GENERAL INFORMATION. Management Board Ryszard Kunicki Robert Bednarski Marcin Dobrzański Artur Osuchowski

Transcription

1 GENERAL INFORMATION Management Board Ryszard Kunicki Robert Bednarski Marcin Dobrzański Artur Osuchowski Supervisory Board Grzegorz Kłoczko Jacek Goszczyński Krzysztof Salwach Przemysław Cieszyński Krzysztof Mastalerz Marzena Okła-Anuszewska Alicja Pimpicka Registered Office of the Company ul. Puławska Warsaw Poland Certified auditor Deloitte Audyt Sp. z o.o. ul. Piękna Warsaw Poland 1

2 Ladies and Gentlemen, The year 2008 was a year of further development for the Ciech Group. The most significant challenge was the commencement of the Polish chemical industry s consolidation. Together with Azoty Tarnów and Zakłady Azotowe Kędzierzyn we have established Polskie Konsorcjum Chemiczne (Polish Chemical Consortium), a special purpose entity formed to acquire shares in Anwil and to integrate operating activities of the Consortium s shareholders. These activities will enable consistent strengthening of the companies included in the Consortium. Due to the status of the largest Polish chemical company listed on the stock exchange, we are an important link in the programme of consolidating the Great Chemical Synthesis sector and we are going to be the leader of this process. Also the decision to complete Ciech s privatisation in 2009 is a positive signal for the Group. The company actively supports the Ministry of Treasury and Nafta Polska in attracting investors interested in the acquisition of our shares. Our business strategy was also updated last year. The introduced changes result from such factors as: completion of the acquisition programme in the Soda Division and Organic Division, increase of production capacity, integration processes and restructuring as well as development of the Agro Division. I am convinced that the implementation of the plans included in the strategy will contribute to the Group s dynamic development and for the shareholders will signify an increase in our Company s value. The year 2008 was also a period of intensive work on maintaining the market position. The macroeconomic conditions were not easy we could observe the commencement of the global economic crisis and the severe weakening of the Polish zloty. However, we managed to achieve good financial results the Group earned almost PLN 55 million and its sale revenues increased by 11% in comparison with 2007 and amounted to PLN 3.8 billion. The diverse product portfolio of the Ciech Group turned out to be a good solution in the period of the crisis. Nevertheless, it was possible to take advantage of the opportunities created by the portfolio mostly due to the great effort of our employees. I would like to thank them all most sincerely. We knew how to benefit from the good economic situation on the soda and soda derivatives market. As a result, the losses caused by the slowdown in other markets, for instance, TDI, epoxy resins, protection chemicals and fertilisers were made good. When the Chinese market, being a significant recipient of our second most important product after soda TDI, collapsed in autumn, we managed to find alternative markets. Consequently, the Ciech Group, contrary to other worldwide chemical companies, did not have to stop production on any of its systems. In 2009, we are going to continue the ongoing processes with the aim of strengthening the Group s financial standing and to increase its value. We are planning to conduct restructuring, limit indebtedness and minimise the influence of exchange rates on the results. I believe that our Company s shares will be seen as an attractive long-term investment. This is a good company for hard times, a company with solid foundations, effective organisation and products attracting customers. The Management Board of Ciech S.A. shall spare no effort to ensure dynamic development of the Group despite less favourable economic conditions and financial results leading to stable growth of the Company s value for its shareholders. Ryszard Kunicki President of the Management Board of CIECH S.A.

