Ciech S.A.

Quarterly Report • Apr 22, 2021

FINANCIAL STATEMENTS of CIECH S.A. for 2020 We are providing a courtesy English translation of our audited financial statements which were originally written in Polish. We take no responsibility for the accuracy of our translation. For an accurate reading of our audited financial statements, please refer to the Polish language version of our audited financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 2 CIECH S.A. – SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA in thousand PLN in thousand EUR 12 months ended 31.12.2020 12 months ended 31.12.2019 12 months ended 31.12.2020 12 months ended 31.12.2019 Sales revenues on continued operations 1,654,075 2,085,515 369,692 484,801 Operating profit on continued operations 64,082 104,340 14,323 24,255 Profit before tax on continued operations 177,890 79,111 39,759 18,390 Net profit for the period 155,287 60,436 34,707 14,049 Other comprehensive income net of tax (24,725) 69 (5,526) 16 Total comprehensive income 130,562 60,505 29,181 14,065 Cash flows from operating activities 66,310 (62,551) 14,821 (14,541) Cash flows from investment activities (303,166) 135,380 (67,759) 31,471 Cash flows from financial activities 327,809 42,089 73,267 9,784 Total net cash flows 90,953 114,918 20,329 26,714 as at 31.12.2020 as at 31.12.2019 as at 31.12.2020 as at 31.12.2019 Total assets 4,357,634 3,889,932 944,274 913,451 Total non-current liabilities 40,973 1,632,936 8,879 383,453 Total current liabilities 2,722,893 793,790 590,035 186,401 Total equity 1,593,768 1,463,206 345,360 343,597 Share capital 287,614 287,614 62,324 67,539 The above selected financial data were converted into PLN in accordance with the following principles: • items in the statement of financial position were converted using the average exchange rate determined by the National Bank of Poland on the last day of the reporting period, • items in the statement of profit or loss, statement of other comprehensive income and statement of cash flows were converted using the exchange rate constituting the arithmetic mean of rates determined by the National Bank of Poland on the last day of each calendar month of the reporting period. as at 31.12.2020 as at 31.12.2019 12 months ended 31.12.2020 12 months ended 31.12.2019 EUR 1 = PLN 4.6148 EUR 1 = PLN 4.2585 EUR 1 = PLN 4.4742 EUR 1 = PLN 4.3018 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 3 TABLE OF CONTENTS STATEMENT OF PROFIT OR LOSS OF CIECH S.A. ....................................................................................................................................... 4 STATEMENT OF OTHER COMPREHENSIVE INCOME OF CIECH S.A. ............................................................................................................ 5 STATEMENT OF FINANCIAL POSITION OF CIECH S.A. ................................................................................................................................ 6 STATEMENT OF CASH FLOWS OF CIECH S.A. ............................................................................................................................................ 7 STATEMENT OF CHANGES IN EQUITY OF CIECH S.A. ................................................................................................................................. 8 1. GENERAL INFORMATION ............................................................................................................................................................... 9 1.1. INFORMATION ON THE COMPANY’S ACTIVITIES ................................................................................................................................... 9 1.2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING PRINCIPLES ................................................................. 9 1.4. ACCOUNTING POLICIES ......................................................................................................................................................................... 11 1.5. CHANGES IN ACCOUNTING POLICIES AND THE SCOPE OF DISCLOSURES ............................................................................................ 11 2. SEGMENT REPORTING ................................................................................................................................................................. 13 3. NOTES TO THE STATEMENT OF PROFIT OR LOSS AND STATEMENT OF OTHER COMPREHENSIVE INCOME ..................................... 19 3.1. SALES REVENUES .................................................................................................................................................................................. 19 3.2. COST OF SALES, SELLING COSTS, GENERAL AND ADMINISTRATIVE EXPENSES .................................................................................... 19 3.3. COSTS BY TYPE ...................................................................................................................................................................................... 20 3.4. OTHER OPERATING INCOME AND EXPENSES ....................................................................................................................................... 20 3.5. FINANCIAL INCOME AND EXPENSES ..................................................................................................................................................... 21 3.6. COMPONENTS OF OTHER COMPREHENSIVE INCOME ......................................................................................................................... 23 4. INCOME TAX, DEFERRED TAX ASSETS AND LIABILITY ................................................................................................................... 24 4.1. MAIN COMPONENTS OF TAX EXPENSE ................................................................................................................................................ 24 4.2. EFFECTIVE TAX RATE ............................................................................................................................................................................. 24 4.3. DEFERRED INCOME TAX ....................................................................................................................................................................... 25 5. NOTES TO ASSETS REPORTED IN THE STATEMENT OF FINANCIAL POSITION ................................................................................. 28 5.1. PROPERTY, PLANT AND EQUIPMENT ................................................................................................................................................... 28 5.2. RIGHT-OF-USE ASSETS .......................................................................................................................................................................... 30 5.3. INTANGIBLE ASSETS .............................................................................................................................................................................. 32 5.4. LONG-TERM FINANCIAL ASSETS ........................................................................................................................................................... 33 5.5. INVENTORIES ........................................................................................................................................................................................ 36 5.6. SHORT-TERM RECEIVABLES .................................................................................................................................................................. 