SECURITIES ACT RULE 144A

Transcription

1 IMPORTANT NOTICE THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QUALIFIED INSTITUTIONAL BUYERS ( QIBS ) IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), PROVIDED BY RULE 144A UNDER THE SECURITIES ACT ( RULE 144A ) OR (2) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT ( REGULATION S ). IMPORTANT: You must read the following before continuing. The following applies to the offering memorandum following this disclaimer (the Offering Memorandum ), and you are therefore advised to read this carefully before reading, accessing or making any other use of the Offering Memorandum. In accessing the Offering Memorandum, you agree to be bound by the following terms and conditions, including any modifications to them, any time you receive any information from us as a result of such access and you agree that Petkim Petrokimya Holding A.Ş., together with its subsidiaries and affiliates and others will rely upon the truth and accuracy of the following representations, acknowledgements and agreements. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE NOTES (AS DEFINED IN THE OFFERING MEMORANDUM) HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE NOTES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THE OFFERING MEMORANDUM MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THE OFFERING MEMORANDUM IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. Confirmation of your representations: In order to be eligible to view the Offering Memorandum or make an investment decision with respect to the Notes, investors must either (1) be QIBs (within the meaning of Rule 144A) or (2) be outside the United States in compliance with Regulation S. The Offering Memorandum is being sent at your request and by accepting the and accessing the Offering Memorandum, you shall be deemed to have represented to us that (1) you and any customers you represent are either (a) QIBs or (b) you and the electronic mail (or ) address that you gave us and to which this electronic mail has been delivered are not located in the United States and (2) you consent to delivery of such Offering Memorandum by electronic transmission. You are reminded that the Offering Memorandum has been delivered to you on the basis that you are a person into whose possession the Offering Memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver the Offering Memorandum to any other person. The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and any of Goldman Sachs International and J.P. Morgan Securities plc (each, a Joint Global Coordinator and together, the Joint Global Coordinators ), Citigroup Global Markets Limited (together with the Joint Global Coordinators, the Joint Bookrunners ) and Société Générale and VTB Capital plc (together with the Joint Bookrunners, the Joint Lead Managers ) or any affiliate of the Joint Lead Managers is a licensed broker or dealer in that jurisdiction, the offer shall be deemed to be made by the Joint Lead Managers or such affiliate on behalf of the Issuer (as defined in the Offering Memorandum) in such jurisdiction. No person may communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the FSMA )) received by it in connection with the issue or sale of the Notes other than in circumstances in which Section 21(1) of the FSMA does not apply. The attached Offering Memorandum may only be distributed to, and is only directed at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), (b) high net worth bodies corporate falling within Article 49(2) of the Order, and (c) any other persons to whom it may

2 otherwise lawfully be communicated (all such persons together being referred to as relevant persons ). Any person who is not a relevant person should not act or rely on this Offering Memorandum or any of its contents. The Offering Memorandum has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Issuer, the Joint Lead Managers or any person who controls them, nor any director, officer, employee or agent of any of them or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Offering Memorandum distributed to you in electronic format and the hard copy version available to you on request from the Joint Lead Managers.

3 8JAN Petkim Petrokimya Holding A.Ş. U.S.$500,000, per cent. Notes due 2023 The U.S.$500,000, per cent. Notes due 2023 (the Notes ) are issued by Petkim Petrokimya Holding A.Ş. (the Issuer or Petkim and together with its subsidiaries, the Group ). Interest on the Notes is payable semi-annually in arrear on 26 January and 26 July in each year and the first payment shall be made on 26 July The Notes mature on 26 January All payments in respect of the Notes shall be made without withholding or deduction for, or on account of, taxes imposed or levied by or on behalf of a Relevant Jurisdiction (as defined in Terms and Conditions of the Notes Taxation ) to the extent described under Terms and Conditions of the Notes Taxation. Under current Turkish tax law, withholding tax at the rate of 0 per cent. applies to payments of interest on the Notes. See Taxation Certain Turkish Tax Considerations. The Issuer may, at its option, redeem the Notes in whole, but not in part, at any time at par plus accrued interest, in the event of certain tax changes as described under Terms and Conditions of the Notes Redemption and Purchase Redemption for Taxation Reasons. On the occurrence of a Change of Control (as defined in the terms and conditions of the Notes (the Conditions )), each Noteholder shall have the option to give notice requiring the Issuer to redeem or, at the Issuer s option, purchase (or procure the purchase of) each Note held by the relevant Noteholder on the purchase date, at 101 per cent. of the principal amount of the Note together with accrued interest (if any). See Terms and Conditions of the Notes Redemption at the Option of the Noteholders upon a Change of Control. Application has been made to the Irish Stock Exchange plc (the Irish Stock Exchange ) for the approval of this document (this Offering Memorandum ) as listing particulars. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the official list of the Irish Stock Exchange (the Official List ) and to trading on the Global Exchange Market of the Irish Stock Exchange (the Global Exchange Market ). The Global Exchange Market is not a regulated market for the purposes of the European Union ( EU ) Directive 2004/39/EC (as amended) (the Markets in Financial Instruments Directive ). References in this Offering Memorandum to Notes being listed (and all related references) shall mean that such Notes have been admitted to trading on the Global Exchange Market and have been admitted to the Official List. Application has been made to the Capital Markets Board (the CMB ) of the Republic of Turkey ( Turkey ), in its capacity as competent authority under Law No (the Capital Markets Law ) of Turkey relating to capital markets, for its approval of the issuance and sale of the Notes by the Issuer outside Turkey. The Notes cannot be sold before the necessary approvals are obtained from the CMB and an approved issuance certificate (ihraç belgesi) is published on the Public Disclosure Platform and the Issuer s website. The CMB s approval of the issuance certificate (ihraç belgesi), based upon which the offering of the Notes will be conducted, was obtained on 22 December 2017, and the written approval of the CMB relating to the issue of the Notes (which may be in the form of a tranche issuance certificate (in Turkish: tertip ihraç belgesi) is expected to be obtained from the CMB on or before the Issue Date (as defined below). The Notes are expected to be rated B1 (stable outlook) by Moody s Investors Service Ltd. ( Moody s ) and B (stable outlook) by Fitch Ratings Limited ( Fitch ). Each of Moody s and Fitch is established in the EU, domiciled in the United Kingdom, and is included in the list of credit rating agencies registered in accordance with Regulation (EC) No. 1060/2009 on Credit Rating Agencies as amended by Regulation (EU) No. 513/2011 (the CRA Regulation ). This list is available on the European Securities and Markets Authority ( ESMA ) website ( (last updated 29 March 2017). A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating organisation. Issue Price: per cent. plus accrued interest, if any, from the Issue Date. The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the Securities Act ), or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, sold or delivered within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the Notes are being offered, sold or delivered: (a) in the United States only to qualified institutional buyers ( QIBs ) (as defined in Rule 144A under the Securities Act ( Rule 144A )) in reliance on, and in compliance with, Rule 144A; and (b) outside the United States in reliance on Regulation S under the Securities Act ( Regulation S ). Each purchaser of the Notes will be deemed to have made the representations described in Subscription and Sale and is hereby notified that the offer and sale of Notes to it is being made in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A. In addition, until 40 days after the commencement of the offering, an offer or sale of any of the Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if the offer or sale is made otherwise than in accordance with Rule 144A. The Notes will be issued in registered form in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. The Notes will initially be represented by two global certificates in registered form (the Global Certificates ), one of which will be issued in respect of the Notes (the Rule 144A Notes ) offered and sold in reliance on Rule 144A (the Restricted Global Certificate ) and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company ( DTC ) and the other of which will be issued in respect of the Notes ( Regulation S Notes ) offered and sold in reliance on Regulation S (the Unrestricted Global Certificate ) and will be registered in the name of a nominee for a common depositary of Euroclear Bank SA/NV ( Euroclear ) and Clearstream Banking S.A. ( Clearstream, Luxembourg ). Interests in the Restricted Global Certificate will be subject to certain restrictions on transfer. See Selling and Transfer Restrictions. Beneficial interests in the Global Certificates will be shown on, and transfers thereof will be effected only through, records maintained by DTC, Euroclear and Clearstream, Luxembourg and their participants. It is expected that delivery of the Global Certificates will be made on 26 January 2018 or such later date as may be agreed (the Issue Date ) by the Issuer and the Joint Lead Managers (as defined under Subscription and Sale ). Except in limited circumstances, individual certificates will not be issued in exchange for beneficial interests in the Global Certificates. An investment in Notes involves certain risks. Prospective investors should have regard to the factors described under the heading Risk Factors, beginning on page 21 of this Offering Memorandum. Goldman Sachs International Joint Global Coordinators Joint Bookrunners Goldman Sachs International J.P. Morgan Citigroup Société Générale Joint Lead Managers The date of this Offering Memorandum is 22 January VTB Capital J.P. Morgan

4 IMPORTANT NOTICES We accept responsibility for the information contained in this Offering Memorandum. To the best of our knowledge (having taken all reasonable care to ensure that such is the case) the information contained in this Offering Memorandum is in accordance with the facts and does not omit anything likely to affect the import of such information. Any information sourced from third parties contained in this Offering Memorandum has been accurately reproduced and, as far as we are aware and are able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. This third-party information is presented in the following section of this Offering Memorandum: Industry Overview. Where third-party information has been used in this Offering Memorandum, the source of this information has been identified. Neither the Joint Lead Managers nor BNY Mellon Corporate Trustee Services Limited (the Trustee ) has independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Joint Lead Managers or the Trustee as to the accuracy or completeness of the information contained in this Offering Memorandum or any other information provided by us in connection with the offering of the Notes. No Joint Lead Manager nor the Trustee accepts any liability in relation to the information contained in this Offering Memorandum or any other information provided by us in connection with the offering of the Notes or their distribution. The contents of this Offering Memorandum are not, are not to be construed as, and should not be relied on as, legal, business or tax advice and each prospective investor should consult its own legal and other advisers for any such advice relevant to it. No person is or has been authorised to give any information or to make any representation not contained in or not consistent with this Offering Memorandum or any other information supplied in connection with the offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by us, any of the Joint Lead Managers or the Trustee. Neither this Offering Memorandum nor any other information supplied in connection with the offering of the Notes constitutes an offer or invitation by or on behalf of us, any of the Joint Lead Managers or the Trustee to any person to subscribe for or to purchase any Notes. Neither the delivery of this Offering Memorandum nor the offering, sale or delivery of the Notes shall in any circumstances imply that the information contained herein concerning us is correct at any time subsequent to the date hereof or that any other information supplied in connection with the offering of the Notes is correct as of any time subsequent to the date indicated in the document containing the same. The Joint Lead Managers and the Trustee expressly do not undertake to review our financial condition or affairs during the life of the Notes or to advise any investor in the Notes of any information coming to their attention. This Offering Memorandum does not constitute an offer to sell or the solicitation of an offer to buy the Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distribution of this Offering Memorandum and the offer or sale of Notes may be restricted by law in certain jurisdictions. We, the Joint Lead Managers and the Trustee do not represent that this Offering Memorandum may be lawfully distributed, or that the Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by us, the Joint Lead Managers or the Trustee which is intended to permit a public offering of the Notes or the distribution of this Offering Memorandum in any jurisdiction where action for that purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither this Offering Memorandum nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Offering Memorandum or any Notes may come must inform themselves about, and observe, any such restrictions on the distribution of this Offering Memorandum and the offering and sale of Notes. In particular, there are restrictions on the distribution of this Offering Memorandum and the offer or sale of Notes in the United States, the United Kingdom, Turkey and Canada. See Subscription and Sale. The offering of the Notes has been authorised by the CMB only for the purpose of the issuance and sale of the Notes outside Turkey in accordance with Article 15(b) of Decree 32 on the Protection of the Value of the Turkish Currency (as amended from time to time, the Decree 32 ) and the Communiqué, No. VII on the Debt Instruments (the Communiqué ). The Notes (and any beneficial interests i

5 therein) must be offered or sold only outside Turkey, and the CMB has authorised the offering of the Notes on the basis that, following the primary sale of the Notes, no transaction that may be deemed as a sale of the Notes (or any beneficial interests therein) in Turkey by way of private placement or public offering may be engaged in. Pursuant to Article 15(d)(ii) of Decree 32, there is no restriction on the purchase or sale of the Notes (or beneficial interests therein) by residents of Turkey, provided that they purchase or sell such Notes (or such beneficial interests) in the financial markets outside Turkey and such sale or purchase is made through banks and/or licensed brokerage institutions authorised pursuant to CMB regulations and the purchase price is transferred through Turkish banks. As such, Turkish residents should use banks or licensed brokerage institutions when purchasing any Notes (or beneficial interests therein) and transfer the purchase price through Turkish banks. The Issuer has obtained the CMB approval letter dated 22 December 2017 and numbered E and the CMB approved issuance certificate (onaylanmış ihraç belgesi) and the approved tranche issuance certificate (tertip ihraç belgesi) will be obtained from the CMB before any sale and issuance of the Notes. Pursuant to the Communiqué, we are required to notify the Central Registry Agency (Merkezi Kayıt Kuruluşu A.Ş.) (the CRA Turkey ) within three business days from the issue date of the Notes of the principal amount, the issue date, the ISIN (if any), the interest commencement date, the maturity date, the interest rate, the name of the custodian and the currency of the Notes and the country of issuance. IN CONNECTION WITH THE ISSUE OF THE NOTES, GOLDMAN SACHS INTERNATIONAL AS STABILISING MANAGER (THE STABILISING MANAGER ) (OR PERSON(S) ACTING ON BEHALF OF THE STABILISING MANAGER) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, WE MAY NOT (WHETHER THROUGH OVER-ALLOTMENT OR OTHERWISE) ISSUE MORE NOTES THAN HAVE BEEN APPROVED BY THE CMB. This Offering Memorandum is being provided in the United States to a limited number of QIBs for informational use solely in connection with the consideration of the purchase of the Notes. It may not be copied or reproduced in whole or in part nor may it be distributed or any of its contents disclosed to anyone other than the prospective investors to whom it is originally submitted. Each purchaser or holder of interests in the Notes will be deemed, by its acceptance or purchase of any such Notes, to have made certain representations and agreements as set out in Selling and Transfer Restrictions. In this Offering Memorandum, the terms Group, we, us and our refer to the Issuer and collectively to the Issuer and its subsidiaries on a consolidated basis as the context requires. Neither this Offering Memorandum nor any other information supplied in connection with the offering of the Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should be considered as a recommendation by the Issuer or any of the Joint Lead Managers that any recipient of this Offering Memorandum or any other information supplied in connection with the offer or sale of the Notes should purchase the Notes. Each person contemplating making an investment in the Notes must make its own investigation and analysis of the creditworthiness of the Issuer and its own determination of the suitability of any such investment, with particular reference to its own investment objectives and experience, and any other factors that may be relevant to it in connection with such investment. In particular, each potential investor should: have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Offering Memorandum or any applicable supplement; ii

6 have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact such investment will have on its overall investment portfolio; have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal and profit payments is different from the potential investor s currency; understand thoroughly the terms of the Notes and be familiar with the behaviour of financial markets in which they participate; and be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks. None of the Issuer, the Joint Lead Managers or any of their respective representatives is making any representation to any offeree or purchaser of the Notes (or beneficial interests therein) regarding the legality of any investment by such offeree or purchaser under applicable legal investment or similar laws. Each investor should consult with its own advisers as to the legal, tax, business, financial and related aspects of an investment in the Notes. MIFID II product governance / Professional investors and Eligible Counterparties only target market Solely for the purposes of each manufacturer s product approval process, the target market assessment in respect of the Notes has led to the conclusion that: (i) the target market for the Notes is eligible counterparties and professional clients only, each as defined in Directive 2014/65/EU (as amended, MiFID II ); and (ii) all channels for distribution of the Notes to eligible counterparties and professional clients are appropriate. Any person subsequently offering, selling or recommending the Notes (a distributor ) should take into consideration the manufacturers target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the Notes (by either adopting or refining the manufacturers target market assessment) and determining appropriate distribution channels. PRIIPs Regulation / Prohibition of sales to EEA retail investors The Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area ( EEA ). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of MiFID II; or (ii) a customer within the meaning of Directive 2002/92/EC (as amended, the Insurance Mediation Directive ), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II. Consequently no key information document required by Regulation (EU) No 1286/2014 (as amended, the PRIIPs Regulation ) for offering or selling the Notes or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the Notes or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPS Regulation. NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY IN THE UNITED STATES, NOR HAS ANY SUCH COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES. THE NOTES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. AS A PROSPECTIVE INVESTOR, YOU SHOULD BE AWARE THAT YOU MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. PLEASE REFER TO THE SECTIONS IN THIS OFFERING MEMORANDUM ENTITLED SUBSCRIPTION AND SALE AND SELLING AND TRANSFER RESTRICTIONS. iii

7 NOTICE TO PROSPECTIVE INVESTORS IN CANADA The Notes may be sold only to purchasers purchasing, or deemed to be purchasing, as principal, that are accredited investors, as defined in National Instrument Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), or section 1.1 of National Instrument Prospectus Exemptions and are permitted clients, as defined in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the Notes must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this Offering Memorandum (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser s province or territory for particulars of these rights or consult with a legal adviser. Pursuant to section 3A.3 of National Instrument Underwriting Conflicts (NI ), the initial purchasers are not required to comply with the disclosure requirements of NI regarding underwriter conflicts of interest in connection with this offering. iv

8 FORWARD-LOOKING STATEMENTS This Offering Memorandum includes forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of All statements other than statements of historical facts included in this Offering Memorandum, including, without limitation, certain statements regarding our operations, financial position, and business strategy, may constitute forwardlooking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, believe, continue, or similar statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable at this time, we can give no assurance that such expectations will prove to be correct. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this Offering Memorandum, including, without limitation, in conjunction with the forward-looking statements listed below, and include, among others, the following: the cyclical nature of the petrochemicals industry; Turkish and global economic and financial market conditions; volatility in the price of oil and natural gas; disruption in the supply of raw materials and access to electricity; competition in the petrochemicals industry; changes in environmental and other laws and regulations; pipeline leaks and ruptures, explosions, fires, mechanical failures, transportation interruptions or truck accidents, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks or other similar events; challenges in connection with the construction of the STAR Refinery (as defined herein); fluctuations in exchange rates and inventory prices; natural disasters, terrorist activities and disruptive geopolitical events; interruptions or failures in our information technology systems; deterioration in employee relations; and adverse political or economic developments in Turkey. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by reference to these cautionary statements. HISTORICAL AND CURRENT MARKET AND INDUSTRY DATA Historical and current market data used throughout this Offering Memorandum were obtained from internal company analyses, consultants reports and industry publications. In particular, information has been provided by Nexant, Inc. ( Nexant ), an industry consultant. Industry surveys and publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of information contained therein is not guaranteed. While we accept responsibility for the accurate extraction and reproduction of this market data, we have not independently verified such data and cannot guarantee its accuracy or completeness. In addition, certain statements in this Offering Memorandum regarding the petrochemicals industry, our position in that industry and our market share are based on internal company estimates, our experience and investigations of market conditions and our review of industry positions. We cannot assure you that any of the assumptions underlying those statements are accurate or correctly reflect our position in the industries. Similarly, internal company analyses, while believed by us to be reliable, have not been verified by any independent sources, and neither we nor any of the Joint Lead Managers make any representation as to the accuracy of such information. While we are not aware of any misstatements regarding any industry or similar data presented herein, such data involve risks and uncertainties and v

9 are subject to change based on various factors, including those discussed under the Risk Factors section in this Offering Memorandum. Nexant conducted its analysis and prepared its reports utilising reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review was based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen, including the actions of governments, individuals, third parties and competitors. There is no implied warranty of merchantability or fitness for a particular purpose to apply. Some of the information on which the Nexant reports are based has been provided by others. Nexant has utilised such information without verification unless specifically noted otherwise. Nexant accepts no liability for errors or inaccuracies in information provided by others. AVAILABLE INFORMATION We are not currently required to file periodic reports under Section 13 or 15 of the United States Securities Exchange Act of 1934, as amended (the Exchange Act ) with the United States Securities and Exchange Commission. To permit compliance with Rule 144A in connection with any resales or other transfers of Notes that are restricted securities within the meaning of the Securities Act, we have undertaken to furnish, upon the request of a holder of such Notes or any beneficial interest therein, to such holder or to a prospective purchaser designated by him, the information required to be delivered under Rule 144A(d)(4) under the Securities Act if, at the time of the request, we are neither a reporting company under Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder. ENFORCEABILITY OF JUDGMENTS We are a corporation organised under the laws of Turkey. Certain of the officers and directors named herein reside in Turkey and all or a substantial portion of our assets and of such officers and directors are located outside the United Kingdom and the United States. As a result, it may not be possible for investors to effect service of process in the United Kingdom or the United States upon us or such persons, or to enforce judgments against them obtained in the courts of the United Kingdom or the United States. In order to enforce such judgments in Turkey, investors should initiate enforcement lawsuits before the competent Turkish courts. In accordance with Articles 50 to 59 of Turkey s International Private and Procedure Law (Law No. 5718), the courts of Turkey will not enforce any judgment obtained in a court established in a country other than Turkey unless: (a) there is in effect a treaty between such country and Turkey providing for reciprocal enforcement of court judgments; (b) there is de facto enforcement in such country of judgments rendered by Turkish courts; or (c) there is a provision in the laws of such country that provides for the enforcement of judgments of the Turkish courts. There is no treaty between Turkey and the United Kingdom or between Turkey and the United States providing for reciprocal enforcement of judgments. Turkish courts have rendered at least one judgment confirming de facto reciprocity between Turkey and the United Kingdom; however, since de facto reciprocity is decided by the relevant court on a case-by-case basis, there is uncertainty as to the enforceability of court judgments obtained in the United Kingdom by Turkish courts. There is no de facto reciprocity between the United States and Turkey. Moreover, there is uncertainty as to the ability of an investor to bring an original action in Turkey based upon any non-turkish securities laws. In addition, the courts of Turkey will not enforce any judgment obtained in a court established in a country other than Turkey if: (a) the defendant was not duly summoned or represented or the defendant s fundamental procedural rights were not observed; (b) the judgment in question was rendered with respect to a matter within the exclusive jurisdiction of the courts of Turkey; vi

10 (c) the judgment is incompatible with a judgment of a court in Turkey between the same parties and relating to the same issues or, as the case may be, with an earlier foreign judgment on the same issue and enforceable in Turkey; (d) the judgment is not of a civil nature; (e) the judgment is clearly against public policy rules of Turkey; (f) the judgment is not final and binding with no further recourse for appeal or similar revision process under the laws of the country where the judgment has been rendered; or (g) the judgment was rendered by a foreign court that has deemed itself competent even though it has no actual relationship with the parties or the subject matter at hand. Furthermore, to be enforceable under the laws of Turkey, the choice of laws of a foreign jurisdiction or submission to the jurisdiction of the courts of such a foreign jurisdiction should indicate the competent courts with sufficient precision. Therefore, lack of precision while determining the competent court of a foreign jurisdiction may render the choice of foreign court unenforceable. As a result, it may not be possible to: effect service of process outside Turkey upon any of the directors and executive officers named in this Offering Memorandum; or enforce, in Turkey, court judgments obtained in courts of jurisdictions other than Turkey against us or any of the directors and executive officers named in this Offering Memorandum in any action. vii

11 PRESENTATION OF FINANCIAL AND OTHER INFORMATION Financial Information As we are listed on the Istanbul Bourse (the Borsa Istanbul ), our consolidated financial statements are required to be prepared in conformity with the accounting standards issued by the Public Oversight Accounting and Auditing Standards Authority in Turkey ( POA ), which contain Turkish Financial Reporting Standards and its addendum and interpretations ( Turkish Accounting Standards ). The consolidated financial statements have not been prepared in accordance with the international accounting standards adopted pursuant to the procedure of Article 3 of Regulation (EC) No. 1606/2002. There may be material differences in the financial information had Regulation (EC) No. 1606/2002 been applied to our historical consolidated financial information. Our consolidated financial statements include: the unaudited interim condensed consolidated financial statements as at and for the nine months ended 30 September 2017, which include comparative financial information as at and for the nine months ended 30 September 2016 (the 2017 Unaudited Interim Financial Statements ); the unaudited interim condensed consolidated financial statements as at and for the nine months ended 30 September 2016, which include comparative financial information as at and for the nine months ended 30 September 2015 (the 2016 Unaudited Interim Financial Statements and, together with the 2017 Unaudited Interim Financial Statements, the Unaudited Interim Financial Statements ); the audited consolidated financial statements as at and for the year ended 31 December 2016, which include comparative financial information as at and for the year ended 31 December 2015 (the 2016 Audited Financial Statements ); and the audited consolidated financial statements as at and for the year ended 31 December 2015, which include comparative financial information as at and for the year ended 31 December 2014 (the 2015 Audited Financial Statements, and together with the Unaudited Interim Financial Statements and the 2016 Audited Financial Statements, the Financial Statements ). The 2015 Audited Financial Statements and 2016 Audited Financial Statements have been prepared and presented in accordance with Turkish Accounting Standards and the Unaudited Interim Financial Statements have been prepared and presented in accordance with Turkish Accounting Standard 34 Interim Financial Reporting. Unless otherwise indicated, the financial information presented in this Offering Memorandum is extracted or derived from the Financial Statements, which appear beginning on page F-1 of this Offering Memorandum. Turkish Accounting Standards differ from International Financial Reporting Standards ( IFRS ) as promulgated by the International Accounting Standards Board ( IASB ). See Summary of Differences between IFRS and Turkish Accounting Standards below. For future periods, we intend to continue to use Turkish Accounting Standards as our sole basis for reporting and not to publish or otherwise report financial statements in accordance with IFRS. Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi ( E&Y Turkey ), a member firm of Ernst & Young Global Limited, independent auditors, have audited the 2015 Audited Financial Statements and the 2016 Audited Financial Statements, as stated in their reports thereon appearing elsewhere herein, without qualification, in accordance with the Standards on Auditing as issued by the CMB and the Auditing Standards, which are part of the Turkish Auditing Standards as issued by the POA. E&Y Turkey was not reappointed as our independent auditor and effective 1 January 2017, PwC Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi ( PwC Turkey ), a member firm of PricewaterhouseCoopers, was appointed as our independent auditor. PwC Turkey have reviewed the 2017 Unaudited Interim Financial Statements in accordance with the Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity as issued by the POA. This Offering Memorandum also contains certain unaudited financial information for the twelve months ended 30 September 2017, which has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. The unaudited financial information for the twelve months ended 30 September 2017 contained in this viii

12 Offering memorandum has not been prepared in accordance with any generally accepted accounting standards, has not been audited or reviewed in accordance with any generally accepted auditing or review standards and has been prepared for illustrative purposes only and is not necessarily indicative of our results of operations for any future period and is not prepared in the ordinary course of our financial reporting. This Offering Memorandum also includes certain unaudited financial information that has been adjusted to give effect to the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ with respect to pro forma cash and cash equivalents, pro forma debt (excluding project finance), pro forma debt, pro forma net debt (excluding project finance), pro forma net debt and pro forma interest expense as at and for the twelve months ended 30 September This unaudited pro forma financial information has been prepared for illustrative purposes only and does not purport to represent what our actual consolidated financial position would have been had the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ occurred on 30 September 2017, nor does it purport to project our financial position at any future date. The unaudited pro forma financial information included in this Offering Memorandum is based on available information and certain assumptions and estimates that we believe are reasonable but may differ from the actual amounts. Reclassifications 2017 Unaudited Interim Financial Statements In preparing the 2017 Unaudited Interim Financial Statements, we made a number of reclassifications to the comparative information contained therein in respect of the consolidated statement of financial position as at 31 December 2016 and the consolidated statements of financial position and cash flows as at and for the nine months ended 30 September These related to the reclassification of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. We have evaluated the impact of these revisions both individually and in the aggregate and concluded they are not material to any previously reported annual or interim financial statements. The following tables illustrate the adjustments that would have been made to the consolidated statements of financial position and cash flows as at and for the years ended 31 December 2014, 2015 and 2016, and the nine months ended 30 September 2016 as a result of the reclassifications in the 2017 Unaudited Interim Financial Statements. Consolidated Statement of Financial Position as at 30 September 2016 As Previously Impact of Reported revisions Adjusted (TL millions) Trade payables (541) 221 Short term borrowings Consolidated Statement of Cash Flows for the nine months ended 30 September 2016 As Previously Impact of Reported revisions Adjusted (TL millions) Cash flows from operating activities Cash flows from financing activities... (449) (291) (741) ix

13 Consolidated Statement of Financial Position as at 31 December 2016 As Previously Impact of Reported revisions Adjusted (TL millions) Trade payables... 1,085 (702) 383 Short term borrowings ,164 Investment properties (927) 1 Property, plant and equipment... 1, ,831 Consolidated Statement of Cash Flows for the year ended 31 December 2016 As Previously Impact of Reported revisions Adjusted (TL millions) Cash flows from operating activities Cash flows from financing activities... (310) (270) (581) Consolidated Statement of Financial Position as at 31 December 2015 As Previously Impact of Reported revisions Adjusted (TL millions) Trade payables... 1,106 (838) 268 Short term borrowings ,157 Consolidated Statement of Cash Flows for the year ended 31 December 2015 As Previously Impact of Reported revisions Adjusted (TL millions) Cash flows from operating activities (513) 348 Cash flows from financing activities Consolidated Statement of Financial Position as at 31 December 2014 As Previously Impact of Reported revisions Adjusted (TL millions) Trade payables (275) 356 Short term borrowings Consolidated Statement of Cash Flows for the year ended 31 December 2014 As Previously Impact of Reported revisions Adjusted (TL millions) Cash flows from operating activities... (31) Cash flows from financing activities (50) 245 In this Offering Memorandum, unless stated otherwise, the financial information as at and for the years ended 31 December 2014 and 2015 are derived from the 2015 Audited Financial Statements, the financial information as at and for the year ended 31 December 2016 are derived from the 2016 Audited Financial Statements, the financial information as at and for the nine months ended 30 September 2016 is derived from the 2016 Unaudited Interim Financial Statements, rather than from the 2017 Unaudited Interim Financial Statements, and the financial information as at and for the nine months ended 30 September 2017 is derived from the 2017 Unaudited Interim Financial Statements. x

14 2016 Audited Financial Statements In preparing the 2016 Audited Financial Statements, we made a number of reclassifications to the comparative information contained therein in respect of the year ended 31 December The reclassifications made to our consolidated statement of profit and loss and other comprehensive income statement for the year ended 31 December 2015 are as follows: trade receivable rediscount income amounting to TL 8 million netted off under other operating expense were classified to other operating income; deferred finance costs related to trade payables amounting to TL 2 million netted off under cost of sales were classified to other operating loss; and rent income amounting to TL 11 million shown in other operating income was classified to income from investment activities. The reclassifications made to our consolidated statement of financial position as at 31 December 2015 are as follows: Social Security Institution ( SSI ) premium payables to employees amounting to TL 5 million shown in trade payables to third parties were classified to short-term liabilities for employee benefits; and a payable to the Energy Market Regulatory Authority ( EMRA ) amounting to TL 2 million shown in short-term provisions was classified to other payables to third parties. The reclassifications made to our consolidated statement of cash flows for the year ended 31 December 2015 were made in accordance with the Turkish Accounting Standards taxonomy published on 6 June These reclassifications are as follows: there is a classification in the amount of TL 194 million in relation to adjustments related to unrealised foreign exchange translation differences between cash flow generated from operating activities and impact of foreign currency translation differences on cash and cash equivalents; and there is a classification in the amount of TL 55 million in relation to advances given for fixed assets between cash flow from operating activities and cash flow from investment activities. In this Offering Memorandum, when the year ended 31 December 2015 is being compared to the year ended 31 December 2016, the reclassified financial information for the year ended 31 December 2015 is presented. When the year ended 31 December 2015 is being compared to the year ended 31 December 2014, the un-reclassified financial information for the year ended 31 December 2015 is presented. Summary of Differences between IFRS and Turkish Accounting Standards The Financial Statements are prepared in accordance with Turkish Accounting Standards. Turkish Accounting Standards require the use of International Reporting Standards ( IAS/IFRS ) endorsed by the European Union with certain exceptions, including with respect to the application of inflation accounting for the period between January 1 to 31 December We do not believe that the application of IFRS inflation accounting would not have had a material effect on the Financial Statements. Non-TAS Financial Measures This Offering Memorandum includes certain measures that are not measures of performance under Turkish Accounting Standards. These include EBITDA and other related measures. Although EBITDA is not a measure of operating income, operating performance or liquidity under Turkish Accounting Standards, we have presented EBITDA because we understand that EBITDA and EBITDA-based indicators are used by some investors to determine a company s ability to service indebtedness and fund ongoing capital expenditures. EBITDA should not, however, be considered in isolation or as a substitute for operating income as determined by Turkish Accounting Standards, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with Turkish Accounting Standards. In addition, EBITDA as reported by us may not be comparable to similarly titled amounts reported by other companies. xi

15 EXCHANGE RATE INFORMATION The following table sets forth, for the periods indicated, information concerning the high, low, period average and period-end exchange rates for U.S. dollars, expressed as the number of Turkish Lira per U.S. dollar. The rates set forth below are provided solely for your convenience and were not used by us in the preparation of our Financial Statements included elsewhere in this Offering Memorandum. No representation is made that Turkish Lira could have been, or could be, converted into U.S. dollars at that rate or at any other rate. Exchange Rates High Low Average Period End (TL per U.S.$1.00) Nine months ended 30 September Nine months ended 30 September Twelve months ended 30 September January 2018 (to 18 January) Source: Bloomberg xii

16 SUMMARY This summary highlights some information from this Offering Memorandum. It does not contain all of the information that is important in making a decision whether to invest in the Notes. You should read the following summary together with the more detailed information regarding the Group and the Notes being sold in this offering included and incorporated by reference in this Offering Memorandum. Overview of the Group Petkim was established on 3 April 1965 by the Turkish government and is currently the sole petrochemicals producer of size in Turkey. We produce basic and intermediate petrochemical raw materials with an annual average gross production capacity of 3.6 million tons. In 2016, we operated at 88 per cent. capacity, producing 1.7 million tons of saleable products from a total gross output of 3.1 million tons, and in the twelve months ended 30 September 2017, we operated at 94 per cent. capacity, producing 1.8 million tons of saleable products from a total gross output of 3.3 million tons. The Petkim complex has 14 production plants and one masterbatch unit, as well as seven auxiliary processing units, and covers 19 million square metres. We produce petrochemicals across the integrated value chain based on naphtha and related feedstock, including an ethylene cracker with capacity of 588,000 tons per year, downstream integration into polyolefins and vinyl chain products and direct sales of selected cracking co-products (e.g. aromatics). Our products are used by customers in a wide range of industries, including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. Approximately 64 per cent. of our products by value were sold in the domestic market in the nine months ended 30 September 2017, with the remaining 36 per cent. being sold in export markets, where the main destination is Europe. Based on management estimates, as at 31 December 2016, we had a direct domestic market share (based on production capacity) in Turkey of approximately 18 per cent. from our own production, with additional involvement in the domestic market through third party trading. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometers from Izmir, which is one of the few coastal areas in Turkey dedicated to industrial activity. As an integrated company, Petkim is located in a strategic area logistically in terms of both sales and procurement of raw materials. Our logistics capabilities are one of our greatest strengths given the strategic location of our assets. Aliağa s proximity to Izmir, its connection to a large number of Organised Industrial Zones and its access to motorways and railways make it an advantageous location. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make it an attractive platform to serve regional and global trade. Additionally, our facilities are very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. Since the acquisition of Petkim by the SOCAR Group through a privatisation process (as further described under History and Development below), we have undertaken several operational efficiency programmes and investments with the aim of enhancing our competitiveness in the petrochemicals sector. In 2014, for example, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and we also increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. Following the acquisition of Petkim, the SOCAR Group has been focused on creating an industrial hub on the Petkim Peninsula in Aliağa via various projects. This has included the construction of the STAR Refinery, Turkey s first privately established refinery, which is intended to provide us with raw material security. It is the first part of the integration chain, with an investment value of U.S.$6.3 billion and a refining capacity of 10 million tons per year. As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 46 per cent. was financed by equity and the remainder by debt. As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete and it is expected to come onstream in the third quarter of On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş., and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. See Integration STAR Refinery, Strategy Capitalise on potential for synergies and additional, diversified cash flows through the STAR Refinery, Petlim and other projects and 1