3 Contents TABLE OF CONTENTS I. REPORT ON THE GROUP S ACTIVITIES IN GENERAL INFORMATION ABOUT THE CIECH GROUP SIGNIFICANT ACHIEVEMENTS OF THE CIECH GROUP IN DESCRIPTION OF FACTORS AND EVENTS HAVING A SIGNIFICANT INFLUENCE ON THE GROUP S ACTIVITIES PRIMARY ECONOMIC AND FINANCIAL INFORMATION TRADE AND PRODUCTION ACTIVITY OF THE CIECH GROUP INVESTMENT ACTIVITY FUNDS MANAGEMENT IN THE CIECH GROUP OBJECTIVES AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT IN THE CIECH GROUP METHODS OF SECURING MATERIAL TYPES OF PLANNED TRANSACTIONS IN RELATION TO WHICH HEDGE ACCOUNTING IS APPLIED EXPLANATION OF DIFFERENCES BETWEEN THE FINANCIAL RESULTS AND PREVIOUSLY PUBLISHED FORECASTS EMPLOYMENT INFORMATION CHANGES IN THE ORGANISATION, MANAGEMENT AND FINANCIAL ASSETS OF THE CIECH GROUP CHANGES IN THE BASIC PRINCIPLES OF MANAGING THE CIECH GROUP CHANGES IN THE ORGANISATIONAL AFFILIATIONS OF THE CIECH GROUP INFORMATION ABOUT THE ACQUISITION OF OWN SHARES OF THE CONTROLLING ENTITY DESCRIPTION OF THE USE OF ISSUE PROCEEDS BY THE ISSUER GROWTH PROSPECTS OF THE CIECH GROUP CHARACTERISTICS OF EXTERNAL AND INTERNAL FACTORS MATERIAL FOR THE DEVELOPMENT OF THE CIECH GROUP EXPECTED FINANCIAL SITUATION OF THE CIECH GROUP STRATEGIC PRIORITIES OF THE CIECH GROUP ADDITIONAL INFORMATION INFORMATION ABOUT CONCLUDED AGREEMENTS SIGNIFICANT FOR THE CIECH GROUP S ACTIVITY (INCLUDING AGREEMENTS CONCLUDED BETWEEN THE SHAREHOLDERS, INSURANCE AGREEMENTS AND COOPERATION AGREEMENTS) INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE CIECH GROUP S CONSOLIDATED FINANCIAL STATEMENT TRANSACTIONS WITH ASSOCIATED ENTITIES INFORMATION ABOUT NATURAL ENVIRONMENT PROTECTION LEGAL ASPECTS OF THE COMPANIES ACTIVITY IMPACT ON THE ENVIRONMENT EMISSION TRADING SYSTEM REACH SIGNIFICANT RESEARCH AND DEVELOPMENT ACHIEVEMENTS OF THE CIECH GROUP INFORMATION ABOUT MATERIAL OFF-BALANCE SHEET ITEMS INFORMATION ABOUT AGREEMENTS THAT MAY AFFECT THE CHANGES IN THE PROPORTIONS OF SHARES HELD BY THE EXISTING SHAREHOLDERS AND BONDHOLDERS INFORMATION ABOUT THE EMPLOYEE STOCK OWNERSHIP PLAN CONTROL SYSTEM REMUNERATION OF THE MANAGEMENT BOARD AND SUPERVISORY BOARD ESTABLISHMENT OF THE TOTAL AMOUNT AND NOMINAL VALUE OF ALL THE COMPANY S SHARES AND SHARES AND STOCKS IN ASSOCIATED ENTITIES HELD BY THE MANAGEMENT AND SUPERVISORY PERSONNEL STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE PRINCIPLES OBSERVED BY THE ISSUER AND PLACE WHERE THEIR CONTENT IS AVAILABLE FOR THE PUBLIC DESCRIPTION OF THE MAIN FEATURES OF INTERNAL AUDIT AND RISK MANAGEMENT SYSTEMS IN RELATION TO THE PROCESS OF COMPILING FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS INFORMATION ABOUT THE HOLDERS OF ANY SECURITIES THAT GIVE SPECIAL CONTROL RIGHTS IN RELATION TO THE ISSUER AND DESCRIPTION THEREOF INFORMATION ABOUT ANY RESTRICTIONS ON EXERCISING THE RIGHT TO VOTE AND ABOUT PROVISIONS PURSUANT TO WHICH EQUITY RIGHTS CONNECTED WITH SECURITIES ARE SEPARATED FROM HOLDING SECURITIES INFORMATION ABOUT ANY RESTRICTIONS ON TRANSFERRING OWNERSHIP RIGHTS RELATED TO THE ISSUER S SECURITIES AND ANY RESTRICTIONS ON EXERCISING THE RIGHT TO VOTE VESTED IN THE ISSUER S SHARES PRINCIPLES OF APPOINTING AND DISMISSING MANAGERIAL STAFF AND QUALIFICATIONS THEREOF, IN PARTICULAR, THE RIGHT TO MAKE A DECISION ABOUT SHARE ISSUE OR REDEMPTION PRINCIPLES OF INTRODUCING CHANGES TO THE MEMORANDUM AND ARTICLES OF ASSOCIATIONS GENERAL SHAREHOLDERS MEETING AND ITS COMPETENCE CHANGES IN THE COMPOSITION OF THE MANAGEMENT AND SUPERVISORY BOARDS OF CIECH S.A. IN THE PREVIOUS BUSINESS PERIOD ACTIVITY OF THE MANAGEMENT, SUPERVISORY AND ADMINISTRATIVE BODIES OF THE ISSUER AND THEIR COMMITTEES INFORMATION ABOUT AGREEMENTS CONCLUDED BETWEEN THE ISSUER AND THE MANAGERIAL PERSONNEL, ANTICIPATING COMPENSATION IN THE EVENT OF THEIR RESIGNATION OR DISMISSAL FROM THE OCCUPIED POST 3

4 Contents WITHOUT A SIGNIFICANT REASON OR WHEN THEIR RESIGNATION OR DISMISSAL IS CAUSED BY A MERGER OF THE ISSUER THROUGH ACQUISITION INFORMATION ABOUT SHAREHOLDERS HOLDING SIGNIFICANT BLOCKS OF SHARES...57 APPENDIX INFORMATION ABOUT BASIC PRODUCTS, GOODS AND SERVICES...58 APPENDIX INFORMATION ABOUT CHANGING SELLING MARKETS...65 APPENDIX INFORMATION ABOUT CHANGING SOURCES OF SUPPLY IN PRODUCTION MATERIALS, GOODS AND SERVICES

5 Contents II. CONSOLIDATED FINANCIAL STATEMENT OF THE CIECH GROUP FOR ADDITIONAL NOTES AND EXPLANATIONS TO THE CONSOLIDATED FINANCIAL STATEMENT GENERAL INFORMATION BASIS FOR THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENT INFORMATION ABOUT ASSOCIATES INFORMATION ABOUT ACTIVITY SEGMENTS OTHER REVENUES/COSTS INCOME TAX DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD FOR SALE EARNINGS PER SHARE DIVIDEND PAYOUT AND PROPOSED DIVIDEND PAYOUT TANGIBLE NON-CURRENT ASSETS RIGHT OF PERPETUAL USUFRUCT OF LAND INTANGIBLE ASSETS GOODWILL IMPAIRMENT TESTING INVESTMENT REAL PROPERTY NON-CURRENT RECEIVABLES INVESTMENTS IN AFFILIATES MERGER OF ECONOMIC UNITS INITIAL PROVISIONAL SETTLEMENT OTHER LONG-TERM INVESTMENTS INVENTORY TRADE AND OTHER RECEIVABLES SHORT-TERM INVESTMENTS CASH AND CASH EQUIVALENTS ASSET IMPAIRMENT CAPITALS NON-CURRENT LIABILITIES DUE TO LOANS, BORROWINGS AND OTHER DEBT INSTRUMENTS EMPLOYEE BENEFITS PROVISIONS CURRENT LIABILITIES FINANCIAL LEASE OPERATING LEASE LIABILITIES DETAILED INFORMATION COURT AND ARBITRATION LIABILITIES OF CIECH S.A INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE CIECH GROUP S CONSOLIDATED FINANCIAL STATEMENT AIMS AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT FINANCIAL INSTRUMENTS EMBEDDED INSTRUMENTS DERIVATIVE INSTRUMENTS FINANCIAL INSTRUMENTS DESIGNATED FOR HEDGE ACCOUNTING INFORMATION ON TRANSACTIONS WITH ASSOCIATES EVENTS OCCURRING AFTER THE BALANCE SHEET DATE FINANCIAL AND ECONOMIC POSITION OF THE SUBSIDIARY PRZEDSIĘBIORSTWO CHEMICZNE CHEMAN S.A PROGRAM OF REACHING STABLE PROFITABILITY OF S.C. UZINELE SODICE GOVORA CIECH CHEMICAL GROUP S.A GOING CONCERN OF INOWROCŁAWSKIE ZAKŁADY CHEMICZNE SODA MĄTWY SPÓŁKA AKCYJNA GOING CONCERN OF JANIKOWSKIE ZAKŁADY SODOWE JANIKOSODA SPÓŁKA AKCYJNA INFORMATION ON SIGNIFICANT EVENTS RELATED TO PREVIOUS YEARS, RECOGNISED IN THE FINANCIAL STATEMENT FOR THE FINANCIAL YEAR OTHER INFORMATION NOT MENTIONED ABOVE WHICH MAY SIGNIFICANTLY INFLUENCE THE ASSESSMENT OF THE ECONOMIC AND FINANCIAL CONDITION OF THE CIECH GROUP AND ITS FINANCIAL RESULT RECONCILIATION OF FINANCIAL FIGURES PRESENTED IN THE CONSOLIDATED FINANCIAL STATEMENT FOR 2007 AND THE CURRENTLY PRESENTED ONES AS COMPARABLE DATA RECONCILIATION OF FINANCIAL FIGURES PRESENTED IN THE CONSOLIDATED FINANCIAL STATEMENT FOR THE 4 TH QUARTER OF 2008 AND THE CURRENTLY PRESENTED ONES MANAGEMENT BOARD S STATEMENT

