

2005 saw the commencement and/or completion of a number of construction projects designed to mitigate or eliminate the environmental impacts of mining and fuel production operations.

50 REPORT OF THE BOARD OF DIRECTORS

Energy Generation By-products project, products that used to be permanently disposed at the ash matter dump will be converted through a certified industrial process into forms capable of further utilization. The third quarter of 2006 will see the completion of the Malodorous Gases Liquidation project, the aim of which is to substantially lower and minimize the negative environmental impact of waste gases arising in the gas production and purification processes.

Intensive mining of brown coal is one of the significant factors negatively influencing the envi- ronment of the Sokolov area. For this reason, a Master Plan for Reclamation of Land Affected by Coal Mining in the Sokolov District was drafted on the basis of Resolution of the Government of the Czech Republic No. 490/91 on the Sokolov District Environ- mental Revitalization Program. The Master Plan focuses on restoration of lakes and water management conditions in the area following coal extraction with the objective of attaining maximum diversity and aesthetic value in the reclaimed landscape.

This also forms the basis of Sokolovská uhelná’s reclamation work from the beginning of min- ing operations until the end of 2005:

completed 2,888.98 hectares (31.20%) in progress 1,868.26 hectares (20.18%) hase Two of Stepping Up water. At the same time, measures planned 4,502.24 hectares (48.62%) Multipowder Production are being taken at the ash matter Paims to reduce the amount dump facility to separate out As the summary indicates, the of multipowder that is flushed fine coal-bearing sludges. After Company has a total of 9,259.48 into the sewer designated for coal- gravity removes water from these hectares of land for reclamation. bearing water, thereby reducing sludges, they will be recovered Since the establishment of the load placed on the specialized and further utilized as fuel. Sokolovská uhelná in 1994, 934.66 facility for treating coal-bearing Thanks to the Redepositing of hectares of land have been com-

51 REPORT OF THE BOARD OF DIRECTORS

SINCE RECLAMATION WORK in the Sokolov region began in the 1950s, 2,889 hectares of land have been completely reclaimed. Over one half of this area is forest land. Over one thousand hectares have been returned to the landscape in the form of fully utilizable farmland. The remainder consists of man-made lakes.

pletely reclaimed. This can be bro- Ongoing Reclamation Work At the Medard – Libík site, ken down into cropland (445.79 between the towns of Citice, hectares), forests (416.72 hectares), Bukovany, Habartov, Svatava, and and man-made lakes (72.15 At the Lítov – Boden site, the City of Sokolov, forest recla- hectares). located between the towns mation work is ongoing. of Habartov, Chlum Sv. Máří, and Since reclamation work began Lítov, 2004 saw the completion The former Michal surface in the Sokolov area in the 1950s, of trial operation of the mine located southeast of the City a total of 2,888.98 hectares has 16.97-hectare man-made lake of Sokolov was backfilled in 1995, been reclaimed: 1,081.21 hectares which is designated for recreation. in accordance with the liquidation as cropland, 1,700.76 hectares as Forestry work continues on the plan, and subsequently prepared forests, 77.75 hectares as man- Lítov – North (Phase One) and for clean-up and reclamation. made lakes, and 29.26 hectares for Boden – West forest reclamation Forestry reclamation work began other purposes. projects. in 1997 in the eastern portion of

52 REPORT OF THE BOARD OF DIRECTORS

THE NEWLY-BUILT golf course at the site of a former surface mine is part of a 200-hectare sports and recreation facility near the recently completed Michal reservoir. In addition to the golf course, the site will also house a zoo and a forest park.