37 5.7. SHORT-TERM FINANCIAL ASSETS ......................................................................................................................................................... 39 5.8. CASH AND CASH EQUIVALENTS ............................................................................................................................................................ 40 5.9. DISCONTINUED OPERATIONS, NON-CURRENT ASSETS AND LIABILITIES CONNECTED WITH NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE ........................................................................................................................................................................... 41 6. EQUITY ....................................................................................................................................................................................... 42 6.1. CAPITAL MANAGEMENT ....................................................................................................................................................................... 42 6.2. EQUITY .................................................................................................................................................................................................. 42 6.3. DIVIDENDS PAID OR DECLARED............................................................................................................................................................ 44 6.4. BUSINESS COMBINATIONS AND ACQUISITION OF INTEREST .............................................................................................................. 44 6.5. EARNINGS PER SHARE ................................................................................................................................................................. 46 7. LIABILITIES, PROVISIONS, EMPLOYEE BENEFITS ........................................................................................................................... 47 7.1. INFORMATION ABOUT FINANCIAL LIABILITIES .................................................................................................................................... 47 7.2. OTHER NON-CURRENT LIABILITIES ....................................................................................................................................................... 48 7.3. CURRENT TRADE AND OTHER LIABILITIES ............................................................................................................................................ 49 7.4. LEASES ................................................................................................................................................................................................... 50 7.5. PROVISIONS FOR EMPLOYEE BENEFITS ................................................................................................................................................ 53 7.6. OTHER PROVISIONS .............................................................................................................................................................................. 54 8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT ................................................................................................. 55 8.1. FINANCIAL INSTRUMENTS .................................................................................................................................................................... 55 8.2. FINANCIAL INSTRUMENTS DESIGNATED FOR HEDGE ACCOUNTING ................................................................................................... 58 8.3. FINANCIAL RISK MANAGEMENT ........................................................................................................................................................... 60 8.4. DETERMINATION OF FAIR VALUE ......................................................................................................................................................... 67 9. OTHER NOTES ............................................................................................................................................................................. 70 9.1. NOTES TO THE STATEMENT OF CASH FLOWS ...................................................................................................................................... 70 9.2. INFORMATION ON CHANGES IN CONTINGENT ASSETS AND LIABILITIES AND OTHER MATTERS ....................................................... 71 9.3. INFORMATION ON TRANSACTIONS WITH RELATED PARTIES .............................................................................................................. 74 9.4. INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE FINANCIAL STATEMENTS OF CIECH S.A. .............................................................................................................................................................................................................. 77 9.5. EVENTS AFTER THE BALANCE SHEET DATE ........................................................................................................................................... 77 9.6. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE COVID-19 CORONAVIRUS PANDEMIC ON THE OPERATIONS OF CIECH S.A. .................................................................................................................................................................. 78 REPRESENTATION BY THE MANAGEMENT BOARD ........................................................................................................................................ 81 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 4 STATEMENT OF PROFIT OR LOSS OF CIECH S.A. note 01.01.-31.12.2020 01.01.-31.12.2019 CONTINUING OPERATIONS Sales revenues 3.1 1,654,075 2,085,515 Cost of sales 3.2 (1,409,843) (1,748,689) Gross profit on sales 244,232 336,826 Other operating income 3.4 5,590 26,901 Selling costs 3.2 (108,042) (177,464) General and administrative expenses 3.2 (64,322) (76,984) Other operating expenses 3.4 (13,376) (4,939) Operating profit 64,082 104,340 Financial income 3.5 286,286 86,107 Profit from financial instruments 3.5 64,617 74,893 Financial expenses 3.5 (172,478) (111,336) (Loss) from financial instruments 3.5 (126,311) (68,654) Net financial income/(expenses) 113,808 (25,229) Profit before tax 177,890 79,111 Income tax 4.1, 4.2 (23,056) (26,695) Net profit on continuing operations 154,834 52,416 DISCONTINUED OPERATIONS Net profit/(loss) on discontinued operations 5.9 453 8,020 Net profit for the year 155,287 60,436 Earnings per share (in PLN): Basic 2.95 1.15 Diluted 2.95 1.15 Earnings per share (in PLN) from continuing operations: Basic 2.94 0.99 Diluted 2.94 0.99 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. The statement of profit or loss of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 5 STATEMENT OF OTHER COMPREHENSIVE INCOME OF CIECH S.A. note 01.01.-31.12.2020 01.01.