6 Report on the Ciech Group s Operations in 2008 I. REPORT ON THE GROUP S ACTIVITIES IN General information about the Ciech Group The Ciech Group is a group of domestic and foreign manufacturing, distribution and trade companies operating in the chemical industry. As at December 31st, 2008, it was composed of 58 business entities, including: the controlling entity CIECH S.A., 40 subsidiaries, including: 25 domestic subsidiaries, 15 foreign subsidiaries, 14 domestic affiliates, 2 foreign affiliates, 1 foreign jointly-controlled entity. The Ciech Group is composed of direct subsidiaries and affiliates, for which CIECH S.A. is the controlling entity, as well as indirect subsidiaries and affiliates, whose controlling entities are direct subsidiaries of CIECH S.A. The Ciech Group runs manufacturing activity connected with the sale of own products as well as commercial activity connected with the trade of goods. The Ciech Group sells chemicals on the domestic market and plays a significant role in the foreign trade in the field of export and import of chemical products. The main products sold by the Group in 2008 on the Polish market were: soda ash, TDI, plastics, plant protection chemicals, chemical fertilisers, resins, glass blocks and glass packaging, salt and other chemicals. The most important products exported by the Group included: soda ash, TDI, epichlorohydrin, phosphate fertilisers, sulphur, plastics, resins, phosphorus compounds, sodium silicate and pharmaceuticals. The biggest market for the Ciech Group s products were the EU Member States. The Group s strategic and operating objectives are accomplished by the Corporate Centre and Divisions. The Corporate Centre concentrates on managing goodwill and finance, controlling, preparing strategies, managing corporate image, etc. Operating activity is managed by four Divisions: Soda, Organic, Agro, Silicates and Glass. The divisions are responsible for strategy operationalisation and financial results. The key processes realised in the divisions include sale, purchase, supplies, product development and controlling. Production is located in facilities/production companies. Ciech Chemical Group Dywizja Soda Division Sodowa Dywizja Organic Organiczna Division Dywizja Agro Division Agro Dywizja Silicates and Krzemiany Glass Division i Szk? o Companies Soda Polska CIECH Uzinele Sodice Govora Soda Deutschland Group Zachem Group Organika Sarzyna Transclean Fosfory Group Alwernia Vitrosilicon Products soda ash, baking soda, vacuum salt TDI, EPI, PVC, polyurethane, epoxy and polyester foam NPK fertilisers, plant protection chemicals, phosphate products, chromium compounds glass blocks, lanterns and jars, sodium silicates, potassium silicates Recipients glass and detergent industry furniture and paint industry agriculture, food industry building industry, consumer markets Markets European, domestic global, European domestic, European European, domestic 6

7 Report on the Ciech Group s Operations in 2008 The following companies were subject to consolidation when preparing the consolidated financial statement for 2008: Consolidation under the full method: 1. CIECH S.A. controlling entity 2. Zakłady Chemiczne Organika-Sarzyna Spółka Akcyjna 3. S.C. Uzinele Sodice Govora Ciech Chemical Group S.A. 4. Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna (valuation of Polskie Towarzystwo Ubezpieczeń Spółka Akcyjna under the equity method) 5. VITROSILICON Spółka Akcyjna 6. Zakłady Chemiczne Alwernia Spółka Akcyjna 7. POLFA Spółka z ograniczoną odpowiedzialnością 8. Przedsiębiorstwo Transportowo-Usługowe TRANSCLEAN Spółka z ograniczoną odpowiedzialnością 9. POLSIN PRIVATE LIMITED 10. DALTRADE PLC 11. CIECH FINANCE Spółka z ograniczoną odpowiedzialnością 12. Przedsiębiorstwo Chemiczne Cheman Spółka Akcyjna. The consolidated financial statement also covers four capital groups of a lower level: 1. ZACHEM Group, including: Zakłady Chemiczne ZACHEM Spółka Akcyjna controlling entity ZACHEM UCR Spółka z ograniczoną odpowiedzialnością ZACHEM Barwniki Spółka z ograniczoną odpowiedzialnością. 2. SODA MĄTWY Group, including: Inowrocławskie Zakłady Chemiczne SODA MĄTWY Spółka Akcyjna controlling entity Soda Polska CIECH Spółka z ograniczoną odpowiedzialnością TRANSODA Spółka z ograniczoną odpowiedzialnością Polskie Towarzystwo Ubezpieczeń Spółka Akcyjna (company valued under the equity method) 3. Soda Deutschland Ciech Group, including: Soda Deutschland Ciech GmbH controlling entity Sodawerk Holding Stassfurt GmbH Sodawerk Stassfurt Verwaltungs GmbH Sodawerk Stassfurt GmbH&Co.KG KWG GmbH. 4. FOSFORY Group, including: Gdańskie Zakłady Nawozów Fosforowych FOSFORY Spółka z ograniczoną odpowiedzialnością controlling entity AGROCHEM Spółka z ograniczoną odpowiedzialnością in Człuchów AGROCHEM Spółka z ograniczoną odpowiedzialnością in Dobre Miasto. The controlling entity has no branches. 7