the slopes. Currently, a 32.1 hec- planting work was done for the tion was prepared for Phase XI tare man-made lake is in opera- forest portion. Two man-made and XII of the site’s reclamation. tion in the summer season, with lakes, feeder canals, and roads an adjoining recreation complex around the lakes still remain to be At the Smolnická Spoilbank, that opened its doors in 2004. The completed. the area between the City of latest project at this site is a 33.92 Chodov and the town of Božíčany hectare forestry reclamation. At the Podkrušnohorská Spoil- has been reclaimed, including the bank site located north of the City area around the Bílá Voda lake, At the Silvestr site, locate south of Sokolov, 2003 saw the last over- which is used for recreation. of the City of Sokolov, as part of burden material deposited on the Phase II.B of the Silvestr reclama- spoilbank via Division Jiří’s tech- At the Velký Loket Spoilbank, tion project, most of the technical nology complexes and Division which is located in the eastern por- work was completed, topsoil was Družba’s 1,435 mm gauge rail tion of the Sokolov Basin, reclama- brought in for cropland, and tree- spur. In 2005, project documenta- tion work was completed in 2005.

53 REPORT OF THE BOARD OF DIRECTORS

Sokolovská uhelná – a stabilizing element in the Sokolov region

THE COMPANY’S FINANCIAL PERFORMANCE and good reputation confirmed the importance of Sokolovská uhelná for the region as a whole and were reflected in its social climate. The recognition of the Company’s position is all the more valuable because it was achieved in a context of dynamic change both inside and outside the Company. Strict compliance with all obligations toward State and local government agencies is a matter of course and a factor stabilizing the budgets of the region’s cities and towns – especially those in the Sokolov area.

54 REPORT OF THE BOARD OF DIRECTORS

of 2006, and the Michal Water Park such as the Motocross World in the location of a decommis- Championship in Loket, the Czech sioned mine of the same name, Republic Biketrial Championship have convinced the general in Březová, the International Gol- public that even a large-scale den Czech Trophy Run in Marián- project, currently in preparation ské Lázně, and the Sokolov Dance to deal with the pit left by the Cup. decommissioned Medard and Libík mines, will not remain Further recipients of the Com- a mere urban development study pany’s financial support included but that it will be completed in a number of non-profit organiza- the next few years, contributing tions, local clubs, and regional to the revitalization and develop- organizations and institutions. ment of this site. The donations went toward holding many cultural events, as well as restoration of heritage sites.

Corporate Social Also significant is the Compa- Responsibility ny’s unique relationship with the Sokolov Regional Museum, which Another integral part of the has resulted in the preservation of Company’s philosophy is support 900 mm gauge rail cars and an for cultural and sports activities, exhibit of the same at the Mining especially those focusing on child- Museum in Krásna. In addition, ren and youth, within the wider the exhibit features a number of Karlovy Vary region. other objects from Sokolovská uhelná that were used in mining he public’s perception of In 2005, the Company continued operations in the Sokolov area Sokolovská uhelná has to serve as a patron of physical over a period of approximately Tundergone a fundamental education groups with large mem- one century. change as revitalization projects ber bases, specializing primarily have been completed and others in ice hockey and football. In September 2005 marked the have entered the preparatory addition to these, the Company ten-year anniversary of the com- stages. These demonstrate how also financially supported a num- plete renovation of the Old Town seriously the Company takes the ber of small sports clubs in foot- Hall, an important architectural renewal and revitalization of the ball, basketball, table tennis, heritage site, that today serves as landscape upon completion of indoor football, volleyball, chess, the Company’s seat. The renovation brown coal mining operations. swimming, hiking, wrestling, was the largest construction project A new golf course on the re- boxing, and kick-boxing. The in the old part of Sokolov and, claimed Silvestr spoilbank in Company’s financial contributions thanks to it, a unique historical Dolní Rychnov, prepared for full also made it possible to success- building has been preserved for operation starting in the summer fully organize prestigious events future generations.