-31.12.2019 Net profit on continuing operations 154,834 52,416 Net profit/(loss) on discontinued operations 453 8,020 Net profit for the year 155,287 60,436 Other comprehensive income before tax that may be reclassified to the statement of profit or loss 3.6 (30,466) 112 Cash flow hedge reserve 3.6 (30,466) 112 Other comprehensive income before tax that may not be reclassified to the statement of profit or loss 3.6 (57) (59) Actuarial gains 3.6 (51) (59) Other components of other comprehensive income 3.6 (6) - Income tax attributable to other comprehensive income 4.1 5,798 16 Income tax attributable to other comprehensive income that may be reclassified to the statement of profit or loss 4.1 5,788 5 Income tax attributable to other comprehensive income that may not be reclassified to the statement of profit or loss 4.1 10 11 Other comprehensive income net of tax (24,725) 69 TOTAL COMPREHENSIVE INCOME 130,562 60,505 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. The statement of other comprehensive income of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 6 STATEMENT OF FINANCIAL POSITION OF CIECH S.A. note 31.12.2020 31.12.2019 ASSETS Property, plant and equipment 5.1 11,805 14,131 Intangible assets 5.3 57,428 54,414 Long-term financial assets 5.4 2,538,642 2,416,967 Deferred income tax assets 4.3 - 2,166 Rights to use an asset 5.2 26,057 29,336 Total non-current assets 2,633,932 2,517,014 Inventory 5.5 6,394 30,694 Short-term financial assets 5.7 1,189,162 794,231 Income tax receivables - 1,792 Trade and other receivables 5.6 232,895 376,218 Cash and cash equivalents 5.8 265,287 169,983 Non-current assets held for sale 5.9 29,964 - Total current assets 1,723,702 1,372,918 Total assets 4,357,634 3,889,932 EQUITY AND LIABILITIES Share capital 6.2 287,614 287,614 Share premium 470,846 470,846 Cash flow hedge reserve 8.2 (25,713) (1,035) Actuarial gains (78) (37) Other reserve capitals 6.2 422,699 76,199 Retained earnings 438,400 629,619 Total equity 1,593,768 1,463,206 Loans, borrowings and other debt instruments 7.1 - 1,580,756 Lease liabilities 7.4 21,792 24,405 Other non-current liabilities 7.2 18,198 26,686 Employee benefits reserve 7.5 979 1,089 Deferred income tax liability 4.3 4 - Total non-current liabilities 40,973 1,632,936 Loans, borrowings and other debt instruments 7.1 2,238,619 301,762 Lease liabilities 7.4 6,332 5,035 Trade and other liabilities 7.3 438,836 451,315 Income tax liabilities 4,539 41 Employee benefits reserve 7.5 826 2,312 Other provisions 7.6 33,741 33,325 Total current liabilities 2,722,893 793,790 Total liabilities 2,763,866 2,426,726 Total equity and liabilities 4,357,634 3,889,932 * Reclassification of loans to short-term liabilities in connection with failure to meet the covenant of the loan agreement. Details are described in point 7.1. The statement of financial position of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 7 STATEMENT OF CASH FLOWS OF CIECH S.A. note 01.01.-31.12.2020 01.01.-31.12.2019 Cash flows from operating activities Net profit for the period 155,287 60,436 Amortisation/depreciation 18,839 13,433 Recognition of impairment allowances 15,508 12,836 Foreign exchange (profit) /loss (39,199) 2,335 (Profit) / loss on investment activities 461 - (Profit) / loss on disposal of property, plant and equipment (174) (32) Dividends and interest (171,669) 8,342 Income tax 23,056 26,695 Change in liabilities due to loan arrangement fee 2,226 606 Value of derivatives 20,240 (9,867) Cash from operating activities before changes in working capital and provisions 24,575 114,784 Change in receivables 9.1 131,642 23,418 Change in inventory 24,300 10,325 Change in current liabilities 9.1 (57,121) (81,054) Change in provisions and employee benefits 9.1 (1,180) (1,156) Cash generated from operating activities 122,216 66,317 Interest paid (47,943) (78,990) Income tax (paid) (7,963) (49,878) Net cash from operating activities 66,310 (62,551) Cash flows from investment activities Disposal of a subsidiary 104 - Disposal of intangible assets and property, plant and equipment 3,566 34 Dividends received 181,903 5,268 Interest received 37,713 18,607 Cash pooling inflows - 39,853 Proceeds from repaid borrowings 433,850 293,388 Acquisition of a subsidiary (4,918) (4,867) Acquisition of intangible assets and property, plant and equipment (11,710) (19,893) Raise capital expenditures and extra charge on capital (4,855) (13,780) Borrowings paid out (937,299) (183,230) Cash pooling outflows (1,520) - Net cash from investment activities (303,166) 135,380 Cash flows from financial activities Proceeds from loans and borrowings 7.1 662,787 261,701 Cash pooling inflows 19,442 42,317 Repayment of loans and borrowings 7.1 (347,813) (256,500) Repayment of lease liabilities 7.4 (6,607) (5,429) Net cash from financial activities 327,809 42,089 Total net cash flows 90,953 114,918 Cash and cash equivalents as at the beginning of the period 169,984 54,988 Impact of foreign exchange differences 4,350 77 Cash and cash equivalents as at the end of the period 5.8 265,287 169,983 * Cash pooling - presentation in cashflow: • Investing activities - the company presents a change in cash pooling receivables. • Financial activities - the company presents a change in cash pooling liabilities. The statement of cash flows of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 8 STATEMENT OF CHANGES IN EQUITY OF CIECH S.A. Attributable to shareholders of the parent company Total equity Share capital Share premium Cash flow hedge reserve Other reserve capitals Actuarial gains Retained earnings note 6.2 8.2 6.2 01.01.2020 287,614 470,846 (1,035) 76,199 (37) 629,619 1,463,206 Transactions with shareholders included directly in equity - - - 346,500 - (346,500) - Reserve fund for the purchase of own shares - - - 346,500 - (346,500) - Total comprehensive income for the period - - (24,678) - (41) 155,281 130,562 Net profit / (loss) for the period - - - - - 155,287 155,287 Other comprehensive income - - (24,678) - (41) (6) (24,725) 31.12.2020 287,614 470,846 (25,713) 422,699 (78) 438,400 1,593,768 01.01.2019 287,614 470,846 (1,152) 76,199 11 569,183 1,402,701 Total comprehensive income for the period - - 117 - (48) 60,436 60,505 Net profit / (loss) for the period - - - - - 60,436 60,436 Other comprehensive income - - 117 - (48) - 69 31.12.2019 287,614 470,846 (1,035) 76,199 (37) 629,619 1,463,206 The statement of changes in equity of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 9 1. GENERAL INFORMATION 1.1. INFORMATION ON THE COMPANY’S ACTIVITIES Company Name CIECH S.A. Legal form Spółka Akcyjna Registered office Warsaw, Poland Address ul. Wspólna 62, 00-684 Warsaw, Poland KRS (National Court Register number) 0000011687 (District Court for the capital city of Warsaw in Warsaw 12 th Commercial Division of the National Court Register) Country of registration Poland Statistical identification number (REGON) 011179878 Tax ID No (NIP) 118-00-19-377 BDO Registry Number 000015168 Website www.ciechgroup.com Branches held CIECH S.A.’s Branch in Romania CIECH S.A.’s Branch in Germany Parent company KI Chemistry s. à r. l (a subsidiary of Kulczyk Investments) Parent company of the highest level Luglio Limited CIECH S.A. is a holding company that manages and provides support services to its subsidiaries — domestic and foreign manufacturing, trade and service companies of the CIECH Group. The CIECH Group is an international, professionally managed group with a well-established position of a leader of the chemical sector in Central and Eastern Europe. It manufactures products which are used in the production of articles necessary in everyday life of people all over the world – state-of-the- art products of the highest, world quality. Taking advantage of the support of a reliable strategic investor – Kulczyk Investments – it implements the strategy of global development. Key products manufactured by the CIECH Group include: sodium carbonate, sodium bicarbonate, evaporated salt, agrochemical products, polyurethane foams, lanterns and jars, sodium and potassium silicates. The core sales market for the CIECH Group is the European Union, including mainly Poland, Germany and Central Eastern European countries. Products manufactured by the CIECH Group are also exported to overseas markets. 