8 Report on the Ciech Group s Operations in Significant achievements of the Ciech Group in 2008 On January 15th, 2008, the subsidiary of CIECH S.A. VITROSILICON Spółka Akcyjna acquired 419,684 shares in Huta Szkła in Wymiarki, constituting % of the share capital. Simultaneously, acquisition of another 5-10% of shares in Huta Szkła in Wymiarki is being negotiated. The information was announced in Current Report no. 5 of January 22nd, On January 23rd, 2008, a loan agreement to the amount of EUR 75 million was concluded by and between the companies Soda Deutschland Ciech GmbH, Sodawerk Stassfurt GmbH&Co. KG and Commerzbank Aktiengesellschaft. The purpose of the loan is refinancing of the previous bank indebtedness of SWS KG and financing of the Company s growth investments. CIECH S.A. issued a guarantee to the amount of EUR 25 million to secure a part of the loan. The loan matures on December 31st, The information was announced in Current Report no. 6 of January 23rd, In accordance with the Sponsor s Undertaking Agreement concluded on January 23rd, 2008 by and between CIECH S.A., a subsidiary of Soda Deutschland CIECH GmbH and Commerzbank Aktiengesellschaft, CIECH S.A. obliged to: hold, directly or indirectly, 90% of shares in Soda Deutschland and all of its subsidiaries, make available to Soda Deutschland funds amounting to EUR 5,000 thousand through a capital increase or loan. These funds may be allocated for the repayment of loans granted to Soda Deutschland, financial support for Soda Deutschland and its subsidiary Sodawerk Stassfurt GmbH&Co. KG in the event of their inability to satisfy their obligations. Under the aforesaid obligation CIECH S.A. shall support the said companies until December 31st, On February 5th, 2008, the Pomeranian Voivode obliged GZNF FOSFORY Sp. z o.o. to close the phosphogypsum yard in Wiślinka, Pruszcz Gdański municipality, by December 31st, Simultaneously, the Pomeranian Voivode granted GZNF FOSFORY Sp z o.o. a permit to conduct recycling activity in relation to non-hazardous waste in the yard in Wiślinka, Pruszcz Gdański municipality, for phosphogypsum code in the amount of 250,000 Mg annually. The permit is valid until December 31st, On June 17th, 2008, CIECH S.A. completed the first stage of the acquisition process of (employee) shares in two companies of the Ciech Group: Z.Ch. Organika-Sarzyna S.A. and ZACHEM S.A.: 1. CIECH S.A. acquired 520,383 ordinary registered A series shares in Zakłady Chemiczne Organika- Sarzyna Spółka Akcyjna (constituting % of the Company s shares) for the amount of PLN 10,407,660. The equity interest of CIECH S.A. in Z.Ch. Organika-Sarzyna S.A. increased to 86.13%. 8

9 Report on the Ciech Group s Operations in CIECH S.A. acquired 754,581 ordinary registered A series shares in Zakłady Chemiczne ZACHEM Spółka Akcyjna (constituting % of the Company s shares) for the amount of PLN 3,825, The equity interest of CIECH S.A. in ZACHEM S.A. increased to 85.10%. The transactions were concluded in accordance with relevant sale agreements pertaining to the shares of the Companies by Nafta Polska S.A. The information was announced in Current Report no. 37 of June 18th, On June 18th, 2008, in conjunction with the closing of the Public Offering of Zakłady Azotowe w Tarnowie- Mościcach S.A., CIECH S.A. acquired 2,560,000 B series shares in ZA Tarnów for PLN each, i.e. PLN 49,920,000 in total. The share of CIECH S.A. in the Company s equity amounts to %. Prior to the transaction CIECH S.A. held no shares of the Company. The investment made by CIECH S.A. in the shares of ZA Tarnów is a long-term investment and is connected with the implementation of the strategy of the Ciech Group for In the opinion of the Management Board of CIECH S.A. the acquisition of a 6.5% shareholding in ZA Tarnów in the public offering strengthens the company s position in the context of the further privatisation of ZA Tarnów, Zakłady Azotowe in Kędzierzyn and CIECH S.A. itself, announced by the Ministry of Treasury for The information was announced in Current Report no. 40 of June 18th, On June 19th, 2008, the District Court in Bydgoszcz, 13th Commercial Division of the National Court Register, issued a decision on introducing changes to the entry in the National Court Register consisting in the merger of the companies Soda Polska CIECH Sp. z o.o., having its registered office in Inowrocław, and Elektrociepłownie Kujawskie Sp. z o.o., having its registered office in Inowrocław, pursuant to Art item 1) of the Commercial Companies Code, through the transfer of all assets of the acquired company, i.e. Elektrociepłownie Kujawskie Sp. z o.o. (the acquired company) on Soda Polska CIECH Sp. z o.o. (the acquiring company). The merger was not accompanied by any increase of share capital, for Soda Polska CIECH Sp. z o.o. held all shares in the company Elektrociepłownie Kujawskie Sp. z o.o. The information was announced in Current Report no. 42 of June 23rd, On October 9th, 2008, a Letter of Intent concerning the purchase of a controlling shareholding in Anwil S.A. was signed. The following entities are its signatories: CIECH S.A., Zakłady Azotowe Kędzierzyn S.A. (ZAK) and Zakłady Azotowe w Tarnowie - Mościcach S.A. (Azoty Tarnów). The information was announced in the Current Report no. 64 of October 9th, On December 23rd, 2008, Polskie Konsorcjum Chemiczne Spółka z ograniczoną odpowiedzialnością was entered into the register of entrepreneurs maintained by the Regional Court for the Capital City of Warsaw, 13th Commercial Division of the National Court Register, under the KRS no The Company s share capital amounting to PLN 50 thousand (1,000 shares for PLN 50 each) was fully acquired by CIECH S.A. The establishment and registration of Polskie Konsorcjum Chemiczne Sp. z o.o. results from the execution of the provisions included in the Letter of Intent concerning the acquisition of a controlling shareholding in Anwil S.A., signed on October 9th, 2008 by CIECH S.A., Zakłady Azotowe w Tarnowie- Mościcach S.A. (ZAT) and Zakłady Azotowe Kędzierzyn S.A. (ZAK). The information was announced in Current Report no. 76 of December 23rd, On January 5th, 2009 the shareholders of Polskie Konsorcjum Chemiczne Sp. z o.o. (PKCh) on the Shareholders Meeting adopted a resolution on increasing the Company s share capital by PLN 50 thousand to the amount of PLN 100 thousand. Simultaneously, Zakłady Azotowe Kędzierzyn S.A. (ZAK) and PKCh signed a Shareholders Agreement, regulating the principles of cooperation between the parties in the process of future acquisition of a controlling shareholding in Anwil S.A. The shares acquired by ZAT and ZAK will entitle each of the companies to 25% of the votes at the Shareholders Meeting. The remaining 50% shall belong to CIECH S.A. The registration by the Registry Court in the register of entrepreneurs of the National Court Register occurred on February 19th, The information was announced in Current Report no. 1 of January 5th, 2009 and Current Report no. 10 of February 27th, In 2008, the Ciech Group invested in the development and modernisation of production capacity in the largest production companies of the Group: o Soda Deutschland Ciech Group growth investments connected with increasing the production capacity of the soda plant to 510 thousand tons per year (currently approx. 460 thousand tons per year), o ZACHEM Group growth investments connected with developing the TDI complex to 75 thousand tons per year (outlays amounting to PLN 63,368 thousand) with increasing the production of polyurethane foam to 25 thousand tons per year (PLN 24,885 thousand) investment to be completed in the first quarter of o Z. Ch. Organika-Sarzyna S.A. growth investment Establishment of a new line of unsaturated polyester resins production system (increase of production capacity to 25 thousand tons per year), outlays PLN 16,785 thousand, o VITROSILICON Spółka Akcyjna - growth investment Increasing the production capacity of the Pobiedziska plant to 75 tons per day, outlays PLN 13,344 thousand, 9