17 Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Another major project was the construction of the Petlim Container Port, which was commissioned in 2016 with an initial capacity of 0.8 million TEU. The terminal s capacity was expanded to 1.5 million TEU in September 2017, making it Turkey s third largest port, and is expected to be fully operational in This investment was undertaken by Petlim, 70 per cent. of which is owned by Petkim, with the remaining 30 per cent. being owned by Goldman Sachs, which acquired this stake in 2014 for U.S.$250 million. The total cost of the development and its financing was approximately U.S.$400 million. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. Under this agreement, APM Terminals is responsible for all operational aspects of the port and associated deliverables, including obtaining permits, while Petlim is responsible for all construction-related aspects of the port, including dredging. The expansion of the port to its current capacity was completed in September 2017, and APM Terminals is expected to obtain all necessary permits for use of the port s full capacity in the first quarter of In order to diversify our sources of revenue, we have also invested in a wind farm with a total capacity of 51 MW. The wind farm has 17 new turbines, each able to generate 3 MW of electricity. The construction of all turbines was completed in September 2017, and while the wind farm is currently licensed to generate 25 MW of electricity, we have applied for an amendment to the license which would allow it to generate 51 MW. We plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. The wind farm is expected to reduce carbon emissions by 120,000 tons per year. The investment in the wind farm amounts to e55 million. Petkim holds a Regional Incentive Certificate for modernisation and replacement investments, as well as a Strategic Incentive Certificate for capacity increases and new investments. These certificates were granted within the scope of the Decree published by the Turkish government in 2012 pursuant to a decision by the Council of Ministers regarding State Assistance for Investment. These certificates entitle us to certain tax benefits, including VAT exemptions, customs duty exemptions and tax reduction, among other benefits. The incentive certificate regime is intended to support economic development and address Turkey s current account deficit. Our shares have been listed on Borsa Istanbul since We had a market capitalisation of approximately U.S.$3.1 billion, or approximately TL 11.7 billion, as at 31 December Strengths We believe that we have the following key strengths: Sole petrochemicals producer in an attractive and growing market We are the sole petrochemicals producer of size in Turkey, with an annual average gross production capacity of 3.6 million tons and an 18 per cent. share of the domestic market (based on production capacity) as at 31 December 2016, based on management estimates, with additional involvement in the domestic market through third party trading. In addition, our market share has been driven primarily by our production capacity, given that we have historically been able to sell everything we have produced. As a result, we are well positioned to benefit from expected growth in the Turkish petrochemicals market. Demand for petrochemicals products in Turkey grew at a compound annual growth rate of 6.6 per cent. during the period from 2012 to 2016 and we expect that it will grow at a compound annual growth rate of 7 per cent. between 2016 and This reflects growth for the petrochemicals industry of 1.4 times overall projected GDP growth over that period. We believe in particular that growth in demand for petrochemicals products will be underpinned by two trends, the emergence of a new middle class in developing countries and the expansion of the usage of petrochemicals products, including new technologies in plastics processing. Superior market and customer access as sole incumbent producer with granular marketing network We believe that we are well positioned to address foreign competitive threats as a result of our large and diversified customer base, strong barriers to entry and ability to protect ourselves from import threats. We have over 6,000 customers across a wide range of industries, including the plastics, chemistry, 2

18 packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. We have long-standing supply arrangements with our customers and as a local producer in Turkey, are able to offer customers just-in-time inventory management. We are also able to make sales in much smaller volumes than importers, which represents a key competitive advantage. We have sought to strengthen our customer relationships through sectoral meetings, trade shows and customer visits, where we share domestic production capacity and technical know-how with customers. We believe that we benefit from barriers to entry as a result of the burdensome process to obtain licences, permits and approvals from the government for the production of petrochemicals. There are limited suitable locations for a petrochemicals complex and the requirements for country-wide distribution channels and extensive human know-how also represent barriers to entry. As a result of the foregoing factors, no domestic competition is expected to come onstream in Turkey in the near future. While Turkey is an open market, with no customs duties applicable to imports from the European Union, EFTA and/or FTA countries, we are able to protect ourselves against import threats in extraordinary circumstances. We currently benefit from anti-dumping restrictions, including a rate of 16 per cent. to 18 per cent. for PVC for Germany and the United States and a rate of 8.44 per cent. for PA for South Korea. In the event of unfair competition, under World Trade Organisation rules, we can demand the imposition of anti-dumping duties on countries and/or companies engaging in dumping. In addition, the Turkish market is currently protected against imports as a result of import duties. A customs duty of 3 per cent. is applicable to imports from GSP countries and a customs duty of 6.5 per cent. is applicable to imports from all other countries. We also benefit from tariff restrictions for all LDPE imports. In relation to PTA, we have also initiated anti-dumping proceedings and expect a decision later in Strong operational track-record across an integrated value chain and well-invested asset base strategically located on the Petkim Peninsula We have a strong operational track record, as evidenced by our ability to maintain our capacity utilisation following an expansion of our ethylene cracker by 13 per cent. and an increase in our PTA production capacity by 50 per cent. in The operational efficiency projects we have undertaken have also contributed to our ability to maintain and increase our capacity utilisation. For instance, we have been able to increase our polypropylene production in recent periods without any capacity expansions as a result of utilisation improvements. Our total capacity utilisation rates were 87 per cent. and 88 per cent. for the years ended 31 December 2015 and 2016 and 98 per cent. and 100 per cent. for the first and second quarters of 2017, respectively. This is compared to average industry-wide capacity utilisation rates in Europe of 81 per cent. and 78 per cent. in the first and second quarters of 2017, respectively, according to Nexant. Capacity utilisation rates at our ethylene facility were 95 per cent. and 94 per cent. for the years ended 31 December 2015 and 2016 and 100 per cent. for the nine months ended 30 September 2017, respectively. The capacity expansions we have undertaken have also enabled us to increase our energy efficiency, with a reduction in energy costs per ton of 52 per cent. from 2014 to These factors, along with lower oil prices, tightening availability of steam crackers in the region and weakness of regional currencies, have contributed to significant improvements in our EBITDA margin in recent periods. Our EBITDA margin and average gross profit per ton improved to 24.6 per cent. and U.S.$246/ton in the nine months ended 30 September 2017, compared to 1.9 per cent. and U.S.$43/ton in 2014, respectively. We have systematic and consistent health, safety and environment ( HSE ) policies which are based on industry best practices. We have adopted an HSE management system, SAFE, which is focused on four pillars: continuous improvement, leadership, risk management and implementation. Our HSE management is focused on four sub-disciplines: occupational health and safety, environment, process safety and plant protection. We employ over 75 full-time HSE professionals across our operations. Our focus on HSE has enabled us to decrease our total recordable injury rate ( TRIR ) (based on a 12-month rolling average per 200,000 man hours) from 3.22 in June 2016 to 1.11 in November 2017, and we seek to further decrease our TRIR to 0.3 in the short- to mid-term, in line with global petrochemical industry best practice levels. We have a well-invested asset base with well-maintained, custom-built facilities which we have expanded in recent years, including through investments in our ethylene cracker and PTA production capacity. In comparison with European naphtha-based producers, we have a relatively young ethylene cracker which has had very few unplanned stoppages. 3

19 The strategic location of our assets also provides us with a competitive advantage. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometres from Izmir. Its connection to a large number of Organised Industrial Zones and its access to motorways and railways make Aliağa an advantageous location. The Gebze-Izmir Motorway Project, which is currently under construction and is expected to be completed in 2020, is expected to enhance the competitiveness of our location by connecting the area around Istanbul with Izmir. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make the Petkim Peninsula an attractive platform to serve regional and global trade. The SOCAR Group is focused on achieving the integration of refineries, petrochemicals production, energy, logistics, distribution and transmission in the Petkim Peninsula. This is expected to further contribute to our strategic location. The project is aimed at transforming the Petkim Peninsula into Turkey s first Chemical Industry Park and enhancing the competitiveness of the petrochemicals industry in Turkey. This project includes the construction of the STAR Refinery, which is expected to be our main supplier of naphtha and mixed xylene once it comes onstream in Additionally, our facilities are located very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. The following map shows the location of our assets: 8JAN Attractive financial profile with efficient working capital and risk management, improving cash conversion and natural currency hedge investments We have demonstrated strong potential for cash generation as a result of our track record of profitability and strong receivables risk management capabilities and strong cash conversion. Our cash conversion (defined as EBITDA less maintenance capital expenditure, divided by EBITDA) improved to 88 per cent. in the nine months ended 30 September 2017 from (22) per cent. in the nine months ended 30 September We expect our capital expenditure requirements to decrease in future periods following completion of the investments we have made in Petlim, our wind farm, pipelines to the STAR Refinery for feedstock requirements and Petkim Specialities. We also have a conservative funding structure, primarily comprising U.S. dollar, euro and Turkish lira denominated borrowings. We are focused on maintaining a healthy balance sheet and generally target a net debt/ebitda ratio of no more than 2.0x to 2.5x. As adjusted to give effect to the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ, our net debt/ebitda ratio was 2.3x as at and for the twelve months ended 30 September Excluding indebtedness outstanding under Petlim s project finance credit agreement with Akbank in relation to the Petlim Container Port, our net debt/ebitda ratio was 1.8x as at and for the twelve months ended 30 September * * The EBITDA used to calculate the ratio of pro forma net debt (excluding project finance) to EBITDA does not exclude the contribution to EBITDA from the Petlim Container Port of TL 38 million for the twelve months ended 30 September 2017, the inclusion of which would result in a ratio of pro forma net debt (excluding project finance) to EBITDA of 1.9x. 4

20 We benefit from favourable foreign exchange dynamics as a result of our U.S. dollar denominated revenues. Approximately 45 per cent., 40 per cent. and 15 per cent. of our sales are invoiced in Turkish lira, U.S. dollars and euro, respectively, although most of our sales in Turkish lira are indexed to the U.S. dollar exchange rate on the relevant day announced by Turkish Central Bank. Approximately 90 per cent. of our variable costs are denominated in U.S. dollars, with the remainder being denominated in Turkish lira, and our fixed costs are mainly denominated in Turkish lira. As a result, most of our foreign currency exposure is naturally hedged. We also have efficient working capital management, with inventory and payables controls that allow us to maintain favourable working capital metrics in terms of inventory days, receivables days and payables days. On average, our inventory days and receivables days are each 45 days and our payables days are 90 days, although we expect our payables days to decrease once the STAR Refinery comes onstream due to the contractual terms of the offtake agreement. We manage our receivables through a guarantee system via a direct debit system ( DDS ), guarantee letters and receivable insurance tools. These strong receivables risk management capabilities enable us to sell our products to small- and medium-sized customers, which typically provide us with higher margins in comparison with larger customers. As at 30 September 2017, substantially all of our receivables from local customers were backed by bank guarantees, a system which is accepted by local customers and which enables us to minimise our collection risk, with approximately 86 per cent. of our total receivables being backed by bank guarantees as at the same date. The remaining receivables are with reputable firms which management believes represent relatively low credit risk. This approach represents an important competitive advantage in the local market particularly during periods of economic instability. Our close relationships with local banks as well as our strong receivables risk management capabilities contribute to our ability to achieve stable cash conversion. Further operational improvement from synergies and integration of the STAR Refinery into our supply chain In 2008, STEAŞ and Turcas, a Turkish oil and energy investment company, established a project company, STAR Rafineri A.Ş., to develop, construct, own and operate a complex crude oil refinery with a processing capacity of 10 million tons of crude oil per annum on the Aegean coast of Turkey (the STAR Refinery ). The refinery is located adjacent to Petkim on the Aliağa industrial peninsula north of Izmir and is expected to employ 750 staff. On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş. (by purchasing 30 per cent. of STEAŞ s stake in a holding company which owns 60 per cent. of STAR Rafineri A.Ş.), and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. The state of Azerbaijan and STEAŞ currently hold 40 per cent. and 60 per cent. stakes, respectively, in STAR Rafineri A.Ş. (though STEAŞ s stake is expected to decrease to 42 per cent. following our acquisition). See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Since 2014, we have paid an average premium of approximately U.S.$30/ton over the market price for our imported naphtha. When the STAR Refinery comes onstream, we expect to pay a premium of approximately U.S.$6/ton due to logistical synergies, resulting in cost savings of approximately U.S.$24/ton. Based on a weighted average premium cost, we expect to benefit from annual cost savings of approximately U.S.$38 million per year in naphtha premiums. Additionally, we expect cost savings of approximately U.S.$30 million per year in relation to reformate supplied by the STAR Refinery. We also expect the STAR Refinery to provide us with a steady dividend stream over the medium-term. The refinery is a strategic project for Turkey, as it is expected to reduce Turkey s dependence on imports and decrease the current account deficit. The strategic importance of the STAR Refinery has been confirmed by the fact that it was the first project to receive the Strategic Investment Incentive Certificate from the Turkish Ministry of Economy in December The refinery is located in close proximity to crude oil production sites in the Middle East and the CIS and also benefits from access to key product demand centres in the west of Turkey. It has access to existing port facilities, as well as utilities supply, via our existing infrastructure, which also provides substantial capital cost savings. In addition, the refinery will benefit from on-site offtake by us for naphtha and mixed xylenes. Naphtha is a key feedstock for us and the offtake arrangements with the refinery will provide logistics cost savings for us (compared to imports) and ensure long term reliable supply. Naphtha production and sales to us also mean that the STAR Refinery is not required to produce any gasoline. 5

21 As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete, and it is expected to come onstream in the third quarter of 2018 with a total investment value of approximately U.S.$6.3 billion. As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 47 per cent. was financed by equity (approximately U.S.$2.4 billion invested out of U.S.$2.7 billion committed) and the remainder by debt (approximately U.S.$2.5 billion invested out of U.S.$3.3 billion committed). Approximately U.S.$2.6 billion of the debt financing has a maturity of 18 years with a four year grace period, while the remaining U.S.$600 million has a maturity of 15 years with a four year grace period. Diversified business profile through ancillary infrastructure and energy investments We also plan to diversify our business profile through the Petlim Container Port and our investment in our wind farm. Petlim, in which we own a 70 per cent. stake, was established in 2010 with the aim of developing land already owned by us, thereby diversifying our sources of revenue. It is now the largest container terminal in the Aegean region and the third largest port in Turkey. In addition, Petlim offers deep water capacity and addresses commercial demand from shipping lines for more efficient access to Turkey s high growth market. In addition, we have invested in a wind farm, which is expected to result in a 22 per cent. increase in Petkim s electricity generating capacity and a 120,000 ton reduction in annual carbon emissions. In addition to meeting a portion of our electricity requirements, we plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. As a result, we expect the port and the wind farm to provide additional stability to our cash flows. Experienced senior management team and strong support from controlling shareholder Our senior management team has extensive experience in the energy and petrochemicals industry as well as other sectors in Turkey, Azerbaijan and the broader region. Our general manager, Anar Mammadov, has worked at the SOCAR Group since 2009, including as the CEO of SOCAR Georgia and SOCAR Greece. Riza Bozoklar, our Deputy General Manager and CFO, has experience as a CFO at various companies in Turkey, including Fiat-GM Powertrain, TOFAS, Atas Holding, Delphi Automotive and Cimko Cement and Concrete. See Directors, Senior Management and Corporate Governance. In addition, we enjoy strong support from our controlling shareholder, the SOCAR Group, which is the leading oil and gas company in Azerbaijan with vertically integrated upstream, midstream and downstream operations. The SOCAR Group has made a commitment to Turkey, with the aim of becoming one of the three largest companies in the country. The SOCAR Group has already invested approximately U.S.$18 billion in pursuit of this goal (having invested approximately U.S.$2.8 billion in equity financing into its Turkish operations from 2008 to 2015 through STEAŞ), and expects this investment to increase to U.S.$19.5 billion by These aims are underpinned by the strategic relationship between Azerbaijan and Turkey, which share historical, linguistic, cultural and political similarities, as well as the geo-strategically important location of Turkey as a transit country in key energy corridors. The National Assembly of Azerbaijan has ratified an agreement for cooperation and mutual assistance, including economic cooperation, military-political and security issues, military and militarytechnical cooperation and humanitarian issues. In the energy sector, a key agreement was reached on a package of issues relating to the Shah Deniz gas field in 2013 and successful joint projects have included the Trans-Anatolian Natural Gas Pipeline ( TANAP ) and the Trans-Adriatic Pipeline ( TAP ). The initial capacity of TANAP is expected to be 16.5 billion cubic metres of gas annually. SOCAR Group is expected to inject further capital in TANAP in the medium term to fund its construction capital expenditure. 6

22 The graph below sets forth the SOCAR Group s contribution to Turkey s gross total and industrial foreign direct investment ( FDI ) from 2010 to Turkey gross FDI inflow (billion US$) Total FDI % 8% 8.0 Industrial FDI SOCAR s Share in Industrial FDI (%) SOCAR s Share in Total FDI (%) FDI stands for transactions in the external assets and liabilities of an economy, which in SOCAR s case, means greenfield & brownfield investments. Industrial FDI stands for agriculture, mining, manufacturing and energy % 3% % 8% % 23% 4.3 Industrial s share out of total FDI is on the decline due to the increasing interest in the financial services industry % % % 20% % 50% 40% 30% 20% 10% 0% 8JAN The graph below sets forth the SOCAR Group s historical equity contributions in Turkey from 2008 to 2016 (in U.S.$ millions). 1,938 1, STEAS 1 TANAP 10JAN Note: (1) STEAŞ historical equity contributions include contributions in connection with the Petkim acquisition (including debt service). The SOCAR Group is focused on achieving the integration of refineries, petrochemicals production, energy, logistics, distribution and transmission by The project is aimed at transforming the Petkim Peninsula into Turkey s first Chemical Industry Park and enhancing the competitiveness of the petrochemicals industry in Turkey. We also benefit from the expertise of our shareholder in the development and implementation of our strategy. Hayati Ozturk, who worked at Petkim in various roles from 1977 to 2015 and now acts as CEO Adviser at STEAŞ, and Teymur Abasguliyev, the CFO of STEAŞ, provide valuable operational support. Our key financial policies and governance are closely coordinated with STEAŞ, including in relation to our dividend policy, leverage target, liquidity management and foreign exchange management. Finally, the SOCAR Group has demonstrated its commitment to Petkim through a cross-default clause in relation to its outstanding bonds. 7

23 Strategy Continue to pursue operational efficiency programmes We are focused on achieving operating efficiencies across our organisation, including through the integration of our sales, trading, manufacturing, procurement and maintenance functions. We have also improved productivity at our plants, including through energy efficiency projects, an initiative we intend to continue to pursue. We have developed an integrated optimisation model, which will monitor a wide range of factors across our production facilities to optimise maintenance schedules. Digitisation is also an area of focus for us. For example, the digitisation of our production facilities has enabled us to monitor and control the temperature of our furnaces more efficiently, which has resulted in significant cost savings. In January 2017, we also introduced an operational excellence programme (called Petkim Benim, translated as My Petkim ) which is aimed at creating a working environment in which employees and other stakeholders throughout our entire business are involved in the decision-making process around improving operational efficiency across four main areas of focus. The first area of focus is improving production and energy efficiency and reducing maintenance costs; the second is digitisation with a view to improving the integration of our business functions through advanced analytics; the third is promoting commercial excellence to increase sales force effectiveness and revenues; and the fourth is implementing a dynamic procurement strategy which results in optimal solutions with vendors and better inventory management. As a result of current and planned investments in the operational excellence program, we aim to realise financial savings of approximately U.S.$50 million by the end of Finally, we have implemented certain efficiency measures aimed at enhancing profitability. These have included, for example, working capital measures designed to improve inventory days and payables days, as well as measures intended to facilitate efficient and secure receivables collection. We will continue to implement these types of programmes in future periods in order to improve our working capital position. Capitalise on potential for synergies and additional, diversified cash flows through the STAR Refinery, Petlim and other projects We intend to capitalise on the potential for synergies expected from projects that are being undertaken by us and by our controlling shareholder, STEAŞ. In particular, the STAR Refinery project undertaken by STEAŞ will produce naphtha for use by us as feedstock in our operations, which will provide us with increased raw material security. See Integration STAR Refinery. On 26 May 2014, we signed a 20-year offtake agreement with STAR Rafineri A.Ş. for the purchase of a minimum of 1,300,000 tons and a maximum of 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year, which is expected to be sufficient to sustain our current production levels. The refinery will also produce other refined products which are in deficit in Turkey, including diesel and jet fuel. In addition to providing us with raw material security, we expect significant cost savings from the STAR Refinery resulting from lower raw material transport and storage costs, the higher quality of the feedstock produced by the refinery, the replacement of a portion of the heavy naphtha feedstock used at our facilities with reformate produced by the refinery, a reduction in inventory costs and shared maintenance and security costs. Since 2014, we have paid an average premium of approximately U.S.$30/ton over the market price for our imported naphtha. When the STAR Refinery comes onstream, we expect to pay a premium of approximately U.S.$6/ton due to logistical synergies, resulting in cost savings of approximately U.S.$24/ton. Based on a weighted average premium cost, we expect to benefit from annual cost savings of approximately U.S.$38 million per year in naphtha premiums. Additionally, we expect cost savings of approximately U.S.$30 million per year in relation to reformate supplied by the STAR Refinery (though we have not yet signed an offtake agreement with respect to reformate produced by the STAR Refinery). In terms of strategic rationale, our acquisition of a stake in the STAR Refinery also ensures long-term alignment of interests with the STAR Refinery, as we will enjoy board-level participation and an ability to influence decision-making at the refinery. Furthermore, under the governance framework in the shareholders agreement set out in the STAR Refinery Share Sale Agreement, we expect long-term security of feedstock supply even if STEAŞ ceases to be a controlling shareholder. We also expect the STAR Refinery to provide us with a steady dividend stream over the medium-term. 8

24 We also plan to pursue additional cash flow streams in order to diversify our sources of revenue, including through Petlim, in which we own a 70 per cent. stake. Petlim was established in 2010 with the aim of developing land already owned by us, thereby diversifying our sources of revenue. It is now the largest container terminal in the Aegean region and the third largest port in Turkey. In addition, Petlim offers deep water capacity and addresses commercial demand from shipping lines for more efficient access to Turkey s high growth market. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. The operations agreement between parties has been drafted in a way which seeks to apportion the primary risks to those parties in the best position to manage those risks. In this respect, the operational criteria, operational performance and associated deliverables, such as requisite permits, rest entirely with APM Terminals while all construction responsibilities, including dredging, lie with Petlim. Construction of the port has been completed. While the completion of Petlim has not resulted in an operational benefit to our core petrochemicals business since it is a container port that does not ship chemicals or feedstock, we believe that it represents a significant potential cash flow stream due to the positive outlook for container traffic in the Aegean region. We also expect cost savings on shipments for any expansion projects which we may undertake in the future. Petlim shareholders will be the sole beneficiary of cash flows from Petlim once the Petlim project finance loan is fully amortised. Finally, we plan to develop an additional cash flow stream through the wind farm in which we have invested. The wind farm is expected to result in a 22 per cent. increase in Petkim s electricity generating capacity and a 120,000 ton reduction in annual carbon emissions. In addition to meeting a portion of our electricity requirements, we plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. As a result, we expect the port and the wind farm to provide additional stability to our cash flows. Continue to invest in improving our asset base We intend to continue to invest in our asset base in order to increase capacity to meet demand for our products and increase efficiency across our operations. In particular, although we do not plan to increase production capacity in the near term, we plan to add capacity in Petkim Specialities, with expansions coming onstream in 2018 and Petkim Specialities will produce advanced masterbatch and compounds for which Turkey currently has a significant net import position. We have continuously invested in the Aliağa Complex since its inception, increasing capacity, renovating, modernising and improving energy efficiency. In 2005, for example, we completed expansions of our ethylene, LDPE and polypropylene plants. We also increased capacity at the aromatics plant. In 2014, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and we also increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. We have been able to maintain our capacity utilisation following these investments and have improved our energy efficiency, with a reduction in energy costs per ton of 52 per cent. from 2014 to Expand our trading business We are focused on continuing to grow our trading business through the utilisation of excess capacity across our sales team in Turkey. Through our trading business, we import products from Azerbaijan as well as third parties in Saudi Arabia and South Korea. In addition to polypropylene, we also trade in products that we do not produce, including styrenes. We believe that the expansion of our trading business will not only help us to increase our sales but will also aid us in maintaining our market share in the Turkish market. The Issuer The Issuer, Petkim Petrokimya Holding A.Ş., was incorporated in Turkey on 3 April 1965 with registration number 314 in the Aliağa Trade Register. The address of the Issuer s registered office is Siteler Mh. Necmettin Giritlioglu Cd. No:6, Aliağa İzmir, Turkey and its telephone number is SOCAR Turkey Petrokimya, a wholly-owned subsidiary of STEAŞ, owns 51 per cent. of the Issuer s shares. STEAŞ is in turn owned by SOCAR and Goldman Sachs, who hold 87 per cent. 9

25 and 13 per cent. of STEAŞ s shares, respectively. The remaining 49 per cent. of the Issuer s shares (other than the Group share owned by the Turkish Privatisation Administration) are owned by third party shareholders (free float) pursuant to the Issuer s listing on Borsa Istanbul, which occurred in Corporate Structure The following diagram depicts our corporate structure as at the date of this Offering Memorandum: State Oil Company of Azerbaijan Republic ( SOCAR ) 87% Goldman Sachs International 13% Petkim will acquire 30% of STEA S stake in Refinery Holding which owns 60% of STAR. Effectively Petkim will end up owning 18% of STAR SOCAR Turkey Enerji A.Ş.( STEAŞ ) 100% 30% 70% Rafineri Holding A.Ş. 60% SOCAR Turkey Yatirim A.Ş. The Republic of Azerbaijan Ministry of Economy and Industry 40% 100% The Turkish Government holds a golden share in Petkim Free Float ISE Ticker: PETKM Goldman Sachs International 49% 30% SOCAR Turkey Petrokimya A.Ş. ( SOCAR Turkey Petrokimya ) 51% Petrokimya Holding A.Ş. ( Petkim ) 70% Petlim Limancilik Ticaret A.Ş. ( Petlim ) STAR Rafineri A.Ş. ( STAR Refinery ) The Notes Bank Loans and Trade Finance Akbank Project Finance Credit Agreement Issuer SOCAR and related parties External Shareholders STAR Refinery Bank Facilities The Notes 8JAN The Turkish Privatisation Administration holds a Group C preferential, or golden, share in the Issuer that carries special rights. In particular, the validity of decisions taken by the Board on the following matters depends on the affirmative vote of the member of Board elected from holders of the Group C shares: (i) modifications of the Articles of Association that will affect the privileges assigned to Group C share; (ii) registration of the transfer of registered shares on the share ledger; (iii) determination of the form of power of attorney indicated in the Article 31 of the present Articles of Association; (iv) decisions stipulating a decrease of at least 10 per cent. in the capacity of any plant owned by the Issuer; (v) the Issuer s establishment of a new company or partnership, acquisition of a company being partner to and/or merging with an existing company, separation, dematerialisation, annulment and liquidation of the Issuer. The project finance credit agreement with Akbank in relation to the Petlim Container Port, which is guaranteed by us, is an obligation of Petlim and all other loans and trade financing commitments are obligations of Petkim. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Facilities. 10

26 Overview of the Offering The following is a summary of the terms of this offering. For a more complete description of the terms of the Notes, see Terms and Conditions of the Notes in this Offering Memorandum. Capitalized terms used herein without definition shall have the meanings ascribed thereto in Terms and Conditions of the Notes. Issuer... Petkim Petrokimya Holding A.Ş. Description of Notes... U.S.$500,000, per cent. Notes due Issue Price per cent. Issue Date January Currency... U.S. dollars. Final Redemption and Maturity Date... Unless previously redeemed in accordance with Condition 7 (Redemption and Purchase), the Notes will be redeemed at their principal amount on 26 January 2023 (the Maturity Date ). Interest... The Notes will bear interest from and including the Issue Date at the rate of per cent. per annum, payable semi-annually in arrear on 26 January and 26 July in each year. Yield per cent. Risk Factors... An investment in the Notes involves risks. Investors should read carefully the risks described in more detail in Risk Factors and all of the information contained in this Offering Memorandum before deciding whether or not to purchase any Notes. The order in which these risks are presented is not intended to provide an indication of the likelihood of their occurrence or of their severity or significance. This Offering Memorandum also contains forward-looking statements that are subject to future events, risks and uncertainties. The actual outcome could differ materially from the outcome anticipated in these forward-looking statements as a result of many factors, including but not limited to the risks described in this Offering Memorandum. See Forward- Looking Statements. Joint Global Coordinators... Goldman Sachs International and J.P. Morgan Securities plc. Joint Bookrunners... Citigroup Global Markets Limited, Goldman Sachs International and J.P. Morgan Securities plc. Joint Lead Managers... Citigroup Global Markets Limited, Goldman Sachs International, J.P. Morgan Securities plc, Société Générale and VTB Capital plc. Trustee... BNY Mellon Corporate Trustee Services Limited. Principal Paying Agent... The Bank of New York Mellon, London Branch. Registrar... The Bank of New York Mellon SA/NV, Luxembourg Branch. 11

27 Redemption for Taxation Reasons. The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time (subject to certain conditions), at their principal amount (together with interest accrued to the date fixed for redemption) if, as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction, or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, we would be required to pay additional amounts as provided or referred to in Condition 8 (Taxation) and we cannot avoid the requirement by taking reasonable measures available to us. Redemption at the option of the Noteholders upon a Change of Control... If at any time a Change of Control occurs, each Noteholder shall have the option to give notice requiring the Issuer to redeem or, at the option of the Issuer, purchase (or procure the purchase of) that Noteholder s Note(s) at 101 per cent. of the principal amount of the Note(s) together with interest (if any) accrued to (but excluding) the purchase date. Status of the Notes... Gross up for Withholding Tax... Listing, approval and admission to trading... Governing Law... The Notes will constitute direct, general, unsubordinated, unconditional and (subject to the provisions of Condition 4(b) (Limitation on Liens)) unsecured obligations of the Issuer and will rank pari passu amongst themselves and at least pari passu in right of payment, without preference among themselves, with all other unsecured and unsubordinated obligations of ours, present and future, but, in the event of insolvency, only to the extent permitted by applicable laws relating to creditors rights. All payments of principal and interest in respect of the Notes made by or on behalf of the Issuer shall be made without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatsoever nature imposed or levied by or on behalf of a Relevant Jurisdiction, unless such withholding or deduction is required by law. In that event, we shall pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders after the withholding or deduction shall equal the respective amounts which would have been received in the absence of the withholding or deduction, except that no such additional amounts shall be payable in the circumstances described under Condition 8 (Taxation). Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market, however no assurance can be given that such applications will be accepted. The Global Exchange Market is not a regulated market for the purposes of the Markets in Financial Instruments Directive. The Notes are expected to be listed on or around 26 January The Notes, and any non-contractual obligations arising out of or in connection therewith, will be governed by, and construed in accordance with, English law. See Condition 17 (Governing Law and Submission to Jurisdiction). 12

28 Form, Transfer and Denominations Expected Credit Ratings... Selling Restrictions... The Notes will be issued in registered form in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. The Notes will initially be represented by two global certificates in registered form, one of which will be issued in respect of the Notes offered and sold in reliance on Rule 144A, the Restricted Global Certificate, and the other of which will be issued in respect of the Notes offered and sold in reliance on Regulation S, the Unrestricted Global Certificate. The Restricted Global Certificate will be in registered form, without interest coupons attached, will be deposited with a custodian for, and registered in the name of, Cede & Co. as nominee for DTC. The Unrestricted Global Certificate will be in registered form, without interest coupons attached, will be delivered to a common depositary for, and registered in the name of a nominee of, Euroclear and Clearstream, Luxembourg. Except in limited circumstances, certificates for Notes will not be issued in exchange for beneficial interests in the Global Certificates. See Condition 2 (Transfers of Notes and Issue of Definitive Certificates). Interests in the Rule 144A Notes will be subject to certain restrictions on transfer. See Summary of Provisions Relating to the Notes While in Global Form and Selling and Transfer Restrictions. Interests in the Global Certificates will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg, in the case of the Regulation S Notes, and by DTC and its direct and indirect participants, in the case of Rule 144A Notes. The Notes are expected to be assigned on issue a rating of B1 (stable outlook) by Moody s and B (stable outlook) by Fitch. Each of Moody s and Fitch is established in the EU and is registered under the CRA Regulation. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Neither the assigning rating agency nor the Issuer is obliged to provide the holders of the Notes with any notice of any suspension, change or withdrawal of any rating. Fitch and Moody s are established in the EU, domiciled in the United Kingdom and are included in the list of credit rating agencies registered in accordance with Regulation (EC) No. 1060/2009. This list is available on the ESMA website ( (last updated 29 March 2017). The Notes have not been nor will be registered under the Securities Act or any state securities laws and may not be offered or sold within the United States, except to QIBs in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A or otherwise pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes may be sold in other jurisdictions only in compliance with applicable laws and regulations. The offer and sale of the Notes (or beneficial interests therein) is also subject to restrictions in the United States, the United Kingdom, Turkey and Canada. See Subscription and Sale. 13

29 Use of Proceeds... We intend to use the net proceeds from the offering of the Notes, expected to amount to approximately U.S.$491.8 million after deducting fees and expenses, along with cash on hand, to acquire an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ pursuant to the share sale and transfer agreement we signed with STEAŞ on 9 January See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement and Use of Proceeds. Regulation S Security Codes... ISIN: XS Common Code: Rule 144A Security Codes... ISIN: US71638YAA47 Common Code: CUSIP: 71638Y AA4 14

30 Summary Financial and Operating Information The tables below show our selected historical consolidated financial information as at and for the nine months ended 30 September 2017 and 2016 and as at and for the years ended 31 December 2016, 2015 and Unless otherwise indicated, this information has been extracted without material adjustment from the Unaudited Interim Financial Statements, the 2016 Audited Financial Statements and the 2015 Audited Financial Statements. In connection with the preparation of the 2017 Unaudited Interim Financial Statements and the 2016 Audited Financial Statements, certain line items were reclassified. In this section, unless otherwise indicated, the consolidated statement of financial position information as at 31 December 2016 is derived from the 2016 Audited Financial Statements and the consolidated statement of cash flows information for the nine months ended 30 September 2016 is derived from the 2016 Unaudited Interim Financial Statements, rather than from the 2017 Unaudited Interim Financial Statements. In addition, the reclassified comparative financial information as at and for the year ended 31 December 2015 contained in the 2016 Audited Financial Statements is presented. See Presentation of Financial and Other Information for further detail on the reclassification. The 2015 Audited Financial Statements and the 2016 Audited Financial Statements have been prepared and presented in accordance with Turkish Accounting Standards and the Unaudited Interim Financial Statements have been prepared and presented in accordance with Turkish Accounting Standard 34 Interim Financial Reporting. The following selected historical consolidated financial information should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements, including the notes thereto, included elsewhere in this Offering Memorandum. Consolidated Statement of Profit or Loss and Comprehensive Income Nine months ended Year ended 31 December 30 September Twelve months ended September 2017 (2) (TL millions) (TL (U.S.$ millions) millions) (1) Revenue... 4,133 4,533 4,533 3,253 5,402 6,682 1,900 Cost of sales... (4,047) (3,814) (3,575) (2,585) (4,023) (5,013) (1,425) Gross profit ,379 1, General and administrative expenses... (100) (118) (138) (103) (148) (183) (52) Marketing, selling and distribution expenses... (27) (32) (42) (31) (43) (54) (15) Research and development expenses... (12) (12) (13) (10) (12) (15) (4) Other operating income Other operating expense... (127) (180) (240) (66) (100) (274) (78) Operating profit/(loss)... (61) ,238 1, Income from investing activities Expenses from investing activities... (4) (4) Operating profit/(loss) before financial income and expense (58) ,276 1, Financial income Financial expense... (145) (364) (339) (174) (432) (597) (170) Profit/(loss) before tax... (62) ,227 1, Current tax expense... (19) (163) (113) (177) (227) (65) Deferred tax income/(expense) (23) Profit for the period ,027 1, Note: (1) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September See Exchange Rate Information. (2) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. 15