1.2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING PRINCIPLES 1.2.1. REPRESENTATION BY THE MANAGEMENT BOARD These financial statements of CIECH S.A. for the period from 1 January 2020 to 31 December 2020, including comparative data, were approved by the Management Board of CIECH S.A. on 22 April 2021. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 10 The Management Board of CIECH S.A. represents that these separate financial statements for the current and comparable period have been prepared in compliance with International Financial Reporting Standards approved by the European Union and related interpretations issued by the European Commission in the form of Regulations (IFRS). The Management Board of CIECH S.A. represents that to the best of its knowledge these separate financial statements, including corresponding figures, have been prepared in accordance with the generally acceptable accounting principles and that they represent a true, accurate and fair reflection of CIECH S.A.’s financial position and the results of operations. Furthermore, the Management Board of CIECH S.A. represents that the Directors’ report on operations of the CIECH Group and CIECH S.A. in 2020 contains a true image of the Company’s developments, achievements, and condition, including the description of major risks and threats. The Management Board of CIECH S.A. represents that Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered office in Warsaw, entered into the list of entities authorised to audit financial statements under the registry No 73 kept by the National Chamber of Statutory Auditors was chosen in accordance with the binding legal regulations for the auditor of these separate financial statements. The above entity, including the certified auditors performing the audit, satisfy all the conditions required in order to issue an unbiased and independent audit report, pursuant to the applicable domestic legal regulations. 1.2.2. BASIS OF PREPARATION On 31 January 2007, the Extraordinary General Meeting of Shareholders of CIECH S.A. adopted resolution No 4, concerning the preparation of separate financial statements in accordance with International Financial Reporting Standards as approved by the European Union. Due to the adopted resolution, since 2007 the reports of CIECH S.A. have been prepared in accordance with the IFRS using the valuation of assets and liabilities and the measurement of net profit/loss. Major accounting principles applied in the preparation of these financial statements are listed in note 1.4. These principles have been applied on a continuous basis in all presented periods. The financial statements of CIECH S.A. have been prepared on the historical cost basis except for financial assets and liabilities (derivative instruments) measured at fair value through profit or loss. These financial statements were prepared under the assumption that CIECH S.A. will continue as a going concern in the foreseeable future. As at the date of approval of these financial statements, no facts or circumstances are known that would indicate any threat to the Company continuing as a going concern. The financial year for CIECH S.A is the calendar year. These financial statements, with the exception of the separatory statement of cash flows, have been prepared on an accrual basis. The statement of profit or loss of CIECH S.A. is prepared in the cost by function format. The statement of cash flows is prepared using the indirect method. Preparation of the financial statement in accordance with IFRS requires the Management Board to make own assessments and apply certain assumptions and accounting estimates as part of the application of accounting principles adopted by the Company. Issues which require significant assessments or areas where the assumptions and estimates made have a significant impact on these financial statements have been described in note 1.4. CIECH S.A. also prepares consolidated financial statements available at https://ciechgroup.com/en/relacje- inwestorskie/reports/periodical-reports/. 1.3. FUNCTIONAL AND REPORTING CURRENCY The Polish zloty (PLN) is the functional currency of CIECH S.A., and the reporting currency of these financial statements. Unless stated otherwise, all financial data in these financial statements have been presented in thousands of Polish zlotys (PLN ’000). CIECH S.A. has Branches (in Romania and Germany) whose accounting records are kept in local currencies (RON and EUR). For the purpose of preparing the financial statements of CIECH S.A., accounting records of the Branch in Romania are translated using the transaction exchange rates and the accounting records of the Branch in Germany – at the average NBP rate for a given period. Due to an insignificant value of transactions, translation at this exchange rate does not result in a material distortion of results. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 11 1.4. ACCOUNTING POLICIES To ensure more legible presentation and better understanding of the information disclosed in the financial statements, key accounting principles applicable in CIECH S.A. as well as judgements and estimates made have been presented in separate notes. Note Title Accounting principles Judgements and estimates 3.1. Sales revenues x 3.2. Cost of sales x 3.4.; 3.5. Other income and expenses x x 4.1. Income tax x 4.3. Deferred income tax x x 5.1. Property, plant and equipment x x 5.2. Right-of-use assets x x 5.3. Intangible assets x x 5.4. Long-term financial assets x x 5.5. Inventories x x 5.6. Short-term receivables x x 5.7. Short-term financial assets x x 5.8. Cash and cash equivalents x x 5.9. Discontinued operations, assets and liabilities classified as held for sale x x 6.2. Equity x x 7.1 Information on financial liabilities x 7.2. Other long-term liabilities x x 7.3. Current trade and other liabilities x x 7.4. Leases x x 7.5. Provisions for employee benefits x x 7.6. Other provisions x x 8.1. Financial instruments x x 8.2. Financial instruments designated for hedge accounting x x 9.2. Information on changes in contingent assets and liabilities and other matters x x 1.5. CHANGES IN ACCOUNTING POLICIES AND THE SCOPE OF DISCLOSURES Amendments to IAS/IFRS and their potential impact on the Company’s financial statements are presented below: New Standards, amendments to Standards and Interpretations: Approved by the IASB for application as at the balance sheet date Impact on the financial statements Effective year in the EU Amendments to references to the Conceptual Framework in IFRSs No material impact on the financial statements is estimated 2020 Amendments to IFRS 3 “Business Combinations” – definition of a business – published on 22 October 2018 No material impact on the financial statements is estimated 2020 Amendments to IAS 1 and IAS 8 – definition of “material” No material impact on the financial statements is estimated 2020 Amendments to IFRS 9, IAS 39 and IFRS 7 in response to the IBOR reform – modification of IFRS and IAS so that the expected reform of benchmark rates does not result in the termination of hedge accounting. The Company analyses issues related to the expected reform of benchmark rates – if there are any changes, their estimated effects would be recognised in the financial statements 2020 IFRS 14 “Regulatory deferral accounts” No material impact on the financial statements is estimated n/a Amendment to IFRS 16 “Leases” – Covid-19-related rent concessions No material impact on the financial statements is estimated 2020 New standards and interpretations entering into force after the balance sheet date FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 12 New Standards, amendments to Standards and Interpretations: As at the date of approval