10 Report on the Ciech Group s Operations in 2008 o S.C. Uzinele Sodice Govora Ciech Chemical Group S.A. growth investments aimed at increasing production capacity to the amount of PLN 26,187 thousand (EUR 7,714 thousand) establishment of carbonating columns, band filter and steam calcinator. 3. Description of factors and events having a significant influence on the Group s activities In 2008, the activities of the Ciech Group were realised under difficult market conditions. The first half of 2008 was a period of stable but deteriorating economic situation. In the first half of 2008 the activities of CIECH S.A. and the entire Group were determined by the following external factors: very good economic situation of the European glass industry (major recipient of soda ash) reflected on the European market in the demand for soda ash considerably higher than its supply. The favourable market situation made it possible to transfer the increased costs of soda production onto customers; high demand and prices on the world and European chemical fertilisers market, induced to a great extent by the increasing demand of growing countries and the development of biofuel-oriented farming. Also the prices of raw materials for the production of multicomponent fertilisers, including phosphorites and sulphur, were record-breaking in this period; high demand and margins on organic products from the petrochemical industry, in particular, on the Group s major organic product, i.e. TDI manufactured by ZACHEM S.A. The prices of organic products from the petrochemical industry increased together with the record growth of oil prices; continuous fast economic growth in Poland with the simultaneous economic downturn at the beginning of 2008, in particular, in the developed countries; strong appreciation of the Polish zloty translating into lower competitiveness and commercial export margins. The second half of 2008, especially the fourth quarter, significantly changed the environment of CIECH S.A. and of the entire Group: financial markets slump, which translated into a fast depreciation of the Polish zloty in relation to major global currencies accompanied by considerable destabilisation of financial markets and limited credit availability. Depreciation of the Polish zloty in relation to the Euro resulted in a high negative valuation of liabilities pertaining to financial instruments (options) held by CIECH S.A.; sudden deterioration in the economic situation of industries of key importance for the Ciech Group: construction, automobile, agricultural and furniture; sudden fall of prices and demand for petrochemical products caused by the deteriorating economic situation of the key industries and falling oil prices; low demand for multicomponent fertilisers in autumn caused by falling prices of basic agricultural products and limited income earned by farmers. The economic downturn also influenced the markets of basic raw materials for the production of these fertilisers, i.e. phosphates and sulphur. 3.1 Significant risk and hazard factors and the Group s exposure Risk of economic slowdown in Poland The activity of the Ciech Group is connected with many segments of chemical industry (broadly understood) and its development is directly correlated to the economic situation. In the last years Poland s economic growth was at the level of several percent GDP annually. The forecasts for the following years anticipate a definite slowdown of the previous high growth dynamics resulting from the global economic crisis (internal demand slowdown, export slowdown and investment slowdown). The deterioration of the economic situation will definitely affect the chemical industry. Lower demand for chemical products may negatively influence the revenues obtained by the Ciech Group and lead to worse results. Risk of economic stagnation/recession in Europe and in the world The activity of the Ciech Group relies to a great extent on the export of chemical products, whose level and profitability depend on the global economic situation in Europe and in the world. The economic downturn may lead to lower foreign turnover in export and at the same time lower revenues from particular segments of the Ciech Group s activity. Lower profitability and revenues may be observed in all segments of Ciech s activity, including the soda, organic and fertilisers segments. Risk connected with financial markets and financial liquidity CIECH S.A. and other companies forming the Ciech Group take advantage of external sources of obtaining funds to finance their current activity and investments. External financing is necessary for further undisturbed activity of CIECH S.A. and the Group s companies. The financial crisis and deterioration of the economic situation are a risk factor for CIECH S.A. due to: (i) lower readiness of financial institutions to credit enterprises; (ii) worse financial results, which in 2008 led to the violation 10