31 Consolidated Statement of Financial Position As at 31 December (1) As at 30 September 2017 (TL millions) (TL millions) (U.S.$ millions) (2) Assets Current assets Cash and cash equivalents ,342 1,267 1, Financial investments Trade receivables Other receivables Derivative financial assets Inventories Prepaid expenses Other current assets Total current assets... 1,768 2,768 2,660 2, Non-current assets Financial investments Other receivables Investment properties Property, plant and equipment... 1,817 2,277 1,904 3, Intangible assets Prepaid expenses Deferred income tax assets Other non-current assets Total non-current assets... 2,021 2,693 3,609 3,818 1,071 Total assets... 3,788 5,461 6,269 6,802 1,908 Liabilities Current liabilities Short term borrowings , Short term portion of long term borrowings Derivative financial instruments Trade payables ,137 1, Payables related to employee benefits Other payables Deferred revenue Short term provisions Current tax liabilities Other current liabilities Total current liabilities... 1,137 1,584 1,797 2, Non-current liabilities Long term financial liabilities , Derivative financial instruments Deferred revenue Long term provisions Total non-current liabilities ,071 1, Total liabilities... 1,605 2,655 3,199 3, Equity Equity attributable to owners of the parent company. 2,132 2,741 3,002 3, Share capital... 1,000 1,500 1,500 1, Adjustment to share capital Share premium Other comprehensive (expense)/income not to be reclassified to profit and loss... (15) (24) (24) (24) (7) Other comprehensive (expense) to be reclassified to profit and loss... 1 (7) 1 (5) (1) Restricted reserves Retained earnings Net profit for the period/year , Non-controlling interest Total equity... 2,183 2,805 3,069 3, Total liabilities and equity... 3,788 5,461 6,269 6,802 1,908 Note: (1) The consolidated statement of financial position as at 31 December 2016 has not been reclassified to reflect the reclassification in the 2017 Unaudited Interim Financial Statements of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. See Presentation of Financial and Other Information. The reclassified consolidated statement of financial position as at 31 December 2016 is presented on pages F-80 to F-156. (2) The results as at 30 September 2017 are based upon the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. 16

32 Consolidated Statement of Cash Flows Nine months Year ended ended 31 December 30 September Twelve months ended (1) September 2017 (3) (TL millions) (TL (U.S.$ millions) millions) (2) Net cash generated by/(used in) operating activities... (31) , Net cash generated by/(used in) investing activities (735) (405) (256) (332) (481) (137) Net cash generated by/(used in) financing activities (310) (449) (706) (567) (161) Net increase/(decrease) in cash and cash equivalents (253) (551) (60) Foreign exchange differences on cash and cash equivalents Cash and cash equivalents at the beginning of the period ,342 1,342 1, Cash and cash equivalents at the end of the period ,342 1, ,208 1, Note: (1) The consolidated statement of cash flows for the nine months ended 30 September 2016 is derived from the 2016 Unaudited Interim Financial Statements and has not been reclassified to reflect the reclassification in the 2017 Unaudited Interim Financial Statements of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. See Presentation of Financial and Other Information. The reclassified consolidated statement of cash flows for the nine months ended 30 September 2016 is presented on pages F-43 to F-79. (2) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September 2017, except that cash and cash equivalents at the beginning of the period are based upon the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. (3) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. Other Financial Data As at and for the nine As at and for the year months ended Twelve months ended 31 December 30 September ended 30 September (8) EBITDA (1) (TL millions) ,331 1,612 EBITDA (U.S.$ millions (2) ) EBITDA margin (3) % 14.7% 19.6% 18.7% 24.6% 24.1% Capital expenditure (4) (TL millions) Capital expenditure (5) (U.S.$ millions) Capital expenditure (6) (U.S.$ millions) Maintenance capital expenditure (6) (U.S.$ millions) Investment capital expenditure (6) (U.S.$ millions) Cash conversion (7)... (22)% 88% 79% 76% 88% 88% Note: (1) EBITDA is defined as operating profit excluding other operating income and other operating expense, plus depreciation and amortisation (including amounts capitalised as cost of inventories) and provisions. 17

33 The increase in EBITDA to TL 1,331 million for the nine months ended 30 September 2017 from TL 609 million for the nine months ended 30 September 2016 was attributable to an increase of TL 145 million from changes in the quantity of products sold, an increase of TL 711 million from changes in sales prices, an increase of TL 238 million from changes in foreign exchange ( FX ) rates and an increase of TL 135 million from other, offset by a decrease of TL 507 million from changes in naphtha prices. The increase in EBITDA to TL 890 million for the year ended 31 December 2016 from TL 664 million for the year ended 31 December 2015 was attributable to an increase of TL 463 million from changes in naphtha prices, an increase of TL 142 million from changes in FX rates and an increase of TL 97 million from other, offset by a decrease of TL 473 million from changes in sales prices and a decrease of TL 4 million from changes in the quantity of products sold. This reconciliation of EBITDA for the nine months ended 30 September 2017 to EBITDA for the nine months ended 30 September 2016 is based on indicative calculations prepared by us, and has not been audited or reviewed by our auditors. (2) EBITDA (U.S.$ millions) for each period is based upon the average exchange rate for each respective period as set out in Exchange Rate Information. (3) EBITDA margin is defined as EBITDA divided by revenue. (4) Capital expenditure comprises cash outflows from purchases of property, plant and equipment. (5) Capital expenditure, maintenance capital expenditure and investment capital expenditure (U.S.$ millions) for each period is based upon the average exchange rate for each respective period as set out in Exchange Rate Information. (6) Capital expenditure, maintenance capital expenditure and investment capital expenditure are presented on an accrual basis. (7) Cash conversion is defined as EBITDA less maintenance capital expenditure divided by EBITDA. (8) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. Pro Forma Financial Data The table below sets forth certain financial data as at and for the twelve months ended 30 September 2017, as adjusted to give effect to the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ. As at and for the twelve months ended 30 September 2017 (TL millions, (U.S.$ millions) (2) unless ratio) Pro forma cash and cash equivalents (1) Pro forma debt (excluding project finance (3) )... 3, Pro forma debt... 4,115 1,155 Pro forma net debt (excluding project finance (3) )... 2, Pro forma net debt... 3,720 1,044 Pro forma interest expenses Ratio of pro forma net debt (excluding project finance)/ebitda (4) x Ratio of pro forma net debt/ebitda x Ratio of EBITDA to pro forma interest expenses x Note: (1) The adjustment corresponds to the aggregate of (1) the amount paid to STEAŞ using available cash reserves for the uses set forth in Use of Proceeds pursuant to the STAR Refinery Share Sale Agreement and (2) total estimated fees and expenses associated with the offering of the Notes. See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Actual fees and expenses may vary. (2) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September 2017 or the spot exchange rate of TL = U.S.$1.00 as at 30 September 2017, as applicable. See Exchange Rate Information. (3) Project finance represents the amount outstanding under Petlim s project finance credit agreement with Akbank in relation to the Petlim Container Port. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Facilities. (4) The EBITDA used to calculate the ratio of pro forma net debt (excluding project finance) to EBITDA does not exclude the contribution to EBITDA from the Petlim Container Port of TL 38 million for the twelve months ended 30 September 2017, the inclusion of which would result in a ratio of pro forma net debt (excluding project finance) to EBITDA of 1.9x. 18

34 Reconciliations The following table presents a reconciliation of EBITDA to operating profit for the nine months ended 30 September 2017 and 2016 and the years ended 31 December 2016, 2015 and 2014: Nine months Year ended ended 31 December 30 September Twelve months ended September 2017 (4) (TL millions) (TL millions) (U.S.$ millions) (3) Operating profit... (61) ,238 1, Depreciation and amortisation (1) Other operating income... (119) (128) (204) (113) (162) (253) (72) Other operating expenses Provisions (2) (6) EBITDA ,331 1, Note: (1) Depreciation and amortisation includes amounts capitalised as cost of inventories. (2) Provisions relate to employee benefits, impairment on inventories and the reversal of these impairments. (3) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September See Exchange Rate Information. (4) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. The following table, which is based on indicative calculations prepared by us, and has not been audited or reviewed by our auditors, presents a reconciliation of free cash flow to revenue for the twelve months ended 30 September 2017: Twelve months ended 30 September 2017 (TL millions) (U.S.$ millions) (1) Revenue... 6,682 1,900 Cost of sales... (5,013) (1,425) Selling, general and administrative expenses... (237) (67) Research and development... (15) (4) Provisions (2) Depreciation and amortisation (3) EBITDA (4)... 1, Change in net working capital... (394) (112) Capital expenditure (5)... (562) (162) Free cash flow Note: (1) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September See Exchange Rate Information. (2) Provisions relate to employee benefits, impairment on inventories and the reversal of these impairments. (3) Depreciation and amortisation includes amounts capitalised as cost of inventories. (4) EBITDA is defined as operating profit excluding other operating income and other operating expense, plus depreciation and amortisation (including amounts capitalised as cost of inventories) and provisions. (5) Capital expenditure comprises cash outflows from purchases of property, plant and equipment. 19

35 Other Operating Data As at and for the nine As at and for the year months ended ended 31 December 30 September Overall capacity utilisation rate (1)... 68% 87% 88% 89% 96% Ethylene... 63% 95% 94% 93% 100% Thermoplastics... 74% 89% 89% 93% 96% Fibres... 66% 70% 85% 79% 98% Other products (2)... 68% 85% 83% 86% 91% Total production (kilotons)... 2,247 3,118 3,129 2,360 2,558 Ethylene Thermoplastics Fibres Other products (3)... 1,209 1,701 1,675 1,272 1,380 Gross profit per ton (4) (U.S.$/ton) Thermoplastics Fibres Other products (3)... (18) (1) Note: (1) Overall capacity utilisation rate takes into account production across all of our production facilities. (2) Other products utilisation rate takes into account production of aromatics products and derivatives, as well as VCM, CA and MB. (3) Other products include, among others, PA, benzene, P-X, propylene, C4, py-gas, aromatic oil, chlorine, VCM and EDC. (4) Gross profit per ton is calculated as gross profit divided by sales volume. 20

36 RISK FACTORS An investment in the Notes involves a high degree of risk. Any of the following risks could adversely affect the Issuer s or the Group s business, results of operations, financial condition and prospects, in which case the trading price of the Notes could decline, resulting in the loss of all or part of an investment in the Notes, and our ability to pay all or part of the interest or principal on the Notes could be negatively affected. We believe that the following factors may affect our ability to fulfil our obligations under the Notes. All of these factors are contingencies which may or may not occur and we are not in a position to express a view on the likelihood of any such contingency occurring. Factors which we believe may be material for the purpose of assessing the market risks associated with the Notes are also described below. We believe that the factors described below represent the principal risks inherent in investing in the Notes, but we may be unable to pay interest, principal or other amounts on or in connection with the Notes for other reasons, and we do not represent that the statements below regarding the risks of holding the Notes are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Offering Memorandum and reach their own views prior to making any investment decision. Risks Relating to our Industry and Business The cyclical nature of the petrochemicals industry may reduce our sales and gross margin. Margins in the petrochemicals industry are heavily influenced by industry utilisation, which is in turn influenced by the cycles of expansion and contraction of the global economy, creating volatility in the prices of both inputs and finished products. Due to this cyclical nature, historically the international petrochemicals industry has experienced alternating periods of limited supply, which have caused utilisation to increase, followed by an expansion of production capacity, which has resulted in oversupply and decreased utilisation. Historically, the relationship between margins and utilisation has been highly cyclical due to fluctuations in supply resulting from the timing of new investments in capacity and global economic conditions affecting the relative strength or weakness of demand. Generally, capacity is more likely to be added in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result, and in the past frequently have resulted, in overcapacity, which typically leads to a reduction in margins. In response, petrochemicals producers typically reduce capacity or control further capacity additions, eventually causing the market to be relatively undersupplied. In addition, prices of products are set by reference to international market prices and international price trends of key commodities such as oil and natural gas. In line with the high correlation between naphtha prices and oil prices, prior to June 2014, the costs of naphtha based producers such as ourselves were significantly higher than those of their ethane based peers, which resulted in lower EBITDA margins. Subsequently, however, as oil prices declined, the cost of ethylene production for both naphtha based and ethane based producers correspondingly declined, making naphtha based production more competitive in relative terms. Although we expect pricing across our products to remain similar in 2018 and beyond, there can be no assurance that these trends will continue. See Volatility in the price of oil and natural gas may adversely impact our business, results of operations or financial condition and Management s Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Operating Results Supply and Demand Cycle in the Petrochemicals Industry. Current market volatility, along with the increased cost of capital in the emerging markets, has resulted in a decline in new investments in the petrochemicals industry as compared to the last ten years. This trend is likely to continue in the short to medium term, with the majority of such investments expected to originate from China, the United States, India and the Middle East, where access to capital in the emerging markets may be an issue. Despite the decline in new investments, the industry may nonetheless experience a period of oversupply depending on demand dynamics. In addition, our performance is particularly influenced by economic cycles affecting companies in the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents sectors, among others, as our products are used as chemical intermediates in the manufacturing process of such companies. Cyclicality and volatility of earnings in petrochemicals continues to be one of the greatest challenges facing the industry. Unpredictable energy markets, changes in economic growth, capacity expansions, 21

37 operating performance of existing assets, unplanned supply interruptions, and geopolitical influence on markets represent key variables that are difficult to predict and yet have a significant impact on market cycles and the performance of petrochemicals companies. We cannot predict with any measurable accuracy these pricing trends or economic cycles or the duration and dates of such trends and cycles. Our business, results of operations and financial condition could be adversely affected in the event of oversupply and excess capacity in the petrochemicals industry. Furthermore, increased volatility in industry margins could have a significant impact on our short-term results. In such cases, we would have to absorb any losses or borrow additional funds. If we experience significant margin volatility or if we generate losses over a prolonged period and are unable to obtain additional funds, our liquidity could be materially adversely affected and our ability to make payments on our debt obligations would be impaired. Unfavourable Turkish and global economic and financial market conditions could adversely affect our business, results of operations and financial condition. We face risks in relation to changes in Turkish and global economic conditions, consumer demand for goods that incorporate our products, changes in interest rates and instability in securities markets globally, among other factors. We cannot predict the future effects of adverse conditions in the Turkish or global economy and financial markets on market demand for our products. In particular, a worsening economic climate can result in decreased industrial output and decreased consumer demand in sectors including plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents, all of which incorporate our products. Adverse economic conditions can affect consumer and business spending generally, which would result in decreased demand for goods that incorporate our products. Our results of operations are dependent upon economic conditions in Turkey, where approximately 64 per cent. of our products by value were sold in the nine months ended 30 September Turkey s economy has recorded growth during the past five years, with real GDP growth of 11.1 per cent., 4.8 per cent., 5.2 per cent., 6.1 per cent. and 2.9 per cent. for 2012, 2013, 2014, 2015 and 2016, respectively, according to TURKSTAT. Nonetheless, the pace of growth has slowed, and any further slowdown in growth or the emergence of adverse economic conditions or changes in public perception that result in adverse economic conditions could substantially decrease demand for our products and adversely affect our business. See Risks Relating to Turkey We are subject to risks associated with Turkey s political and economic environment. Factors that could hinder long-term macroeconomic conditions include an aging population, low population growth and increasing barriers to trade and globalisation. Many of our customers rely on access to credit to adequately fund their operations. The inability of our customers to access credit may adversely affect our business by reducing our sales, increasing our exposure to accounts receivable bad debts and reducing our profitability. Our results of operations are also dependent upon economic conditions in Europe, where approximately 36 per cent. of our products by value, primarily comprising aromatics, were sold in The global financial and economic crisis resulted in a severe recession in the European Union, followed by a recovery in 2010 and in 2011, with real GDP growth in the Eurozone of 2.1 per cent. and 1.7 per cent., respectively, according to Eurostat. In the wake of the sovereign debt crisis, real GDP contracted by 0.4 per cent. in This was followed by steady growth of 0.3 per cent., 1.8 per cent., 2.3 per cent. and 1.9 per cent. in 2013, 2014, 2015 and 2016, respectively. There can be no assurance, however, that this growth will continue, particularly given geopolitical risks in the region such as the impact of the United Kingdom s vote to withdraw from the European Union in June Moreover, adverse conditions in the credit and financial markets could prevent us from obtaining financing or credit at favourable terms in order to fulfil our financing needs (including the need to refinance or repay our debt obligations, including the Notes). If we are unable to refinance or repay our debt obligations or access the credit and/or capital markets, we may not be able to pursue certain aspects of our business plans, which could materially adversely affect our business, financial condition and results of operations. 22

38 Volatility in the price of oil and natural gas may adversely impact our business, results of operations and financial condition. Our business is subject to volatility in the prices of crude oil and natural gas. International prices of oil and natural gas fluctuate due to various factors beyond our control. These factors include but are not limited to: changes in the global supply and demand of crude oil and natural gas as well as the petrochemicals and chemical products derived therefrom; an increase or decrease in oil or natural gas reserves; global petrochemicals production capacity trends; geopolitical developments; alternative sources of energy; global economic trends; currency exchange fluctuations, inflation, local and foreign regulations and political developments in major oil and natural gas producing and consuming countries; actions by members of the Organisation of Petroleum Producers and Exporting Countries ( OPEC ), and other oil exporting countries; and the use of derivative financial instruments related to oil and natural gas. Increases in the prices of oil and natural gas could result in increases to the cost of feedstock for our operations. On the other hand, a decrease in oil prices may reduce the price of our final petrochemicals products. The price of crude oil has fluctuated significantly during the past five years. According to OPEC s website, the year-end figure for a barrel of crude oil as measured in accordance with OPEC s reference basket (which represents a weighted average of oil prices collected from various oil producing countries) rose from U.S.$ in 2011 to U.S.$ in 2012, before declining to U.S.$ in 2013, U.S.$96.29 in 2014 and U.S.$49.49 in Oil prices increased in 2016 and 2017, with a year-end figure of U.S.$40.68 and U.S.$51.64, respectively. The decline in oil prices during the period from 2012 to 2015 led to a decline in the cost of ethylene production for both naphtha based and ethane based producers. There can be no assurance, however, that oil prices will not continue to rise. The prices of oil and natural gas impact our results indirectly through inventory effects, working capital requirements and demand dynamics. Sharp increases in oil and natural gas prices typically lead to significant inventory gains, while rapid decreases in prices typically result in inventory losses. These inventory gains and losses impact our cost of sales and accordingly, our profitability. Higher oil and natural gas prices also lead to an increase in working capital requirements for us, because payments for supplies increase. Higher absolute prices or rapid price increases can also negatively impact consumer demand for our products. As a result of the foregoing factors, any movements in the price of oil and natural gas could adversely affect our business, results of operations and financial condition. If our contractual arrangements do not enable us to effectively respond to and pass through increases in raw materials to our customers, or we are not able to negotiate required price increases for our products to pass through such increased costs, our results of operations may be negatively affected. Since the value of our chemical products is to a significant extent determined by the raw materials that are required for the production of these products, our profitability strongly depends on the relationship between the sales prices for our products and the costs we incur for raw materials. As prices for most of the raw materials we require tend to be volatile, we constantly need to adjust sales prices, in particular in an environment of rising raw material prices, in order to maintain our profitability. The most significant direct cost associated with the production of our products is naphtha. We purchase naphtha from a range of suppliers, primarily including refineries located in the Black Sea region, pursuant to supply agreements or on the spot market. We intend to rely on feedstock supplied by the STAR Refinery, with which we have signed a contract for the purchase of between 1,300,000 tons and 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year, once it comes onstream in the third quarter of

39 In terms of our contracts with our customers, we have long-standing arrangements which include basic terms such as quantities and price formulae relying on global publications such as Nexant, ICIS and PLATTS. In order to protect our profitability, most of these contracts contain features that permit regular price resetting, which in principle enables the pass-through of increasing raw material costs to customers, albeit this is subject to a time lag. However, we may be unable to fully pass through increasing raw material prices to our customers in such negotiations. Any inability to pass through cost increases to our customers could have a material adverse effect on our business, results of operations and financial condition. Any disruption in our supply of raw materials or access to electricity may have negative consequences for our supply and production chain. Our ability to achieve our strategic objectives and our overall performance and prospects depend and will continue to depend, in large part, upon the successful, timely and cost-effective acquisition of raw materials, in particular naphtha, and access to electricity. We currently source the majority of our supply of naphtha through spot contracts from suppliers in the Black Sea region of Russia and the remainder from the Aliağa refinery of Tüpraş, Turkey s only domestic oil refiner, both of which are located near our facilities or are accessible via direct transportation routes. Nevertheless, the availability of these raw materials may be negatively affected by interruptions in production; industrial actions, accidents or other similar events at suppliers premises or along the supply chain; wars and natural disasters; and the availability of transportation. Our supply of naphtha is expected to become more stable as a result of the STAR Refinery coming onstream in the third quarter of On 26 May 2014, we signed a contract with STAR Rafineri A.Ş., whose main shareholder is SOCAR Turkey Enerji A.Ş. ( STEAŞ ), for the purchase of a minimum of 1,300,000 tons and a maximum of 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year, which is expected to be sufficient to sustain our current production levels. Nonetheless, there can be no assurance that there will not be delays in the STAR Refinery coming onstream or that production from the STAR Refinery will sufficient to meet our needs in future periods. Given that we hold a limited number of days of inventory, any significant disruptions in the supply of raw materials will result in delays in the delivery of products to our customers. In addition, our operations consume a significant amount of electricity and are dependent to a large degree on the electricity generated by our power plant, which has a total electricity generation capacity of 226 MW. In the past, there have been infrequent short-term disruptions in the supply of electricity from our power plant, during which have we relied on our access to Turkey s national electricity grid, and our supply and production chains have not been materially adversely affected to date. However, we may experience more substantial and frequent disruptions in the supply of electricity from our power plant in the future and, notwithstanding any disruptions, such supply of electricity may be insufficient to meet our future requirements. There can be no assurance that we will be able to access the Turkish national electricity grid or any other back-up electricity sources in a timely or cost-effective manner in either of these scenarios. Any disruption in our supply of raw materials or electricity could adversely affect our business, results of operations and financial condition. We face competition in our industry, which may increase due to the emergence of new competitors or the actions of current competitors, and may adversely affect our market position, sales and overall operations. We sell our products in highly competitive markets. Competition in the markets for a majority of our products is based primarily on price. As a result, we may not be able to protect our market position by product differentiation. As a result of competition, increases in raw material costs and other costs may also not necessarily correlate with changes in product prices, either in the direction or the magnitude of the price change. Although we strive to maintain or increase our profitability by reducing costs through improving production efficiency, energy-saving measures, emphasising higher margin products and controlling selling and administration expenses, we cannot provide any assurance that these efforts will be sufficient to offset fully the effect of any pricing changes on our results of operations. In addition, we are exposed to competitive dynamics across several sectors. As the only petrochemicals producer in Turkey, we face competition primarily from imports from large global petrochemicals companies, primarily from the United States and the Middle East, as well as, to a lesser extent due to the extensive lead-time required, the introduction of new PTA (as defined below) and aromatics production capacity in the domestic market. Some of our global competitors are larger and more vertically 24

40 integrated than us (in terms of their upstream and/or downstream processes), are able to source feedstock at lower costs (in particular ethane-based producers) and receive the benefit of substantial government subsidies. Therefore, such competitors may be able to manufacture products more economically than we can, although we expect to achieve greater vertical integration following the completion of the STAR Refinery project. In addition, certain of our competitors may have greater financial, technical, research and technology and marketing resources than we do. As the markets for our products expand, existing competitors may commit more resources to the markets in which we operate, which would have the effect of increasing competition. Global competitors may also engage in dumping in order to gain market share in the markets in which we sell our products, and, though we do not rely on them, we currently benefit from certain regulatory measures in response to such imports (such as anti-dumping duties). However, there can be no assurance that such regulatory measures will remain in place, that new such measures will be implemented or that they will be implemented in a way that is beneficial to us. Moreover, new products and technologies may develop in the future which compete with the products manufactured and technologies we utilise in our plants, which, while well-maintained and refurbished in line with those of our peers in Europe, were originally built in the mid-1980s for the most part. Any of the above could hinder our ability to compete effectively in the markets in which we operate in the future and our business, results of operations and financial condition may be adversely affected as a result. Our operations are subject to various environmental and other laws and regulations, including those related to greenhouse gases. We are subject to various environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, remediation, disposal and transportation of hazardous materials, the emission and discharge of hazardous materials into the ground, air or water, and the health and safety of our employees. Changes in such laws and regulations, the enactment of new laws and regulations that are stricter than those currently in force, or a stricter interpretation of existing laws and regulations, may impose new obligations on us or result in the need for additional investments related to environmental controls, which could adversely affect our business, results of operations and financial condition. In addition, as a petrochemicals producer, we are sometimes subject to unfavourable market perceptions as a result of the environmental impact of our business. As a result, the regulatory requirements applicable to our operations may become more stringent over time, which may in turn adversely affect business, results of operations and financial condition. In addition, over the past few decades, concerns about the relationship between emissions such as carbon dioxide and other greenhouse gases ( GHG ), and global climate change have resulted in increased levels of scrutiny from regulators and the public alike, and have led to proposed and enacted regulations on both national and supranational levels, to monitor, regulate and control carbon dioxide and other GHG emissions. In Turkey, we are required by the Ministry of Environment and Urbanisation (the Ministry of Environment ) to monitor GHG emissions from our facilities and prepare an annual GHG monitoring plan for approval by the Ministry of Environment. See Certain Regulatory Matters. Although we believe that we have been fully compliant with this monitoring requirement to date, there can be no assurance that we will be able to maintain full compliance in the future. In addition, compliance with future GHG regulations governing our operations may result in significantly increased capital expenditure for measures such as capital expenditure to install more environmentally efficient technology or the purchase of allowances to emit carbon dioxide or other GHG. In particular, Turkey has made certain commitments under its Nationally Determined Contribution (NDC) plan in connection with the Paris Agreement on Climate Change which recently came into force, which may affect our operations. While we have budgeted for future capital and operating expenditures to maintain compliance with environmental laws, we cannot assure you that environmental laws, including those related to GHG regulations, will not change or become more stringent in the future, forcing us to make additional expenditures, or that we have been or will be at all times in complete compliance with environmental protection and health and safety law, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage. Therefore, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or arising from stricter or different interpretations of 25

41 such laws, and our liabilities arising from past or future releases of, or exposures to, hazardous substances will not adversely affect our business, results of operations and financial condition. We are required to obtain, maintain and renew governmental permits and approvals to operate our businesses. Any failure to obtain, maintain and review such permits and approvals may negatively impact the way in which we conduct our business. We require permits and approvals to operate our businesses and/or construct and operate our facilities. In the future, we may be required to renew such permits and approvals or to obtain new permits and approvals. In particular, downstream and midstream activities in the Turkish petroleum market are regulated by EMRA. Therefore, we are subject to supervision by EMRA and are required to maintain a processing license and an eligible consumer license in the petroleum market and a production license in the electricity market. Under current environmental legislation, we are also required to obtain permits from governmental authorities for certain operations at our facilities, including, but not limited to, those involving emissions, wastewater discharge, noise control and hazardous waste. See Certain Regulatory Matters. While we are currently fully compliant with the requirements of all of our required permits and approvals, including those issued by EMRA, and have not experienced any difficulty in renewing and maintaining these permits and approvals in the past, there can be no assurance that the relevant authorities will issue or renew any such permits and approvals in the time frame anticipated by us, or at all, in the future. Any failure to renew, maintain or obtain any of these permits and approvals, or the revocation or termination of existing permits and approvals, may subject us to penalties or fines, or interrupt our operations or delay or prevent the implementation of any capacity expansion programmes, and could adversely affect our business, results of operations and financial condition. Our production facilities process some volatile and hazardous materials that subject us to operating risks. We are committed to fostering a culture of industry-leading health and safety best practices, which we believe is essential to the continued safe operation of our production facilities. Our operations are subject to the usual inherent hazards associated with the manufacture of petrochemicals and the handling, storage and transportation of petrochemical materials, including: pipeline leaks and ruptures; explosions; fires; mechanical failure; transportation interruptions and truck accidents; chemical spills; discharges or releases of toxic or hazardous substances or gases; storage tank leaks; and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A major accident at one of our facilities could force us to suspend our operations temporarily or, in severe circumstances, permanently, cause production delays and result in significant remediation costs and lost profits as well as liability for workplace injuries and fatalities. We may also incur litigation related expenses and may face reputational damage as a result of any such incidents. We cannot assure you that our insurance will be sufficient to cover fully all potential hazards incident to our business. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, this could result in significant additional capital expenditure for us and could have a material adverse effect on our business, results of operations and financial condition. 26

42 We may be unable to implement our business strategies or fully capitalise upon our investments in production capacity. Since the acquisition of Petkim by the Azerbaijan State Oil Company ( SOCAR or the SOCAR Group ), we have undertaken several operational efficiency programmes and investments with respect to our existing systems with the aim of enhancing our competitiveness in the petrochemicals sector. In 2014, for example, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and also increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. We may in the future continue to undertake such programmes and investments. There can be no assurance that we will recognise the benefits of these investments, particularly if demand for our products does not continue to expand or if it were to contract. We may also experience unforeseen technical difficulties in completing any capacity expansions, which could give rise to unanticipated costs or capital expenditure overruns. Furthermore, we may be required to seek additional external financing in order to meet our capital expenditure requirements in connection with any such expansions. There can be no assurance that such financing will be available, or, if available, that the terms thereof will be attractive to us. If we are unable to fully capitalise upon our investments or obtain adequate financing for such investments, or if we experience technical difficulties in expanding our capacity, our business, results of operations and financial condition could be materially adversely affected. We are subject to a number of risks in relation to our acquisition of a stake in the STAR Refinery. In 2008, STAR Rafineri A.Ş. was established by the SOCAR Group and Turcas, a Turkish oil and energy investment company, to develop, construct, own and operate the STAR Refinery, a complex crude oil refinery with a processing capacity of 10 million tonnes of crude oil per annum on the Aegean coast of Turkey. The refinery is located adjacent to Petkim on the Aliağa industrial peninsula north of Izmir and, as of November 2017, overall construction was approximately 97 per cent. complete. It is expected to come onstream in the third quarter of 2018 with a total investment value of U.S.$6.3 billion, of which U.S.$4.9 billion has already been invested as at 30 November On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş., and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. However, our offering of the Notes is not conditional upon the consummation of this acquisition, which is subject to the satisfaction or waiver of customary closing conditions, and there can be no assurance that the acquisition will be consummated in the anticipated time frame or at all. In particular, the conditions precedent for the acquisition include the successful and timely construction and testing of the STAR Refinery, in respect of which we have no involvement and over which we have no control. Factors that could negatively impact this include difficulties in obtaining necessary licenses and/or complying with applicable regulations, the occurrence of unforeseen technical difficulties (including technical problems that may delay the start-up of, or interrupt production from, the project or lead to unexpected downtime of the plans) and delays resulting from the actions of third parties. See Our business and operations are subject to business interruption risks due to the actions of third parties. Although we believe that the implementation schedules of the STAR Refinery project are reasonable, we cannot assure you that the actual time required to complete the implementation of the project will not substantially exceed the current estimates of the SOCAR Group for such completion. Furthermore, the conditions precedent for the acquisition include the signing by us and STEAŞ of a shareholders agreement with respect to our ownership of Rafineri Holding A.Ş. Although we have agreed in principle the key terms of the shareholders agreement with STEAŞ, such shareholders agreement has not yet been signed and there can be no assurance that it will be finalised in a timely manner or on terms consistent with the agreed principles (details of which are set out in Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement ). Moreover, even if we do conclude the shareholders agreement with respect to our ownership of Rafineri Holding A.Ş, our interest in the STAR Refinery itself will be limited to an indirect economic interest only, as the power to decide all shareholder, board and other management-related matters at the STAR Refinery-level will continue to be controlled by the SOCAR Group and the Republic of Azerbaijan Ministry of Economic and Industry. 27

43 In addition, under the terms of the share sale and transfer agreement, the purchase price will be paid in three equal instalments, the first of which was paid by us on 9 January 2018, the second of which is due on the date on which testing at the STAR Refinery commences and the third of which is due on the closing date, being the date on which the shares are to be transferred by STEAŞ to us (which is currently expected to occur in the third quarter of 2018). If, for any reason, STEAŞ fails to transfer the shares to us, or the agreement is terminated, we will have an unsecured claim against STEAŞ for reimbursement of the payments made and there can be no assurance that we will be able to recover such amounts successfully. Even if the acquisition successfully closes, the STAR Refinery may not perform in accordance with expectations, and the anticipated synergies and cost savings from the integration of the STAR Refinery into our supply chain may not be achieved on a timely basis, or at all, or may be lower than projected. A failure to deliver the anticipated synergies and cost savings, as well as any of the factors mentioned above, could hinder or prevent the implementation of our strategy and result in higher than expected costs. Our business and operations are subject to business interruption risks, including in relation to Petlim. We are subject to the risk of business interruption due to required maintenance on our facilities as well as the actions of third parties on which we rely, including the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner, delays in the delivery of third-party equipment and the failure of the equipment supplied by these vendors to comply with the expected capabilities of the equipment. For instance, given ethylene s place in the value chain of our products, major overhauls and maintenance shutdowns (both scheduled and unscheduled) at our ethylene cracker may result in disruptions to our operations. In July 2016, for example, we had an unscheduled 15-day shutdown at our ethylene cracker due to a technical problem in the unit s chimney, which had an adverse impact on our production levels and capacity utilisation. Our production facilities typically undergo scheduled shutdowns for major maintenance, which last approximately one month, every four years. Furthermore, we are exposed to these risks in relation to the Petlim Container Port, which was commissioned in 2016 with an initial capacity of 0.8 million TEU (Twenty Foot Equivalent, which is a standard metric for measuring cargo capacity), which was subsequently expanded to a maximum capacity of 1.5 million TEU, making it Turkey s third largest port. This investment was undertaken by Petlim Limancılık ve Ticaret A.Ş. ( Petlim ), 70 per cent. of which is owned by us, with the remaining 30 per cent. being owned by Goldman Sachs International ( Goldman Sachs ). The total cost of the development and its financing was approximately U.S.$400 million. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. Under this agreement, APM Terminals is responsible for all operational aspects of the port and associated deliverables, including obtaining permits, while Petlim is responsible for all construction-related aspects of the port, including dredging. The expansion of the port to its current capacity was completed in September 2017, and APM Terminals is expected to obtain all necessary permits for use of the port s full capacity in the first quarter of Although we are entitled to a fixed share of income from APM Terminals, the variable component of the income we receive from APM Terminals may decrease if volumes handled at the port do not grow as expected. In addition, there can be no assurance that we would be able to replace APM Terminals, or any other third party on which we rely, in a timely and cost-effective manner should it terminate the contract, which it is entitled to do in certain circumstances, or fail to make payments to us under the concession agreement or perform its obligations in a manner satisfactory to us. Any of the foregoing factors could adversely affect our business, results of operations and financial condition. All of our production facilities are located in the Petkim Peninsula and as a result any adverse events or occurrences could cause significant disruption to our business. Our production facilities and the Petlim Container Terminal are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometres from Izmir. In addition, following its completion, we expect to rely significantly on the STAR Refinery for the purchase of naphtha and reformate to sustain our current production levels. The refinery is located adjacent to Petkim in Aliağa. Although our facilities are spread across 19 million square metres, our operations may be subject to significant disruption if severe weather or other natural disasters were to occur in the Petkim Peninsula. Any disruption experienced at our production facilities or at the STAR Refinery could have a material adverse effect on our business, results of operations or financial condition. 28

44 Uninsured losses, losses in excess of our insurance coverage for certain risks and unanticipated changes in our insurance costs could have a material adverse effect on our business, results of operations and financial condition. Our plant, equipment and other assets are insured for property damage and business interruption risks. However, such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond these maximum limits or outside the coverage of our insurance policies. If this occurs, and we face liability, our business, results of operations and financial condition could be materially adversely affected. In addition, from time to time, various types of insurance for companies in our industries have not been available on commercially acceptable terms or, in some cases, have not been available at all. In the future, we may not be able to obtain coverage at current levels, and/or our premiums and deductibles for certain insurance policies may increase significantly on the coverage that we currently maintain. If insurance is not available at economically acceptable premiums, there is a risk that our insurance coverage does not cover the full scope and extent of claims against us or losses that we incur, including, but not limited to, claims for environmental or industrial accidents, occupational illnesses, pollution and product liability and business interruption. Furthermore, we could be required to increase our debt or divert resources from other investments in our business to discharge an uninsured claim. Costs associated with unanticipated events in excess of our insurance coverage, or a failure to maintain such coverage could materially adversely affect our business, results of operations and financial condition. We are exposed to the effects of fluctuations in exchange rates and inventory prices that could adversely affect our profitability and ability to repay indebtedness. We are exposed to currency risk on assets or liabilities denominated in foreign currencies. Approximately 45 per cent., 40 per cent. and 15 per cent. of our sales are invoiced in Turkish lira, U.S. dollars and euro, respectively, although most of our sales in Turkish lira are indexed to the U.S. dollar exchange rate on the relevant day announced by Turkish Central Bank. Approximately 90 per cent. of our variable costs are denominated in U.S. dollars, with the remainder being denominated in Turkish lira, and our fixed costs are mainly denominated in Turkish lira. As a result, most of our foreign currency exposure is naturally hedged. However, we are exposed to currency risk on foreign currencydenominated sales to the extent the exchange rate of the Turkish lira versus the relevant foreign currency fluctuates between the date of the invoice and the date of payment. As at 31 December 2016, a 10 per cent. appreciation of the U.S. dollar versus the Turkish lira would have had an adverse effect of approximately TL 50 million on our profit for the year. Conversely, a 10 per cent. depreciation of the U.S. dollar versus the Turkish lira would have a positive effect of approximately TL 50 million on our profit for the year. In addition, we are exposed to currency risks in relation to our inventory and adverse movements in currency exchange rates may lead to us being required to recognise impairments in respect of our inventory. Any significant adverse fluctuations in currency exchange rates could have a material adverse effect on our business, results of operations and financial condition. Following the issuance of the Notes, our indebtedness will increase, which could limit our financial flexibility and our ability to access additional financing. As at 30 September 2017, our total gross debt was TL 2,333 million. Following the offering of the Notes, our indebtedness will increase. Our level of debt may have important consequences for our business. Among other things, it may: make it more difficult for us to generate sufficient cash flow to satisfy our obligations to make payments on the Notes; limit our ability to use our cash flow, or obtain additional financing, for future working capital, capital expenditure, acquisitions or other general corporate purposes; require a substantial portion of our cash flow from operations to make debt service payments; limit our flexibility to plan for, or react to, changes in our business and industry conditions; and increase our vulnerability to the impact of adverse economic and industry conditions and, to the extent of our outstanding debt under our floating rate debt facilities, the impact of increases in interest rates. 29