of these financial statements, amendments to IFRS 4 "Insurance Contracts" entitled “Extension of the Temporary Exemption from Applying IFRS 9” have been issued by the International Accounting Standards Board (IASB) and adopted by the European Union on 16 December 2020, and are effective as of a later date No material impact on the financial statements is estimated The expiry date of the temporary exemption from IFRS 9 has been extended from 1 January 2021 to annual periods beginning on 1 January 2023 New standards and interpretations pending endorsement by the European Union Impact on the financial statements Effective year in the EU IFRS 14 “Regulatory Deferral Accounts” No material impact on the financial statements is estimated The European Commission has decided not to launch the endorsement process of this interim standard until the final IFRS 14 is issued. Amendments to IAS 1 “Presentation of financial statements” – classification of liabilities as current or non-current No material impact on the financial statements is estimated 2023 Amendments to IFRS 16 “Property, plant and equipment” proceeds before intended use No material impact on the financial statements is estimated 2022 Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” – onerous contracts – cost of fulfilling the contract No material impact on the financial statements is estimated 2022 Amendments to IFRS 3 “Business Combinations” – amendments to references in the Conceptual Framework along with amendments to IFRS 3 No material impact on the financial statements is estimated 2022 Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” – sale or contribution of assets between an investor and its associate or joint venture, and further amendments No material impact on the financial statements is estimated The effective date has been postponed Amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures”, IFRS 4 “Insurance Contracts” and IFRS 16 “Leases” – Reform of the Benchmark Interest Rate – Stage 2 No material impact on the financial statements is estimated 2021 Amendments to various standards resulting from “Annual Improvements to IFRS Standards 2018–2020 Cycle” – amendments made as part of the annual IFRS improvements project (IFRS 1, IFRS 9, IAS 16 and IAS 41) primarily to correct conflicts and clarify wording (amendments to IFRS 1, IFRS 9 and IAS 41 No material impact on the financial statements is estimated 2022 IFRS 17 “Insurance Contracts” No material impact on the financial statements is estimated 2023 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 13 2. SEGMENT REPORTING Following the change of the business model and the adoption of the Reorganisation concept of the CIECH group, it was decided to introduce the division of competences within the CIECH Group among individual business areas – business units (“BUs”). The adoption of the Reorganisation Concept is to serve the implementation of the strategy adopted, as well as to streamline business and decision-making processes and improving the transparency of the operation of the CIECH Group. In connection with the reorganisation, the previously presented operating segments were assigned to the new business structure: 1. BU Soda 2. BU Salt 3. BU Agro 4. BU Resins 5. BU Foams 6. BU Silicates 7. BU Packaging. Currently, the Company has reached its target structure for most BUs, assets and operations have been unambiguously assigned to the designated areas. Below are presented the figures according to the new segment structure, taking into account its current form: Previous structure: Current structure: Soda Segment (BU Soda, BU Salt) Soda Segment comprising BU Soda, BU Salt and transport services assigned to these BUs Organic Segment (BU Agro, BU Resins, BU Foams) Agro Segment comprising BU Agro, Resins Segment comprising BU Resins, Foams Segment comprising BU Foams and transport services assigned to these Bus Silicates and Glass Segment (BU Silicates, BU Packaging) Silicates Segment comprising BU Silicates, Packaging Segment comprising BU Packaging and transport services assigned to these Bus Transport Segment Operations reallocated to individual segments Other Segment Other services provided to selected companies from the Group and transport services assigned to this segment. For details on the reorganisation of the CIECH Group, see current report No 47/2019. The CIECH S.A.’s operating segments are designated on the basis of internal reports prepared by the Company’s and are regularly reviewed by the Management Board, which is responsible for operating decisions aimed at allocating resources to segments and assessing the subsidiaries performance. CIECH S.A. has been divided into the following operating segments: Soda Segment (comprising BU Soda, and BU Salt) – the most important products manufactured in this segment are: light and dense sodium carbonate, evaporated salt, sodium bicarbonate and calcium chloride. The products of this area are sold mainly by the parent company CIECH S.A. Production of the Segment goods is implemented in CIECH Soda Polska S.A., the Romanian company CIECH Soda Romania S.A. (until September 2019) and in the German company CIECH Soda Deutschland GmbH&Co. KG (German company also sells its own products) . These products are used in the glass, food, detergent and pharmaceutical industries. Agro Segment – the CIECH Group is a manufacturer of a number of crop protection products used in agriculture and produced by the companies: CIECH Sarzyna S.A. and Proplan Plant Protection Company, S.L., and CIECH S.A. was the main supplier of raw materials for production for CIECH Sarzyna S.A. Resins Segment – the CIECH Group is a producer of a variety of organic compounds manufactured by CIECH Żywcie Sp. z o.o. In 2020, it was producing, among others, epoxy resins and polyester resins. These products are used in the following industries: automotive, paints and electronics. In 2020, CIECH Żywice Sp. z o.o. was designated for sale due to the signing of a preliminary sales agreement with LERG S.A., and its figures are reported as discontinued operations. Data on discontinued operations also include the result of CIECH S.A. obtained from transactions with CIECH Żywice Sp. z o.o. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 14 Foams Segment – the CIECH Group is a producer of polyurethane foams manufactured by CIECH Pianki Sp. z o.o and CIECH S.A. was the main supplier of raw materials for production for this company. Silicates Segment – CIECH S.A. sells silicates segment products manufactured by CIECH Soda Romania S.A. In 2020, these were mainly glassy sodium silicate and sodium water glass. These products are used in the construction industry and for the production of detergents. Packaging Segment – within this segment, CIECH S.A. provides support services for the company CIECH Vitrosilicon S.A., which deals with the production of glass packaging - lanterns and jars, used for the production of candles and in the food industry. Other activities covers mainly services provided outside the Group and goods sold by CIECH S.A. outside the area of activity of the above-mentioned segments. The individual segments also show the support services provided by CIECH S.A. for companies from the CIECH Group, incl. accounting, controlling, legal, administrative, IT. The Company’s financing is managed (including finance expenses and income with the exception of interest and exchange differences on trade receivables and liabilities) and income tax is calculated on the Group level and they are not allocated to particular segments. CIECH S.A. has been divided into the following geographical areas: Poland, European Union, Other European countries, Africa, Asia, Other regions. Information on the Company’s geographical areas is established based on the Company’s assets localisation. Revenues and costs, assets and liabilities of segments are recognised and measured in a manner consistent with the method used in the separate financial statements. Operational segments results are assessed by the CIECH S.A’s Management Board on the basis of sales revenue, operating profit, level of EBITDA and adjusted EBITDA. The need to separate additional segments in accordance with IFRS 8 has not been identified. EBITDA should be viewed as a supplement not as a substitute for the business performance presented in accordance with IFRS. EBITDA is a useful ratio of the ability to incur and service debt. EBITDA and adjusted EBITDA levels are not defined by the IFRS and can be calculated in a different manner by other entities. The reconciliation and definitions applied by CIECH S.A. when determining these measures are presented below. 