11 Report on the Ciech Group s Operations in 2008 of provisions of some loan agreements in the companies of the Ciech Group and contribute to lower interest of banks in crediting CIECH S.A. and less favourable conditions of granted loans; (iii) unfavourable financing structure of CIECH S.A. and the Group, whose vital part are short-term financial liabilities. Also currency options, which will be settled by CIECH S.A. by August 2010, are a factor having a negative influence on the forecasted financial situation of CIECH S.A. The Company undertakes actions to change the financing structure, aimed at extending the period of credit line availability and establishing long-term relations with key banks financing CIECH S.A. 4. Primary economic and financial information In 2008, the Ciech Group generated a net profit amounting to PLN 54,845 thousand, the balance sheet total amounted to PLN 4,362,114 thousand and the net cash decreased by PLN 55,662 thousand. The table below presents selected financial data and basic financial ratios for 2008 and Selected financial data of the Ciech Group PLN Change 2008/2007 Net sales 3,781,304 3,414, % Cost of goods sold 3,002,998 2,603, % Gross profit from sales 778, ,184 (4.1%) Cost of sales 247, , % General and administrative expenses 291, , % Other operating revenue/expenses 17,672 (266,524) - Profit on operating activities 256,418 42, % Financial revenue/expenses (157,341) (29,982) 424.8% Share in net profit of subsidiaries valued under the equity method (3,262) 5,062 - Income tax 40,970 48,096 (14.8%) Net profit 54,845 (30,033) - Net profit attributable to minority shareholders 10,357 1, % Net profit attributable to controlling shareholders 44,488 (31,720) - EBITDA 459, , % PLN Change 2008/2007 Assets 4,362,114 3,966, % Non-current assets 2,781,769 2,401, % Current assets, including: 1,580,345 1,564, % - inventory 437, , % - current receivables 959, ,278 (2.0%) - cash and cash equivalents 112, ,490 (9.9%) - current investments 1,185 2,066 (42.6%) Total equity 914,288 1,112,419 (17.8%) Equity attributable to controlling shareholders 864,876 1,067,515 (19.0%) Minority interest 49,412 44, % Non-current liabilities 1,117,431 1,308,080 (14.6%) Current liabilities 2,330,395 1,545, % PLN Change 2008/2007 Net cash flows from operating activities 33, ,182 (86.4%) Net cash flows from investment activities (426,246) (575,836) (26.0%) Net cash flows from financial activities 337, , % Total net cash flows (55,662) (35,918) Change 2008/

12 Report on the Ciech Group s Operations in Change 2008/2007 Net earnings per share 159 (1.13) - EBIT % 6.8% 1.3% 438.8% EBITDA % 12.2% 6.5% 86.7% Total debt ratio 79.0% 72.0% 9.8% Source: CIECH S.A. Calculation principles: net earnings per share net earnings / weighted average number of ordinary shares in a given period (pursuant to the definition of IAS 33 Earnings per share ) net return net profit for a given period / net revenues from sales of products, services, goods and materials in a given period EBIT % operating profit for a given period / net revenues from sales of products, services, goods and materials in a given period EBITDA % (operating profit + depreciation for a given period) / net revenues from sales of products, services, goods and materials in a given period current ratio current assets at the end of a given period / current liabilities at the end of a given period quick ratio current assets less inventory at the end of a given period / current liabilities at the end of a given period total debt ratio current and non-current liabilities at the end of a given period / total assets at the end of a given period. Revenues from sales Consolidated net sales of the Ciech Group in 2008 amounted to PLN 3,781,304 thousand. In comparison to 2007 net sales increased by PLN 366,322 thousand, i.e. 11%. The increase was mainly due to the revenues generated by Soda Deutschland Ciech Group that joined the Ciech Group in December Another positive contributor to the revenues was the economic situation on the market of agro-chemical products, reflected in a significant increase in the prices of fertilisers. The revenues from sales were affected negatively by a significant decrease in the prices of basic products of the organic segment, especially TDI. The activity of the Ciech Group concentrates on five main segments: soda, organic, agro-chemical, inorganic, silicates and glass. These segments generated in total more than 94% of the Group s sales revenues. The structure of revenues has changed compared to the analogous period in the previous year, mostly on account of the purchase of Soda Deutschland Ciech Group in the fourth quarter of 2007 and an increase in the revenues of the agro-chemical segment. The greatest share in the revenues for the four quarters of 2008 is attributed to the sales of soda segment products. Last year the organic segment played a leading role. Sales revenues by business segment % share % share in change in total total change % revenues revenues Soda segment, including: 1,363, , , % 36.1% 27.9% Dense soda ash 856, , , % 22.7% 16.9% Light soda ash 261, ,456 90, % 6.9% 5.0% Salt 112, ,689 8, % 3.0% 3.0% Baking soda 79,120 52,036 27, % 2.1% 1.5% Calcium chloride 20,925 18,845 2, % 0.6% 0.6% Organic segment, including: 1,136,148 1,308,459 (172,311) (13.2%) 30.0% 38.3% TDI 476, ,751 (99,128) (17.2%) 12.6% 16.9% Resins 238, ,929 7, % 6.3% 6.8% Plastics 230, ,729 (62,157) (21.2%) 6.1% 8.6% EPI 69,602 92,545 (22,943) (24.8%) 1.8% 2.7% Agro-chemical segment, including: 615, ,132 71, % 16.3% 15.9% Fertilisers 398, ,108 82, % 10.5% 9.3% Plant protection chemicals 134, ,393 (35,194) (20.8%) 3.5% 5.0% Inorganic segment, including: 290, ,462 10, % 7.7% 8.2% Phosphorus compounds 99,685 62,046 37, % 2.6% 1.8% Sulphur 56,811 32,841 23, % 1.5% 1.0% Sodium hydroxide 40,565 41,044 (479) (1.2%) 1.1% 1.2% Sodium tripolyphosphate 25,642 57,539 (31,897) (55.4%) 0.7% 1.7% Silicates and glass segment, including: 161, ,086 13, % 4.3% 4.3% Glass blocks and lanterns 92,183 83,806 8, % 2.4% 2.5% Potassium water glass 37,942 2,761 35, % 1.0% 0.1% Sodium water glass 17,189 46,206 (29,017) (62.8%) 0.5% 1.4% 12