45 We cannot assure you that we will continue to generate sufficient cash flow in amounts that enable us to meet our working capital, capital expenditure and other requirements. To the extent that we are unable to generate sufficient cash flows from operations, or if we are unable to borrow additional funds, we may be required to reduce capital expenditure, refinance all or a portion of our existing debt, or obtain additional financing through equity or debt financings. We cannot assure you that we will be able to refinance our debt, sell assets or obtain additional financing on terms acceptable to us, if at all. We are also subject to certain restrictive financial covenants and ratios under Petlim s project finance credit agreement with Akbank in relation to the Petlim Container Port, and if additional funds are raised by incurring debt, we may become more leveraged and subject to additional or more restrictive financial covenants and ratios. In addition, the Trust Deed governing the Notes will contain certain covenants, including covenants restricting our ability to incur additional indebtedness and to engage in transactions with affiliates. Such covenants may limit our ability to engage in future transactions, thereby limiting our ability to grow our business. A breach of any of these covenants could also give rise to a default. There can be no assurance that we will be able to comply with our covenants in the future or that or that the Trustee or the holders of the Notes would not seek to enforce any remedies following any breach of covenants. Any of the foregoing events could adversely affect our business, results of operations and financial condition. We may experience difficulties in raising additional capital on favourable terms or at all in the future. In the event that our existing cash balances and cash generated from our operations, together with the financing transactions we undertake, are insufficient to make investments, acquisitions, expand our activities, achieve our growth objectives or provide the working capital we need in the future, we may find it necessary to obtain additional financing from other sources. Our ability to obtain such additional financing on favourable terms or at all will depend in part on prevailing conditions in the international capital and banking markets, the condition of the petrochemicals industry and our results of operations. Moreover, any downgrade in our credit ratings could adversely affect our cost of borrowing and our access to the international capital and banking markets. In the event that we are unable to obtain additional financing on acceptable terms or at all, our ability to make investments, acquire companies, expand our activities, achieve our growth objectives or obtain working capital could be adversely affected which would, in turn, adversely impact our business, results of operations and financial condition. We may be subject to natural disasters, terrorist activities and/or disruptive geopolitical events and their consequences. Natural disasters, such as earthquakes, hurricanes, storms, floods or tornadoes may disrupt our business or the businesses of our suppliers and customers. A significant portion of Turkey s population and most of its economic resources are located in a first degree earthquake risk zone and Turkey has experienced a large number of earthquakes in recent years, some quite significant in magnitude. For example, in October 2011, the eastern part of the country was struck by an earthquake measuring 7.2 on the Richter scale, causing significant property damage and loss of life. In February 2017, two earthquakes with preliminary magnitudes of 5.3 on the Richter scale jolted Turkey s northern Aegean coast, damaging dozens of homes in at least five villages and injuring at least five people. In March 2017, an earthquake with a magnitude of 5.5 hit south-eastern Turkey, damaging buildings and injuring five people and, in June 2017, an earthquake with a magnitude of 6.2 on the Richter scale hit Turkey s northern Aegean coast, which resulted in building damage in surrounding areas. If earthquakes or other natural disasters occur in the future, we may suffer business interruption or shutdown or damage to our production facilities and other infrastructure, which could materially adversely affect our business, results of operations or financial condition. Furthermore, the impact of any such events may be heightened due to the geographic concentration of our operations and the operations of our suppliers. See All of our production facilities are located in the Petkim Peninsula and as a result any adverse events or occurrences could cause significant disruption to our business. Turkey has also experienced a significant level of terrorist activity in recent years, including an attack at Atatürk Airport in İstanbul in June 2016, a series of suicide bombs during 2016 and an attack in a nightclub in İstanbul in January See Risks Relating to Turkey. Strategic infrastructure targets, such as energy-related assets (which could include our facilities), may be at greater risk of future terrorist attacks than other targets, and such terrorist attacks or the threat of terrorism may cause significant disruptions to our business. Related political events, as well as political and economic instability in other 30

46 regions of the world, may also indirectly adversely affect our business, results of operations and financial condition. We may be subject to interruptions or failures in our information technology systems. We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures and similar events. Information technology system failures, network disruptions and breaches of data security could disrupt our operations by causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, processing transactions and reporting financial results, resulting in the unintentional disclosure of customer information and/or damage to our reputation. Such failures could adversely affect our business, results of operations and financial condition, and we cannot assure you that our business continuity plans will be completely effective during any information technology failure or interruption. We are dependent on maintaining good relations with our employees and any deterioration in employee relations could impact our ability to supply our products. As at 30 September 2017, we employed approximately 2,400 people (measured as full-time equivalents) across our operations. Approximately 1,900 of our employees are members of a trade union. Our management and human resources department negotiate a collective bargaining agreement with the relevant trade union every two years. Any significant increase in labour costs, deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our business, results of operations or financial condition. Although past work stoppages have not had a material adverse effect on our ability to supply our products to customers, there can be no assurance that this will continue to be the case in the future. Any increase in labour costs or work stoppage could have a material adverse effect on our business, results of operations and financial condition. We depend on our ability to attract and retain key personnel to implement our business strategy and develop existing or new businesses. Our success is dependent upon our ability to attract and retain key personnel. In particular, our senior managers have considerable experience and knowledge of the industry, and the loss of any of them, or the inability to attract and retain enough additional qualified staff, could adversely affect the ability to implement our business strategy or develop existing or new businesses. In addition, our future success depends on our continued ability to identify, hire, train and retain qualified personnel in sales, marketing, operations and administration positions, among others. Our business, results of operations and financial condition could be adversely affected if we fail to attract and retain the necessary personnel. The Turkish Privatisation Administration holds a golden share in the Issuer and its interests may conflict with our interests or the interests of the Noteholders. The Turkish Privatisation Administration holds a Group C preferential, or golden, share in the Issuer that carries special rights. In particular, the validity of decisions taken by the Board on the following matters depends on the affirmative vote of the member of Board elected from holders of the Group C shares: (i) modifications of the Articles of Association that will affect the privileges assigned to Group C share; (ii) registration of the transfer of registered shares on the share ledger; (iii) determination of the form of power of attorney indicated in the Article 31 of the present Articles of Association; (iv) decisions stipulating a decrease of at least 10 per cent. in the capacity of any plant owned by the Issuer; (v) the Issuer s establishment of a new company or partnership, acquisition of a company being partner to and/or merging with an existing company, separation, dematerialisation, annulment and liquidation of the Issuer. In addition, as we are the sole domestic supplier of petrochemical products in Turkey, the Turkish Privatisation Administration can require us to maintain certain production levels, whether or not such production is economical or profitable. While the Turkish Privatisation Administration has not exercised the rights conferred upon it as a result of its holding of the golden share to date, if it were to do so, this could have a material adverse effect on our business, results of operation and financial condition. 31

47 STEAŞ and the SOCAR Group exert a significant degree of control over us and their interests may conflict with our interests or the interests of the Noteholders. STEAŞ indirectly owns 51 per cent. of our share capital through its wholly-owned subsidiary SOCAR Turkey Petrokimya A.Ş. ( SOCAR Turkey Petrokimya ), as well as a 60 per cent. stake in STAR Rafineri A.Ş. (which is expected to decrease to 42 per cent. following our acquisition of an 18 per cent. stake therein using, in part, the net proceeds from the offering of the Notes). Accordingly, the SOCAR Group is able to exercise control over, among other things: election of our board of directors; our business policies and strategies; budget approval, including personnel costs; the issuance of securities; mergers, acquisitions and disposals of our assets or businesses; and amendments to our constitutional documents. The SOCAR Group is also able to influence the STAR Refinery, which is expected to be our main supplier of naphtha and mixed xylene when it comes onstream in There can be no assurance that the resolution of any matter that may involve the interests of the SOCAR Group will be resolved in a manner that Noteholders would consider to be their best interests. In certain circumstances, the interests of the SOCAR Group may conflict with our interests since the SOCAR Group effectively has the power to influence the outcome of any vote of shareholders, including for example amending the articles of association, due to the percentage of shares it owns. Furthermore, the SOCAR Group may have different views on important matters such as our objectives, strategy, operations, investments or financing and it may not act in our best interest. Risks Relating to Turkey We are subject to risks associated with Turkey s political and economic environment. Turkey has been a parliamentary democracy since Unstable coalition governments have been common and, in the 94 years since its formation, Turkey has had numerous, short-lived governments, with political disagreements frequently resulting in early elections. The Justice and Development Party (Adalet ve Kalkınma Partisi) (the AKP ) has been in power since 2002 and is the first party since 1987 to have a parliamentary majority and has thus been able to govern without reliance upon a coalition partner. Turkey held its inaugural presidential election on 10 August 2014 based on the constitutional changes implemented following the referendum held on 21 October Recep Tayyip Erdoğan, leader of the ruling AKP, won the election in the first round with 51.8 per cent. of the vote. On 15 July 2016, a coup d état was attempted in Turkey against state institutions, including, but not limited to, the Turkish government by a faction within the army with ties to the Gülen movement that, in May 2016, was officially designated by the Turkish government as a terrorist organisation ( FETÖ ). The Turkish government and Turkish security forces (including the Turkish armed forces) took control of the situation in a short period of time and the ruling government remained in control. Under Article 120 of the Turkish Constitution, in the event of serious indications of widespread acts of violence aimed at the destruction of the free democratic order, a state of emergency may be declared in one or more regions of, or throughout, the country for a period not exceeding six months; however, this period may be extended. On 20 July 2016, the Turkish government declared a three-month state of emergency in the country, entitling it to exercise additional powers. The Grand National Assembly of Turkey extended the state of emergency five times subsequently. The latest extension was approved on 18 January 2018, which extended the state of emergency for an additional three-month period. There can be no guarantee that the state of emergency will not be extended again. The state of emergency entitles the Turkish government to exercise additional powers. In this respect, investigations and similar actions have been initiated to identify members of FETÖ and a significant number of the suspects (numbering in the thousands) across various sectors (including government, business, the military and the judiciary) have been dismissed from their roles and/or arrested. There may be further arrests and 32

48 actions taken by the governmental and judicial authorities in relation to these investigations, including changes in policies and laws. Following the attempted coup, several SOCAR Turkey Petrokimya and Petkim executives, including Petkim s CEO, Saadettin Korkut, resigned from their posts following a raid of Mr. Korkut s house and Petkim s offices by the Turkish Counterterrorism Unit, which was based on suspicion of his ties to FETÖ. Anar Mammadov, an Azeri national, was subsequently appointed as CEO of Petkim. Several other Petkim employees were also subsequently arrested. On 28 July 2016, STEAŞ, Petkim and Petlim s Chairman Vagif Aliyev announced that the SOCAR Group was committed to Turkey and was undergoing a corporate restructuring and reorganisation involving the re-shuffling of a number of high-ranking posts in line with their international operational consolidation plans. The attempted coup and its aftermath have had a significant impact on the political and social environment in Turkey (including ratings downgrades of Turkey) as well as on Turkey s foreign relations. For instance, the United States and Turkey temporarily suspended non-immigrant visa applications to either country in October 2017 as a result of the arrest of a Turkish worker at the U.S. consulate in Istanbul with alleged ties to FETÖ, though visa services between the two countries have fully resumed as of December In addition, tensions remain over the extradition of the leader of FETÖ, who has lived in exile in the United States since 1999, as well as the arrest of and proceedings against certain Turkish individuals, including a former Turkish economy minister, for evading U.S. sanctions on Iran (the findings of which that implicate Turkish banks and government officials may lead to the imposition of sanctions on the Turkish banking sector). These tensions, as well as any further deterioration in U.S.-Turkish relations, or any other foreign relations of Turkey (including any potential political or financial sanctions), may have a material adverse impact on the Turkish economy (including the value of the Turkish Lira, international investors willingness to invest in Turkey, the cost of financing and domestic demand). On 16 April 2017, a majority of Turkish voters approved a referendum amending certain articles of the Turkish Constitution. The amendments expand the powers of the president to create an executive presidency and are expected to be implemented gradually by November 2019, the expected date for the next general and presidential election. Following the entry into force of the package of constitutional amendments: the current parliamentary system will be transformed into a presidential system; the president will be entitled to be the head of a political party and to appoint the ministers; the office of the prime minister will be abolished; the parliament s right to interpellate ministers (that is, to submit questions requesting explanation of an act or a policy) will be annulled; the president will be entitled to issue decrees as the head of the government (except for certain matters such those relating to the fundamental rights and liberties and political rights); and the president will be entitled to dissolve parliament and call for new general elections along with presidential elections. There can be no assurance that the political situation in Turkey will not deteriorate. Actual or perceived political instability in Turkey or any negative changes in the political environment, including further conflicts between senior politicians in Turkey or the failure of the government to devise or implement appropriate economic programmes, may individually or in the aggregate adversely affect the Turkish economy and, in turn, our business, financial condition and results of operations. Volatile international markets and events as well as the threat of terrorism may have a negative effect on the Turkish economy, and hence our business, results of operations and financial condition. Turkey is located in a region that has been subject to ongoing political and security concerns, especially in recent years. Political uncertainty within Turkey and in certain neighbouring and nearby countries, such as Iraq, Syria, Iran, Georgia, Cyprus, Egypt, Tunisia, Israel, Armenia and Russia has historically been one of the potential risks associated with an investment in Turkish securities. Turkey experiences ongoing tensions with domestic terrorist and ethnic separatist groups, such as the People s Congress of Kurdistan, known as the PKK, and jihadist terrorist groups in neighbouring countries, such as DAESH, also known as ISIS. In the past several years, these have resulted in a 33

49 number of bombing incidents in several Turkish cities and regions, including in Reyhanlı, Suruç, Istanbul and Ankara, as well as attacks against Turkish armed forces in the south-eastern part of Turkey. On 17 February 2016, a large explosion in Ankara killed over 20 people and injured over 60 people. On 1 January 2017, a gunman attacked a nightclub in Istanbul, with ISIS later claiming responsibility for the attack. If additional attacks occur in the future, Turkey s capital markets, levels of tourism and foreign investment, amongst other things, may suffer, which could have a material adverse effect on our business, financial condition and results of operations. Since December 2010, political instability has increased markedly in a number of countries in the Middle East and North Africa, such as Syria, Iraq, Egypt, Libya, Tunisia, Jordan, Bahrain and Yemen. Unrest in these countries, as well as global tensions with Iran and between Russia and Ukraine, may have political implications in Turkey or otherwise have a negative impact on the Turkish economy, including both the financial markets and the real economy. Furthermore, military activities in Ukraine and on its borders, including Russia effectively taking control of Crimea (followed by Crimea s independence vote and absorption by Russia) have combined with Ukraine s very weak economic conditions to create great uncertainty in Ukraine and in the global markets. Resolution of Ukraine s political and economic conditions may not occur for some time, and the situation could deteriorate into increased violence and/or economic collapse. While not directly impacting Turkey s territory, the disputes could negatively affect Turkey s economy, including through its impact on the global economy and the impact it might have on Turkey s access to Russian energy supplies. On 24 November 2015, a Turkish fighter jet shot down a Russian military aircraft near the Turkish-Syrian border. The incident resulted in political tension, and Russia imposed certain economic sanctions on Turkey. This led to a decrease in export-import and investment activity between the countries and an escalation of geopolitical tensions. Although the restrictions have since been lifted, there can be no certainty that the relationship between the countries will not worsen in the future. The impact on Turkey s economic relationship with Russia and the geopolitical implications remain uncertain. In addition, on 24 August 2016, Turkey began military operations in Syria in an effort to remove ISIS from the Turkish-Syrian border. These operations have resulted in, and may continue to lead to, retaliatory attacks by terrorist groups, such as ISIS or others, and create additional security risks in Turkey. There is on-going tension in the region, which was elevated following a request by Iraq on 5 October 2016 for the UN Security Council to hold a meeting to discuss the presence of Turkish troops in northern Iraq and certain Syrian border regions. Regional instability has also resulted in an influx of displaced persons into Turkey, which is expected to increase. On 25 September 2017, the residents of Kurdish-controlled areas within Iraq voted in favour of independence for the Kurdistan Region of Iraq, a semi-autonomous region within Iraq s current borders, which has substantial cross-border trade with Turkey and an oil pipeline to the Mediterranean via Turkish territory. While we do not conduct business with the Kurdistan Regional Government, in the event that Turkey or another stakeholder decides to close the border or cut the Kurdistan Region s export pipeline, this could have a negative impact on the economy in the region and the supply of energy to Turkey. The circumstances stated above have had and could continue to have a material adverse effect on the Turkish economy, and could in turn have a material adverse effect on our business, financial condition and results of operations. Economic instability in Turkey could have a material adverse effect on our business, financial condition and results of operations. In spite of its economic development since 2001, Turkey has experienced recent economic difficulties and remains vulnerable to both external and internal shocks, including volatile oil prices and terrorist activity, as well as domestic political uncertainty and changing investor sentiment. In 2016, Turkey s GDP growth slowed to 2.9 per cent., compared to 6.1 per cent. in 2015 and 5.2 per cent. in 2014, as the attempted coup, an increase in terrorist attacks and rising foreign exchange rates contributed to economic uncertainty. In addition, tourism revenues declined and economic growth in the EU, Turkey s biggest export market, remained slow. Turkish exports to Russia fell significantly and the Middle East export market weakened as a result of security concerns. See Volatile international markets and events as well as the threat of terrorism may have a negative effect on the Turkish economy, and hence our business, results of operations and financial condition. These factors also contributed to 34

50 the Turkish Lira s depreciation against major currencies, including the Turkish Lira s 17.3 per cent. depreciation against the US Dollar on a nominal basis in the fourth quarter of However, Turkey s GDP growth rate grew to 11.1 per cent. in the three months ended 30 September 2017 compared to a year earlier. Furthermore, since the global financial crisis, the Turkish unemployment rate has remained high (10.6 per cent. as at September 2017) (Source: Turkstat), and the unemployment rate may increase in the future. Continuing high levels of unemployment may adversely affect the demand of retail customers for petroleum-based products, which could have a material adverse effect on our business, financial condition and results of operations. The Turkish economy has experienced significant inflationary pressures in the past and may be subject to similar pressures in the future. Consumer price inflation was 8.2 per cent., 8.8 per cent. and 8.5 per cent. in 2014, 2015 and 2016, respectively, and the year-on-year rate reached an eight-year high of 13.0 per cent. in November Any inflation-related measures that may be taken by the Turkish government or the Central Bank, such as the tightening of monetary policy, may reduce liquidity in the Turkish market and could have an adverse effect on the Turkish economy. If the level of inflation in Turkey were to continue to fluctuate or increase significantly, this could have a material adverse effect on our business, financial condition and results of operations. On 20 July 2016, S&P downgraded Turkey s sovereign credit rating to BB from BB+, and assigned its outlook as negative, citing, amongst other reasons, the polarisation of Turkey s political landscape. On 23 September 2016, Moody s downgraded Turkey s sovereign credit rating to Ba1 from Baa3 with stable outlook. On 27 January 2017, Fitch downgraded Turkey s sovereign credit rating to sub-investment grade in line with the ratings of S&P and Moody s. On the same date, S&P revised its outlook for Turkey s sovereign credit rating from stable to negative and affirmed its credit rating at BB. On 17 March 2017, Moody s revised its outlook for Turkey s sovereign credit rating from stable to negative. Following the constitutional referendum in Turkey, on 18 April 2017 Fitch issued a statement noting that while the outcome of the referendum reflected a political shift that was negative for credit ratings, it could facilitate credit-positive economic reforms. On 19 April 2017, Moody s issued a report stating that the ability of the Turkish government to implement structural economic reforms may be limited by the potential government s focus on the domestic political agenda and geopolitical security risks. These changes in ratings and outlook may materially affect our ability to obtain financing and may result in an increase in our borrowing costs. It is not certain whether Turkey will be able to remain economically stable during any periods of renewed global economic weakness. Future negative developments in the Turkish economy could impair our business strategy and have a materially adverse effect on our business, financial condition and results of operations. Turkey s current account deficit could have negative repercussions for the Turkish economy and thereby our business, results of operations and financial condition. Turkey s current account deficit has widened considerably in recent years mainly due to its widening trade deficit. The current account deficit increased from U.S.$44.6 billion (5.76 per cent. of GDP) in 2010 to U.S.$74.4 billion (8.94 per cent. of GDP) in 2011, but decreased to U.S.$48.0 billion (5.48 per cent. of GDP) in In 2013, the current account deficit increased to U.S.$63.6 billion (6.70 per cent. of GDP), then decreased to U.S.$43.6 billion (4.66 per cent. of GDP) in In 2015, the current account deficit decreased to U.S.$32.1 billion (3.75 per cent. of GDP). Between January and December 2016, Turkey had a current account deficit of U.S.$32.6 billion, compared to a current account deficit of U.S.$32.1 billion in the same period in The current account deficit in October 2017 rose to U.S.$3.8 billion, an increase from U.S.$1.6 billion in October A widening current account deficit may result in an increase in the levels of borrowing by Turkey, a decline in the Central Bank s reserves to finance the current account deficit and/or depreciation of the Turkish lira. In addition, in recent years the financing of the current account deficit has become more reliant on volatile portfolio investment, which is highly sensitive to changes in investor sentiment. As a result, any increase in Turkey s current account deficit could have a material adverse effect on the financial and economic condition of Turkey, which could in turn adversely affect our business, results of operations and financial condition. 35

51 Risks associated with the foreign exchange rate of Turkey s currency could affect our business, results of operations and financial condition. The depreciation of the Turkish lira against the U.S. dollar or other major currencies might adversely affect the financial condition of Turkey, such as through potential unhedged foreign currency positions of Turkish banks and the deterioration of bank asset quality. The Turkish corporate sector may also be susceptible to additional foreign exchange risk because a large volume of corporate loans is denominated in foreign currencies, resulting in additional risk if the Turkish lira depreciates. Turkish corporate borrowers such as us or our customers may not have sufficient foreign currency reserves or adequate hedging, particularly if Turkish lira depreciation is compounded by macroeconomic factors that impact certain sectors or clients (such as the potential combined impact of Turkish lira depreciation and global oil price reductions on the energy sector). An exchange rate shock could have negative implications for the Turkish banking sector, the main lenders of corporate debt, as well as the credit quality of Turkish corporate entities. Accordingly, Turkey s economy faces risks associated with the refinancing of private sector debt, which constituted 70.5 per cent. of Turkey s gross external debt at 30 September 2016, which risks are exacerbated by Turkish lira depreciation. In addition, depreciation of the Turkish lira may increase the price of imported goods, which may increase the trade deficit and the current account deficit. Due to market volatility, the Turkish lira has fluctuated, appreciating or depreciating to TL per U.S. dollar at 31 December 2012, TL per U.S. dollar at 31 December 2013, TL per U.S. dollar at 31 December 2014 and TL per U.S. dollar at 31 December In the aftermath of the failed coup d état, on 21 July 2016, the Turkish lira depreciated significantly to TL per U.S. dollar. In addition, after the U.S. presidential election on 8 November 2016, the U.S. dollar strengthened while the Turkish lira continued to depreciate significantly against the U.S. dollar. As at 31 December 2017, the Turkish Lira depreciated to TL per U.S. dollar compared to the previous year. The depreciation of the Turkish lira against the U.S. dollar has led to a significant increase in the share of dollar deposits in total deposits in the Turkish banking system and an increase in foreign exchange hedging costs for Turkish banks and the Turkish corporate sector. From time to time, the Turkish lira may be subject to increased volatility. For example, in connection with the depreciation of the Turkish lira, the Central Bank on 10 January 2017, cut the foreign exchange reserve requirement ratios for lenders in an effort to increase liquidity. Risks associated with delays or other adverse developments in Turkey s accession to the EU may have a negative impact on Turkey s economic performance, which could in turn adversely affect our business, results of operations and financial condition. Turkey has a long-standing relationship with the EU. In 1963, Turkey signed an association agreement with the EU, and a supplementary agreement was signed in 1970 providing for a transitional second stage of Turkey s integration into the EU. Turkey commenced negotiations on its accession to the EU in October However, Turkey s accession depends on a number of economic and political factors relating to both Turkey and the EU. Although the shared objective of these negotiations is accession, they constitute an open-ended process, the outcome and timing of which cannot be guaranteed. The EU decided in December 2006 to suspend negotiations in eight out of 35 parts, or chapters, and not to close the other 27 chapters of Turkey s accession negotiations because of Turkey s restrictions with respect to the Greek Cypriot Administration. On 24 November 2016, the European Parliament voted to temporarily suspend accession negotiations with Turkey. This decision, however, is not legally binding. On 25 April 2017, the Parliamentary Assembly of the Council of Europe voted to restart monitoring Turkey in connection with human rights, the rule of law and the state of democracy. This decision might result in (or contribute to) a deterioration of the relationship between Turkey and the EU. Although Turkey continues to express a desire to become a member state of the EU, it may not become one for several more years, if at all. Delays or other adverse developments in Turkey s accession to the EU, such as the dismantling of the customs union agreement, may have a negative effect on Turkey s economy in general, and Turkey s economic performance and credit ratings in particular and could, as a result, have an adverse effect on our business, financial condition and results of operations. There can be no assurance that the EU will continue to maintain an open approach to Turkey s EU membership or that Turkey will be able to meet all the criteria applicable to becoming a member state or that Turkey will become a member state. 36

52 Turkey is an emerging market economy and may continue to be negatively affected by uncertainty regarding the global macroeconomic environment. Emerging market investment generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilisation resulting from domestic and international developments. Turkey s economy also remains vulnerable to external shocks, including turmoil in the markets for sovereign and other debt, foreign currencies and equities. If there is a significant decline in the economic growth of any of Turkey s major trading partners, such as the EU, or any euro area member experiences difficulties issuing securities in the sovereign debt market or servicing existing debt or ceases to use the euro as its national currency, it could have a material adverse impact on Turkey s balance of trade and adversely affect Turkey s economic growth. EU member states, particularly Germany, comprise Turkey s largest export market. A decline in demand for imports from any member of the EU could have a material adverse effect on Turkish exports and Turkey s economic growth. Furthermore, Turkey s economy is vulnerable to external events that increase global risk aversion, which could include such events as U.S. Federal Reserve interest rate decisions. The U.S. Federal Reserve began to normalise its monetary policy by raising the U.S. federal funds rate in December 2015, December 2016 and March and June Any increase or expected increase in the U.S. federal funds rate may encourage outflows of capital from emerging markets, a reduction of external financing to corporate entities in emerging markets, foreign currency depreciation against the U.S. dollar and higher long-term interest rates. Companies with U.S. dollar-denominated debt may also face higher costs of borrowing due to currency depreciation. As a result, market reaction to increases in the U.S. federal funds rate may indirectly adversely affect our business, financial condition and results of operations. Emerging markets, including Turkey, experienced volatility in 2016 amid concerns that the level of foreign investment inflows would decline substantially as the liquidity-enhancing measures in the United States were tapered down. There can be no guarantee that such volatility will not continue if the U.S. Federal Reserve raises interest rates or if market participants anticipate any further increases. Further, any slowing or reversal of accommodative monetary policies in developed economies or other events may also cause capital outflows from emerging economies and generate a negative impact on emerging economies, such as Turkey. In addition, because international investors reactions to the events occurring in one emerging market country sometimes appear to demonstrate a contagion effect, in which an entire region or class of investment is disfavored by international investors, Turkey could be adversely affected by negative economic or financial developments in other countries, including emerging market countries. Turkey has been adversely affected by such contagion effects on a number of occasions, including following the two financial crises in 1994 and 2000/2001 and the recent global economic crisis. Recent volatility in the markets stemming from concerns over China s economic growth may adversely affect economic growth in other emerging economies with close trade links with China. Although China is not a major trading partner of Turkey, no assurance can be given that these developments will not have a negative effect on the economic or financial condition of Turkey. In addition, similar developments can be expected to affect the Turkish economy in the future. There can be no assurance that any crises or external shocks such as those described above or similar events will not negatively affect investor confidence in emerging markets, the economies of the principal countries in Europe or Turkey. In addition, there can be no assurance that these events will not adversely affect the Turkish economy and therefore our business, results of operations and financial condition. Turkish financial disclosure standards differ in certain significant respects from those in more developed markets, leading to a relatively limited amount of information being available. The reporting, accounting and financial practices applicable to Turkish companies differ in certain respects from those applicable to similar companies in the United States. There is also less publicly available information regarding the securities of listed Turkish companies than the securities of public companies in the United States, the United Kingdom and other more developed markets. 37

53 Risks Relating to the Notes The Notes will constitute unsecured obligations of the Issuer. Our obligations under the Notes will constitute unsecured obligations. Accordingly, any claims against us under the Notes would be unsecured claims. Our ability to pay such claims will depend upon, among other factors, our liquidity, overall financial strength and ability to generate cash flows, which could be affected by (inter alia) the circumstances described in these Risk Factors. Claims of Noteholders under the Notes will rank behind those of certain other creditors and those of our subsidiaries on an insolvency. The Notes are direct, unconditional, unsecured and unsubordinated obligations of the Issuer. Accordingly, any claims against us under the Notes would be unsecured claims. The Notes will rank equally with all of the Issuer s other unsecured and unsubordinated indebtedness. However, the Notes will be effectively subordinated to the Issuer s secured indebtedness and securitisations, if any, to the extent of the value of the assets securing such transactions, and will be subject to certain preferential obligations under Turkish law, such as wages of employees. Any such preferential claims might reduce the amount recoverable by the Noteholders on any dissolution, winding up or liquidation and might result in an investor in the Notes losing all or some of its investment. Generally, lenders and trade and other creditors of the Issuer s subsidiaries are entitled to payment of their claims from the assets of such subsidiaries before these assets are made available for distribution to the Issuer, as direct or indirect shareholder. Any debt that the Issuer s subsidiaries may incur in the future will also rank structurally senior to the Notes. Moreover, our ability to make payments from Turkey will depend upon, among other factors, the Turkish government not having imposed any restrictive foreign exchange controls, our ability to obtain U.S. dollars and our ability to secure any necessary approval that may be required as a result of the imposition of or any change to Turkish exchange controls. The Notes may not be a suitable investment for all investors. Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: (i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Offering Memorandum or any applicable supplement; (ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio; (iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor s currency; (iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and (v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate-related and other factors that may affect its investment and its ability to bear the applicable risks. The Notes are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in the Notes unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of the Notes and the impact this investment will have on the potential investor s overall investment portfolio. 38

54 Redemption prior to maturity. We may redeem all outstanding Notes in accordance with the Conditions in the event that we have been or would become obligated to pay additional amounts as a result of certain changes in tax laws or their interpretation and we cannot avoid such obligation by taking reasonable measures available to us. On any such redemption, Noteholders would receive the principal amount of the Notes that they hold, together with interest accrued on those Notes up to (but excluding) the date fixed for redemption. The redemption at the option of the Issuer may affect the market value of the Notes. During any period when we may elect to redeem the Notes, the market value of the Notes generally will not rise substantially above the price at which they can be redeemed. In addition, it may not be possible to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Notes. See Terms and Conditions of the Notes Redemption and Purchase Redemption for Taxation Reasons. We may not be able to finance certain mandatory redemptions required by the Conditions. Upon the occurrence of a Change of Control (as defined in Terms and Conditions of the Notes Redemption and Purchase Redemption at the Option of the Noteholders upon a Change of Control ), we will be required to offer to repurchase all outstanding Notes at a purchase price in cash equal to 101 per cent. of the principal amount of the Notes plus any accrued and unpaid interest, if any, in the case of a Change of Control, plus additional amounts, if any, to the date of the repurchase. If any such Change of Control were to occur, there can be no assurance that we would have sufficient funds available at the time to pay the price of the outstanding Notes or that restrictions in agreements governing other indebtedness would not restrict or prohibit such repurchases. The Change of Control may cause the acceleration of other of our or our subsidiaries indebtedness that may be senior to the Notes or rank equally with the Notes. In any case, we expect that it would require third party financing to make a change of control offer. There can be no assurance that we would be able to obtain this financing. The Trustee may request Noteholders to provide an indemnity and/or security and/or prefunding to its satisfaction. In certain circumstances (including without limitation pursuant to Condition 14(a) (Indemnification)), the Trustee may (at its sole discretion) request Noteholders to provide an indemnity and/or security and/or prefunding to its satisfaction before it takes action on behalf of Noteholders. The Trustee shall not be obliged to take any such action if not indemnified and/or secured and/or prefunded to its satisfaction. Negotiating and agreeing an indemnity and/or security and/or prefunding can be a lengthy process and may impact on when such action can be taken. The Trustee may not be able to take action, notwithstanding the provision of an indemnity or security or prefunding to it, in breach of the terms of the Trust Deed and in circumstances where there is uncertainty or dispute as to the applicable laws or regulations and, to the extent permitted by the agreements and applicable law, it will be for the Noteholders to take such action directly. The Conditions contain modification and waiver provisions. The Conditions contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders, including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority. The Conditions also provide that the Trustee may, without the consent of Noteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of Notes or (ii) determine without the consent of the Noteholders that any Event of Default (as defined in the Conditions) or potential Event of Default shall not be treated as such, in the circumstances described in Condition 12 (Meetings of Noteholders; Modification, and Waivers). Noteholders rights may be adversely affected by a change of law. The Conditions are governed by English law in effect at the date of this Offering Memorandum. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of this Offering Memorandum. 39

55 Turkish insolvency laws to which the Issuer is subject may not be as favourable to the holders of the Notes as United States or other insolvency laws. We are incorporated and organised under the laws of Turkey. Any insolvency proceedings relating to us, can be brought only before the Turkish courts and in accordance with Turkish insolvency laws, the procedural and substantive provisions of which may differ from comparable provisions of United States federal bankruptcy law. If we become insolvent, there is a risk that holders of Notes may not be able to fully enforce their rights under the Notes and that any claims may be considerably delayed. Turkish insolvency laws may not be as favourable as insolvency laws in the United States or in any other jurisdiction with which the investors may be familiar. Investors may experience difficulties in enforcing foreign judgments under laws other than Turkish law, including under United States federal securities laws. We are a corporation organised under the laws of Turkey. Certain of our officers and directors are residents of Turkey and all or a substantial portion of our assets and of our officers and directors are located outside the United Kingdom and the United States. As a result, it may not be possible for an investor to effect service of process in the United Kingdom or the United States upon us or such persons, or to enforce any judgments against us or such persons obtained in the courts of the United Kingdom or the United States. There is no treaty between Turkey and the United Kingdom or between Turkey and the United States providing for reciprocal enforcement of judgments. Turkish courts have rendered at least one judgment confirming de facto reciprocity between Turkey and the United Kingdom; however, since de facto reciprocity is decided by the relevant court on a case-by-case basis, there is uncertainty as to the enforceability of court judgments obtained in the United Kingdom by Turkish courts. There is no de facto reciprocity between the United States and Turkey. Moreover, there is uncertainty as to the ability of an investor to bring an original action in Turkey based upon any non-turkish securities laws. See Enforceability of Judgments. An active trading market for the Notes may not develop. The Notes will not have an established trading market when issued and we cannot assure investors that an active trading market for the Notes will develop or be maintained. In addition, there may be a limited number of buyers when an investor decides to sell the Notes, which can affect the price an investor receives for such Notes or the ability to sell such Notes at all. Therefore, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. Illiquidity may have a severely adverse effect on the market value of the Notes. Transfers of interests in the Notes will be subject to certain restrictions. Although the CMB has approved the issuance certificate authorising the issuance of a maximum amount of Notes pursuant to Decree 32, the Capital Markets Law and the Communiqué with its letter dated 22 December 2017 and numbered E.14302, the Notes will not be offered in Turkey. The Notes have not been and will not be registered under the Securities Act or any United States state securities laws. Prospective investors may not offer or sell the Notes, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Similar restrictions will apply in other jurisdictions. Prospective investors should read the discussion under the headings Subscription and Sale and Selling and Transfer Restrictions for further information about these transfer restrictions. It is the obligation of the investors to ensure that offers and sales of the Notes within the United States and other countries comply with any applicable securities laws. Pursuant to the Communiqué, we are required to notify the CRA Turkey within three business days from the issue date of the Notes of the principal amount, the issue date, the ISIN (if any), the interest commencement date, the maturity date, the interest rate, the name of the custodian and the currency of the Notes and the country of issuance. 40