55 FUTURE

COMPANY Business Plan

56 FUTURE

IN THE YEARS TO COME, the Company will continue to reinforce its position as the largest independent electricity producer in the Czech Republic. In so doing, emphasis will be placed on providing ancillary services in the electricity market. Currently, these have already become an integral part of electricity revenues.

s in the past, the attention the area of cleaning up and Company management is of Sokolovská uhelná reclaiming land affected by min- aware of the indispensable role Amanagement will be ing activity. Thus, our attention that Sokolovská uhelná plays in focused on achieving the most will be focused both on further the region. Therefore, all future effective possible utilization of reducing the region’s environmen- steps in the Company’s develop- plant and equipment built and tal burden by continuing to main- ment will be taken with the acquired in previous years. 2006 tain low levels of the pollutants awareness that the Company is will see the commissioning of the we release into the surface water the largest and strongest partici- new burner generator, which will and the air, as well as on reclaim- pant in the Karlovy Vary regional enable the utilization of liquid by- ing spoilbanks and other areas economy. In the near future, then, products in the Processing Sec- affected by the Company’s opera- we will remain one of the basic tion. This will conclude the tions and implementing subse- elements stabilizing the develop- process of large-scale process quent revitalization programs. ment of the entire region. innovations for the near future. The Company’s operations will “WE ESTIMATE continue to focus on mining coal that our and converting it into value- coal reserves will last added forms of energy – electrici- roughly 30 years more. ty and heat in particular. On the Currently the Jiří other hand, it must be mentioned mining operation has that both Sokolovská uhelná reached areas where mines, and Jiří in particular, are moving into areas where „long- underground mines wall“ underground mines operat- operated in the past. ed in the past. It is becoming This has increased the more and more complicated and demands placed on cost-intensive to obtain high-quality our miners in terms coal from these areas, and this will continue to be the case. of selective extraction.“ Jaroslav Rokos, Sokolovská uhelná will contin- Finance Director ue to invest in protecting the envi- ronment. Closely linked to this is

57 FINANCIAL STATEMENTS Balance Sheet (TCZK) Short form

31 December 2005 1 January 2005 Gross Provision Net Net ASSETS B. Fixed assets 24,528,084 (14,233,578) 10,294,506 10,603,418 B. I. Intangible fixed assets 264,237 (173,449) 90,788 19,041 B. II. Tangible fixed assets 23,851,890 (14,060,129) 9,791,761 10,247,446 B. III. Long-term financial investments 411,957 0 411,957 336,931 C. Current assets 4,277,695 (189,162) 4,088,533 4,832,446 C. I. Inventories 472,549 (44,739) 427,810 266,960 C. II. Long-term receivables 28,146 0 28,146 59,206 C. III. Short-term receivables 1,230,486 (144,423) 1,086,063 780,488 C. IV. Short-term financial assets 2,546,514 0 2,546,514 3,725,792 D. Accruals and deferrals 74,204 0 74,204 62,348 D. I. Prepayments and accruals 74,204 0 74,204 62,348 TOTAL ASSETS 28,879,983 (14,422,740) 14,457,243 15,498,212

31 December 2005 1 January 2005 LIABILITIES AND EQUITY A. Equity 5,653,304 5,135,698 A. I. Share capital 2,000 2,000 A. II. Capital contributions 54,121 44,994 A. III. Reserve funds 5,794 5,618 A. IV. Retained earning 5,058,086 5,083,086 A. V. Net profit for the current period 533,303 0 B. Liabilities 8,787,178 10,362,405 B. I. Provisions 3,241,788 3,072,933 B. II. Long-term liabilities 782,408 658,054 B. III. Short-term liabilities 1,486,982 1,355,488 B. IV. Bank loans and overdrafts 3,276,000 5,275,930 C. I. Accruals and deferrals 16,761 109 TOTAL LIABILITIES AND EQUITY 14,457,243 15,498,212

58 FINANCIAL STATEMENTS Profit and Loss Account (TCZK) Short form

Year ended 31 December 2005 I. Sales of goods 15 A. Cost of goods sold 3 + Gross profit/loss on goods for resale 12 II. Sale of production 7,541,943 B. Cost of sales 3,187,092 + Value added 4,354,863 C. Personnel costs 1,771,322 D. Taxes and changes 143,677 E. Depreciation of fixed assets 1,000,309 III. Revenues from sale of fixed assets and materials 73,333 F. Net book value of fixed assets and raw materials sold 25,487 G. Increase (+) in operating provisions and impairment allowances 331,158 IV. Other operating income 2,907,221 H. Other operating charges 3,085,006 * Operating profit 978,458 VI. Income from sale of securities and interests 4,687,790 J. Cost of securities and interests sold 4,714,237 VII. Income from long-term financial investments 25,622 VIII. Income from short-term financial assets 105,927 L. Cost on revaluation of investments and derivatives 5,802 X. Interest income 30,037 N. Interest expense 29,207 XI. Other financial income 933 O. Other financial expenses 91,502 * Loss from financing activities (258,439) Q. Corporation tax on ordinary activities 186,716 ** Net profit on ordinary activities 533,303 *** Profit for the financial period 533,303 Profit before tax 720,019