13 Report on the Ciech Group s Operations in 2008 % share % share in change in total total change % revenues revenues Pharmaceutical segment 54,665 50,075 4, % 1.4% 1.5% Petrochemical segment 48,421 38,430 9, % 1.3% 1.1% Power segment 32,626 21,428 11, % 0.9% 0.6% Discontinued operations segment (658) - 0.0% 0.0% Other operations segment 78,197 72,542 5, % 2.1% 2.1% TOTAL 3,781,304 3,414, , % 100.0% 100.0% Source: CIECH S.A. Profit/loss on sales and operating profit/loss In 2008, gross profit on sales amounted to PLN 778,306 thousand and in 2007 PLN 811,184 thousand, whereas the operating profit amounted to PLN 256,418 thousand and PLN 42,983 thousand, respectively. The positive contributors to the presented profit were as follows: good economic situation on the soda market, still high prices of soda ash on European and global markets, increase in sales prices and profitability of agro-chemical products on European and global markets caused to a great extent by the growing demand of developing countries (however, negative changes on the market of fertilisers occurred in the third quarter and resulted in lower demand also in the fourth quarter), increase in sales prices and profitability of silicates and glass, recognition of the revenues and costs of Soda Deutschland Ciech Group (sales of caverns) in the Group's results, a relatively high 13% increase in the domestic sales of construction and assembly products throughout 2008 (for which the chemical industry manufactures many raw materials and semi-finished products). The negative contributors to the presented profit were as follows: unfavourable price and demand relations on the market of EPI and TDI sales; due to a high level of supply for the product, a decrease in sales prices and volume was recorded, lower sales prices of epoxy resins, which had a negative effect on the sales profit, decrease in the sales of plant protection chemicals due to low purchase prices for agricultural products, fortuitous events (equipment failure and lower output) and increase in the costs of raw materials and energy at the Romanian soda company S.C. Uzinele Sodice Govora Ciech Chemical Group S.A., decreasing dynamics of the domestic chemical industry (throughout 2008 up to 1% compared to the adequate index for the entire Polish industry at the level of more than 3%), decrease in market prices of the Ciech Group s organic products in the second half of 2008 (induced by the overall global economic downturn), very high prices of phosphorites raw material for the production of phosphate and multicomponent fertilisers manufactured by the Ciech Group, high exchange rate of the Polish zloty (against the Euro and American dollar) in the first three quarters of 2008, making it difficult to improve profitability of the Ciech Group s export activity, high oil prices in the first three quarters of 2008, resulting in increasing prices of raw materials for the Ciech Group s organic sector. The presented results take into account also one-time events, i.e. the operating profit for 2008 includes the profit earned in the sale of investment real property (at. ul. Jasna in Warsaw) and the operating profit for 2007 includes the sale of fixed assets in Zachem Group ( Chemik Holiday Resort in Sopot, CHEMIK Health Resort in Ciechocinek and Production Facility T-7300) and measurement of goodwill created as a result of purchasing Soda Deutschland Ciech Group. In 2008, the EBIT margin rate amounted to 6.8% (compared to 1.3% the year before). Net profit/loss The consolidated net profit for 2008 amounted to PLN 54,845 thousand, whereby PLN 44,488 thousand is the controlling shareholders net profit. Net profitability reached 1.5%. 13

14 Report on the Ciech Group s Operations in 2008 The net loss in 2007 resulted from the partial write-off of goodwill that was created in the acquisition of Soda Deutschland Ciech Group. A detailed description may be found in point 17 of the additional notes and explanations to the financial statement. Apart from the operating result, the net profit in 2008 was negatively affected by the measurement of financial instruments and costs of increased debt service. At the same time, the negative impact of high financial costs was partially balanced by positive currency differences. Financial performance by type of activity (PLN '000) PLN Change 2008/ Profit on operating activities 256,418 42, % 2. Net financial income/costs (157,341) (29,982) 424.8% 3. Share in net profit of subsidiaries valued under the equity method (3,262) 5, Income tax 40,970 48,096 (14.8%) 5. Profit on sales attributable to discontinued operations Net profit ( ) 54,845 (30,033) - 7. Profit attributable to minority shareholders 10,357 1, % 8. Profit attributable to controlling shareholders (6-7) 44,488 (31,720) - Source: CIECH S.A. Balance sheet Equity The Group s consolidated equity as at December 31st, 2008 amounted to PLN 914,288 thousand and was lower than the previous year by PLN 198,131 thousand. The introduction of an item connected with the application of hedge accounting to the amount of PLN 111,700 thousand had a decisive impact on the decrease in equity. Assets At the end of December 2008, the Group s non-current assets amounted to PLN 2,781,769 thousand. In comparison to the balance as at December 31st, 2007 the value of non-current assets increased by PLN 379,974 thousand (i.e. 16%). The highest increase was observed in the case of tangible non-current assets, which grew by PLN 345,958 thousand, i.e. by 17.3% as compared to the end of The increase was mainly due to investment expenditure on production assets in order to keep up with the current pace of growth. In particular, this refers to SODA MĄTWY Group, Z.Ch. Organika-Sarzyna S.A., ZACHEM S.A. and Soda Deutschland Ciech Group. The share of non-current assets in total assets is 64% (nearly 61% the year before). Moreover, the increase in non-current assets was also due to the purchase of a block of 6.5% shares in Zakłady Azotowe w Tarnowie-Mościcach S.A. in June As at the balance-sheet day the block was recognised at PLN 17,715 thousand. The Group's current assets amounted to PLN 1,580,345 thousand as at December 31st, The following items dominated among the current assets: trade and other receivables 59% of current assets, inventory 28% and cash and cash equivalents 7%. In comparison to the end of December 2007 the value of current assets increased by PLN 15,823 thousand and reallocations within the current asset structure occurred. The major part of this resulted from the recognition of non-current assets of Soda Deutschland Ciech Group available for sale (caverns) in the consolidated balance sheet for In 2008 there was a significant increase in inventory in FOSFORY Group resulting from the concentration of purchases of raw materials for fertilisers before the autumn season and relatively low sales of fertilisers in August and September due to a downturn on the agricultural market. Consolidated liabilities The Ciech Group s liabilities (non-current and current) as at December 31st, 2008 amounted to PLN 3,447,826 thousand, which signifies an increase in comparison with the balance as at the end of December 2007 by PLN 593,928 thousand (i.e. 21%). The increase in liabilities results mainly from the increase in liabilities pertaining to loans and borrowings and other debt instruments (increase by PLN 454,646 thousand, i.e. 35.9%), whereby current by PLN 821,708 thousand, while non-current decreased by PLN 367,062 thousand. 14