56 Investors may be exposed to exchange rate risks and exchange controls. We will pay principal and interest on the Notes in U.S. dollars. This presents certain risks relating to currency conversions if an investor s financial activities are denominated principally in a currency or currency unit (the Investor s Currency ) other than U.S. dollars. These include the risk that exchange rates may significantly change (including changes due to devaluation of the U.S. dollar or depreciation of the Investor s Currency) and the risk that authorities with jurisdiction over the Investor s Currency may impose or modify exchange controls. An appreciation in the value of the Investor s Currency relative to the U.S. dollar, would decrease (i) the Investor s Currency-equivalent yield on the Notes, (ii) the Investor s Currency-equivalent value of the principal payable on the Notes and (iii) the Investor s Currency-equivalent market value of the Notes. Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal. Investors may be exposed to interest rate risks. Investment in Notes bearing interest at a fixed rate involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes. Any credit ratings assigned to us or the Notes may not reflect all the risks of an investment in the Notes. One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised, suspended or withdrawn by the assigning rating agency at any time. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in the EU and registered under the CRA Regulation (and such registration has not been withdrawn or suspended), subject to transitional provisions that apply in certain circumstances whilst the registration application is pending. Such general restriction will also apply in the case of credit ratings issued by non-eu credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-eu rating agency is certified in accordance with the CRA Regulation (and such endorsement action or certification, as the case may be, has not been withdrawn or suspended). The list of registered and certified rating agencies published by ESMA on its website in accordance with the CRA Regulation is not conclusive evidence of the status of the relevant rating agency included in such list, as there may be delays between certain supervisory measures being taken against a relevant rating agency and the publication of the updated ESMA list. Certain information with respect to the credit rating agencies and ratings is set out on the cover of this Offering Memorandum. Certain covenants may be suspended upon the occurrence of a change in our ratings. The Conditions will provide that, if at any time following the Issue Date, the Notes receive a rating of Baa3 or better from Moody s or BBB- or better from Fitch and no Potential Event of Default or Event of Default (each as defined in the Conditions) has occurred and is continuing, then beginning that day and continuing until such time, if any, that the Notes receive a rating of below Baa3 from Moody s or BBB from Fitch, certain covenants will cease to be applicable to the Notes. See Terms and Conditions of the Notes Covenants Suspension of Covenants when Notes rated Investment Grade. If these covenants were to cease to be applicable, we would be able to incur additional indebtedness or make payments, including dividends or investments, which may conflict with the interests of Noteholders. There can be no assurance that the Notes will ever achieve an investment grade rating or that any such rating will be maintained. Legal investment considerations may restrict certain investments. The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (i) the Notes are legal investments for it, (ii) the Notes can be used 41

57 as collateral for various types of borrowing and (iii) other restrictions apply to its purchase or pledge of any Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules. Reliance on DTC, Euroclear and Clearstream, Luxembourg procedures. The Rule 144A Notes will be represented by the Restricted Global Certificate, which will be deposited with a nominee for DTC. Except in the circumstances described in the Restricted Global Certificate, investors will not be entitled to receive Notes in definitive form. DTC and its direct and indirect participants will maintain records of beneficial interests in the Restricted Global Certificate. While the Notes are represented by the Restricted Global Certificate, investors will be able to trade their beneficial interest only through DTC and its participants, including Euroclear and Clearstream, Luxembourg. The Regulation S Notes will be represented by the Unrestricted Global Certificate, which will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. Except in the circumstances described in the Unrestricted Global Certificate, investors will not be entitled to receive Notes in definitive form. Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants will maintain records of beneficial interests in the Unrestricted Global Certificate. While the Notes are represented by the Unrestricted Global Certificate, investors will be able to trade their beneficial interest only through Euroclear and Clearstream, Luxembourg and their respective participants. While the Notes are represented by the relevant Global Certificate(s), we will discharge our payment obligations under the Notes by making payments through the relevant clearing systems(s). A holder of a beneficial interest in a Global Certificate must rely on the procedures of the relevant clearing system and its participants to receive payments under the Notes. We have no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in any Global Certificate. Holders of beneficial interests in a Global Certificate will not have a direct right to vote in respect of the Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by the relevant clearing system and its participants to appoint appropriate proxies. The Notes may be delisted in the future. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market. The Notes may subsequently be delisted despite our best efforts to maintain such listing and, although no assurance is made as to the liquidity of the Notes as a result of listing, any delisting of the Notes may have a material effect on a Noteholder s ability to resell the Notes on the secondary market. 42

58 SELECTED HISTORICAL AND OTHER FINANCIAL INFORMATION The tables below show our selected historical consolidated financial information as at and for the nine months ended 30 September 2017 and 2016 and as at and for the years ended 31 December 2016, 2015 and Unless otherwise indicated, this information has been extracted without material adjustment from the Unaudited Interim Financial Statements, the 2016 Audited Financial Statements and the 2015 Audited Financial Statements. In connection with the preparation of the 2017 Unaudited Interim Financial Statements and the 2016 Audited Financial Statements, certain line items were reclassified. In this section, unless otherwise indicated, the consolidated statement of financial position information as at 31 December 2016 is derived from the 2016 Audited Financial Statements and the consolidated statement of cash flows information for the nine months ended 30 September 2016 is derived from the 2016 Unaudited Interim Financial Statements, rather than from the 2017 Unaudited Interim Financial Statements. In addition, the reclassified comparative financial information as at and for the year ended 31 December 2015 contained in the 2016 Audited Financial Statements is presented. See Presentation of Financial and Other Information for further detail on the reclassification. The following selected historical consolidated financial information should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements, including the notes thereto, included elsewhere in this Offering Memorandum. Consolidated Statement of Profit or Loss and Comprehensive Income Nine months Year ended ended Twelve months 31 December 30 September ended 30 September (2) (TL millions) (TL (U.S.$ millions) millions) (1) Revenue... 4,133 4,533 4,533 3,253 5,402 6,682 1,900 Cost of sales... (4,047) (3,814) (3,575) (2,585) (4,023) (5,013) (1,425) Gross profit ,379 1, General and administrative expenses... (100) (118) (138) (103) (148) (183) (52) Marketing, selling and distribution expenses (27) (32) (42) (31) (43) (54) (15) Research and development expenses... (12) (12) (13) (10) (12) (15) (4) Other operating income Other operating expense... (127) (180) (240) (66) (100) (274) (78) Operating profit/(loss)... (61) ,238 1, Income from investing activities Expenses from investing activities... (4) (4) Operating profit/(loss) before financial income and expense... (58) ,276 1, Financial income Financial expense... (145) (364) (339) (174) (432) (597) (170) Profit/(loss) before tax... (62) ,227 1, Current tax expense... (19) (163) (113) (177) (227) (65) Deferred tax income/(expense) (23) Profit for the period ,027 1, Note: (1) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September See Exchange Rate Information. (2) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. 43

59 Consolidated Statement of Financial Position As at 31 December As at 30 September (1) 2017 (TL millions) (TL (U.S.$ millions) millions) (2) Assets Current assets Cash and cash equivalents ,342 1,267 1, Financial investments Trade receivables Other receivables Derivative financial assets Inventories Prepaid expenses Other current assets Total current assets... 1,768 2,768 2,660 2, Non-current assets Financial investments Other receivables Investment properties Property, plant and equipment... 1,817 2,277 1,904 3, Intangible assets Prepaid expenses Deferred income tax assets Other non-current assets Total non-current assets... 2,021 2,693 3,609 3,818 1,071 Total assets... 3,788 5,461 6,269 6,802 1,908 Liabilities Current liabilities Short term borrowings , Short term portion of long term borrowings Derivative financial instruments Trade payables ,137 1, Payables related to employee benefits Other payables Deferred revenue Short term provisions Current tax liabilities Other current liabilities Total current liabilities... 1,137 1,584 1,797 2, Non-current liabilities Long term financial liabilities , Derivative financial instruments Deferred revenue Long term provisions Total non-current liabilities ,071 1, Total liabilities... 1,605 2,655 3,199 3, Equity Equity attributable to owners of the parent company... 2,132 2,741 3,002 3, Share capital... 1,000 1,500 1,500 1, Adjustment to share capital Share premium Other comprehensive (expense)/income not to be reclassified to profit and loss... (15) (24) (24) (24) (7) Other comprehensive (expense) to be reclassified to profit and loss.. 1 (7) 1 (5) (1) Restricted reserves Retained earnings Net profit for the period/year , Non-controlling interest Total equity... 2,183 2,805 3,069 3, Total liabilities and equity... 3,788 5,461 6,269 6,802 1,908 Note: (1) The consolidated statement of financial position as at 31 December 2016 has not been reclassified to reflect the reclassification in the 2017 Unaudited Interim Financial Statements of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. See Presentation of Financial and Other Information. The reclassified consolidated statement of financial position as at 31 December 2016 is presented on pages F-80 to F-156. (2) The results as at 30 September 2017 are based upon the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. 44

60 Consolidated Statement of Cash Flows Nine months Year ended ended Twelve months 31 December 30 September ended 30 September (1) (3) (TL millions) (TL (U.S.$ millions) millions) (2) Net cash generated by/(used in) operating activities... (31) , Net cash generated by/(used in) investing activities (735) (405) (256) (332) (481) (137) Net cash generated by/(used in) financing activities (310) (449) (706) (567) (161) Net increase/(decrease) in cash and cash equivalents (253) (551) (60) Foreign exchange differences on cash and cash equivalents Cash and cash equivalents at the beginning of the period ,342 1,342 1, Cash and cash equivalents at the end of the period ,342 1, ,208 1, Note: (1) The consolidated statement of cash flows for the nine months ended 30 September 2016 is derived from the 2016 Unaudited Interim Financial Statements and has not been reclassified to reflect the reclassification in the 2017 Unaudited Interim Financial Statements of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. See Presentation of Financial and Other Information. The reclassified consolidated statement of cash flows for the nine months ended 30 September 2016 is presented on pages F-43 to F-79. (2) The results for the period are based upon the blended quarterly average exchange rate of TL = U.S.$1.00 for the twelve months ended 30 September 2017, except that cash and cash equivalents at the beginning of the period are based upon the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. (3) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. Other Financial Data As at and for As at and for the the nine year ended months ended 31 December 30 September Twelve months ended September 2017 (8) EBITDA(1) (TL millions) ,331 1,612 EBITDA (U.S.$ millions (2) ) EBITDA margin (3) % 14.7% 19.6% 18.7% 24.6% 24.1% Capital expenditure (4) (TL millions) Capital expenditure (5) (U.S.$ millions) Capital expenditure (6) (U.S.$ millions) Maintenance capital expenditure (6) (U.S.$ millions) Investment capital expenditure (6) (U.S.$ millions) Cash conversion (7)... (22)% 88% 79% 76% 88% 88% Note: (1) EBITDA is defined as operating profit excluding other operating income and other operating expense, plus depreciation and amortisation (including amounts capitalised as cost of inventories) and provisions. 45

61 The increase in EBITDA to TL 1,331 million for the nine months ended 30 September 2017 from TL 609 million for the nine months ended 30 September 2016 was attributable to an increase of TL 145 million from changes in the quantity of products sold, an increase of TL 711 million from changes in sales prices, an increase of TL 238 million from changes in FX rates and an increase of TL 135 million from other, offset by a decrease of TL 507 million from changes in naphtha prices. The increase in EBITDA to TL 890 million for the year ended 31 December 2016 from TL 664 million for the year ended 31 December 2015 was attributable to an increase of TL 463 million from changes in naphtha prices, an increase of TL 142 million from changes in FX rates and an increase of TL 97 million from other, offset by a decrease of TL 473 million from changes in sales prices and a decrease of TL 4 million from changes in the quantity of products sold. This reconciliation of EBITDA for the nine months ended 30 September 2017 to EBITDA for the nine months ended 30 September 2016 is based on indicative calculations prepared by us, and has not been audited or reviewed by our auditors. (2) EBITDA (U.S.$ millions) for each period is based upon the average exchange rate for each respective period as set out in Exchange Rate Information. (3) EBITDA margin is defined as EBITDA divided by revenue. (4) Capital expenditure comprises cash outflows from purchases of property, plant and equipment. (5) Capital expenditure, maintenance capital expenditure and investment capital expenditure (U.S.$ millions) for each period is based upon the average exchange rate for each respective period as set out in Exchange Rate Information. (6) Capital expenditure, maintenence capital expenditure and investment capital expenditure are presented on an accrual basis. (7) Cash conversion is defined as EBITDA less maintenance capital expenditure divided by EBITDA. (8) The unaudited financial information for the twelve months ended 30 September 2017 has been prepared by adding the audited financial information for the year ended 31 December 2016 extracted from the 2016 Audited Financial Statements to the unaudited financial information for the nine months ended 30 September 2017 extracted from the 2017 Unaudited Interim Financial Statements, and then subtracting the unaudited financial information for the nine months ended 30 September 2016 extracted from the 2017 Unaudited Interim Financial Statements. See Presentation of Financial and Other Information. 46

62 CAPITALISATION The following table sets forth our unaudited interim consolidated cash and cash equivalents, total shortand long-term borrowings and equity as at 30 September 2017 (i) on an actual basis and (ii) as adjusted to give effect to the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.S. from STEAŞ. There have been no material changes to our capitalisation as presented below since 30 September Adjusted, Adjusted, As at As at As at 30 September 30 September 30 September (1) (TL millions) (U.S.$ millions) Cash and cash equivalents... 1, (2) 111 Short-term borrowings (including current portion of long-term borrowing)... 1,870 1, Long-term borrowings , Notes offered hereby... 1, Total debt... 2,333 4,115 1,155 Share capital... 1,500 1, Adjustment to share capital Share premium Other comprehensive income/(expense) not to be reclassified to profit or loss... (24) (24) (7) Other comprehensive income/(expense) to be reclassified to profit or loss... (5) (5) (1) Restricted reserves Retained earnings Equity attributable to owners of the parent company. 3,434 3, Non-controlling interest Total equity... 3,493 3, Total capitalisation (3)... 5,826 7,608 2,135 Notes: (1) The results as at 30 September 2017 are based upon the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. (2) The adjustment corresponds to the aggregate of (1) the amount paid to STEAŞ using available cash reserves for the uses set forth in Use of Proceeds pursuant to the STAR Refinery Share Sale Agreement and (2) total estimated fees and expenses associated with the offering of the Notes. See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Actual fees and expenses may vary. (3) Total capitalisation represents the aggregate of total debt and total equity. 47

63 USE OF PROCEEDS We intend to use the net proceeds from the offering of the Notes, expected to amount to approximately U.S.$491.8 million after deducting fees and expenses, along with cash on hand, to acquire an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ pursuant to the share sale and transfer agreement we signed with STEAŞ on 9 January See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. The following tables present the expected estimated sources and uses of the funds with respect to the acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ, including the Notes offered hereby. Actual amounts are subject to adjustments and may vary from estimated amounts depending on several factors, including differences from our estimates of fees and other expenses and fluctuations in the exchange rate between the Turkish lira and the U.S. dollar. Sources (TL millions) (U.S.$ millions) Notes offered hereby... 1, Cash (1) Total sources... 2, Uses (TL millions) (U.S.$ millions) Purchase of stake in STAR Rafineri A.Ş. from STEAŞ... 2, Fees and expenses (2) Total uses... 2, Notes: (1) Corresponds to the aggregate of (1) amount paid to STEAŞ using available cash reserves for the uses set forth above pursuant to the STAR Refinery Share Sale Agreement and (2) total estimated fees and expenses associated with the offering of the Notes. Actual fees and expenses may vary. See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. For cash and cash equivalents as of 30 September 2017, see Capitalisation. (2) Represents total estimated fees and expenses associated with the offering of the Notes. Actual fees and expenses may vary. 48

64 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Unaudited Interim Financial Statements, the 2016 Audited Financial Statements and the 2015 Audited Financial Statements, appearing elsewhere in this Offering Memorandum. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Offering Memorandum, particularly in Risk Factors and Forward-Looking Statements. Unless otherwise indicated, the financial information set out below and referred to in this section has been extracted without material adjustment from the Unaudited Interim Financial Statements, the 2016 Audited Financial Statements and the 2015 Audited Financial Statements. In connection with the preparation of the 2017 Unaudited Interim Financial Statements and the 2016 Audited Financial Statements, certain line items were reclassified. When comparisons are made between the nine months ended 30 September 2017 and 2016, the un-reclassified financial information for 2016 included in the 2016 Unaudited Interim Financial Statements is presented. When comparisons are made between the years ended 31 December 2016 and 2015, the reclassified financial information for 2015 contained in the 2016 Audited Financial Statements is presented. When comparisons are made between the years ended 31 December 2015 and 2014, the un-reclassified financial information for 2015 contained in the 2015 Audited Financial Statements is presented. See Presentation of Financial and Other Information for further detail on the reclassification. Overview Petkim was established on 3 April 1965 by the Turkish government and is currently the sole petrochemicals producer of size in Turkey. We produce basic and intermediate petrochemical raw materials with an annual average gross production capacity of 3.6 million tons. In 2016, we operated at 88 per cent. capacity, producing 1.7 million tons of saleable products from a total gross output of 3.1 million tons, and in the twelve months ended 30 September 2017, we operated at 94 per cent. capacity, producing 1.8 million tons of saleable products from a total gross output of 3.3 million tons. The Petkim complex has 14 production plants and one masterbatch unit, as well as seven auxiliary processing units, and covers 19 million square metres. We produce petrochemicals across the integrated value chain based on naphtha and related feedstock, including an ethylene cracker with capacity of 588,000 tons per year, downstream integration into polyolefins and vinyl chain products and direct sales of selected cracking co-products (e.g. aromatics). Our products are used by customers in a wide range of industries, including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. Approximately 64 per cent. of our products by value were sold in the domestic market in the nine months ended 30 September 2017, with the remaining 36 per cent. being sold in export markets, where the main destination is Europe. Based on management estimates, as at 31 December 2016, we had a direct domestic market share (based on production capacity) in Turkey of approximately 18 per cent. from our own production, with additional involvement in the domestic market through third party trading. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometers from Izmir, which is one of the few coastal areas in Turkey dedicated to industrial activity. As an integrated company, Petkim is located in a strategic area logistically in terms of both sales and procurement of raw materials. Our logistics capabilities are one of our greatest strengths given the strategic location of our assets. Aliağa s proximity to Izmir, its connection to a large number of Organised Industrial Zones and its access to motorways and railways make it an advantageous location. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make it an attractive platform to serve regional and global trade. Additionally, our facilities are very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. Since the acquisition of Petkim by the SOCAR Group through a privatisation process, we have undertaken several operational efficiency programmes and investments with the aim of enhancing our competitiveness in the petrochemicals sector. In 2014, for example, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and we also 49

65 increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. Following the acquisition of Petkim, the SOCAR Group has been focused on creating an industrial hub on the Aliağa Peninsula via various projects. This has included the construction of the STAR Refinery, Turkey s first privately established refinery, which is intended to provide us with raw material security. It is the first part of the integration chain, with an investment value of U.S.$6.3 billion and a refining capacity of 10 million tons per year, or 214,000 barrels per day. As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 46 per cent. was financed by equity and the remainder by debt. As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete and it is expected to come onstream in the third quarter of On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş., and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. See Business of the Group Integration STAR Refinery, Business of the Group Strategy Capitalise on potential for synergies and additional, diversified cash flows through the STAR Refinery, Petlim and other projects and Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Another major project was the construction of the Petlim Container Port, which was commissioned in 2016 with an initial capacity of 0.8 million TEU. The terminal s capacity was expanded to a maximum of 1.5 million TEU in September 2017, making it Turkey s third largest port, and is expected to be fully operational in This investment was undertaken by Petlim, 70 per cent. of which is owned by Petkim, with the remaining 30 per cent. being owned by Goldman Sachs, which acquired this stake in 2014 for U.S.$250 million. The total cost of the development and its financing was approximately U.S.$400 million. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. Under this agreement, APM Terminals is responsible for all operational aspects of the port and associated deliverables, including obtaining permits, while Petlim is responsible for all construction-related aspects of the port, including dredging. The expansion of the port to its current capacity was completed in September 2017, and APM Terminals is expected to obtain all necessary permits for use of the port s full capacity in the first quarter of In order to diversify our sources of revenue, we have also invested in a wind farm with a total capacity of 51 MW. The wind farm has 17 new turbines, each able to generate 3 MW of electricity, paving the way for a 22 per cent. increase in Petkim s electricity generating capacity. The construction of all turbines was completed in September 2017, and while the wind farm is currently licensed to generate 25 MW of electricity, we have applied for an amendment to the license which would allow it to generate 51 MW. We plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. The wind farm will reduce carbon emissions by 120,000 tons. The investment in the wind farm amounts to e55 million. Petkim holds a Regional Incentive Certificate for modernisation and replacement investments, as well as a Strategic Incentive Certificate for capacity increases and new investments. These certificates were granted within the scope of the Decree published by the Turkish government in 2012 pursuant to a decision by the Council of Ministers regarding State Assistance for Investment. These certificates entitle us to certain tax benefits, including VAT exemptions, customs duty exemptions and tax reduction, among other benefits. The incentive certificate regime is intended to support economic development and address Turkey s current account deficit. Key Factors Affecting Results of Operations Our results of operations are affected by a range of factors affecting the petrochemicals industry generally, including general economic conditions, pricing for raw materials and supply and demand for our products, as well as factors specific to our operations. These factors are discussed in detail below. General Economic Conditions Our results of operations are affected by general economic conditions in Turkey, where we sell substantially all of our products. Turkey s economy has recorded growth during the past five years, with real GDP growth of per cent., 4.79 per cent., 8.49 per cent., 5.17 per cent., 6.06 per cent. and 50

66 2.10 per cent. for 2011, 2012, 2013, 2014, 2015 and 2016, respectively, according to TURKSTAT saw divergent developments in different country groups. The failed coup attempt in July 2016 heightened political uncertainty and Russian sanctions have also negatively affected confidence, which has in turn adversely affected economic growth. In 2016, Turkey s credit rating was downgraded by Fitch and Moody s to below investment grade, with S&P s rating remaining one notch below investment grade. Turkey s economy is also affected by developments in the global economy, particularly in relation to the monetary policies of advanced economies, whose monetary policy was largely accommodative in 2017, with generally low policy rates. Average balance sheets are expected to expand significantly due to ongoing asset purchases by the Bank of Japan and the European Central Bank. In the United States, however, the Federal Reserve increased its policy rate three times in 2017 and market commentators are forecasting expect three rate hikes from the Federal Reserve in The European Central Bank has extended the maturity of its quantitative easing program to December 2017 but is expected to curtail its easing in The Turkish lira depreciated by 21.0 per cent. against the U.S. dollar in 2016 and depreciated by a further 3.2 per cent. in the nine months ended 30 September Furthermore, Turkey s PPI and CPI for the year ended 31 December 2015 were 5.71 per cent. and 8.81 per cent., respectively, and, for the year ended 31 December 2016 were 9.94 per cent. and 8.53 per cent., respectively. Inflation increased after the attempted coup in July 2016 as a result of an increase in food prices and pass-through effects of the depreciation of the Turkish lira along with political uncertainties and geopolitical risks. In its April 2017 inflation report, the Central Bank revised its inflation forecast for 2017 from 8.0 per cent. to 8.5 per cent. and increased its inflation forecast for 2018 from 6.0 per cent. to 6.4 per cent., as a result of various inflationary pressures. Turkey s current account deficit remains sizeable, as the decline in tourism offsets savings from low energy prices. Progress on structural reforms also remains slow. In 2015, the current account deficit decreased to U.S.$32.1 billion (3.75 per cent. of GDP). Between January and December 2016, Turkey had a current account deficit of U.S.$ billion, compared to a current account deficit of U.S.$ billion in the same period of Potential capital outflows due to a decrease in global U.S. dollar liquidity and rising U.S. interest rates may have a negative impact on the Turkish economy if not counterbalanced by the actions of the European Central Bank and the Bank of Japan. Supply and Demand Cycle in the Petrochemicals Industry Margins in the petrochemicals industry are heavily influenced by industry utilisation, which is in turn influenced by the cycles of expansion and contraction of the global economy, creating volatility in the prices of both inputs and finished products. Due to this cyclical nature, historically the international petrochemicals industry has experienced alternating periods of limited supply, which have caused utilisation to increase, followed by an expansion of production capacity, which has resulted in oversupply and decreased utilisation. Historically, the relationship between margins and utilisation has been highly cyclical due to fluctuations in supply resulting from the timing of new investments in capacity and global economic conditions affecting the relative strength or weakness of demand. Generally, capacity is more likely to be added in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result, and in the past frequently have resulted, in overcapacity, which typically leads to a reduction in margins. In response, petrochemicals producers typically reduce capacity or control further capacity additions, eventually causing the market to be relatively undersupplied. Currently, there is excess supply in the global petrochemicals industry. Ethane-based investments in the United States and the Middle East, which are rich in natural gas, have been the key factor contributing to excess supply. This has led to a concentration of investments in ethylene and its derivatives. While investments in Asia have continued in order to maintain self-sufficiency, there have been very few investments in Europe. There is also an increased need for maintenance of production plants in Europe due to the age of such plants. Within the petrochemicals industry, the highest growth potential has been for thermoplastics, including LDPE, PP, polystyrene ( PS ) and ABS. This is largely due to growth in demand for these products as a result of increased usage. While growth in demand for general purpose products is higher in less developed countries, demand for specialty products such as engineering plastics is increasing in developed countries. 51

67 Demand for fibers, including ACN and ethylene glycol, has been increasing at a faster rate compared to other petrochemicals products, although growth rates for these products have been gradually decreasing in recent years due to the increasing substitution of natural raw materials such as cotton for these products. Other products such as C. Soda and PA have the lowest growth potential mainly due to environmental restrictions. We have experienced positive pricing for most of our products during the past few years, which has contributed to higher margins, and we expect pricing to remain stable across all of our products in 2018 and The following graphs presents Nexant s view of expected growth for our various products over the period from 2016 to 2025: PP ( CAGR) PVC ( CAGR) HDPE ( CAGR) 4.9% 5.1% 4.2% 3.7% 5.1% 5.2% 1.6% 1.0% 1.3% Western Europe Middle East Turkey Western Europe Middle East Turkey Western Europe Middle East Turkey LDPE ( CAGR) PTA ( CAGR) MEG ( CAGR) 4.8% 4.6% 7.5% 4.4% 4.8% 5.2% 2.4% 1.5% 0.2% Western Europe Middle East Turkey Western Europe Middle East Turkey Western Europe Middle East 8JAN Turkey Competition Until a decade ago, the Turkish petrochemicals industry was growing at a rate of over 10 per cent. per year. Recently, this has decreased to 5 per cent. to 6 per cent., which is still above GDP growth. Although the overall market has been growing, our market share (based on production capacity), which management estimates is approximately 18 per cent. as at 31 December 2016, has declined during the same period. This decrease is solely due to constraints in our production capacity, given that we are the sole petrochemical producer in Turkey and have historically been able to sell everything we have produced. The Turkish petrochemicals industry is one of the most competitive markets in the world due to several factors. First, Turkey has applied liberal foreign trade policies, including the customs union with the EU, a high volume of trade agreements and an open fiscal regime. Moreover, there are export incentives, especially for finished products, that make imports of raw material more attractive. For example, because of the advantage of the aforementioned trade agreements, producers in Middle Eastern countries, which have cost advantages due to their supply of natural gas and oversupply conditions, are increasingly focusing on the Turkish market. On the other hand, the Turkish petrochemicals industry mainly operates on a spot basis and therefore does not provide exporters an attractive and permanent net-back. Therefore, potential exporters are effectively required to track our prices, although they may engage in dumping in order to gain market share. As a result, we have from time to time demanded the imposition of anti-dumping duties on countries and/or companies who are engaging in these pricing strategies. However, while our operations have benefitted from anti-dumping duties in the past and may continue to do so in the future, we do not rely on such measures as a general matter. 52

68 The following table sets forth detail on customs duties and anti-dumping duties by country and product: United States Iran South Korea Germany Customs Anti-dumping Customs Anti-dumping Customs Anti-dumping Customs Anti-dumping duty duty duty duty duty duty duty duty LDPE % N/A 6.5% N/A N/A N/A N/A N/A PA % N/A 6.5% N/A 0.0% 8.44% N/A N/A PVC % 18.1% N/A N/A N/A N/A 0.0% 16.4% In addition, in relation to PTA, we have also initiated anti-dumping proceedings and expect a decision later in In the international market, both the slowdown in general demand and the rise in supply with new capacity coming on-stream have led to a contraction in regional arbitrage and a decline in global trade. To address these issues, some companies, particularly multi-national companies, have increased their vertical and horizontal integration and have increasingly pursued a strategy of increasing production of higher value added products. There has also been an acceleration in research and development and innovation activities in order to diversify the product range. Oil and Gas Price Movements In general, oil and gas price movements can affect our results of operations and, in particular, our margins, in a number of ways. The price of crude oil and natural gas is historically correlated to a certain extent with sales prices for our products. As crude oil and natural gas prices decrease, the sales prices of our products tend to decrease as well, and vice versa. In addition, oil and gas price movements have an impact on the cost of our feedstock, which is primarily naphtha. In recent periods, our feedstock costs have decreased in tandem with lower crude oil and natural gas prices. The decrease in our feedstock costs has been disproportionately greater than the decrease in sales prices for our products, resulting in a significant increase in our EBITDA margin and average gross profit per ton during the periods under review. This is generally the case for naphtha-based producers such as ourselves, whereas ethanebased producers tend to experience margin erosion as a result of declining oil and gas prices. The price of crude oil has fluctuated significantly during the past five years. According to OPEC s website, the year-end figure for a barrel of crude oil as measured in accordance with OPEC s reference basket (which represents a weighted average of oil prices collected from various oil producing countries) rose from U.S.$ in 2011 to U.S.$ in 2012, before declining to U.S.$ in 2013, U.S.$96.29 in 2014 and U.S.$49.49 in 2015 and reaching a low of U.S.$26.01 in January The price of the OPEC reference basket as at 31 December 2016 was U.S.$53.30 per barrel. Asset Utilisation and Capacity Expansions Our results of operations are influenced by the degree to which we utilise our assets. We seek to operate our facilities at full capacity and in 2016, we operated at 88 per cent. overall capacity utilisation, with capacity utilisation of 94 per cent. for ethylene and 95 per cent. for aromatics. This is compared to overall capacity utilisation of 87 per cent. in 2015, with capacity utilisation of 95 per cent. for ethylene and 100 per cent. for aromatics, and overall capacity utilisation of 68 per cent. in 2014, with capacity utilisation of 63 per cent. for ethylene and 85 per cent. for aromatics. The increase in utilisation across these periods has had a positive effect on our sales and margins. 53

69 The graph below illustrates capacity utilisation rates at our ethylene facility on a quarterly basis for the period from 1 January 2014 to 30 September Petkim Ethylene Cracker Facility Utilisation Rates 2014 Q % Capacity Utilisation Rates 100% 80% 60% 40% 20% 0% Drop in production due to ethylene cracker shutdown for c.100 days for construction work Average: 88.6% Drop in production due to 15-day shutdown of ethylene cracker for maintenance work Jan-2014 May-2014 Sep-2014 Jan-2015 May-2015 Sep-2015 Jan-2016 May-2016 Sep-2016 Jan-2017 May-2017 Sep JAN Note: (1) For 2014, our overall capacity utilisation is used instead of Petkim s ethylene cracker capacity utilisation due to lack of available individualised data for the ethylene facility during this period. The capacity expansions we undertake also have an impact on our results of operations. In November 2014, we completed the expansion of our ethylene cracker, increasing ethylene production capacity by 13 per cent. from 520,000 tons per year to 588,000 tons per year. In 2014, we completed our investments in improving production processes at our PTA plant, which resulted in capacity increasing by 50 per cent. from 70,000 tons per year to 105,000 tons per year. We have also made investments to increase efficiency at our production plants. In 2015, we completed several energy efficiency projects, with significant gains obtained in particular with projects in the VCM, ethylene, ACN, aromatics and LDPE plants. In 2016, general maintenance at our aromatics production plant, ethylene cracker and LDPE production plant contributed to higher utilisation. We are continuing our focus on operational efficiency, including through the development of an integrated optimisation model, which will monitor a wide range of factors across our production facilities to optimise maintenance schedules. Digitisation is also an area of focus for us. For example, the digitisation of our production facilities has enabled us to monitor the temperature of our furnaces more efficiently, which has resulted in significant cost savings. Our asset utilisation can also be affected by the number and length of turnarounds (scheduled outages of a unit in order to perform necessary inspections and testing to comply with industry regulations and to permit us to carry out any maintenance activities that may be necessary). Our production facilities typically undergo major turnarounds every four years, which last approximately one month. Unplanned outages can also impact our results of operations, even if such outages are covered by insurance. Similarly, planned or unplanned outages of our competitors can positively affect our results of operations by decreasing the supply of products in the market. Foreign Exchange Rate Fluctuations Our results of operations may be affected by foreign currency exchange rate fluctuations. Most of our foreign currency exposure is naturally hedged, with the vast majority of our customers invoiced, and our expenses paid, in U.S. dollars. However, we are exposed to currency risk on foreign currencydenominated sales to the extent the exchange rate of the Turkish lira versus the relevant foreign currency fluctuates between the date of the invoice and the date of payment. As at 31 December 2016, a 10 per cent. appreciation of the U.S. dollar versus the Turkish lira would have had an adverse effect of TL 50 million on our profit for the year. In addition, we are exposed to currency risks in relation to our inventory and adverse movements in currency exchange rates may lead to us being required to recognise impairments in respect of our inventory. 54

70 Results of Operations Nine Months Ended 30 September 2017 and 2016 The following table sets forth our results of operations for the nine months ended 30 September 2017 and 2016 (for purposes of this discussion, the un-reclassified financial information for the nine months ended 30 September 2016 included in the 2016 Unaudited Interim Financial Statements is presented. See Presentation of Financial and Other Information ): Nine months ended 30 September (TL millions) Sales... 3,253 5,402 Cost of sales... (2,585) (4,023) Gross profit ,379 General and administrative expenses... (103) (148) Marketing, selling and distribution expenses... (31) (43) Research and development expenses... (10) (12) Other operating income Other operating expense... (66) (100) Operating profit/(loss) ,238 Income from investment activities Expense from investment activities... Operating profit before financial income and expense ,276 Finance income Finance expense... (174) (432) Profit/(loss) before tax ,227 Current tax expense... (113) (177) Deferred tax income/(expense) (23) Net profit for the period ,027 Net Sales Our net sales increased by TL 2,149 million, or 66 per cent., to TL 5,402 million for the nine months ended 30 September 2017 from TL 3,253 million for the nine months ended 30 September The increase was primarily due to increased demand across our products and trade goods sold, higher oil prices and the depreciation of the Turkish Lira against the U.S. dollar. The following table presents a breakdown of our net sales for the nine months ended 30 September 2017 and 2016: Nine months ended 30 September (TL millions) Domestic sales... 2,309 3,432 Export sales ,065 Other sales Sales discounts... (56) (124) Net sales... 3,253 5,402 Domestic sales Domestic sales increased by TL 1,123 million, or 49 per cent., to TL 3,432 million for the nine months ended 30 September 2017 from TL 2,309 million for the nine months ended 30 September The increase was primarily due to an increase in overall capacity utilisation at our facilities from 89 per cent. to 96 per cent. in the nine months ended 30 September 2016 and 2017, respectively, as well as an 55

