GENERAL INFORMATION Management Board Ryszard Kunicki Andrzej B ąba ś Artur Osuchowski Rafał Rybkowski Supervisory Board Ewa Sibrecht-Ośka Przemysław Cieszy ński Arkadiusz Grabalski Dariusz Krawczyk Waldemar Maj Mariusz Obszy ński Sławomir Stelmasiak Registered office of the Company ul. Puławska 182 02-670 Warsaw Poland Certified auditor KPMG Audyt Sp z o.o. ul. Chłodna 51 00-867 Warsaw Poland Dear Sirs and Madams Last year was very important for the Ciech Group. We were consequently carrying out a recovery plan aiming at creating an efficient and effective capital group providing its Shareholders with stable and fair profits. We executed processes which were essential for the future of the company: establishing a new financing structure, raising the capital and operating efficiency. A measurable result of our activities is PLN 590 million of revenue and savings generated by the Ciech Group at the end of 2011. This amount constitutes over 90 percent of the amount provided for in the Restructuring Plan for the years 2011-2015. By the end of this year, that is two years before the deadline, we are planning to generate the target amount of PLN 652 million of revenue and savings. We have entered the last year preparing a new financing structure. Its foundation was the long-term loan agreement signed on February 10th with a bank consortium. Soon the agreement was also joined by the European Bank for Reconstruction and Development which promised to grant the Group additional investment loan in euro amounting to an equivalent of PLN 300 million. The involvement of EBRD has confirmed the confidence of financial institutions in the strategy adopted by the Management Board. Another important element of the new financing structure was the issue of 23 million shares. The success of the public offering was sealed on March 30th with the first listing of the new shares. As a result, we have accumulated PLN 441.6 million for investments and development. Thanks to the funds acquired in these processes, in this year new facilities for the generation of active substances used in the production of plant protection chemicals in Nowa Sarzyna and modern steam boilers in the power plant in Janikowo will be commissioned. Along with the undertakings aiming at providing the financing, we have also been continuing the optimisation of the Ciech Group’s assets, focusing on two key segments – soda and organic. At the end of April we also finalised the sale of our biggest asset in the agro-chemical segment GZNF “FOSFORY” Sp. z o.o. The proceeds from the transaction amounted to PLN 227 million, including PLN 107 million as a payment for shares and PLN 120 million in the form the repayment of loans. Another major project was an in-kind issue completed in September, as a result of which Ciech acquired minority stakes in the companies of the Group, held by the State Treasury: 5.15% of ZACHEM S.A., 5.06% of Z.Ch. “Organika-Sarzyna” S.A. and 25.01% of the shares of Alwernia S.A. In return, the State Treasury acquired 699,909 of the new shares. This operation allowed Ciech to simplify the ownership structure of subsidiaries and acquire, without using cash, the remaining shares in ZACHEM S.A. and Z. Ch. “Organika-Sarzyna” S.A. amounting to about PLN 26 million provided for in the agreements for the purchase of the companies concluded with the Ministry of the State Treasury in 2006. As the conditions on main markets of ZACHEM S.A. worsened, the restructuring of this part of the Group became a vital issue. With this in mind we have undertaken special corrective actions. They resulted in, among others, purchase by Ciech of a company producing PUR foams and 50% of shares in TRANSCLEAN Sp. z o.o. held by ZACHEM S.A. and the disposal of Centrum Tworzyw Sztucznych and the sale of 75% of shares in a company involved in the repair and maintenance. Currently the company is preparing the establishment of more companies on the basis of organised parts of enterprises, including: Zachem Energetyka, Zachem Park and Zachem Epichlorohydryna. They are to commence their operations this year. At the same time a number of actions have been undertaken, including restructuring of employments and sale of redundant real properties intended to improve the condition of ZACHEM S.A. The Ciech Group has been reorganised on many levels. We have continued the strategy of centralisation of purchase of services, raw materials and energy through, i.a. signing a new consolidated agreement for the delivery of energy for the Polish companies, which enabled us to pay more competitive prices. At the end of the year a contract was signed by the companies of the Soda Deutschland Ciech Group for the lease of a thermal- electric power station in Stassfurt, which will significantly reduce the production