15 Report on the Ciech Group s Operations in 2008 In the presented financial statement non-current liabilities due to loans and borrowings in the amount of PLN 447,954 thousand were reclassified from non-current to current liabilities. Results obtained by the Ciech Group and some of its subsidiaries have led to a violation of conditions of loan agreements which include provisions concerning the required level of relevant financial indices: - net debt/ebitda: violation in two companies, - debt service coverage ratio: violation in one subsidiary, - net profitability and current ratio: violation in one subsidiary, - EBIT/revenues from sales: violation in one subsidiary. According to the requirements of IAS 1, a violation of conditions of loan agreements which may potentially limit unconditional loan availability in the following year makes it necessary to classify such liabilities as current ones. No conditions of repaying capital or interest due to financial liabilities were violated in the period covered by this statement and until the day of its publication. No loan agreement was called. An overdraft facility was used to finance the purchase of shares in ZA Tarnów (expense of approx. PLN 49,920 thousand). The Ciech Group intensified the use of credit limits in conjunction with the higher demand for working capital due to: (i) increase in trade receivables resulting from increasing prices of products, and (ii) increase in inventory (inter alia, purchase of raw materials: anthracite and phosphorites). Moreover, the Group s companies financed certain investment expenditures on production assets from external funds, mainly: SODA MĄTWY Group, Z.Ch. Organika-Sarzyna S.A., ZACHEM Group and VITROSILICON Spółka Akcyjna. An increase in other non-current liabilities is mainly due to the measurement of financial instruments as at the balance sheet date. The consolidated net debt of the Group (covering non-current and current liabilities due to loans, borrowings and other debt instruments in total plus the overdraft facility decreased by cash and cash equivalents) amounted to PLN 1,607,968 thousand as at December 31st, 2008 and increased in comparison with the balance as at the end of December 2007 by PLN 467,016 thousand. The current ratio, calculated as the ratio of total current assets to total current liabilities, amounted to 0.7 as at December 31st, 2008 (1 the year before), while the quick ratio amounted to 0.5 (0.8 the year before). Lower ratios result to a great extent from the reclassification of liabilities due to debt instruments discussed hereinabove. The total debt ratio (current and non-current liabilities / total assets) was 79% as at December 31st, 2008 (72% the year before). Cash flows Net cash flows in 2008 amounted to PLN -55,662 thousand. In comparison to the previous year the Group generated cash flows lower by PLN 19,744 thousand. Net cash flows from operating activities amounted to PLN 33,000 thousand and were lower than the ones generated in the period between January and December 2007 by PLN 210,182 thousand, mainly due to the increase in working capital. The increase in the working capital was mainly the result of a significant increase in receivables and inventory compared to an increase in liabilities of FOSFORY Group. Receivables increased due to an increase in the prices of products, while inventory increased due to the downturn on the agricultural market in August and September, when the sales volumes of fertilisers were lower than planned. The Group paid higher interest in relation to 2007 (expenditure increase by PLN 64,852 thousand), which resulted from a significant increase in the use of external funding. A considerable increase in other adjustments (cash flows from operating activities) by PLN 138,777 thousand in comparison with 2007 is mainly the result of measurement of derivatives held by CIECH S.A. The surplus of investment expenditure over inflows amounted to PLN 426,246 thousand and was lower in relation to the analogical period in 2007 by PLN 149,590 thousand (i.e. 26%). The balance of cash flows from investment activities was influenced mainly by transactions of purchase and disposal of intangible assets and tangible noncurrent assets. Net cash from financial activities was positive and amounted to PLN 337,584 thousand, i.e. higher by PLN 40,848 thousand in comparison with The reason for this increase was a surplus of loans and borrowings taken over loans and borrowings repaid, which amounted to PLN 364,263 thousand and resulted from increased use of loans and borrowings to finance investment projects, mainly by SODA MĄTWY Group, ZACHEM Group, VITROSILICON Spółka Akcyjna and Z.Ch. Organika-Sarzyna S.A. The cash shown in the cash flows statement as at the end of December 2008 amounted to PLN 45,797 thousand and was lower than the cash at the end of December 2007 by PLN 49,805 thousand. 15

16 Report on the Ciech Group s Operations in 2008 The Ciech Group has unlimited capability to fulfil its obligations and the maintenance of full financial liquidity is an important task of the Group. Decision making processes concerning the purchase of basic raw materials and auxiliary materials as well as services assume conducting negotiations to obtain the best financial conditions possible, in particular, the best terms of payment. This principle is also valid for sales, where additional emphasis is placed on the contractor s credibility, payment certainty and, if necessary, undertaking all possible recovery actions. Evaluation of the Ciech Group s earning capacity and profitability In 2008, the Ciech Group recorded a decrease in gross profit on sales by 3.2%, the sales profitability decreased. The major reason was the increase in prices of raw materials and strengthening of the Polish zloty. The Ciech Group concentrates on developing product segments considered strategic ones and creates the Group s goodwill based on basic activities. The tables below present basic information about the financial results and profitability: Consolidated profitability ratios of the Ciech Group Item Net sales 3,781,304 3,414,982 Profit on operating activities 256,418 42,983 Net profit 54,845-30,033 Operating profitability (%) 6.8% 1.3% Net profitability (%) 1.5% (0.9%) Overall asset profitability (%) 1.3% (0.8%) Equity profitability (%) 6.0% (2.7%) Source: CIECH S.A. Calculation principles: profitability ratios profit on sales, profit on operating activities and net profit for a given period / net revenues from products, services, goods and materials sold, return on assets (ROA) net profit for the business year / total assets at the end of a given period return on equity (ROE) net profit for the business year / total equity at the end of a given period. Evaluation of the Ciech Group s liquidity Liquidity ratios were lower in 2008, which results from the increased use of short-term loans. In spite of the fact that the quick ratio is below the optimum level (1.0), liquidity is secure. The Ciech Group has unlimited capability to fulfil its obligations on time. Liquidity ratios of the Ciech Group Item Current ratio Quick ratio Source: CIECH S.A. Calculation principles: current ratio current assets / current liabilities at the end of a given period; measure of a company s capability to cover its current liabilities with current assets. quick ratio current assets less inventory / current liabilities at the end of a given period; measure of a company s capability to collect in a short period of time cash for the coverage of materially due liabilities. Working capital and turnover ratios of the Ciech Group The demand for current assets at the end of 2008 amounted to PLN 467,834 thousand, which signifies an increase by 16% within 12 months. This was mainly the effect of recognising the balance sheet of Soda Deutschland Ciech Group and the increased demand for working capital in Fosfory Group and Z.Ch. Organika- Sarzyna S.A. in the consolidated financial statement. Working capital of the Ciech Group (PLN 000) Item