01.01.-31.12.2020 01.01.-31.12.2019 Net profit/(loss) on continuing operations 154,834 52,416 Income tax 23,056 26,695 Financial expenses 172,478 111,336 Financial income (286,286) (86,107) Amortisation/depreciation 18,839 13,433 EBITDA on continued operations 82,921 117,773 EBITDA on discontinued operations 2,400 5,632 EBITDA on continued and discontinued operations 85,321 123,405 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. 01.01.-31.12.2020 01.01.-31.12.2019 EBITDA on continued operations 82,921 117,773 One-offs including: (1,016) (3,819) Cash items (a) 840 (40) Non-cash items (without impairment) (b) (1,856) (3,779) Adjusted EBITDA from continued operations 81,905 113,954 Adjusted EBITDA from discontinued operations 2,400 5,632 Adjusted EBITDA from continued and discontinued operations 84,305 119,586 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. (a) Cash items include, among others, gain/loss of the sale of property, plant and equipment, as well as fees and compensations received). (b) Non-cash items include: provisions for liabilities, compensation and other provisions. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 15 OPERATING SEGMENTS Revenue and costs data as well as assets, equity and liabilities data of particular CIECH S.A.’s operating segments for periods disclosed in statements are presented in the tables below. OPERATING SEGMENTS 01.01.-31.12.2020 Soda Segment Agro Segment Foams Segment Silicates Segment Packaging Segment Other operations Segment Corporate functions TOTAL Total sales revenues 1,407,865 106,351 100,511 30,828 194 8,326 - 1,654,075 Cost of sales (1,182,762) (99,198) (93,210) (27,703) (186) (6,784) (1,409,843) Gross profit /(loss) on sales 225,103 7,153 7,301 3,125 8 1,542 - 244,232 Selling costs (103,883) 455 (2,294) (1,889) - (431) - (108,042) General and administrative expenses (7,791) - - (4) - - (56,527) (64,322) Result on management of receivables (8,925) (158) - (3) - 15 44 (9,027) Result on other operating activities 1,959 (69) - - - (302) (347) 1,241 Operating profit /(loss) 106,463 7,381 5,007 1,229 8 824 (56,830) 64,082 Exchange differences and interest on trade settlements (310) (1,467) (1,402) - - (396) (10) (3,585) Borrowing costs - - - - - - (13,656) (13,656) Result on financial activity (non-attributable to segments) - - - - - - 131,049 131,049 Profit /(loss) before tax 106,153 5,914 3,605 1,229 8 428 60,553 177,890 Income tax - - - - - - - (23,056) Net profit /(loss) on continuing operations 154,834 Net profit /(loss) on discontinued operations 453 Net profit /(loss) for the period - - - - - - - 155,287 Amortization/depreciation 3,526 44 - - - 417 14,852 18,839 EBITDA from continuing operations 109,989 7,425 5,007 1,229 8 1,241 (41,978) 82,921 Adjusted EBITDA from continuing operations 108,860 7,425 5,007 1,229 8 1,241 (41,865) 81,905 * Adjusted EBITDA for the 12-month period ended 31 December 2020 is calculated as EBITDA adjusted for untypical one-off events such as: reversal of provisions for liabilities: PLN 1,856 thousand; donations given – PLN 881 thousand; other: PLN 41 thousand. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 16 OPERATING SEGMENTS 01.01.-31.12.2019 Soda Segment Agro Segment Foams Segment Silicates Segment Packaging Segment Other operations Segment Corporate functions TOTAL Total sales revenues 1,773,696 133,587 138,584 29,780 - 9,868 - 2,085,515 Cost of sales (1,449,335) (129,385) (133,229) (27,460) - (9,280) (1,748,689) Gross profit /(loss) on sales 324,361 4,202 5,355 2,320 - 588 - 336,826 Selling costs (169,235) (3,431) (2,337) (2,190) - (271) - (177,464) General and administrative expenses (1,909) - - (80) - (667) (74,328) (76,984) Result on management of receivables 693 (78) 2 1 - 17 - 635 Result on other operating activities 1,337 - - - - (862) 20,852 21,327 Operating profit /(loss) 155,247 693 3,020 51 - (1,195) (53,476) 104,340 Exchange differences and interest on trade settlements (14,358) (42) 336 - - (90) - (14,154) Borrowing costs - - - - - - (18,606) (18,606) Result on financial activity (non-attributable to segments) - - - - - - 7,531 7,531 Profit /(loss) before tax 140,889 651 3,356 51 - (1,285) (64,551) 79,111 Income tax - - - - - - - (26,695) Net profit /(loss) on continuing operations - - - - - - 52,416 Net profit /(loss) on discontinued operations - - - - - - 8,020 Net profit /(loss) for the period - - - - - - - 60,436 Amortization/depreciation 3,794 45 - 3 - 630 8,961 13,433 EBITDA from continuing operations 159,041 738 3,020 54 - (565) (44,515) 117,773 Adjusted EBITDA from continuing operations 158,702 738 3,020 54 - (550) (48,010) 113,954 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. ** Adjusted EBITDA for the 12-month period ended 31 December 2019 is calculated as EBITDA adjusted for untypical one-off events such as: reversal of provisions for liabilities: PLN 3,779 thousand, other: PLN 40 thousand. There are no significant customers outside the CIECH Group from whom the Company would earn 10% of its total revenues. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 17 ASSETS AND LIABILITIES BY OPERATING SEGMENTS ASSETS LIABILITIES 31.12.2020 31.12.2019 31.12.2020 31.12.2019 Soda Segment 85,672 175,122 263,849 290,366 Agro Segment 9,858 48,076 4,129 26,149 Resins Segment 97,228 124,199 38,192 28,266 Foams Segment 1,326 4,747 9 16,944 Silicates Segment 4,224 3,870 9,636 2,686 Packaging Segment 83 - - - Other operations Segment 13,901 6,527 16,191 21,337 Corporate functions 4,145,342 3,527,391 2,431,860 2,040,978 TOTAL 4,357,634 3,889,932 2,763,866 2,426,726 * Assets related to discontinued operations. Detailed information on discontinued operations is provided in Note 5.9 to this report. In CIECH S.A. investment outlays for 2020 in the amount of PLN 17,072 thousand PLN and 2019 in the amount of PLN 17,609 thousand were included in the Segment "Corporate functions". SALES REVENUES BY BUSINESS SEGMENTS At CIECH S.A., sales revenues are recognized upon the provision of services or delivery of goods. For detailed information on the recognition of sales revenue, please refer to Note 3.1 to these financial statements. 01.01.-31.12.2020 01.01.