costs. While executing the restructuring of the Group we have observed the financial discipline, which enabled us to reduce loan liabilities, pursuant to the provisions of the agreements concerning the financing of the Group, by PLN 443 million. We have maintained a positive net result with PLN 119 million of operating profit. A decisive impact on the final performance of the Group had a difficult condition of the TDI business. The prices for this product were historically lowest in the last year while the production and material costs were historically highest. A quarter-to-quarter increase in sales in the soda segment was the most important positive contributor to the operating result. It contributed to over 5% increase in sales revenue which amounted to PLN 4.17 billion. We have managed to meet the challenges of 2011 thanks to the efforts of our employees and loyalty of our business partners. On behalf of the Management Board I want to thank them all. Special thanks are due the Shareholders for the trust for the Management Board and the entire Ciech Chemical Group. There are numerous challenges ahead of us. I believe that joint efforts will provide us with good outlooks for further development. Yours faithfully, Ryszard Kunicki President of the Management Board of CIECH S.A. Table of contents TABLE OF CONTENTS I. REPORT ON THE CIECH GROUP’S ACTIVITIES IN 2011 ..................................................................7 1 GENERAL INFORMATION ABOUT THE CIECH GROUP ............................................................................................ 7 2 SIGNIFICANT ACHIEVEMENTS OF THE CIECH GROUP IN 2011. .............................................................................13 3 DESCRIPTION OF FACTORS AND EVENTS HAVING SIGNIFICANT INFLUENCE ON THE GROUP ’S ACTIVITIES ...................19 4 PRIMARY ECONOMIC AND FINANCIAL INFORMATION ............................................................................................23 5 TRADE AND PRODUCTION ACTIVITY OF THE CIECH GROUP ..................................................................................32 5.1 EXPLANATIONS CONCERNING THE SEASONAL AND CYCLICAL NATURE OF CIECH GROUP 'S ACTIVITY .......................32 5.2 INFORMATION ABOUT BASIC PRODUCTS , GOODS AND SERVICES ..........................................................................32 5.3 INFORMATION ON TRADE AREAS , SOURCES OF RAW MATERIALS , GOODS AND SERVICES SUPPLY ............................54 6 INVESTMENT ACTIVITY .....................................................................................................................................56 6.1 PHYSICAL INVESTMENTS .................................................................................................................................56 6.1.1 INVESTMENTS REALIZED IN 2011 .....................................................................................................................56 6.1.2 INVESTMENTS PLANNED IN THE NEXT 12 MONTHS ..............................................................................................57 6.2 DESCRIPTION OF THE MAIN CAPITAL INVESTMENTS AND METHODS OF THEIR FINANCING .........................................57 6.2.1 CAPITAL INVESTMENTS AND DIVESTMENTS MADE IN THE CURRENT REPORTING PERIOD AND DESCRIPTION OF THE METHODS OF THEIR FINANCING ..................................................................................................................57 6.2.2 CAPITAL INVESTMENTS AND DIVESTMENTS PLANNED IN THE NEXT 12 MONTHS ......................................................58 6.3 EVALUATION OF THE PROBABILITY OF REALIZING CONTEMPLATED PROJECTS IN TERMS OF POSSESSED FUNDS , TAKING INTO ACCOUNT POSSIBLE CHANGES IN THE STRUCTURE OF FINANCING THIS ACTIVITY .................................59 7 FUNDS MANAGEMENT IN CIECH GROUP ............................................................................................................59 7.1 LOANS , BORROWINGS , SURETIES AND GUARANTEES ..........................................................................................59 7.2 INFORMATION ABOUT THE ISSUE OF SECURITIES IN CIECH S.A. .........................................................................63 7.3 FINANCIAL INSTRUMENTS ................................................................................................................................64 7.4 OBJECTIVES AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT IN CIECH GROUP ................................................65 8 EXPLANATION OF DIFFERENCES BETWEEN THE FINANCIAL RESULTS AND PREVIOUSLY PUBLISHED FORECASTS ........65 9 EMPLOYMENT IN CIECH GROUP .......................................................................................................................65 10 CHANGES IN THE ORGANIZATION