71 increase in demand for PTA, MEG, P-X and certain trade goods, in particular thermoplastics and styrene. Additional factors that contributed to the increase in domestic sales during this period included higher oil prices and the depreciation of the Turkish Lira against the U.S. dollar. Export sales Export sales increased by TL 1,083 million, or 110 per cent., to TL 2,065 million for the nine months ended 30 September 2017 from TL 982 million for the nine months ended 30 September The increase was primarily due to the increase in capacity utilisation at our facilities, as well as an increase in demand for thermoplastics, MEG, aromatics, benzene and certain trade goods, in particular benzene and hexane. Additional factors that contributed to the increase in export sales during this period included higher oil prices and the depreciation of the Turkish Lira against the U.S. dollar. Sales discounts Discounts increased by TL 68 million, or 122 per cent., to TL 124 million for the nine months ended 30 September 2017 from TL 56 million for the nine months ended 30 September Cost of sales Cost of sales includes direct raw materials and supplies, cost of sold trade goods, energy, labour costs, depreciation and amortisation and other. Cost of sales increased by TL 1,438 million, or 56 per cent., to TL 4,023 million for the nine months ended 30 September 2017, from TL 2,585 million for the nine months ended 30 September The increase was primarily due to an increase in direct raw materials and supplies, cost of trade goods sold, energy, labour costs and depreciation. The following table presents an overview of our cost of sales for the nine months ended 30 September 2017 and 2016: Nine months ended 30 September (TL millions) Direct raw materials and supplies... (1,811) (2,822) Cost of sold trade goods... (280) (542) Energy... (247) (284) Labour costs... (150) (191) Depreciation and amortisation... (78) (117) Other... (19) (68) Total cost of sales... (2,585) (4,023) Direct raw materials and supplies Direct raw materials and supplies increased by TL 1,011 million, or 56 per cent., to TL 2,822 million for the nine months ended 30 September 2017 from TL 1,811 million for the nine months ended 30 September The increase was primarily due to an increase in feedstock costs due to higher oil and naphtha prices, an increase in capacity utilisation at our facilities and the depreciation of the Turkish Lira against the U.S. dollar. Cost of sold trade goods Cost of sold trade goods increased by TL 262 million, or 94 per cent., to TL 542 million for the nine months ended 30 September 2017 from TL 280 million for the nine months ended 30 September The increase was primarily due to an increase in the quantity of certain products we sell through our trading operations, including thermoplastics, benzene, styrene and hexane, which was partially offset by a decrease in the quantity of MEG sold. The depreciation of the Turkish Lira against the U.S. dollar also contributed to the increase in cost of trade goods sold. 56

72 Energy Energy costs increased by TL 37 million, or 15 per cent., to TL 284 million for the nine months ended 30 September 2017 from TL 247 million for the nine months ended 30 September The increase was primarily due to the increase in capacity utilisation at our facilities. Labour costs Labour costs increased by TL 40 million, or 27 per cent., to TL 191 million for the nine months ended 30 September 2017 from TL 150 million for the nine months ended 30 September The increase was in line with inflation. Depreciation and amortisation Depreciation and amortisation increased by TL 39 million, or 50 per cent., to TL 117 million for the nine months ended 30 September 2017 from TL 78 million for the nine months ended 30 September The increase was primarily due to the capitalisation of our wind farm in April 2017 and the Petlim Container Port in December General and administrative expenses General and administrative expenses increased by TL 45 million, or 43 per cent., to TL 148 million for the nine months ended 30 September 2017 from TL 103 million for the nine months ended 30 September The increase was primarily due to higher personnel expenses and higher costs associated with consultancy services in connection with the implementation of the operational excellence program as well as other outsourced services. Marketing, selling and distribution expenses Marketing, selling and distribution expenses increased by TL 12 million, or 39 per cent., to TL 43 million for the nine months ended 30 September 2017 from TL 31 million for the nine months ended 30 September The increase was primarily due to an increase in rent expenses and outsourced services related to transportation incurred in connection with the increased quantities of trade goods sold during the period. Research and development expenses Research and development expenses increased by TL 2 million, or 20 per cent., to TL 12 million for the nine months ended 30 September 2017 from TL 10 million for the nine months ended 30 September Net other operating income Net other operating income increased by TL 16 million, or 34 per cent., to TL 63 million for the nine months ended 30 September 2017 from TL 47 million for the nine months ended 30 September The increase was primarily due to an increase in net foreign exchange gains as a result of fluctuations in the Turkish lira/u.s. dollar exchange rate, partially offset by lower rental income. Net income from investing activities Net income from investing activities increased by TL 37 million to TL 38 million for the nine months ended 30 September 2017 from TL 1 million for the nine months ended 30 September The increase was primarily due to the sale of land to SCR Gayrimenkul A.Ş., a member of the SOCAR Group. Net finance (expense)/income We recorded net finance expense of TL 49 million for the nine months ended 30 September 2017, compared to net finance income of TL 21 million for the nine months ended 30 September This was due to higher foreign exchange losses as a result of fluctuations in the Turkish lira/u.s. dollar exchange rate. 57

73 Total tax expense Total tax expense increased by TL 123 million, or 160 per cent., to TL 200 million for the nine months ended 30 September 2017 from TL 78 million for the nine months ended 30 September This reflected an effective tax rate of 16 per cent. and 13 per cent. for the nine months ended 30 September 2017 and 2016, respectively. Years Ended 31 December 2016 and 2015 The following table sets forth our results of operations for the years ended 31 December 2016 and 2015 (for purposes of this discussion, the reclassified comparative financial information for the year ended 31 December 2015 included in the 2016 Audited Financial Statements is presented. See Presentation of Financial and Other Information ): Year ended 31 December (TL millions) Sales... 4,533 4,533 Cost of sales... (3,814) (3,575) Gross profit General and administrative expenses... (118) (138) Marketing, selling and distribution expenses... (32) (42) Research and development expenses... (12) (13) Other operating income Other operating expense... (180) (240) Operating profit/(loss) Income from investment activities Expense from investment activities... (4) Operating profit before financial income and expense Finance income Finance expense... (364) (339) Profit/(loss) before tax Current tax expense... (19) (163) Deferred tax income/(expense) Net profit for the period Sales Our sales remained stable at TL 4,533 million for the year ended 31 December 2016 and The following table presents a breakdown of our sales for the years ended 31 December 2016 and 2015: Year ended 31 December (TL millions) Domestic sales... 3,180 3,207 Export sales... 1,387 1,367 Other sales Gross sales... 4,619 4,605 Less: other discounts... (71) (58) Less: sales discounts... (11) (10) Less: sales returns... (4) (4) Total sales... 4,533 4,533 58

74 Domestic sales Domestic sales increased by TL 27 million, or 0.9 per cent., to TL 3,207 million for the year ended 31 December 2016 from TL 3,180 million for the year ended 31 December The increase was primarily due to an increase in the Turkish lira/u.s. dollar exchange rate, which was partially offset by a decrease in overall product pricing in U.S. dollar terms due to the decline in oil prices. Export sales Export sales decreased by TL 20 million, or 1.4 per cent., to TL 1,367 million for the year ended 31 December 2016 from TL 1,387 million for the year ended 31 December The decrease was primarily due to an increase in the Turkish lira/u.s. dollar exchange rate, which was partially offset by a decrease in overall product pricing in U.S. dollar terms due to the decline in oil prices. Changes in the product mix sold in the export market (including an increase in quantities sold for ethylene, C4, ACN, PTA and MEG and a decrease in sales of thermoplastics, Py-gas and aromatic oil) also contributed to the decrease. Other sales Other sales decreased by TL 21 million, or 40.8 per cent., to TL 31 million for the year ended 31 December 2016 from TL 52 million for the year ended 31 December The decrease was primarily due to foreign exchange income (which increased) being classified under domestic and export sales in 2016, as well as a decrease in service income from tugboat and pilotage services, and scrap sales. Discounts Discounts decreased by TL 14 million, or 16.0 per cent., to TL 73 million for the year ended 31 December 2016 from TL 86 million for the year ended 31 December Cost of sales Cost of sales decreased by TL 240 million, or 6.3 per cent., to TL 3,575 million for the year ended 31 December 2016 from TL 3,814 million for the year ended 31 December The decrease was primarily due to a decrease in raw materials usage and energy costs and decreases in change in work in process and change in finished goods. The following table presents an overview of our cost of sales for the year ended 31 December 2016 and 2015: Year ended 31 December (TL millions) Raw material usage... 2,576 2,552 Cost of sold trade goods Energy Labour Depreciation Idle capacity expense Packaging costs Change in work in process (57) Change in finished goods (65) Provision for impairment of inventories... (15) (11) Other Total cost of sales... 3,814 3,575 Raw material usage Raw material usage costs decreased by TL 24 million, or 0.9 per cent., to TL 2,552 million for the year ended 31 December 2016 from TL 2,576 million for the year ended 31 December The decrease was primarily due to a decrease in feedstock costs due to lower oil and naphtha prices, which was in turn due to lower pricing. This was partially offset by higher capacity utilisation in

75 Cost of sold trade goods Cost of sold trade goods increased by TL 71 million, or 22.8 per cent., to TL 383 million for the year ended 31 December 2016 from TL 312 million for the year ended 31 December The increase was primarily due to an increase in the quantity of certain products we sell through our trading operations, including styrene and MEG. In the case of MEG, this was in turn due to a planned shutdown related to catalyst change, which led to us having to import MEG for on-sale to customers. Energy Energy costs decreased by TL 52 million, or 13.9 per cent., to TL 321 million for the year ended 31 December 2016 from TL 373 million for the year ended 31 December The decrease was primarily due to lower natural gas prices. Labour Labour costs increased by TL 12 million, or 6.4 per cent., to TL 199 million for the year ended 31 December 2016 from TL 187 million for the year ended 31 December The increase was in line with inflation. Depreciation Depreciation increased by TL 5 million, or 5 per cent., to TL 105 million for the year ended 31 December 2016 from TL 100 million for the year ended 31 December Change in work in process Change in work in process decreased by TL 153 million, or per cent., to negative TL 57 million for the year ended 31 December 2016 from positive TL 96 million for the year ended 31 December The increase was primarily due to the positive effect of increasing naphtha prices on inventories in the first quarter of Change in finished goods Change in finished goods decreased by TL 107 million, or per cent., to negative TL 65 million for the year ended 31 December 2016 from positive TL 42 million for the year ended 31 December The decrease was primarily due to the impact of increasing naphtha prices on inventories in the first quarter of General and administrative expenses General and administrative expenses increased by TL 20 million, or 17.0 per cent., to TL 138 million for the year ended 31 December 2016 from TL 118 million for the year ended 31 December The increase was primarily due to an increase in fees for consultancy services in connection with our operational excellence program. Marketing, selling and distribution expenses Marketing, selling and distribution expenses increased by TL 10 million, or 31.3 per cent., to TL 42 million for the year ended 31 December 2016 from TL 32 million for the year ended 31 December The increase was primarily due to higher outsourcing costs, which was in turn related to an increase in storage rent which was in line with the increase in the quantity of products sold. Research and development expenses Research and development expenses increased by TL 1 million, or 8.3 per cent., to TL 13 million for the year ended 31 December 2016 from TL 12 million for the year ended 31 December Net other operating expense Net other operating expense decreased by TL 16 million, or 30.4 per cent., to TL 36 million for the year ended 31 December 2016 from TL 52 million for the year ended 31 December The decrease was primarily due to higher foreign exchange losses on trade payables in 2016, which was in turn due to the 11 per cent. depreciation of the Turkish lira against the U.S. dollar. 60

76 Net finance income Net finance income decreased by TL 18 million, or 30.8 per cent., to TL 40 million for the year ended 31 December 2016 from TL 58 million for the year ended 31 December The decrease was primarily due to lower foreign exchange gains in 2016, which was in turn due to the 11 per cent. depreciation of the Turkish lira against the U.S. dollar. Total tax expense We had a total tax expense of TL 50 million for the year ended 31 December 2016, compared to a total tax credit of TL 66 million for the year ended 31 December This was primarily due to strategic investment incentives for corporate tax used in 2015, which mostly related to capacity expansion projects. Years Ended 31 December 2015 and 2014 The following table sets forth our results of operations for the years ended 31 December 2015 and 2014 (for purposes of this discussion, the un-reclassified financial information for the year ended 31 December 2015 included in the 2015 Audited Financial Statements is presented. See Presentation of Financial and Other Information ): Year ended 31 December (TL millions) Sales... 4,133 4,533 Cost of sales... (4,047) (3,816) Gross profit General and administrative expenses... (100) (118) Marketing, selling and distribution expenses... (27) (32) Research and development expenses... (12) (12) Other operating income Other operating expense... (127) (170) Operating profit/(loss)... (61) (516) Income from investment activities... 3 Operating profit/(loss) before financial income and expense... (58) 516 Finance income Finance expense... (145) (364) Profit/(loss) before taxation... (62) 574 Current year tax expense... (19) Deferred tax income/(expense) Net profit for the period Sales Our sales increased by TL 400 million, or 9.7 per cent. to TL 4,533 million for the year ended 31 December 2015 compared to TL 4,133 million for the year ended 31 December The increase was due to capacity expansions at our ethylene cracker and PTA production plant which were completed during In addition to those expansions, we undertook planned maintenance works in 2014 at other production units. Following the completion of these capacity expansions and maintenance works, our production increased, which resulted in an increase in sales volumes, particularly for thermoplastics, ACN, MEG, PTA, PP, C4, Py-gas, benzene, PA and C5. 61

77 The following table presents a breakdown of our sales for the years ended 31 December 2015 and 2014: Year ended 31 December (TL millions) Domestic sales... 2,958 3,180 Export sales... 1,240 1,387 Other sales Gross sales... 4,214 4,619 Less: other discounts... (68) (71) Less: sales discounts... (9) (11) Less: sales returns... (4) (4) Total sales... 4,133 4,533 Domestic sales Domestic sales increased by TL 222 million, or 7.5 per cent., to TL 3,180 million for the year ended 31 December 2015 from TL 2,958 million for the year ended 31 December The increase was primarily due to the capacity expansions at our ethylene cracker and PTA production plant which were completed during This resulted in higher sales volumes for thermoplastics, ACN, PTA and MEG. This was partially offset by lower pricing due to a decrease in oil prices. Export sales Export sales increased by TL 147 million, or 11.8 per cent., to TL 1,387 million for the year ended 31 December 2015 from TL 1,240 million for the year ended 31 December The increase was primarily due to low sales volumes in 2014, which was in turn due to reduced production resulting from the shutdowns occasioned by our capacity expansions and maintenance work performed during that year. Given the lower volumes of production, we elected to sell our limited production in the domestic market rather than the export market, where margins are lower. In 2015, once the capacity expansions and maintenance work was completed, our production levels normalised, causing export sales to increase. Other sales Other sales increased by TL 36 million, or 225 per cent., to TL 52 million for the year ended 31 December 2015 from TL 16 million for the year ended 31 December The increase was primarily due to an increase in foreign exchange income due to movements in exchange rates. Discounts Discounts increased by TL 5 million, or 6.2 per cent., to TL 86 million for the year ended 31 December 2015 from TL 81 million for the year ended 31 December Cost of sales Cost of sales decreased by TL 231 million, or 5.7 per cent., to TL 3,816 million for the year ended 31 December 2015 from TL 4,047 million for the year ended 31 December The decrease was primarily due to a sharp decrease in feedstock prices, which was offset by an increase in raw material usage due to higher capacity utilisation rate and capacity expansions at our ethylene cracker and PTA production plant. 62

78 The following table presents an overview of our cost of sales for the year ended 31 December 2015 and 2014: Year ended 31 December (TL millions) Raw material usage... 2,973 2,576 Cost of sold trade goods Energy Labour Depreciation Change in work in process... (58) 96 Change in finished goods Idle capacity expense Packaging costs Rediscount income/(expense) on trade payables Provision for impairment of inventories Other Total cost of sales... 4,047 3,816 Raw material usage Raw material usage costs decreased by TL 397 million, or 13.3 per cent., to TL 2,576 million for the year ended 31 December 2015 from TL 2,973 million for the year ended 31 December The decrease was primarily due to a decrease in feedstock costs, which was in turn due to lower pricing. The decrease was primarily due to a sharp decrease in feedstock prices, which was offset by an increase in raw material usage due to higher capacity utilisation rate and capacity expansions at our ethylene cracker and PTA production plant. Cost of sold trade goods Cost of sold trade goods decreased by TL 160 million, or 33.8 per cent., to TL 312 million for the year ended 31 December 2015 from TL 472 million for the year ended 31 December The decrease was primarily due to a supply deficit in the domestic market in 2014 resulting from the capacity expansions and maintenance work undertaken that year. This led us to purchase a higher volume of trade goods in 2014 than would otherwise have been the case. Following the completion of the capacity expansions and maintenance work, the quantity of trade goods sold increased. Energy Energy costs increased by TL 23 million, or 6.8 per cent., to TL 373 million for the year ended 31 December 2015 from TL 350 million for the year ended 31 December The increase was primarily due to higher capacity utilisation in Labour Labour costs increased by TL 56 million, or 42.7 per cent., to TL 187 million for the year ended 31 December 2015 from TL 131 million for the year ended 31 December The increase was primarily due to the usage of labour in connection with the expansions of our ethylene cracker and PTA production plant. Depreciation Depreciation increased by TL 25 million, or 33.3 per cent., to TL 100 million for the year ended 31 December 2015 from TL 75 million for the year ended 31 December The increase was primarily due to the capacity expansions we undertook in Change in work in process Change in work in process increased by TL 154 million, or per cent., to TL 96 million for the year ended 31 December 2015 from negative TL 58 million for the year ended 31 December The increase was primarily due to the negative effect of decreasing naphtha prices on inventories. 63

79 Change in finished goods Change in finished goods increased by TL 24 million, or per cent., to negative TL 18 million for the year ended 31 December 2015 from negative TL 42 million for the year ended 31 December The increase was primarily due to the negative effect of decreasing naphtha prices on inventories. General and administrative expenses General and administrative expenses increased by TL 18 million, or 18.0 per cent., to TL 118 million for the year ended 31 December 2015 from TL 100 million for the year ended 31 December The increase was primarily due to higher personnel expenses, which was in turn due to a provision for bonuses and an increase in salaries. Marketing, selling and distribution expenses Marketing, selling and distribution expenses increased by TL 5 million, or 18.5 per cent., to TL 32 million for the year ended 31 December 2015 from TL 27 million for the year ended 31 December The increase was primarily due to higher personnel expenses, which was in turn due to a provision for bonuses and an increase in salaries. Research and development expenses Research and development expenses remained stable at TL 12 million for each of the years ended 31 December 2015 and Net other operating expense Net other operating expense increased by TL 31 million, or per cent., to TL 38 million for the year ended 31 December 2015 from TL 8 million for the year ended 31 December The increase was primarily due to foreign exchange losses on trade payables, which was in turn due to the depreciation of the Turkish lira against the U.S. dollar. Net finance income/(expense) We recorded net finance income of TL 58 million for the year ended 31 December 2015, compared to a net finance expense of TL 4 million for the year ended 31 December This was primarily due to higher net foreign exchange gains in 2015 as compared to Total tax expense We had a total tax credit of TL 65 million for the year ended 31 December 2015, compared to TL 70 million for the year ended 31 December This was primarily due to strategic investment incentives for corporate tax used in 2015, which mostly related to capacity expansion projects. Liquidity and Capital Resources Our business has required, and will continue to require, liquidity primarily to meet our debt service requirements, to fund capital expenditures (including for scheduled maintenance of our production facilities and expanding capacity at our production plants) and to fund our working capital. Historically, our principal sources of liquidity have been cash generated from our operating activities, short-term bank borrowings, including overnight loans, and long-term bank borrowings denominated in U.S. dollars and euro with Turkish and international banks. Our ability to generate cash from our operating activities depends on future operating performance, which in turn depends to a certain extent on general economic, financial, competitive market, legislative, regulatory and other factors, many of which are beyond our control, as well as other factors discussed in the section entitled Risk Factors. 64

80 Facilities The table below sets out the outstanding facilities into which we have entered for the financing of capital expenditure and raw materials as at 30 September 2017: Amount drawn Amount drawn as at as at 30 September 2017 Lender Amount 30 September 2017 (U.S.$ millions) (1) Date Tenor European Investment Bank ( EIB )... e40 million Fully drawn U.S.$45.2 million April years Türkiye İhracat Kredi Bankası A.Ş.... TL 100 million Fully drawn U.S.$28 million November year Türkiye İş Bankası A.Ş. U.S.$240 million U.S.$80 million U.S.$80 million November year U.S.$101.5 million U.S.$76.6 million U.S.$76.6 million March years/9 years (2) AKBANK T.A.Ş. ( Akbank )... e29 million Fully drawn U.S.$20.5 million April years Yapi ve Kredi Bankasi A.Ş.... TL 50 million Fully drawn U.S.$14.0 million March year Notes: (1) The amounts outstanding are converted from Turkish lira using the spot exchange rate of TL = U.S.$1.00 as at 30 September See Exchange Rate Information. (2) The facility includes two tranches, comprising a Nippon Export and Investment Insurance tranche with a four-year tenor and a Japan Bank for International Cooperation tranche with a nine year tenor. The table below sets out the outstanding facilities into which we have entered for the financing of the construction of the Petlim Container Port as at 30 September 2017: Amount drawn Amount drawn as at 30 September 2017 Lender Amount as at 30 September 2017 (U.S.$ millions) Date Tenor Akbank.. U.S.$212 million (1) Fully drawn U.S.$ 212 million May years EIB... U.S.$ 80 million e35 million U.S.$41.2 million May years Note: (1) Petlim, in which we own a 70 per cent. shareholding interest, is the borrower under this project finance credit agreement and we are the guarantor, having also pledged our entire shareholding interest in Petlim as collateral until the payment of all outstanding amounts under the loan pursuant to a separate share pledge agreement. The agreement does not require payment for the first three years of the loan, and contains certain covenants, including a requirement for Petlim to maintain a debt to equity ratio (defined as total debt divided by total shareholders equity and subordinated debt) of no more than 75:25 during the construction period and a debt service cover ratio (defined as available cashflow divided by the aggregate of the principal amount and any interest payments, fees and costs payable under any outstanding indebtedness of Petlim during any relevant period) of no less than 1.10:1. On 20 November 2015, Petlim granted a first ranking mortgage in the amount of U.S.$350 million in favour of Akbank over the Petlim Container Port s land as collateral for the loan. The amounts guaranteed by us under the agreement decrease from 100 per cent. of the amounts owed by Petlim (being the case as at the date of this Offering Memorandum) to U.S.$75 million per year from the project completion date specified in the agreement, which is currently expected to fall on or before 31 March 2018 (the Project Completion Date ) to the third anniversary of the Project Completion Date; to U.S.$50 million per year from the third anniversary to the sixth anniversary of the Project Completion Date; and to U.S.$25 million from the sixth anniversary of the Project Completion Date to the date on which 70 per cent. of all amounts owed by Petlim have been repaid. The amount outstanding under the loan, previously classified as a long-term liability, was classified as a short-term liability in our financial statements for the nine months ended 30 September 2017 due to a provision allowing Akbank to require prepayment of amounts outstanding under the loan in the event that the first phase of the construction of the Petlim Container Port was not completed by 1 February 2016 and/or the second phase of the port did not become operational by 24 February Following unforeseen delays in construction outside of our control, Petlim obtained an unofficial waiver of the prepayment provision from Akbank, and subsequently obtained a formal waiver of the prepayment provision and an extension of the second phase completion date to the Project Completion Date, effective 28 September We expect the amount outstanding under the loan to be classified as a long-term liability in our next financial statements. 65

81 Cash Flows Nine Months Ended 30 September 2017 and 2016 The following table presents our consolidated cash flows for the nine months ended 30 September 2017 and 2016: Nine months ended 30 September 2016 (1) 2017 (TL millions) Net cash generated by/(used in) operating activities Net cash generated by/(used in) investing activities... (256) (332) Net cash generated by/(used in) financing activities... (449) (706) Net increase/(decrease) in cash and cash equivalents... (551) (60) Foreign exchange differences on cash and cash equivalents Cash and cash equivalents at the beginning of the period... 1,342 1,267 Cash and cash equivalents at the end of the period ,208 Note: (1) The consolidated statement of cash flows for the nine months ended 30 September 2016 has not been reclassified to reflect the reclassification in the 2017 Unaudited Interim Financial Statements of (1) certain payables with letters of credit to financial institutions from trade payables to third parties to other financial liabilities and (2) certain investments from investment properties to property, plant and equipment. See Presentation of Financial and Other Information. The reclassified consolidated statement of cash flows for the nine months ended 30 September 2016 is presented on pages F-43 to F-79. Net cash generated by operating activities Net cash generated by operating activities increased by TL 824 million to TL 978 million for the nine months ended 30 September 2017 from TL 154 million for the nine months ended 30 September The increase was primarily due to the reclassification of naphtha-related letters of credit from trade payables to short term financial liabilities in 2017 and the increase in net profit during the nine months ended 30 September Net cash used in investing activities Net cash used in investing activities increased by TL 76 million to TL 332 million for the nine months ended 30 September 2017 from TL 256 million for the nine months ended 30 September The decrease was mainly due to other cash inflows of TL 160 million in the nine months ended 30 September 2016, which related to interest gains on time deposits over three months. Net cash used in financing activities We used TL 706 million in financing activities in the nine months ended 30 September 2017, compared to TL 449 million in the nine months ended 30 September The increase was primarily due to the reclassification of naphtha-related letters of credit from trade payables to short term financial liabilities in

82 Years Ended 31 December 2016 and 2015 The following table presents our consolidated cash flows for the years ended 31 December 2016 and 2015: Year ended 31 December (TL millions) Net cash generated by/(used in) operating activities Net cash generated by/(used in) investing activities... (735) (405) Net cash generated by/(used in) financing activities (310) Net increase/(decrease) in cash and cash equivalents (253) Foreign exchange differences on cash and cash equivalents Cash and cash equivalents at the beginning of the period ,342 Cash and cash equivalents at the end of the period... 1,342 1,267 Net cash generated by operating activities Net cash generated by operating activities decreased by TL 399 million to TL 461 million for the year ended 31 December 2016 from TL 860 million for the year ended 31 December The decrease was mainly due to certain adverse working capital movements, including an increase in inventories. Net cash used in investing activities Net cash used in investing activities decreased by TL 330 million to TL 405 million for the year ended 31 December 2016 from TL 735 million for the year ended 31 December The decrease was mainly due to higher tax payments, which was in turn due to lower short-term financial investments. Net cash used in financing activities We used TL 310 million in financing activities in the year ended 31 December 2016 compared to generating TL 319 million in the year ended 31 December This was mainly due to a dividend payment in 2016 in the amount of TL 473 million, compared to nil for the year ended 31 December Years Ended 31 December 2015 and 2014 The following table presents our consolidated cash flows for the years ended 31 December 2015 and 2014: Year ended 31 December (TL millions) Net cash generated by/(used in) operating activities... (31) 999 Net cash generated by/(used in) investing activities (735) Net cash generated by/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period ,342 Net cash generated by operating activities We had a net cash inflow from operating activities of TL 999 million for the year ended 31 December 2015, compared to an outflow of TL 31 million for the year ended 31 December This was mainly due to the improved cash generation of our business as a result of higher profitability. Net cash used in investing activities We had a net cash outflow from investing activities of TL 735 million for the year ended 31 December 2015, compared to an inflow of TL 159 million for the year ended 31 December In 2014, we had proceeds from the sale of property, plant and equipment in the amount of TL 581 million, which related to the sale of 30 per cent. of Petlim to Goldman Sachs. 67

83 Net cash generated by financing activities Net cash generated by financing activities increased by TL 80 million to TL 375 million for the year ended 31 December 2015 compared to TL 295 million for the year ended 31 December The increase was mainly due to higher net proceeds from borrowings. Contractual Obligations Collateral, Pledges and Mortgages We have provided collateral, pledges and mortgages ( CPMs ) in connection with the financing of certain projects. The following table presents CPMs provided by us as at 30 September 2017: As at 30 September 2017 (TL millions) Mortgages given to banks Guarantees given to banks Customs offices and Republic of Turkey Prime Ministry Under secretariat of Customs. 61 Other Total CPMs... 1,960 On 25 May 2015, Petlim, in which we own a 70 per cent. shareholding interest, signed a project finance credit agreement with Akbank in the amount of U.S.$212 million which has a maturity of 13 years with no repayments in the first three years for the external funding of the Petlim Container Port project. Petkim has guaranteed the loan repayment and has also pledged all of its shares in Petlim until the payment of all outstanding amounts under the loan. The agreement contains certain covenants including a requirement to maintain a credit/total Shareholders Equity ratio not exceeding 75:25 during the construction period. On 20 November 2015, Petlim entered into a first ranking mortgage in the amount of U.S.$350 million in favor of Akbank in relation to its land. Operational leases The following table presents operating lease income and expense which are not recognised in our financial statements for the nine months ended 30 September 2017 and 2016 and the years ended 31 December 2016, 2015 and 2014: Nine months Year ended ended 31 December 30 September (TL millions) Operating lease income 0 1 year years years and more ,292 2,832 1,751 1,766 Total operating lease income ,546 3,146 2,643 2,890 Operating lease expense 0 1 year years Total operating lease expense We have signed an operational leasing contract for naphtha tanks effective between 1 December 2014 and 30 April STAR Rafineri A.Ş. has rented out tanks it owns to us and discounted TL 44 million plus VAT over the duration of the contract. STAR Rafineri A.Ş. has obtained an independent valuation report regarding the value of the usage right of the tanks for the duration of the lease so as to determine the fair value of the leasing contract. The net book value of the net rental income from tanks between 1 December 2014 and 20 April 2018, is in the range of TL 40 million to TL 45 million. 68

84 Commitments STAR Refinery Offtake Agreement On 26 May 2014, we signed a 20-year offtake agreement with STAR Rafineri A.Ş., whose main shareholder is STEAŞ, for the purchase of a minimum of 1,300,000 tons and a maximum of 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year. In addition, we signed a cooperation contract with STAR Rafineri A.Ş. on the same date and pursuant to that contract, we will sell steam for 20 years and provide solid and hazardous waste disposal services, a supply of workers on a temporary basis and security services to STAR Rafineri A.Ş. STAR Refinery Share Sale Agreement On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ (the STAR Refinery Share Sale Agreement ) for the purchase of 30 per cent. of the share capital of Rafineri Holding A.Ş. Rafineri Holding A.Ş. is a holding company which owns 60 per cent. of STAR Rafineri A.Ş., and is currently a wholly-owned subsidiary of STEAŞ. Upon payment in full of the purchase price as provided below, we will become a minority shareholder in Rafineri Holding A.Ş. and will thereby acquire an 18 per cent. effective stake in STAR Rafineri A.Ş. The purchase price of U.S.$720 million is to be paid in three equal instalments. The first instalment was paid by us on 9 January 2018, the second instalment is due on the date on which testing at the STAR Refinery commences and the final instalment is due on the closing date, being the date on which the shares in Rafineri Holding A.Ş. are to be transferred by STEAŞ to us. We have agreed in the STAR Refinery Share Sale Agreement that the closing date must occur by no later than 31 March 2019, and is subject to customary conditions precedent, including the obtaining of all regulatory approvals necessary for the transaction. The conditions precedent also include the finalisation between us and STEAŞ of a shareholders agreement. We have agreed in principle with STEAŞ that such shareholders agreement will allow us to appoint one member of the board of directors of Rafineri Holding A.Ş. (with STEAŞ to appoint the remaining three members), that it will entitle us to certain tag-along rights and drag-along rights, that it will require STEAŞ to first offer any shares in Rafineri Holding A.Ş. to us before selling such shares to a third party, and that it will also address customary other matters, such as reserved matters. However, even if we do conclude the shareholders agreement with respect to our ownership of Rafineri Holding A.Ş, our interest in the STAR Refinery itself will be limited to an indirect economic interest only, as the power to decide all shareholder, board and other management-related matters at the STAR Refinery-level will continue to be controlled by the SOCAR Group and the Republic of Azerbaijan Ministry of Economic and Industry. If closing does not take place prior to the long stop date for any reason attributable to STEAŞ, STEAŞ is required, after written notice from us, to refund the purchase price in cash together with interest. If closing does not take place for any reason attributable to us and we do not reach an agreement to extend the long stop date, the STAR Refinery Share Sale Agreement will be deemed to have been terminated on the long stop date, and STEAŞ shall refund the purchase price to us without interest. We have also agreed in the STAR Refinery Share Sale Agreement that STEAŞ must deliver additional shares in Rafineri Holding A.Ş. to us (without any requirement for further payment from us) in the event of a capital increase affecting its effective stake in STAR Rafineri A.Ş., so as to maintain our 18 per cent. effective stake in STAR Rafineri A.Ş. following closing. Financial Instruments and Financial Risk Management Credit Risk The holding of financial assets involves the risk that counterparties may be unable to meet the terms of the agreements. These risks are managed by collecting collateral and by restricting the average risk range for counterparties (other than intercompany exposures) in every agreement. As part of our sales policy, we obtain collateral in the amount of 100 per cent. of total outstanding Turkish lira trade receivables from our customers. The use of credit limits is regularly monitored and financial position of the customers, past experiences, reputation in the market and other factors are considered by management in order to evaluate credit quality. 69

85 The credit risk exposure in terms of financial instruments as at 31 December 2016 is set forth below: As at 31 December 2016 Trade receivables Other receivables Related Third Related Third Bank parties parties parties parties deposits Total (TL millions) Maximum amount of credit risk as of reporting date ,471 14,321 16,471 1,267,188 1,972,452 Covered by guarantees , ,664 Net book value of financial assets neither past due nor impaired ,268 14,321 16,471 1,267,188 1,956,249 Net book value of financial assets whose conditions are renegotiated, otherwise to be classified as past due or impaired... Net book value of assets past due but not impaired... 16,203 16,203 Covered by guarantees... (6,789) (6,789) Net book value of assets impaired.. Past due (gross book value)... 15,820 2,067 17,887 Impairment amount... (15,820) (2,067) (17,887) Net value covered by guarantees Not due (gross book value)... Impairment amount... Net value covered by guarantees Off balance sheet items exposed to credit risk... The following table presents due receivables as at 30 September 2017: As at 30 September 2017 (TL millions) Overdue receivables days due days due days due Over 90 days due Total due receivables Covered by guarantees Liquidity risk Prudent liquidity risk management comprises maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The ability to fund existing and prospective debt requirements is managed by maintaining the availability of fund providers lines from high quality lenders. In order to maintain liquidity, we closely monitor the collection of trade receivables in order to and to prevent any financial burden that may result from late collections and arrange cash and non-cash credit lines with banks. Market risk Foreign exchange risk We are exposed to currency risk on assets or liabilities denominated in foreign currencies. We have set up a policy to balance and manage foreign exchange risk. Existing risks are monitored in meetings held by our Audit Committee and Board of Directors. Although raw materials, which comprise a significant portion of production and import volumes, are foreign exchange-denominated cost items, the determination of sales prices by us in foreign exchange terms serves as a natural hedge, decreasing foreign exchange risk. 70

86 The following table sets forth our foreign currency position as at 30 September 2017: As at 30 September 2017 TL equivalent USD EUR Other (TL millions) Trade receivables Monetary financial assets... 1, Non-monetary financial assets... Current assets... 1, Trade receivables... Monetary financial assets Non-monetary financial assets... Other... Non-current assets Total assets... 2, Trade payables Financial liabilities Monetary other liabilities... Non-monetary other liabilities... Short-term liabilities... 1, Trade payables... Financial liabilities Monetary other liabilities... Non-monetary other liabilities... Long-term liabilities Total liabilities... 1, Amount of asset in the nature of off balance sheet derivative instruments Amount of liability in the nature of off balance sheet derivative instruments... Net foreign (liability)/asset position (61) (5) Net foreign currency (liability)/asset position of monetary items (65) (5) Total fair value of financial instruments used for foreign currency hedging Hedged amount for current assets Hedged amount for current liabilities... Export... 1, Import... 3,