59 ORGANIZATION CHART Sokolovská uhelná Organization Chart as of 1 January 2006

General Meeting

Supervisory Board

Board of Directors

Chief Executive Officer CEO’s Office Property Management Information Technologies Legal Department Organization and Management

Technology Director Production Director Sales Director Finance Director Personnel Director

Environmental Production Coordination Energy Sales Accounting Personnel Activities Capital Expenditure and Management Chemical Product Sales Finance Labor Economics Public Contracts and Production Preparation Solid Fuel Sales Planning Social Affairs Business Activities Coordination Sales Economics Education Property Maintenance Coordination Energy Flow Management Surveying and Geology Laboratories Occupational Safety and Fire Prevention

Division Jiří Division Družba Division Zpracování Division Služby

Coal Extraction Coal Extraction Power Generation Extraction and Processing and Processing Overburden Extraction Heat Generation Section Maintenance Overburden Extraction Coal and Overburden Water Treatment Road Freight Haulage Rock Extraction Conveyance, Rail Spur Coal Drying Stocking and Supply Mine Rescue Service Extraction of Clay for Production of Briquettes Property Management Production of Liapor and Multipowder Telecommunications Cleanup Coal Gasification Measurement and Reclamation Gas Desulfurization and Regulation Agrigulture and Forestry Carbochemical Products Fire and Rescue

60 CONTACT INFORMATION Contact Information

Company name: Sokolovská uhelná, právní nástupce, a.s. Seat: Sokolov, Staré náměstí 69, postcode 356 00 ID: 26348349 Tax ID: CZ26348349 Commercial Register: Plzeň Regional Court, Part B, Entry 980 Bankers: ČSOB Praha, account no.: 17331033/0300 E-mail: [email protected] Internet: http://www.suas.cz

Telephone and Fax Numbers: Telephone: Fax: Switchboard +420 352 461 111 Office of the Chief Executive Officer 352 462 103 352 621 052 Office of the Technology Director 352 462 113 352 621 038 Office of the Production Director 352 462 123 352 621 038 Office of the Finance Director 352 462 133 352 462 132 Office of the Personnel Director 352 462 153 352 462 132 Office of the Sales Director 352 462 143 352 621 032 Office of the Director of Division Jiří 352 463 001 352 675 139 Office of the Director of Division Družba 352 463 501 352 669 457 Office of the Director of Division Zpracování 352 465 001 352 465 002 Office of the Director of Division Služby 352 465 801 352 465 802

Sales Contacts: Telephone: Fax: Brown coal, briquettes, multipowder 352 462 142 352 621 032 352 462 272 352 624 541 352 462 273 352 622 596 352 623 340 Electricity, heat 352 465 210 352 465 212 Carbochemical products and sulfuric acid 352 464 480 352 464 481 352 464 482 352 464 492 352 464 493 Rock/gravel 352 465 910 352 465 910 Secondary materials (expansion clays, adsorption and zeolithic claystones, etc.) 352 462 232 352 462 231 Laboratory work 352 465 650 352 465 670 Stocking and supply 352 465 340 352 465 350 Capital expenditure 352 465 622 352 465 620 Road freight haulage 352 463 207 352 463 211

This report is not a full annual report in accordance with the Act on Accounting, the Commercial Code, the Securities Act and the Act on Business in the Capital Market. A full annual report is available at the company seat, and in the Collection of Documents of the Commercial Register.

Consulting, design and production: © B.I.G. Prague, Hill & Knowlton Associate, 2006