87 The following tables set forth a sensitivity analysis of foreign currency risk as at 30 September 2017 and as at 31 December 2016: As at 30 September 2017 Profit and loss Equity Appreciation of Depreciation of Appreciation of Depreciation of foreign foreign foreign foreign currency currency currency currency (TL millions) Change of USD by 10 per cent. against TL Asset/liability denominated in USD net (89) Portion hedged for USD risk... 9 (9) USD effect net (98) Change of EUR by 10 per cent. against TL Asset/liability denominated in USD net... (26) 26 Portion hedged for USD risk... 2 (2) USD effect net... (24) 24 Change of other currencies by 10 per cent. against TL Asset/liability denominated in USD net... (0.5) 0.5 Portion hedged for USD risk... USD effect net... (0.5) 0.5 Total (73) As at 31 December 2016 Profit and loss Equity Appreciation of Depreciation of Appreciation of Depreciation of foreign foreign foreign foreign currency currency currency currency (TL millions) Change of USD by 10 per cent. against TL Asset/liability denominated in USD net... (58) 58 Portion hedged for USD risk (31) USD effect net... (28) 28 Change of EUR by 10 per cent. against TL Asset/liability denominated in USD net... (24) 24 Portion hedged for USD risk... 2 (2) USD effect net... (22) 22 Change of other currencies by 10 per cent. against TL Asset/liability denominated in USD net... 1 Portion hedged for USD risk... USD effect net... 1 Total... (50) 50 72

88 The total export and import amount from Turkey for the years ended 31 December 2016, 2015 and 2014 are set forth in the tables below: Year ended Year ended Year ended 31 December 31 December 31 December Original Original Original amount TL amount TL amount TL (TL millions) Exports USD EUR Total exports... 1,221 1,374 1,350 Imports USD... 1,473 3, , ,818 EUR British sterling Japanese yen Swiss franc Total imports... 3,358 2,177 2,977 Interest rate risk We are exposed to interest rate risk through the impact of rate changes on interest-bearing assets and liabilities. These exposures are managed by balancing interest rate sensitive assets and liabilities. Our interest rate position as at 31 December 2016 is set forth below: As at 31 December 2016 (TL millions) Financial liabilities USD financial liabilities ,804 EUR financial liabilities... 74,195 TL financial liabilities... 90,591 Financial instruments with variable interest rates USD financial liabilities... 1,089,659 EUR financial liabilities ,942 Price risk Our operational profitability and cash inflows from operations are exposed to the risk arising from fluctuations in naphtha prices which are affected by competition in the petrochemicals sector and raw material prices. We manage this risk by regularly reviewing the amount of inventory held on hand and taking action to reduce costs to decrease the pressure of costs on prices. These risks are managed through regular meetings of the Board of Directors. We set our sales prices considering certain indicators of petrochemicals products in domestic and foreign markets. The changes in foreign markets are monitored through the worldwide publications comparing most attainable competitive market prices of Western Europe, Asia and the US contract, spot and factory prices and computing actual import costs to Turkey. While we determine domestic market prices, we consider indicators such as price information obtained from other producers and sector publications and our production levels, stock levels and order amounts received. We also use some derivative financial instruments, mainly in relation to naphtha, to hedge cash flow risk arising from raw material price risk. Capital risk management Our objectives when managing capital are to safeguard our ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. 73

89 In order to maintain or adjust the capital structure, we may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. We monitor capital on the basis of our debt/equity ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total debt (including short-term liabilities and long-term liabilities) less cash and cash equivalents. Our debt to equity ratio as at 30 September 2017 is set forth below: As at 30 September 2017 (TL millions, unless otherwise indicated) Total debt... 3,309 Less: cash and cash equivalents... 1,208 Net debt... 2,101 Total equity... 3,493 Debt/equity ratio per cent. Critical Accounting Policies Basis of consolidation The consolidated financial statements comprise the financial statements of Petkim, Petlim in which Petkim has a shareholding interest of 70 per cent. and Petkim Specialities Mühendislik Plastikleri Sanayi ve Ticaret A.Ş. in which we have a shareholding interest of 100 per cent. Subsidiaries are consolidated from the date on which control is transferred us until the date on which the control is transferred out of Petkim. As stated above, the consolidated financial statements consist of our financial statements and those of our subsidiaries which we control. This control is normally evidenced when we own, either directly or indirectly, more than 50 per cent. of the voting rights of a company s share capital and are able to govern the financial and operating policies of an enterprise so as to benefit from its activities. Subsidiaries are consolidated by using the full consolidation method, accordingly the registered subsidiary values are netted off with the related equity items. Balances and transactions between us and our subsidiaries, including intercompany profits and unrealised profits and losses (if any) are eliminated. Consolidated financial statements are prepared using uniform accounting policies for transactions and other events in similar circumstances. Inventories Inventories are valued at the lower of cost and net realizable value. The cost of inventory consists of purchase materials, cost of conversion and other costs that are necessary to bring the inventories to their present location and condition. The costs of inventories are determined on a weighted average basis. Net realizable value is the estimated selling price in the ordinary course of business, less cost of completion and selling expenses. Spare parts and material stocks are valued at the lower of cost and net recoverable value. The cost of spare parts and material stocks consist of purchase materials and other costs that are necessary to bring them to their present location and condition. The costs of spare parts and material stocks are determined on a weighted average basis. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and impairment losses if any. Historical costs include the costs directly related to the acquisition of property plant and equipment. Costs incurred after the acquisition can be capitalised to the net book value of the assets or can be booked as another asset if and only if it is probable that the future economic benefits will flow to us and the cost of the asset can be measured reliably. Repair and maintenance expenses are charged to the consolidated statement of comprehensive income as they incurred. Repair and maintenance 74

90 expenditures are capitalised if they result in an enlargement or substantial improvement of the respective asset. Depreciation is provided using the straight-line method based on the estimated useful lives of the net assets. Spare parts and material stocks qualify as property, plant and equipment when they are expected to be used more than one period and only in connection with an item of property, plant and equipment. Spare parts and material stocks are carried at cost less the accumulated depreciation which is calculated over the remaining useful life of the related item of property, plant and equipment. Buildings, machinery and equipment are capitalised and depreciated when they are in the condition necessary for operations in the manner intended by management. Residual values of property, plant and equipment are deemed as insignificant. The useful lives of property, plant and equipment are as follows: Useful life Land improvements years Buildings years Machinery and equipment years Motor vehicles... 5 years Furniture and fixtures years Other fixed assets... 5 years Leasehold improvements... 3 years The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted on a prospective basis. Land is not depreciated as it is deemed to have an indefinite useful life. Gains or losses on disposals of property, plant and equipment are included in the other operating income and expense accounts, in the consolidated statement of comprehensive income as appropriate. Intangible assets Intangible assets comprise acquired rights, information systems and software and capitalised development costs. Intangible assets are amortised on a straight-line basis over their estimated useful lives from the date of acquisition. In case of impairment, the carrying values of the intangible assets are written-down to their recoverable amounts. The estimated useful lives of rights and software is 3-15 years. Impairment of assets At each reporting date, we assess whether there is an impairment indication for the assets, except for the deferred income tax asset and financial assets stated at fair values. We assess whether there is any indication that the book value of tangible and intangible assets, calculated by the acquisition cost less accumulated amortisation, may be impaired. When an indication of impairment exists, we estimate the recoverable values of such assets. When the individual recoverable value of assets cannot be measured, the recoverable value of the cash-generating unit of that asset is measured. Provision for doubtful receivables is booked in the consolidated financial statements when there is an indication that the related receivable cannot be collected. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of all cash flows, including amounts recoverable from guarantees and collateral, discounted based on the original effective interest rate of the originated receivables at inception. If the impairment amount decreases due to an event occurring after the write-down, the release of the provision is credited to other income in the current period. Impairment exists if the carrying value of an asset or a cash-generating unit is greater than its recoverable amount, which is the higher of value in use or fair value less costs to sell. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. 75

91 When the recoverable amount of an asset (or a cash-generating unit) is lower than its carrying value, the asset s (or cash-generating unit s) carrying value is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated statement of comprehensive income. An impairment loss recognised in prior periods for an asset is reversed if the subsequent increase in the asset s recoverable amount is caused by a specific event since the last impairment loss was recognised. Such a reversal amount cannot be higher than the previously recognised impairment and is recognised in the consolidated statement of comprehensive income. The criteria that we use to determine that there is objective evidence of an impairment loss include: Significant financial difficulty of the issuer or obligor; A breach of contract, such as a default or delinquency in interest or principal payments; For economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; It becomes probable that the borrower will enter bankruptcy or other financial reorganisation; and Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets. Current and deferred income tax Taxes include current period income taxes and deferred taxes. Current year tax liability consists of tax liability on the taxable income calculated according to currently enacted tax rates and to the effective tax legislation as of balance sheet date. Deferred income tax is provided, using the liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values. Deferred income tax is determined using tax rates that have been enacted by the balance sheet date. Tax is recognised in the consolidated statement of comprehensive income, except to the extent that it relates to items recognised in equity. Taxes arisen on items recognised in equity are recognised directly in equity. Deferred income tax liabilities are recognised for all taxable temporary differences; whereas deferred income tax assets resulting from deductible temporary differences are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary difference can be utilised. Deferred income tax asset is recognised to the extent that it is probable that the entity will have sufficient taxable profit in the same period as the reversal of the deductible temporary difference arising from tax losses carried forward. Deferred income tax assets and deferred income tax liabilities related to income taxes levied by the same taxation authority are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. Deferred income tax assets and deferred income tax liabilities are classified as long-term in the consolidated financial statements. Revenue recognition Revenue is based on the invoiced amount of products sold and services given. Revenues are recognised on an accrual basis at the time deliveries or acceptances are made, when the amount of revenue can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to us, at the fair value of consideration received or receivable. Risks and rewards are transferred to customers, when the transfer of ownership has realised. Net sales represent the invoiced value of goods sold less sales returns and commission and exclude related taxes. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to us. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. The difference between the fair value and the nominal amount of the consideration is recognised as interest income on a time proportion basis that takes into account the effective yield on the asset. 76

92 Transactions in foreign currency Transactions in foreign currencies during the year have been translated at the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into Turkish lira at the exchange rates prevailing at the balance sheet date. Foreign exchange gains or losses arising from the settlement of such transactions and from the translation of monetary assets and liabilities are recognised in the consolidated statement of comprehensive income. 77

93 BUSINESS OF THE GROUP Overview Petkim was established on 3 April 1965 by the Turkish government and is currently the sole petrochemicals producer of size in Turkey. We produce basic and intermediate petrochemical raw materials with an annual average gross production capacity of 3.6 million tons. In 2016, we operated at 88 per cent. capacity, producing 1.7 million tons of saleable products from a total gross output of 3.1 million tons, and in the twelve months ended 30 September 2017, we operated at 94 per cent. capacity, producing 1.8 million tons of saleable products from a total gross output of 3.3 million tons. The Petkim complex has 14 production plants and one masterbatch unit, as well as seven auxiliary processing units, and covers 19 million square metres. We produce petrochemicals across the integrated value chain based on naphtha and related feedstock, including an ethylene cracker with capacity of 588,000 tons per year, downstream integration into polyolefins and vinyl chain products and direct sales of selected cracking co-products (e.g. aromatics). Our products are used by customers in a wide range of industries, including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. Approximately 64 per cent. of our products by value were sold in the domestic market in the nine months ended 30 September 2017, with the remaining 36 per cent. being sold in export markets, where the main destination is Europe. Based on management estimates, as at 31 December 2016, we had a direct domestic market share (based on production capacity) in Turkey of approximately 18 per cent. from our own production, with additional involvement in the domestic market through third party trading. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometers from Izmir, which is one of the few coastal areas in Turkey dedicated to industrial activity. As an integrated company, Petkim is located in a strategic area logistically in terms of both sales and procurement of raw materials. Our logistics capabilities are one of our greatest strengths given the strategic location of our assets. Aliağa s proximity to Izmir, its connection to a large number of Organised Industrial Zones and its access to motorways and railways make it an advantageous location. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make it an attractive platform to serve regional and global trade. Additionally, our facilities are very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. Since the acquisition of Petkim by the SOCAR Group through a privatisation process (as further described under History and Development below), we have undertaken several operational efficiency programmes and investments with the aim of enhancing our competitiveness in the petrochemicals sector. In 2014, for example, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and we also increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. Following the acquisition of Petkim, the SOCAR Group has been focused on creating an industrial hub on the Petkim Peninsula in Aliağa via various projects. This has included the construction of the STAR Refinery, Turkey s first privately established refinery, which is intended to provide us with raw material security. It is the first part of the integration chain, with an investment value of U.S.$6.3 billion and a refining capacity of 10 million tons per year. As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 46 per cent. was financed by equity and the remainder by debt. As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete and it is expected to come onstream in the third quarter of On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş., and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. See Integration STAR Refinery, Strategy Capitalise on potential for synergies and additional, diversified cash flows through the STAR Refinery, Petlim and other projects and Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Another major project was the construction of the Petlim Container Port, which was commissioned in 2016 with an initial capacity of 0.8 million TEU. The terminal s capacity was expanded to 1.5 million TEU 78

94 in September 2017, making it Turkey s third largest port, and is expected to be fully operational in This investment was undertaken by Petlim, 70 per cent. of which is owned by Petkim, with the remaining 30 per cent. being owned by Goldman Sachs, which acquired this stake in 2014 for U.S.$250 million. The total cost of the development and its financing was approximately U.S.$400 million. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. Under this agreement, APM Terminals is responsible for all operational aspects of the port and associated deliverables, including obtaining permits, while Petlim is responsible for all construction-related aspects of the port, including dredging. The expansion of the port to its current capacity was completed in September 2017, and APM Terminals is expected to obtain all necessary permits for use of the port s full capacity in the first quarter of In order to diversify our sources of revenue, we have also invested in a wind farm with a total capacity of 51 MW. The wind farm has 17 new turbines, each able to generate 3 MW of electricity. The construction of all turbines was completed in September 2017, and while the wind farm is currently licensed to generate 25 MW of electricity, we have applied for an amendment to the license which would allow it to generate 51 MW. We plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. The wind farm is expected to reduce carbon emissions by 120,000 tons per year. The investment in the wind farm amounts to e55 million. Petkim holds a Regional Incentive Certificate for modernisation and replacement investments, as well as a Strategic Incentive Certificate for capacity increases and new investments. These certificates were granted within the scope of the Decree published by the Turkish government in 2012 pursuant to a decision by the Council of Ministers regarding State Assistance for Investment. These certificates entitle us to certain tax benefits, including VAT exemptions, customs duty exemptions and tax reduction, among other benefits. The incentive certificate regime is intended to support economic development and address Turkey s current account deficit. Our shares have been listed on Borsa Istanbul since We had a market capitalisation of approximately U.S.$3.1 billion, or approximately TL 11.7 billion, as at 31 December History and Development The Turkish government first began considering the establishment of a petrochemicals production facility in the context of the First Five-Year Development Plan. Following research and evaluation conducted under the leadership of Türkiye Petrolleri Anonim Ortaklığı ( TPAO ), the Turkish national petroleum company, Petkim Petrokimya Holding A.Ş., or Petkim, was established on 3 April 1965 with TL 250 million in capital. We undertook our initial infrastructure investment with five plants constructed at the Yarımca Complex in Following investments in the Yarımca Complex, we commenced work to establish a second complex in the Aliağa region within the framework of the Turkish government s Third Five-Year Development Plan. The Aliağa Complex became operational in We have continuously invested in the Aliağa Complex since its inception, raising capacity, renovating, modernising and improving energy efficiency, while also maintaining its international competitive edge by efficiently meeting the needs and expectations of our broad customer base. In 2001, in anticipation of the separate privatisation of Petkim and Tüpraş, Petkim transferred the Yarımca Complex to Tüpraş pursuant to the Privatisation High Council s decree. In 2005, we completed expansions of our ethylene, low density polyethylene ( LDPE ) and polypropylene plants, which was the largest investment we had undertaken in the previous 18 years. We also increased capacity at the aromatics plant. Following a U.S.$90 million investment, our 57 MW gas turbine commenced operation at the steam production and electric power generation units in In 2007, a privatisation tender for 51 per cent. of Petkim using the block sale method was announced. In November 2007, the sale of these shares to a consortium consisting of the SOCAR Group and Turcas was approved by Decision No. 2007/63 of the Privatisation High Council. On 30 May 2008, the SOCAR & Turcas Consortium acquired 51 per cent. of Petkim for a consideration of U.S.$2.04 billion. In 2011, following the withdrawal of Turcas from the shareholding structure, 51 per cent. of Petkim s shares were transferred to STEAŞ. 79

95 In 2010, the STAR Refinery received a licence for a 10 million ton per year capacity refinery at the Petkim Complex. Petlim was also established in In December 2010, we received approval from EMRA for the construction of a wind power plant. In 2013, an agreement for the operation of Petlim was signed between Petlim and APM Terminals, a Dutch based company active in the operation and management of container terminals. In 2014, following the purchase of 30 per cent. of Petlim for U.S.$250 million, Goldman Sachs became a shareholder in Petlim. In 2014, we increased the capacity of our ethylene cracker by 13 per cent., bringing its capacity from 520,000 tons per year to 588,000, and also increased the capacity of our PTA production plant by 50 per cent., from 70,000 tons per year to 105,000. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. In 2015, we established Petkim Specialities, a wholly owned subsidiary, in order to diversify our product range and to specialise in high value added advanced engineering plastics and high-tech chemicals (masterbatch, compound). In 2016, the construction of the Petlim Container Terminal was commissioned with an initial capacity of 0.8 million TEU, which was subsequently increased to 1.5 million TEU. The construction of the terminal was completed in September In 2017, we also completed the construction of all turbines of our 51 MW wind farm. Strengths We believe that we have the following key strengths: Sole petrochemicals producer in an attractive and growing market We are the sole petrochemicals producer of size in Turkey, with an annual average gross production capacity of 3.6 million tons and an 18 per cent. share of the domestic market (based on production capacity) as at 31 December 2016, based on management estimates, with additional involvement in the domestic market through third party trading. In addition, our market share has been driven primarily by our production capacity, given that we have historically been able to sell everything we have produced. As a result, we are well positioned to benefit from expected growth in the Turkish petrochemicals market. Demand for petrochemicals products in Turkey grew at a compound annual growth rate of 6.6 per cent. during the period from 2012 to 2016 and we expect that it will grow at a compound annual growth rate of 7 per cent. between 2016 and This reflects growth for the petrochemicals industry of 1.4 times overall projected GDP growth over that period. We believe in particular that growth in demand for petrochemicals products will be underpinned by two trends, the emergence of a new middle class in developing countries and the expansion of the usage of petrochemicals products, including new technologies in plastics processing. Superior market and customer access as sole incumbent producer with granular marketing network We believe that we are well positioned to address foreign competitive threats as a result of our large and diversified customer base, strong barriers to entry and ability to protect ourselves from import threats. We have over 6,000 customers across a wide range of industries, including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. We have long-standing supply arrangements with our customers and as a local producer in Turkey, are able to offer customers just-in-time inventory management. We are also able to make sales in much smaller volumes than importers, which represents a key competitive advantage. We have sought to strengthen our customer relationships through sectoral meetings, trade shows and customer visits, where we share domestic production capacity and technical know-how with customers. We believe that we benefit from barriers to entry as a result of the burdensome process to obtain licences, permits and approvals from the government for the production of petrochemicals. There are limited suitable locations for a petrochemicals complex and the requirements for country-wide distribution channels and extensive human know-how also represent barriers to entry. As a result of the foregoing factors, no domestic competition is expected to come onstream in Turkey in the near future. 80

96 While Turkey is an open market, with no customs duties applicable to imports from the European Union, EFTA and/or FTA countries, we are able to protect ourselves against import threats in extraordinary circumstances. We currently benefit from anti-dumping restrictions, including a rate of 16 per cent. to 18 per cent. for PVC for Germany and the United States and a rate of 8.44 per cent. for PA for South Korea. In the event of unfair competition, under World Trade Organisation rules, we can demand the imposition of anti-dumping duties on countries and/or companies engaging in dumping. In addition, the Turkish market is currently protected against imports as a result of import duties. A customs duty of 3 per cent. is applicable to imports from GSP countries and a customs duty of 6.5 per cent. is applicable to imports from all other countries. We also benefit from tariff restrictions for all LDPE imports. In relation to PTA, we have also initiated anti-dumping proceedings and expect a decision later in Strong operational track-record across an integrated value chain and well-invested asset base strategically located on the Petkim Peninsula We have a strong operational track record, as evidenced by our ability to maintain our capacity utilisation following an expansion of our ethylene cracker by 13 per cent. and an increase in our PTA production capacity by 50 per cent. in The operational efficiency projects we have undertaken have also contributed to our ability to maintain and increase our capacity utilisation. For instance, we have been able to increase our polypropylene production in recent periods without any capacity expansions as a result of utilisation improvements. Our total capacity utilisation rates were 87 per cent. and 88 per cent. for the years ended 31 December 2015 and 2016 and 98 per cent. and 100 per cent. for the first and second quarters of 2017, respectively. This is compared to average industry-wide capacity utilisation rates in Europe of 81 per cent. and 78 per cent. in the first and second quarters of 2017, respectively, according to Nexant. Capacity utilisation rates at our ethylene facility were 95 per cent. and 94 per cent. for the years ended 31 December 2015 and 2016 and 100 per cent. for the nine months ended 30 September 2017, respectively. The capacity expansions we have undertaken have also enabled us to increase our energy efficiency, with a reduction in energy costs per ton of 52 per cent. from 2014 to These factors, along with lower oil prices, tightening availability of steam crackers in the region and weakness of regional currencies, have contributed to significant improvements in our EBITDA margin in recent periods. Our EBITDA margin and average gross profit per ton improved to 24.6 per cent. and U.S.$246/ton in the nine months ended 30 September 2017, compared to 1.9 per cent. and U.S.$43/ton in 2014, respectively. We have systematic and consistent health, safety and environment ( HSE ) policies which are based on industry best practices. We have adopted an HSE management system, SAFE, which is focused on four pillars: continuous improvement, leadership, risk management and implementation. Our HSE management is focused on four sub-disciplines: occupational health and safety, environment, process safety and plant protection. We employ over 75 full-time HSE professionals across our operations. Our focus on HSE has enabled us to decrease our total recordable injury rate ( TRIR ) (based on a 12-month rolling average per 200,000 man hours) from 3.22 in June 2016 to 1.11 in November 2017, and we seek to further decrease our TRIR to 0.3 in the short- to mid-term, in line with global petrochemical industry best practice levels. We have a well-invested asset base with well-maintained, custom-built facilities which we have expanded in recent years, including through investments in our ethylene cracker and PTA production capacity. In comparison with European naphtha-based producers, we have a relatively young ethylene cracker which has had very few unplanned stoppages. The strategic location of our assets also provides us with a competitive advantage. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometres from Izmir. Its connection to a large number of Organised Industrial Zones and its access to motorways and railways make Aliağa an advantageous location. The Gebze-Izmir Motorway Project, which is currently under construction and is expected to be completed in 2020, is expected to enhance the competitiveness of our location by connecting the area around Istanbul with Izmir. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make the Petkim Peninsula an attractive platform to serve regional and global trade. The SOCAR Group is focused on achieving the integration of refineries, petrochemicals production, energy, logistics, distribution and transmission in the Petkim Peninsula. This is expected to further contribute to our strategic location. The project is aimed at transforming the Petkim Peninsula into Turkey s first Chemical Industry Park and enhancing the competitiveness of the petrochemicals industry 81

97 in Turkey. This project includes the construction of the STAR Refinery, which is expected to be our main supplier of naphtha and mixed xylene once it comes onstream in Additionally, our facilities are located very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. The following map shows the location of our assets: 8JAN Attractive financial profile with efficient working capital and risk management, improving cash conversion and natural currency hedge investments We have demonstrated strong potential for cash generation as a result of our track record of profitability and strong receivables risk management capabilities and strong cash conversion. Our cash conversion (defined as EBITDA less maintenance capital expenditure, divided by EBITDA) improved to 88 per cent. in the nine months ended 30 September 2017 from (22) per cent. in the nine months ended 30 September We expect our capital expenditure requirements to decrease in future periods following completion of the investments we have made in Petlim, our wind farm, pipelines to the STAR Refinery for feedstock requirements and Petkim Specialities. We also have a conservative funding structure, primarily comprising U.S. dollar, euro and Turkish lira denominated borrowings. We are focused on maintaining a healthy balance sheet and generally target a net debt/ebitda ratio of no more than 2.0x to 2.5x. As adjusted to give effect to the offering of the Notes and our acquisition of an 18 per cent. stake in STAR Rafineri A.Ş. from STEAŞ, our net debt/ebitda ratio was 2.3x as at and for the twelve months ended 30 September Excluding indebtedness outstanding under Petlim s project finance credit agreement with Akbank in relation to the Petlim Container Port, our net debt/ebitda ratio was 1.8x as at and for the twelve months ended 30 September 2017.* We benefit from favourable foreign exchange dynamics as a result of our U.S. dollar denominated revenues. Approximately 45 per cent., 40 per cent. and 15 per cent. of our sales are invoiced in Turkish lira, U.S. dollars and euro, respectively, although most of our sales in Turkish lira are indexed to the U.S. dollar exchange rate on the relevant day announced by Turkish Central Bank. Approximately 90 per cent. of our variable costs are denominated in U.S. dollars, with the remainder being denominated in Turkish lira, and our fixed costs are mainly denominated in Turkish lira. As a result, most of our foreign currency exposure is naturally hedged. We also have efficient working capital management, with inventory and payables controls that allow us to maintain favourable working capital metrics in terms of inventory days, receivables days and payables days. On average, our inventory days and receivables days are each 45 days and our payables days are 90 days, although we expect our payables days to decrease once the STAR Refinery comes onstream due to the contractual terms of the offtake agreement. * The EBITDA used to calculate the ratio of pro forma net debt (excluding project finance) to EBITDA does not exclude the contribution to EBITDA from the Petlim Container Port of TL 38 million for the twelve months ended 30 September 2017, the inclusion of which would result in a ratio of pro forma net debt (excluding project finance) to EBITDA of 1.9x. 82

98 We manage our receivables through a guarantee system via a direct debit system ( DDS ), guarantee letters and receivable insurance tools. These strong receivables risk management capabilities enable us to sell our products to small- and medium-sized customers, which typically provide us with higher margins in comparison with larger customers. As at 30 September 2017, substantially all of our receivables from local customers were backed by bank guarantees, a system which is accepted by local customers and which enables us to minimise our collection risk, with approximately 86 per cent. of our total receivables being backed by bank guarantees as at the same date. The remaining receivables are with reputable firms which management believes represent relatively low credit risk. This approach represents an important competitive advantage in the local market particularly during periods of economic instability. Our close relationships with local banks as well as our strong receivables risk management capabilities contribute to our ability to achieve stable cash conversion. Further operational improvement from synergies and integration of the STAR Refinery into our supply chain In 2008, STEAŞ and Turcas, a Turkish oil and energy investment company, established a project company, STAR Rafineri A.Ş., to develop, construct, own and operate the STAR Refinery, a complex crude oil refinery with a processing capacity of 10 million tons of crude oil per annum on the Aegean coast of Turkey. The refinery is located adjacent to Petkim on the Aliağa industrial peninsula north of Izmir and is expected to employ 750 staff. On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş. (by purchasing 30 per cent. of STEAŞ s stake in a holding company which owns 60 per cent. of STAR Rafineri A.Ş.), and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. The state of Azerbaijan and STEAŞ currently hold 40 per cent. and 60 per cent. stakes, respectively, in STAR Rafineri A.Ş. (though STEAŞ s stake is expected to decrease to 42 per cent. following our acquisition). See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. Since 2014, we have paid an average premium of approximately U.S.$30/ton over the market price for our imported naphtha. When the STAR Refinery comes onstream, we expect to pay a premium of approximately U.S.$6/ton due to logistical synergies, resulting in cost savings of approximately U.S.$24/ton. Based on a weighted average premium cost, we expect to benefit from annual cost savings of approximately U.S.$38 million per year in naphtha premiums. Additionally, we expect cost savings of approximately U.S.$30 million per year in relation to reformate supplied by the STAR Refinery. We also expect the STAR Refinery to provide us with a steady dividend stream over the medium-term. The refinery is a strategic project for Turkey, as it is expected to reduce Turkey s dependence on imports and decrease the current account deficit. The strategic importance of the STAR Refinery has been confirmed by the fact that it was the first project to receive the Strategic Investment Incentive Certificate from the Turkish Ministry of Economy in December The refinery is located in close proximity to crude oil production sites in the Middle East and the CIS and also benefits from access to key product demand centres in the west of Turkey. It has access to existing port facilities, as well as utilities supply, via our existing infrastructure, which also provides substantial capital cost savings. In addition, the refinery will benefit from on-site offtake by us for naphtha and mixed xylenes. Naphtha is a key feedstock for us and the offtake arrangements with the refinery will provide logistics cost savings for us (compared to imports) and ensure long term reliable supply. Naphtha production and sales to us also mean that the STAR Refinery is not required to produce any gasoline. As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete, and it is expected to come onstream in the third quarter of 2018 with a total investment value of approximately U.S.$6.3 billion. As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 47 per cent. was financed by equity (approximately U.S.$2.4 billion invested out of U.S.$2.7 billion committed) and the remainder by debt (approximately U.S.$2.5 billion invested out of U.S.$3.3 billion committed). Approximately U.S.$2.6 billion of the debt financing has a maturity of 18 years with a four year grace period, while the remaining U.S.$600 million has a maturity of 15 years with a four year grace period. Diversified business profile through ancillary infrastructure and energy investments We also plan to diversify our business profile through the Petlim Container Port and our investment in our wind farm. Petlim, in which we own a 70 per cent. stake, was established in 2010 with the aim of 83

99 developing land already owned by us, thereby diversifying our sources of revenue. It is now the largest container terminal in the Aegean region and the third largest port in Turkey. In addition, Petlim offers deep water capacity and addresses commercial demand from shipping lines for more efficient access to Turkey s high growth market. In addition, we have invested in a wind farm, which is expected to result in a 22 per cent. increase in Petkim s electricity generating capacity and a 120,000 ton reduction in annual carbon emissions. In addition to meeting a portion of our electricity requirements, we plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. As a result, we expect the port and the wind farm to provide additional stability to our cash flows. Experienced senior management team and strong support from controlling shareholder Our senior management team has extensive experience in the energy and petrochemicals industry as well as other sectors in Turkey, Azerbaijan and the broader region. Our general manager, Anar Mammadov, has worked at the SOCAR Group since 2009, including as the CEO of SOCAR Georgia and SOCAR Greece. Riza Bozoklar, our Deputy General Manager and CFO, has experience as a CFO at various companies in Turkey, including Fiat-GM Powertrain, TOFAS, Atas Holding, Delphi Automotive and Cimko Cement and Concrete. See Directors, Senior Management and Corporate Governance. In addition, we enjoy strong support from our controlling shareholder, the SOCAR Group, which is the leading oil and gas company in Azerbaijan with vertically integrated upstream, midstream and downstream operations. The SOCAR Group has made a commitment to Turkey, with the aim of becoming one of the three largest companies in the country. The SOCAR Group has already invested approximately U.S.$18 billion in pursuit of this goal (having invested approximately U.S.$3.4 billion in equity financing into its Turkish operations from 2008 to 2016 through STEAŞ), and expects this investment to increase to U.S.$19.5 billion by These aims are underpinned by the strategic relationship between Azerbaijan and Turkey, which share historical, linguistic, cultural and political similarities, as well as the geo-strategically important location of Turkey as a transit country in key energy corridors. The National Assembly of Azerbaijan has ratified an agreement for cooperation and mutual assistance, including economic cooperation, military-political and security issues, military and militarytechnical cooperation and humanitarian issues. In the energy sector, a key agreement was reached on a package of issues relating to the Shah Deniz gas field in 2013 and successful joint projects have included the Trans-Anatolian Natural Gas Pipeline ( TANAP ) and the Trans-Adriatic Pipeline ( TAP ). The initial capacity of TANAP is expected to be 16.5 billion cubic metres of gas annually. SOCAR Group is expected to inject further capital in TANAP in the medium term to fund its construction capital expenditure. The graph below sets forth the SOCAR Group s contribution to Turkey s gross total and industrial foreign direct investment ( FDI ) from 2010 to Turkey gross FDI inflow (billion US$) Total FDI % 8% 8.0 Industrial FDI SOCAR s Share in Industrial FDI (%) SOCAR s Share in Total FDI (%) FDI stands for transactions in the external assets and liabilities of an economy, which in SOCAR s case, means greenfield & brownfield investments. Industrial FDI stands for agriculture, mining, manufacturing and energy % 3% % 8% % 23% 4.3 Industrial s share out of total FDI is on the decline due to the increasing interest in the financial services industry % % % 20% % 50% 40% 30% 20% 10% 0% 8JAN

100 The graph below sets forth the SOCAR Group s historical equity contributions in Turkey from 2008 to 2016 (in U.S.$ millions). 1,938 1, STEAS 1 TANAP 10JAN Note: (1) STEAS historical equity contributions include contributions in connection with the Petkim acquisition (including debt service). The SOCAR Group is focused on achieving the integration of refineries, petrochemicals production, energy, logistics, distribution and transmission by The project is aimed at transforming the Petkim Peninsula into Turkey s first Chemical Industry Park and enhancing the competitiveness of the petrochemicals industry in Turkey. We also benefit from the expertise of our shareholder in the development and implementation of our strategy. Hayati Ozturk, who worked at Petkim in various roles from 1977 to 2015 and now acts as CEO Adviser at STEAŞ, and Teymur Abasguliyev, the CFO of STEAŞ, provide valuable operational support. Our key financial policies and governance are closely coordinated with STEAŞ, including in relation to our dividend policy, leverage target, liquidity management and foreign exchange management. Finally, the SOCAR Group has demonstrated its commitment to Petkim through a cross-default clause in relation to its outstanding bonds. Strategy Continue to pursue operational efficiency programmes We are focused on achieving operating efficiencies across our organisation, including through the integration of our sales, trading, manufacturing, procurement and maintenance functions. We have also improved productivity at our plants, including through energy efficiency projects, an initiative we intend to continue to pursue. We have developed an integrated optimisation model, which will monitor a wide range of factors across our production facilities to optimise maintenance schedules. Digitisation is also an area of focus for us. For example, the digitisation of our production facilities has enabled us to monitor and control the temperature of our furnaces more efficiently, which has resulted in significant cost savings. In January 2017, we also introduced an operational excellence programme (called Petkim Benim, translated as My Petkim ) which is aimed at creating a working environment in which employees and other stakeholders throughout our entire business are involved in the decision-making process around improving operational efficiency across four main areas of focus. The first area of focus is improving production and energy efficiency and reducing maintenance costs; the second is digitisation with a view to improving the integration of our business functions through advanced analytics; the third is promoting commercial excellence to increase sales force effectiveness and revenues; and the fourth is 85

101 implementing a dynamic procurement strategy which results in optimal solutions with vendors and better inventory management. As a result of current and planned investments in the operational excellence program, we aim to realise financial savings of approximately U.S.$50 million by the end of Finally, we have implemented certain efficiency measures aimed at enhancing profitability. These have included, for example, working capital measures designed to improve inventory days and payables days, as well as measures intended to facilitate efficient and secure receivables collection. We will continue to implement these types of programmes in future periods in order to improve our working capital position. Capitalise on potential for synergies and additional, diversified cash flows through the STAR Refinery, Petlim and other projects We intend to capitalise on the potential for synergies expected from projects that are being undertaken by us and by our controlling shareholder, STEAŞ. In particular, the STAR Refinery project undertaken by STEAŞ will produce naphtha for use by us as feedstock in our operations, which will provide us with increased raw material security. See Integration STAR Refinery. On 26 May 2014, we signed a 20-year offtake agreement with STAR Rafineri A.Ş. for the purchase of a minimum of 1,300,000 tons and a maximum of 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year, which is expected to be sufficient to sustain our current production levels. The refinery will also produce other refined products which are in deficit in Turkey, including diesel and jet fuel. In addition to providing us with raw material security, we expect significant cost savings from the STAR Refinery resulting from lower raw material transport and storage costs, the higher quality of the feedstock produced by the refinery, the replacement of a portion of the heavy naphtha feedstock used at our facilities with reformate produced by the refinery, a reduction in inventory costs and shared maintenance and security costs. Since 2014, we have paid an average premium of approximately U.S.$30/ton over the market price for our imported naphtha. When the STAR Refinery comes onstream, we expect to pay a premium of approximately U.S.$6/ton due to logistical synergies, resulting in cost savings of approximately U.S.$24/ton. Based on a weighted average premium cost, we expect to benefit from annual cost savings of approximately U.S.$38 million per year in naphtha premiums. Additionally, we expect cost savings of approximately U.S.$30 million per year in relation to reformate supplied by the STAR Refinery (though we have not yet signed an offtake agreement with respect to reformate produced by the STAR Refinery). In terms of strategic rationale, our acquisition of a stake in the STAR Refinery also ensures long-term alignment of interests with the STAR Refinery, as we will enjoy board-level participation and an ability to influence decision-making at the refinery. Furthermore, under the governance framework in the shareholders agreement set out in the STAR Refinery Share Sale Agreement, we expect long-term security of feedstock supply even if STEAŞ ceases to be a controlling shareholder. We also expect the STAR Refinery to provide us with a steady dividend stream over the medium-term. We also plan to pursue additional cash flow streams in order to diversify our sources of revenue, including through Petlim, in which we own a 70 per cent. stake. Petlim was established in 2010 with the aim of developing land already owned by us, thereby diversifying our sources of revenue. It is now the largest container terminal in the Aegean region and the third largest port in Turkey. In addition, Petlim offers deep water capacity and addresses commercial demand from shipping lines for more efficient access to Turkey s high growth market. In February 2013, Petlim signed a 28-year concession agreement with an optional extension period of 4 years with APM Terminals, which allows APM Terminals to operate the port in exchange for an annual payment, comprising a fixed and a variable component. The operations agreement between parties has been drafted in a way which seeks to apportion the primary risks to those parties in the best position to manage those risks. In this respect, the operational criteria, operational performance and associated deliverables, such as requisite permits, rest entirely with APM Terminals while all construction responsibilities, including dredging, lie with Petlim. Construction of the port has been completed. While the completion of Petlim has not resulted in an operational benefit to our core petrochemicals business since it is a container port that does not ship chemicals or feedstock, we believe that it represents a significant potential cash flow stream due to the positive outlook for container traffic in the Aegean region. We also expect cost savings on shipments for any expansion projects which we may undertake in the future. Petlim shareholders will be the sole beneficiary of cash flows from Petlim once the Petlim project finance loan is fully amortised. 86

102 Finally, we plan to develop an additional cash flow stream through the wind farm in which we have invested. The wind farm is expected to result in a 22 per cent. increase in Petkim s electricity generating capacity and a 120,000 ton reduction in annual carbon emissions. In addition to meeting a portion of our electricity requirements, we plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. As a result, we expect the port and the wind farm to provide additional stability to our cash flows. Continue to invest in improving our asset base We intend to continue to invest in our asset base in order to increase capacity to meet demand for our products and increase efficiency across our operations. In particular, although we do not plan to increase production capacity in the near term, we plan to add capacity in Petkim Specialities, with expansions coming onstream in 2018 and Petkim Specialities will produce advanced masterbatch and compounds for which Turkey currently has a significant net import position. We have continuously invested in the Aliağa Complex since its inception, increasing capacity, renovating, modernising and improving energy efficiency. In 2005, for example, we completed expansions of our ethylene, LDPE and polypropylene plants. We also increased capacity at the aromatics plant. In 2014, we increased the capacity of our main facility ethylene cracker by 13 per cent., bringing its capacity to 588,000 tons per year, and we also increased our PTA production capacity by 50 per cent., bringing the capacity to 105,000 tons per year. This involved investments of approximately U.S.$118 million in our ethylene cracker and U.S.$20 million for the expansion of our PTA production capacity. We have been able to maintain our capacity utilisation following these investments and have improved our energy efficiency, with a reduction in energy costs per ton of 52 per cent. from 2014 to Expand our trading business We are focused on continuing to grow our trading business through the utilisation of excess capacity across our sales team in Turkey. Through our trading business, we import products from Azerbaijan as well as third parties in Saudi Arabia and South Korea. In addition to polypropylene, we also trade in products that we do not produce, including styrenes. We believe that the expansion of our trading business will not only help us to increase our sales but will also aid us in maintaining our market share in the Turkish market. Integration The SOCAR Group is focused on achieving the integration of refineries, petrochemicals production, energy, logistics, distribution and transmission in the Petkim Peninsula. This is expected to further enhance the benefits we enjoy as a result of our strategic location. The project is aimed at transforming the Petkim Peninsula into Turkey s first Chemical Industry Park and enhancing the competitiveness of the petrochemicals industry in Turkey, including through the construction of the STAR Refinery. We have also undertaken projects, including the Petlim Container Terminal, that are aimed at developing additional cash flow streams. STAR Refinery In 2008, STEAŞ and Turcas, a Turkish oil and energy investment company, established a project company, STAR Rafineri A.Ş., to develop, construct, own and operate the STAR Refinery, a complex crude oil refinery with a processing capacity of 10 million tons of crude oil per annum, or 214,000 barrels per day, on the Aegean coast of Turkey. The refinery is located adjacent to Petkim on the Aliağa industrial peninsula north of Izmir and is expected to employ 750 staff. On 9 January 2018, we signed a share sale and transfer agreement with STEAŞ for the purchase of an 18 per cent. effective stake in STAR Rafineri A.Ş. (by purchasing 30 per cent. of STEAŞ s stake in a holding company which owns 60 per cent. of STAR Rafineri A.Ş.), and we intend to use the net proceeds from the offering of the Notes to fund a portion of the purchase price. The state of Azerbaijan and STEAŞ currently hold 40 per cent. and 60 per cent. stakes, respectively, in STAR Rafineri A.Ş. (though STEAŞ s stake is expected to decrease to 42 per cent. following our acquisition). See Management s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations Commitments STAR Refinery Share Sale Agreement. 87

103 As of November 2017, overall construction on the STAR Refinery was approximately 97 per cent. complete, and it is expected to come onstream in the third quarter of 2018 with a total investment value of approximately U.S.$6.3 billion. Approximately U.S.$3.3 billion of the project finance portion of the STAR Refinery was signed with 23 local and international financial institutions, including export credit agencies, commercial banks and development banks in May As at 30 November 2017, approximately U.S.$4.9 billion had been invested, of which approximately 46 per cent. was financed by equity (approximately U.S.$2.2 billion invested out of U.S.$2.7 billion committed) and the remainder by debt (approximately U.S.$2.7 billion invested out of U.S.$3.3 billion committed). Approximately U.S.$2.6 billion of the debt financing has a maturity of 18 years with a four-year grace period, while the remaining U.S.$600 million has a maturity of 15 years with a four-year grace period. The STAR Refinery will implement a high conversion design which includes deep conversion capabilities associated with a vacuum residue coking unit and a vacuum gasoil hydrocracking unit. The configuration has been designed to be flexible enough to process different sources of crude with medium to light gravity (around 30 to 35 API) and medium to low sulphur content (2.16 wt per cent. to 0.14 wt per cent.). Crude oil meeting such specifications is widely available from the Middle East and the CIS. The STAR Refinery s Nelson complexity factor is expected to be 9.0. The table below sets forth the breakdown by product, volume and customer of the STAR Refinery s expected production capacity. To Market To Petkim via offtake Tons/ Tons/ Product year Product year Diesel 4,900,000 Naphtha Jet fuel 1,600,000 offtake up 1,600,000 to Sulphur Petcoke 159, ,000 M.Xylene 1 270,000 Petkim offtake % Market % 20.0% 80.0% To Market or Petkim 2 Product Reformate Tons/ year LPG 320, ,000 8JAN Notes: (1) Approximately 300 kilotons initially. (2) We have not yet entered into offtake agreements with the STAR Refinery with regard to LPG and reformate. If the LPG-Naphtha price spread is in favour of LPG, Petkim will be able to purchase LPG from the STAR Refinery at market price. With respect to reformate, after investments in aromatics, Petkim will likewise be able to purchase from the STAR Refinery at market price. The refinery represents the key pillar of SOCAR s long-term strategic objective to establish itself as the only fully integrated player in the Turkish energy sector. The refinery will benefit from SOCAR s existing global trading platform for crude oil supply and products marketing, at a time when SOCAR is also enhancing its marketing and distribution presence and activities within Turkey. SOCAR is also developing other strategic projects in Turkey (including the TANAP and the SOCAR Fibre Optic Network). Turkey currently has a significant deficit of certain refined products. Demand for refined products in Turkey is expected to increase due to Turkey s strong economic development, driven by a growth in the industry and service sectors, as well as a growing population. The refinery will focus on those products (i.e. diesel, jet fuel, naphtha) that are in deficit in Turkey with a tailored product slate maximising the middle distillate output and allowing the refinery to benefit from the existing and projected widening diesel deficit in Turkey. The refinery is a strategic project for Turkey, as it is expected to reduce Turkey s dependence on imports and decrease the current account deficit. The strategic importance of the STAR Refinery has been confirmed by the fact that it was the first project to receive the Strategic Investment Incentive Certificate from the Turkish Ministry of Economy in December The STAR Refinery is located in close proximity to crude oil production sites in the Middle East and the CIS and also benefits from access to key product demand centres in the west of Turkey. It has access to existing port facilities, as well as utilities supply, via our existing infrastructure, which also provides 88

104 substantial capital cost savings. In addition, the refinery will benefit from on-site offtake by us for naphtha and mixed xylenes. Naphtha is a key feedstock for us and the offtake arrangements with the refinery will provide logistics cost savings for us (compared to imports) and ensure long term reliable supply. Naphtha production and sales to us also mean that the STAR Refinery is not required to produce any gasoline. Petlim Petlim was established on 22 November 2010 to oversee the development of a port, which was intended to be The Largest Integrated Port of the Aegean Region. In 2014, Goldman Sachs acquired 30 per cent. of Petlim s shares, while we retained the remaining 70 per cent. In connection with the acquisition of this stake, Goldman Sachs and STEAŞ entered into a put option contract pursuant to which Goldman Sachs has the right to sell its stake to STEAŞ in certain circumstances. The put option contract further provides that Goldman Sachs shall be compensated in the event of any loss following an initial public offering of Petlim, which is contemplated to be undertaken within seven years of the date of the sale of the 30 per cent. stake to Goldman Sachs. The cost of the port investment was approximately U.S.$400 million, including financing costs. The project has been financed via a U.S.$212 million project finance facility with Akbank and a U.S.$80 million facility, under which e35 million has been drawn, with the EIB. The costs of the investment have been borne by Petkim, and Goldman Sachs has no obligation to provide further financing for the port investment under the terms of the agreement through which it acquired a 30 per cent. stake. The first phase of Petlim was completed in December The expansion of the port to its current capacity as well as the construction of a 48-hectare back service area was completed in September 2017 as part of the second phase of the investment. As Turkey s first port to accept vessels with capacities of over 11,000 TEU, as well as deep water capacity up to a depth of 16 metres, Petlim will be an important logistics centre in the region, which will rival the Piraeus and Alexandria ports. The operation and management of the port is carried out by the Dutch firm APM Terminals, one of the world s largest port operators in its field, pursuant to a revenue sharing agreement with Petlim for a 28-year period with a four-year extension option. Pursuant to the agreement, APM Terminals is entitled to operate the port in exchange for an annual payment, comprising a fixed and a variable component. APM Terminals also agreed to pay an up-front fee amounting to U.S.$65 million. The port is for dry bulk and will not be used to ship chemicals or feedstock for our operations. However, it has been used as the main port for the shipment of materials required for the construction of the STAR Refinery. Products All of our products are naphtha based and therefore our production starts at the cracker level. We source the naphtha for our ethylene cracker and aromatics plant from a range of suppliers, including refineries located in the Black Sea region, pursuant to supply agreements or on the spot market. Going forward, we will rely on the STAR Refinery for our naphtha requirements, which will provide us with a degree of security with respect to the supply of raw materials and will also provide us with cost savings. For further details of our raw material supply arrangements and the cost savings we expect to benefit from, see Raw Materials Feedstock below. We have invested in certain downstream integrated production chains, in particular related to the olefins (ethylene and propylene), which we produce through our ethylene cracker, and specialised production plants using ethylene as an input. We have also invested in chlorine chain products, which we produce from our CA plant, which in turn uses ethylene produced by our ethylene cracker. Finally, we have also invested in an aromatics plant to produce aromatics and their derivatives. To the extent they are required for the production of downstream chemicals we source certain (chemical) raw materials externally. 89

105 These production chains and products are set forth in the table below. Petrochemical Simplified Flow Chart Years of capacity expansions Petkim has fully integrated operations LDPE (350,000 ton/year) Bag, greenhouse covers, film, cable, toys, pipes, bottles, hose, packaging 1992 and 2001 Ethylene Plant HDPE (96,000 ton/year) Construction and water pipes, packaging film, toys, bottles, soft drink crates, barrels 1998 and 2001 Ethylene MEG (89,000 ton/year) C4 (140,000 ton/year) Polyster fiber, polyester film, antifreeze and 2014 PVC (150,000 ton/year) Pipe, window shades, cable, bottles, building materials, packaging film, floor tiles, serum bags 2001 Chlor-alkali (100,000 ton/year) PP (144,000 ton/year) Knitting yarn, ropes, tablecloths, napkins, doormats, hoses, radiator pipes, fishing nets, brushes 1993 and 2005 Naphtha Propylene ACN (90,000 ton/year) Textile fibers, artificial wool, ABS resins (acrylonitrile butadiene) 1994 Aromatics Plant Benzene (144,000 ton/year) PA (49,000 ton/year) Detergent, solvents, explosives, pharmaceuticals, cosmetics, parts of white goods 2001 and Aromatics C5 Mixtures (80,000 ton/year) P-X (136,000 ton/year) PTA (105,000 ton/year) Polyester industry Polyester fiber, polyester resin, films, plasticizers, synthetic chemicals 1998 and JAN Our products are used by customers in a wide range of industries, including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, textiles, pharmaceuticals and detergents industries, among others. The graph below sets out a breakdown of our sales by product in the year ended 31 December Volume Sold by Product (kt) Others 49% Paraxylene 4% PY-Gas 9% Others 1 18% LDPE 11% Thermoplastics 38% PVC 7% LDPE-T 9% PP 7% C4 9% Benzene 9% MEG PTA 3% 4% Total: 1,705kt Note: (1) Others include remaining aromatics and aromatics derivatives. ACN 6% HDPE 5% Fibers 13% 11JAN Most of our products are sold domestically, with the exception of our aromatics products, which we sell outside of Turkey, primarily in Europe. The tables below set forth a breakdown of our domestic sales revenue, sales volume and customers by region for the year ended 31 December 2016 and the nine months ended 30 September

106 Nine months ended 30 September 2017 Customer Number of percentage Regions Sales Sales customers Volume of total (kilotons) (TL millions) (%) (%) Marmara , Aegean Mediterranean Central Anatolia Southeastern Anatolia Black Sea East Anatolia Total ,405 1, Customer Number of percentage Regions Sales Sales customers Volume of total (kilotons) (TL millions) (%) (%) Marmara , Aegean Mediterranean Central Anatolia Southeastern Anatolia Black Sea East Anatolia Total... 1,018 3,217 1, Our key products are summarised below. Olefins Olefins are the basic building blocks used to create a variety of petrochemical products. Olefins include ethylene, propylene and butadiene. Olefin based polymers and their derivatives (e.g., LDPE, HDPE, polypropylene, MEG and ACN) accounted for over half of our revenues and over 80 per cent. of our gross profit in the year ended 31 December These products are primarily sold in the domestic market. Ethylene We have an average annual capacity of 588,000 tons of ethylene per year. Ethylene is used to produce ethylene oxide, which is one of the most important raw materials used in large-scale chemical production, including for the production of ethylene glycol. We mainly use ethylene internally in the production of LDPE, HDPE, MEG, DEG, TEG and PVC. We expect that demand for HDPE and polypropylene will remain strong in the future. In particular, polypropylene is already starting to replace other thermoplastics especially in food packaging. Our strategic positioning in LDPE is also expected to improve in the future since new investment is centred around LLDPE, leaving us as one of the few LDPE producers left in the region. Ethylene glycol. Ethylene glycol is manufactured by the oxidation of ethylene with oxygen in the presence of catalysts. We sell ethylene glycol directly to our customers and also use it internally to produce MEG and DEG (diethylene glycol). Ethylene glycol and its derivatives play a significant role in the petrochemical industry due to the fact that they can serve as versatile intermediates in a wide range of applications. Ethylene glycol is used in the production of a range of products including polyester fibre, polyethylene terephthalate resins, automotive liquids and other chemical products. We have an average annual capacity of 89,000 tons of MEG per year. MEG is used in the manufacturing of antifreeze, polyester fibre, textile products and plastic bottles. 91

107 We have an average annual capacity of 8,000 tons of DEG per year. DEG is used in the manufacturing of antifreeze, polyester fibre, textile products and bottles. Polyethylene. Polyethylene, which includes LDPE, HDPE and linear low density polyethylene polyolefins, is the single largest category of thermoplastics in the world. It is relatively low cost, and is capable of being moulded, extruded and cast into many various shapes. It is a versatile polymer used in a wide range of moulding and extruding applications such as retail and consumer goods, household and food containers, industrial and chemical containers, toys, food and non-food packaging film and sheet, as well as industrial and agricultural applications. We sell polyethylene directly to our customers and also use it to produce LDPE and HDPE. We have an average annual capacity of 350,000 tons of LDPE (including LDPE-T (LDPE-tubular)) per year. LDPE is used in the manufacturing of heavy duty bags, greenhouse film, packaging film, cable coating, household goods, toys, pipes, hoses, tubes, bottles, fabric and metal coatings, rotations and moulding materials, among other products. We have an average annual capacity of 96,000 tons of HDPE per year. HDPE is used in the manufacturing of household items, toys, packaging film, pressurised water and gas pipes, detergent and cosmetics bottles (non-transparent), bins, fabric and metal coating and rotational moulding material, among other products. Polypropylene Polypropylene is produced through the polymerisation of propylene. We sell polypropylene directly to our customers. We have an average annual capacity of 144,000 tons per year of polypropylene. Polypropylene is used in the manufacturing of knitting materials, sacks, carpet yearn, ropes, tablecloths, mats, filter cloths, felt, cord fabric, pipe, cable sheaths, fishing nets, brushes, basins, tables, chairs, toys and picnic items, among other products. ACN. Acrylonitrile is a polypropylene derivative produced by the catalytic ammoxidation of propylene. We are the only ACN producer in the Middle East and have an average annual capacity of 90,000 tons per year. ACN is used in the production of acrylic fibres, knitting wool (orlon), fabrics, carpets, blankets, ABS resins, acrylic resins and nitrile rubber, among other products. Substantially all of our ACN output is sold domestically. We expect continued strong demand for ACN since demand for this product is significantly in excess of supply, and is expected to remain so in the near future. Aromatics We have an average annual capacity of 150,000 tons of aromatics per year. Aromatics includes benzene, toluene, and xylenes. Benzene is a raw material for dyes and synthetic detergents, and benzene and toluene for isocyanates MDI and TDI used in making polyurethanes. Manufacturers use xylenes to produce plastics and synthetic fibres. We make direct sales of aromatics to third parties. Aromatics and their derivatives (e.g., benzene, toluene, paraxylene, C5 hydrocarbons, PTA and PA) accounted for approximately one-quarter of our revenues and slightly less than 15 per cent. of our gross profit in the year ended 31 December Substantially all of our aromatics products are sold in the export market because of a lack of domestic consumption of these products. Benzene Benzene is the primary building block for many chemicals used in the pharmaceutical and chemicals industries. Styrene and phenol are used as building blocks in the manufacturing of plastics as well as in the manufacturing of synthetic detergents. Aniline is used as a building block in the manufacturing of gasoline and paint. We sell benzene directly to our customers. Toluene Toluene is used as a solvent to thin paints and lacquers. It is also used in plastic manufacturing and the construction of explosive TNT (trinitrotoluene), as an octane increaser in fuel and in manufacturing disinfectant adhesives and inks. We sell toluene directly to our customers. 92

108 Paraxylene Paraxylene is used in the production of PTA, PET resin and DMT (dimetiltereftalat) as a raw material in the textile industry. We use a portion of our paraxylene production for PTA production and sell the remaining portion directly to customers. Orthoxylene Orthoxylene is used in the production of phtallicanhydride, pharmaceutical and diethylphthalate. We primarily use orthoxylene for PA production internally. C5 hydrocarbons C5 hydrocarbons are used in gasoline production. We sell C5 hydrocarbons directly to customers. PTA. We have an average annual capacity of 105,000 tons of PTA per year. PTA, a C5 hydrocarbon derivative, is used in the manufacturing of polyester fibres (including Dacron, teril and perylene) and the manufacturing of yarns such as Trevira, as well as in polyester resin and polyester film production. It is also used in the manufacturing of polyethylene terephthalate. PA. Phthalic anhydride is a principal commercial form of phthalic acid. We have an average annual capacity of 49,000 tons of PA per year. PA is used in the paint industry, in the manufacturing of alkyd resins and in polyester production. We expect the plastics industry to shift from PA-based products to PTA-based products as a result of emerging evidence that foetal development is interrupted by the sublimation of PA. PTA, on the other hand, offers a substitute that does not give rise to these concerns. Chlorine Chain We use CA (chlorine alkali) in the production of VCM (vinylchloride monomer) and PVC. We have an average annual capacity of 100,000 tons of CA per year. We use all of the CA we produce in the production of VCM and PVC and do not sell it directly to customers. We also produce caustic soda in our PA plant, which we sell directly to customers. Chlorine sold in the market is used to disinfect water as well as in the production of organic dyes and decolorising chlorides. It is also used in the preparation of a medicine used against insects. Chlorine alkali is also used to produce caustic soda, which is used in the paper, pulp, aluminium, soap and detergent, textile, oil petrochemicals, food, rayon and film and vegetable oil industries. VCM Ethylene and chlorine are used in the production of VCM. We have an average annual capacity of 152,000 tons of VCM per year. We use VCM to produce PVC, as described in further detail below. VCM is not sold directly to customers. PVC PVC is produced by polymerisation of VCM. We have an average annual capacity of 150,000 tons of PVC per year. PVC is used in the agriculture and construction industries, including in irrigation pipes, sewage pipes and fittings, as well as for the manufacturing of packaging films, wire coatings, transparent cosmetic and oil bottles, various tubes and other bottles, shoe soles, floor tiles and various building materials (including doors, window frames, shutters, flooring and artificial leather). PVC is sold directly to customers. PVC accounted for approximately 10 per cent. of our revenues and gross profit for the year ended 31 December We expect PVC usage to decrease at least in the European Union since future EU regulations will likely limit the usage of PVC products due to the poisonous nature of PVC when exposed to flame. On the other hand, ongoing warfare in Turkey s neighbouring countries is expected to contribute to higher demand for PVC from the construction and infrastructure industries. 93

109 Production plants and auxiliary processing units The Petkim complex has 14 production plants and one masterbatch unit, as well as seven auxiliary processing units. Our production plants produce the products described above under Products. Our auxiliary processing units include the Güzel Hisar Water Dam, which has a total storage volume of 150 million cubic metres, a water purification unit, a demineralised water unit, a wastewater treatment plant, a solid-liquid waste incinerator, a port and energy production facilities. Production plants The following table sets forth certain information regarding our production plants: Year Production Commenced/Expansions and Plant Refurbishments Capacity Tubular Low Density Plant , ,000 tons per year Masterbatch Unit ,000 tons per year PTA Plant , ,000 tons per year Plastics Processing Plant ,000 tons per year FFS roll film PVC Plant , ,000 tons per year VCM Plant , 1995, ,000 tons per year PA Plant , 2001, ,000 tons per year Ethylene Glycol Plant , ,000 tons year MEG ACN Plant , ,000 tons per year Polypropylene Plant , 1993, ,000 tons per year HDPE Plant , 1998, ,000 tons per year LDPE Plant , 1992, ,000 tons per year CA Plant , ,000 tons per year chlorine Aromatics Plant , ,000 tons per year benzene Ethylene Plant , 2005, ,000 tons per year Auxiliary Processing Units The following table sets forth certain information regarding our auxiliary processing units: Unit Capacity and Other Data Güzel Hisar Water Dam... Rainfall area: 450 km 2 Annual average rainfall: kg/m 2 Water level: 63 m (minimum), 104 m (normal), 107 m (maximum) Active volume: 137 million m 3 Total storage volume: 150 million m 3 Water Purification Unit... Capacity: 7,800 m 3 /h Start up date: 1983 Expansion date: 2005 Total storage capacity of raw water basins: 80,000 m 3 Demineralised Water Unit... Capacity: 1,700 m 3 /h Start up date: 1984 Expansion Date: 1998, 2006 Wastewater Treatment Plant... Capacity: 1,670 m 3 /h (550 m 3 /h oily wastewater, 120 m 3 /h domestic wastewater, 1,000 m 3 /h chemical wastewater) Solid-Liquid Waste Incinerator. Installed capacity: 2.26 tons/h (0.85 tons/h solid waste, 1.07 tons/h treatment sludge, 0.34 tons/h waste oil) Port... Energy production... Handling amount: 2.7 million tons (3 jetties for tankers, 1 jetty for salt) Electricity production-distribution total power generated: 226 MW Steam production unit installed capacity: 1,200 tons/h XHS Capacity extensions: 2001,

110 Raw Materials and Energy Feedstock The most significant direct cost associated with the production of our products is feedstock. Feedstock accounted for approximately 82 per cent. of our cost of sales for both the nine months ended 30 September 2017 and the year ended 31 December 2016, respectively. The feedstock we use in the production of our products is naphtha, which is a mixture of C 5 to C 10 hydrocarbons, from the distillation of crude oil. Many of our competitors use ethane-rich gas as feedstock. In line with the high correlation between naphtha prices and oil prices, prior to June 2014, the costs of naphtha based producers such as ourselves were significantly higher than those of their ethane based peers. Subsequently, however, as oil prices declined, the cost of ethylene production for both naphtha based and ethane based producers correspondingly declined, making naphtha based production more competitive in relative terms. Our facilities are located very close to the main naphtha exporting regions, including the Black Sea region and Russia, and our operations are located near the Tüpraş refinery, which is also located at Aliağa. We purchase naphtha from a range of suppliers in these regions, primarily including refineries located in the Black Sea region, pursuant to supply agreements or on the spot market. The naphtha supplied pursuant to these arrangements currently covers the substantial majority of our feedstock requirements, with the remainder supplied by a local naphtha supplier, the adjacent Tüpraş refinery. The remaining portion of our feedstock requirements is sourced from spot purchases and can also be supplied from the refineries with which we have entered into supply agreements. We also source certain raw materials externally to the extent they are required for the production of downstream chemicals in our production chain. Going forward, we will rely on the STAR Refinery for our feedstock requirements, which will provide us with a degree of security with respect to the supply of raw materials. On 26 May 2014, we signed a contract with STAR Rafineri A.Ş. for the purchase of a minimum of 1,300,000 tons and a maximum of 1,600,000 tons of naphtha per year (which can be increased upon bilateral agreement) and 270,000 tons of mixed xylene per year, which is expected to be sufficient to sustain our current production levels. In addition to producing naphtha for use by us as feedstock in our operations, the STAR Refinery will produce other refined products which are in deficit in Turkey, including diesel and jet fuel. The STAR Refinery is expected to be completed in It is expected to cover almost all of our feedstock requirements upon completion. To the extent there are any shortfalls in our feedstock requirements following the completion of the STAR Refinery, we will continue to rely on our existing infrastructure and would continue to source naphtha pursuant to the supply agreements and on the spot market as we do currently. We expect significant cost savings from the STAR Refinery resulting from lower raw material transport and storage costs, the higher quality of the feedstock produced by the refinery, the replacement of a portion of the heavy naphtha feedstock used at our facilities with reformate produced by the refinery, a reduction in inventory costs and shared maintenance and security costs. Since 2014, we have paid an average premium of approximately U.S.$30/ton over the market price for our imported naphtha. When the STAR Refinery comes onstream, we expect to pay a premium of approximately U.S.$6/ton due to logistical synergies, resulting in cost savings of approximately U.S.$24/ton. Based on a weighted average premium cost, we expect to benefit from annual cost savings of approximately U.S.$38 million per year in naphtha premiums. On average, our payables days are 90 days, although we expect our payables days to decrease once the STAR Refinery comes onstream due to the contractual terms of the offtake agreement. Energy We rely on our own facilities for our energy supply, as described above under Production Plants and Auxiliary Processing Units Auxiliary Processing Units. We have the capacity to generate 226 MW of electricity and 1,200 tons/h XHS steam. In order to diversify our sources of revenue, we have also invested in a wind farm with a total capacity of 51 MW. The wind farm has 17 new turbines each able to generate 3 MW of electricity. The construction of all turbines was completed in September 2017, and while the wind farm is currently licensed to generate 25 MW of electricity, we have applied for an amendment to the license which would allow it to generate 95

111 51 MW. We plan to sell electricity produced by the wind farm to Turkey s national grid with a guaranteed tariff. The wind farm is expected to reduce carbon emissions by 120,000 tons per year. The investment in the wind farm amounts to e55 million. While our own facilities are sufficient to meet our electricity needs, we have in the past experienced electricity outages at our operations. We have, however, taken steps to mitigate the impact of these outages. In particular, the Turkish Government has guaranteed that the operations of companies holding a Strategic Incentive Certificate, including ourselves, will not be interrupted in the event of planned power cuts. Furthermore, we have access to Turkey s national grid in the event of outages. We have also developed a comprehensive power cut emergency plan pursuant to which we are able to isolate certain facilities in order to continue production. Sales and Marketing We have over 6,000 customers, which are primarily located in Turkey and operate in industries including the plastics, chemistry, packaging, pipe, paint, construction, agriculture, automotive, electricity, electronics, textiles, pharmaceuticals, detergents and cosmetics industries, among others. For the year ended 31 December 2016, our five largest customers accounted for 21 per cent. of our revenues. However, customer concentration varies based on product and geography. Approximately 64 per cent. of our products by value were sold in the domestic market in the nine months ended 30 September 2017, with the remaining 36 per cent. being sold in export markets, where the main destination is Europe. We primarily sell our aromatics products in the export market due to a lack of domestic consumption of these products. The strategic location of our assets provides us with a competitive advantage in relation to the shipping of our products to customers. Our facilities are located on the Petkim Peninsula in Aliağa, Turkey on the coast of the Aegean Sea, approximately 50 kilometres from Izmir. Its connection to a large number of Organised Industrial Zones and its access to motorways and railways make Aliağa an advantageous location. The Gebze-Izmir Motorway Project, which is currently under construction and is expected to be completed in 2020, is expected to enhance the competitiveness of our location by connecting the area around Istanbul with Izmir. In addition, sea shipping connections and proximity to ports in the Eastern Mediterranean make the Petkim Peninsula an attractive platform to serve regional and global trade. On average, our inventory days and receivables days are each 45 days and our payables days are 90 days, although we expect our payables days to decrease once the STAR Refinery comes onstream due to the contractual terms of the offtake agreement. During recent years, we have been focused on marketing and selling our products to small- and medium-sized customers, which typically provide us with higher margins in comparison with larger customers. As a result of our strong receivables risk management capabilities, including our DDS system, guarantee letters and receivable insurance tools, we have positioned ourselves as the only petrochemical producer that is able to sell to small- and medium-sized customers as well as larger clients in Turkey. Small- and medium-sized customers are also able to obtain financing from local banks, which they are typically not able to do with respect to purchases from importers. In the domestic market, sales are mostly made on a contractual basis with guaranteed quantities and periodic price adjustments. In export markets, most of our sales are made pursuant to one-year contracts with price formulae relying on global publications such as Nexant, ICIS and PLATTS. In order to protect our profitability, most of our contracts contain features that permit regular price resetting, which in principle enables the pass-through of increasing raw material costs to customers, albeit this is subject to a time lag. In 2016, we reached 140,000 tons of trading goods volume, mainly consisting of LDPE, MEG and styrene monomer sales. In future years, we expect to further increase our trading activities in order to maintain our market share. The fact that we are the only petrochemicals producer in the Turkish market, which is the seventh largest market globally, provides us with a strong brand advantage and a strong influence on pricing. Many pricing data providers such as ICIS and Chermorbis report pricing in the Turkish market based on our price lists. 96

112 In order to further strengthen our customer relationships, we organise sectoral meetings, trade shows and customer visits. Customer visits are intended to enable closer monitoring of technical as well as business issues and to take suggestions from relevant personnel at all levels. As part of these visits, we share domestic production and technical know-how with customers, which we believe represents an important advantage over our competitors. In 2014, we also commissioned a Customer Communication Line (Call Centre), which was positioned as a new communication channel that enables customers to reach us more easily. Employees As at 30 September 2017, we had 2,441 employees across our operations on a full-time equivalent basis. Collective Bargaining Agreement Approximately 1,900 of our employees are members of a trade union. Our management and human resources department negotiate a collective bargaining agreement with the relevant trade union every two years. Financial rights and fringe benefits made available to blue-collar workers who are members of the trade union are determined by the collective bargaining agreement. Pursuant to Article 27 Appointment of a Workplace Trade Union Representative and His/Her Duties of Law No on Trade Unions and Collective Bargaining Agreement (the Collective Bargaining Agreement ), we have a Chief Workplace Representative and other representatives at the workplace. Within the scope of the Collective Bargaining Agreement in force for the period between 1 January 2017 and 31 December 2019, we and Petrol-iş Union reached an agreement with respect to pay increases based on inflation. Employee Benefits In accordance with existing social legislation in Turkey, we are required to make lump-sum termination indemnities to each employee who has completed over one year of service with us and whose employment is terminated due to retirement or for reasons other than resignation or misconduct. We also have an employee benefit plan, the Seniority Incentive Bonus, which is paid to employees with a certain level of seniority. See Note 17 to the 2016 Audited Financial Statements for further details on the Seniority Incentive Bonus. Competition The markets for most of our products are competitive and we are exposed to competition arising from imports from large global petrochemicals companies, including producers based in hydrocarbon-rich regions such as the Middle East and the United States. Competition in the markets for a majority of our products is based primarily on price but also on product performance, product quality, product deliverability and customer service. The Turkish petrochemicals sector is highly import reliant due to limited capacity. We operate as the sole producer within the market and due to increasing market demand over the years, we have increased sales as a result of capacity expansions, debottlenecking and a focus on operational excellence resulting in optimisation of our capacity utilisation rates. However, market demand is outpacing our expansion of capacity, resulting in our market share (based on production capacity) decreasing from 26 per cent. in 2006 (when we had a production capacity of 1,902 kilotons) to 18 per cent. in 2016 (when we had a production capacity of 2,067 kilotons). As the sole petrochemicals producer of size in Turkey, we are able to provide a high level of service to our customers and are therefore able to command premiums over the import parity price. For example, whereas an importer may require a month to deliver products to its customers, we are able to deliver most of our products to our customers within a week, which provides our customers with more effective working capital management. While Turkey is an open market, with no customs duties applicable to imports from the European Union, EFTA and/or FTA countries, in extraordinary cases, we are able to avail ourselves of anti-dumping restrictions imposed by the government. We currently benefit from such restrictions, including a rate of 16 per cent. to 18 per cent. for PVC for Germany and the United States and a rate of 8.44 per cent. for PA for South Korea. In the event of unfair competition, under World Trade Organisation rules, we can demand the imposition of anti-dumping duties on countries and/or companies engaging in dumping. In addition, the Turkish market is currently protected against imports as a result of import duties. A customs 97

113 duty of 0 per cent. is applicable to imports from the European Union, EFTA and FTA countries, while a customs duty of 3 per cent. is applicable to imports from GSP countries and a customs duty of 6.5 per cent. is applicable to imports from all other countries. We also benefit from tariff restrictions for all LDPE imports. In relation to PTA, we have also initiated anti-dumping proceedings and expect a decision later in In the future, we expect that the synergies arising from our arrangements with the STAR Refinery in terms of the cost of procuring feedstock, logistics and market premiums, will strengthen our competitive position. See also Industry Overview below for further details on the petrochemicals industry more generally. Insurance We have obtained insurance for our plants, equipment and other assets, as well as business interruption and product liability insurance, which we believe is in line with customary industry practices for similarly situated companies. Through a number of international and local insurers, we have insurance policies relating to employees, contamination and other environmental risks, losses relating to our assets, transportation of our products, certain aspects of business interruption and product and operational accountability, and director and officer liability insurance. Our insurers regularly visit our facilities to review the facilities and our procedures. Health, Safety and Environment We have systematic and consistent HSE policies which are based on industry best practices and aim to promote safety, environmental and occupational health excellence. In 2016, we adopted an HSE management system, SAFE, which is focused on four pillars: continuous improvement, leadership, risk management and implementation. The schematic below sets forth the underlying principles of our SAFE management system: 8JAN Each of these principles (Regulatory Compliance; Management, Leadership and Accountability; Risk Assessment and Management; Operational Accountability; Contractor and Supplier Management; Competence, Training and Behaviours; Management of Change; Facilities, Design and Construction; Environmental Assessment and Management; Safeguarding of Health; Information and Documentation; Societal Commitment; Customer and Products; Performance Monitoring and Improvement; Incident Analysis and Prevention; Emergency Preparedness and Crisis Management) is underpinned by a number of specific expectations, which constitute the standards by which all new HSE policies, systems and procedures are measured. As a result of this risk-based approach, we have also been able to implement a number of measures, including improved and systematic reporting and analysis systems, 98