-31.12.2019 Change 2020/2019 Change % Soda Segment, including: 1,407,865 1,773,696 (365,831) (20.6%) Dense soda ash 814,859 985,772 (170,913) (17.3%) Light soda ash 227,365 410,357 (182,992) (44.6%) Salt 190,410 200,990 (10,580) (5.3%) Sodium bicarbonate 105,770 98,702 7,068 7.2% Calcium chloride 18,111 26,174 (8,063) (30.8%) Other goods and services 51,350 51,701 (351) (0.7%) Agro Segment, including: 106,351 133,587 (27,236) (20.4%) Raw materials for production of plant pro-tection products 98,137 129,381 (31,244) (24.1%) Other goods and services 8,214 4,206 4,008 95.3% Foam Segment, including: 100,511 138,584 (38,073) (27.5%) Raw materials for the production of polyu-rethane foams 96,928 137,111 (40,183) (29.3%) Other goods and services 3,583 1,473 2,110 143.2% Silicates Segment, including: 30,828 29,780 1,048 3.5% Sodium silicates 11,279 10,436 843 8.1% Other goods and services 19,549 19,344 205 1.1% Packaging Segment, including: 194 - 194 - Container glass 194 - 194 - Other Segment, including: 8,326 9,868 (1,542) (15.6%) Revenues from third parties 8,326 9,868 (1,542) (15.6%) TOTAL 1,654,075 2,085,515 (431,440) (20.7%) Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 18 INFORMATION ON GEOGRAPHICAL AREAS Information on CIECH S.A.’s geographical areas is established based on the location of its assets. ASSETS 31.12.2020 31.12.2019 Poland 2,204,723 2,230,288 European Union (excluding Poland) 2,152,810 1,639,972 Other European countries 51 6,665 Africa - 911 Asia 50 12,096 TOTAL 4,357,634 3,889,932 The Company’s non-current assets are located in Poland and the European Union. As regards the European Union, the most significant non-current assets comprise shares in subsidiaries having their registered offices mainly in Romania (PLN 111,000 thousand), Germany (PLN 810,493 thousand) and Spain (PLN 203,866 thousand). Trade and other receivables constitute the main component of current assets presented in individual geographical areas. REVENUES BY GEOGRAPHICAL SEGMENTS 01.01.-31.12.2020 01.01.-31.12.2019 Poland 1,124,908 1,157,998 European Union (excluding Poland) 450,247 598,341 Germany 113,253 113,554 Romania 20,593 83,024 Czech Republic 143,580 132,759 Italy 5,342 5,867 The Netherlands 51,417 46,634 Finland 27,580 50,609 Sweden 21,168 37,327 Belgium 8,485 12,124 United Kingdom 2,880 32,343 Denmark 7,325 7,257 France 11,643 3,957 Luxembourg 1,046 161 Lithuania 6,996 7,537 Other EU countries 28,939 65,188 Other European Countries 64,482 122,583 Switzerland 2,393 12,684 Norway 43,486 44,452 Russia 1,016 863 Other European countries 17,587 64,584 Africa 9,355 69,459 Asia 4,300 131,969 Indie 121 64,802 Singapur 1,043 9,325 Bangladesz - 24,471 Hongkong - 15,023 Turcja - 3,496 Other Asian countries 3,136 14,852 Other regions 949 2,440 Hedge accounting (166) 2,725 TOTAL 1,654,075 2,085,515 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 19 3. NOTES TO THE STATEMENT OF PROFIT OR LOSS AND STATEMENT OF OTHER COMPREHENSIVE INCOME 3.1. SALES REVENUES Accounting policy The Entity recognises revenues based on the so-called 5-step model – when it satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. When (or as) a performance obligation is satisfied, the Entity recognises as revenues the amount of the transaction price that is allocated to that performance obligation. At CIECH S.A., revenues for sales of goods are recognized upon their delivery in accordance with the INCOTERMS conditions contained in contracts with customers. Most often, the company sells on the bases: DAP, FCA, DDP. Revenues from sales of services are recognized upon the provision of services. CIECH S.A. concludes contracts with contractors regarding the provision of CIECH S.A.’s products as part of consignment warehouses owned by contractors. Control over the delivered products is transferred to the customer when they are accepted for storage, and at this point sales revenue is recognized along with the corresponding cost of sale. CIECH S.A. grants rebates to selected customers, and the value of these rebates reduces the value of sales revenues. Revenues from the sales of products and goods are recognised in profit or loss at the NBP’s average exchange rate from the date preceding the date of invoice, except for sales revenues earned by the Branch of CIECH S.A. in Germany whose currency translation principle is described in note 1.3. For detailed information on sales revenues by operating segment and by geographical market, please refer to Note 2 to these financial statements. Payment terms Commercial contracts concluded by CIECH S.A. include various terms of payment of trade receivables depending on the type of transaction, market characteristics and trade conditions. The most common payment terms are: 14, 30 and 60 days. CIECH S.A. uses non-recourse factoring and detailed information is provided in Note 5.6 to these financial statements. SALES REVENUES 01.01.-31.12.2020 01.01.-31.12.2019 Revenues from sales of services 113,513 115,824 Revenues from sales of goods 1,540,562 1,969,691 Net sales of products, goods and materials 1,654,075 2,085,515 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. 3.2. COST OF SALES, SELLING COSTS, GENERAL AND ADMINISTRATIVE EXPENSES Accounting policy Expenses are probable decreases in economic benefits in the form of outflows or depletions of assets or increases in liabilities and provisions. Cost of sales comprises the production cost of services sold and the cost of goods and materials sold. Selling costs include, among others: costs of transport, sales commissions and the costs of advertising, promotion and distribution. General and administrative expenses are expenses associated with activities of the entity’s management or those of general functions. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 20 Provisions for liabilities to employees arising from the employment relationship (salaries, bonuses, holiday entitlements, etc.) are recognised in prime cos of sales, general and administrative expenses, cost od sale. Provisions for liabilities to former key employees (compensation for termination of contracts, non-competition clauses, etc.) are recognised in general and administrative expenses or selling expenses. Provisions for length-of-service awards, retirement and disability benefits are recognised in other operating expenses. Amortisation and depreciation In this item, the Company recognises the cost of accrued depreciation charges on property, plant and equipment, amortisation charges on intangible assets, and depreciation charges on right-of-use assets. Depreciation and amortisation charges are recognised as operating expenses depending on where they arise. COST OF SALES, SELING COST AND ADMINISTRATIVE EXPENSES 01.01.-31.12.2020 01.01.-31.12.2019 Cost of manufacture of products and services sold (94,108) (100,987) Cost of sold goods and materials sold (1,315,735) (1,647,702) Cost of sales (1,409,843) (1,748,689) Selling costs (108,042) (177,464) General and administrative expenses (64,322) (76,984) Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. 3.3. COSTS BY TYPE COST BY KIND (SELECTED) 01.01.-31.12.2020 01.01.-31.12.2019 Amortisation (18,409) (13,433) Consumption of materials and energy (2,727) (3,073) Employee benefits, including: (83,740) (84,641) - payroll (70,768) (72,817) - social security and other benefits (9,324) (10,042) - other (1,119) (1,782) External services (153,653) (235,126) Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. 3.4. OTHER OPERATING INCOME AND EXPENSES Accounting policy The reporting period’s results are also affected by other operating income and expenses indirectly related to the Company's core operations. The key items include: ✓ recognition/reversal of provisions, among others for liabilities, employee benefits, ✓ gains/ losses on disposal and liquidation of non-financial non-current assets, ✓ recognition/ reversal of impairment losses (including allowances for doubtful receivables), ✓ penalty fees and compensation paid/ received; ✓ income from rental of investment property is recognised in profit or loss on a straight-line basis over the lease term. Any lease incentives granted are an integral part of the net consideration agreed for the use of the asset. Judgements and estimates - Impairment of non-financial assets The carrying amounts of the Company’s non-financial assets, other than inventory and deferred tax assets, are reviewed at reporting date to determine whether there is any indication of impairment. If any such indication exists, then the Company estimates the recoverable amount of the respective cash-generating unit. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. The recoverable amount is determined for individual assets, unless the asset does not generate cash inflows that FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 21 are largely independent of the cash inflows from other assets or groups of assets. If the asset's carrying amount exceeds its recoverable amount, an impairment loss is recognised against the carrying amount of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the unit (group of units) and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Impairment losses are recognised in profit or loss. Impairment losses in respect of assets are recognised in those expense categories that correspond to the function of the asset to which they relate. OTHER OPERATING INCOME 01.01.-31.12.2020 01.01.-31.12.2019 Rents/lease income 433 470 Gain on disposal of non-financial non-current assets 186 32 Reversal of impairment allowances on receivables 656 921 Reversal of provisions on employee benefits 158 - Reversal of provisions for liabilities – changing the base 2,172 4,238 Reversal of other provisions - 1,891 Other services - 328 Car sale - lease 320 - Revenues from sublease 570 - Other 1,095 19,021 TOTAL 5,590 26,901 Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. In the corresponding period, the “other” item included the amount of PLN 17,612 thousand, representing the value of deferred payment for the acquisition of Proplan. EUR 4,136 thousand of discounted conditional deferred payment which depended on Proplan’s results for 2018 and 2019, was payable respectively in 2019 and 2020 (the estimation of nominal payments at the moment of acquisition of control was EUR 4,270 thousand). However, due to the fact that Proplan failed to achieve financial results allowing for payment of this part of consideration for the acquisition of Proplan Plant Protection Company, S.L., the value of this deferred payment was recognised on a one-off basis as other operating income in the amount of PLN 17,612 thousand. OTHER OPERATING EXPENSES 01.01.-31.12.2020 01.01.-31.12.2019 Rental costs (766) (847) Recognition of impairment losses on receivables (9,683) (302) Recognition of provisions on employee benefits - (2,767) Recognition of provisions for liabilities (316) (251) Sublease costs (1,052) - Other (1,559) (772) TOTAL (13,376) (4,939) Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. As at 31 December 2020, CIECH S.A. made an assessment of premises, originating both from external and internal sources of information, of indicators of impairment of non-financial assets. These analyses did not indicate the need to conduct impairment tests. 3.5. FINANCIAL INCOME AND EXPENSES Accounting policy Financial income and expenses relate to an entity’s financing activities including the acquisition and disposal of equity, securities, drawing of loans and borrowings, issuance of debt securities. Key items of financing activities include: ✓ interest on borrowings determined based on the effective interest method, ✓ impairment losses on financial assets, FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 22 ✓ interest earned by the Company on cash and cash equivalents (bank deposits and accounts loans granted and receivables) – accounted for in the profit and loss on accrual basis using the effective interest method, ✓ dividend income – recognised in profit or loss when the Company’s right to receive payment is established, ✓ net foreign exchange gains or losses, ✓ gains/(losses) on sales of financial assets, ✓ gains/(losses) on derivatives. Judgements and estimates At each reporting date the Company assesses whether there is any evidence that a financial asset or a group of financial assets is impaired. Where such evidence exists, the Company tests the value of interests in subsidiaries. The recoverable value is defined as the higher of value in use and fair value less costs to sell. Value in use is determined using the discounted cash flow model. The cash flows are based on financial plans covering a period of the next five years, excluding the effects of restructuring, or significant future investments that can improve the operating results of assets being part of the tested cash-generating unit. The recoverable amount is sensitive to the discount rate used in the discounted cash flow model, as well as the expected future cash flows and growth rate adopted for the residual period. Where it is necessary to recognise impairment losses on involvement in other companies, such losses are recognised in the following order: on shares, on loans granted, on interest on loans. Accounting policy concerning financial instruments is presented in note 8.1. NET FINANCIAL INCOME (EXPENSES) 01.01.-31.12.2020 01.01.-31.12.2019 Interest 46,299 45,625 Dividends and shares in profit 181,903 5,269 Net foreign exchange gains 35,793 2,277 Reversal of impairment losses 9,131 4,818 Profits from derivatives 11,589 25,515 Reversal of provision of financial liabilities - 1,755 Other 1,571 848 Total financial income 286,286 86,107 Interest (55,405) (68,563) Recognition of other impairment losses (24,642) (17,730) Bank fees and commissions (3,540) (3,077) Recognition of provision for anticipated losses (1,119) (2,261) Loss due to derivatives (70,906) (91) Costs of discounting of liabilities - (2,522) Guarantees costs (15,171) (14,001) Other (1,695) (3,091) Total financial expenses (172,478) (111,336) Net Financial income (expenses) 113,808 (25,229) Restated data. Detailed information on discontinued operations is provided in Note 5.9 to this report. This includes, among other things, recognised and reversed impairment losses on financial assets, as described in more detail in Notes 5.4, 5.7. In 2020, CIECH S.A. received the largest dividends from the following companies: • CIECH Soda Deutschland GmbH, in the amount of PLN 126,743 thousand, • CIECH Pianki Sp. z o.o., in the amount of PLN 30,000 thousand, • CIECH Vitrosilicon S.A., in the amount of PLN 24,912 thousand. CIECH S.A. recorded a loss on the following derivatives: • CIRS, in the amount of PLN 49,202 thousand, • Forward, in the amount of PLN 18,381 thousand, • SWAP, in the amount of PLN 3,323 thousand. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 23 The item "Profit / loss on financial instruments" in the statement of profit or loss consists of the following values: 01.01.-31.12.2020 01.01.-31.12.2019 Profit on financial instruments 64,617 74,893 Interest 46,299 45,625 Profit on derivatives 11,182 24,571 Write -offs 7,136 4,697 Loss on financial instruments (126,311) (68,654) Interest (55,405) (68,563) Loss on derivatives (70,906) (91) 3.6. COMPONENTS OF OTHER COMPREHENSIVE INCOME 01.01.-31.12.2020 01.01.-31.12.2019 Tax effect of each component of other comprehensive income of the CIECH Group Before tax Tax After tax Before tax Tax After tax Cash flow hedge (30,466) 5,788 (24,678) 112 5 117 Valuation of actuarial provisions (51) 10 (41) (59) 11 (48) Other components of other comprehensive income (6) - (6) - - - TOTAL (30,523) 5,798 (24,725) 53 16 69 Income tax and reclassification adjustments in other comprehensive income Other comprehensive income before tax 01.01.-31.12.2020 01.01.-31.12.2019 Cash flow hedge (30,466) 112 fair value remeasurement in the period (34,661) (4,912) reclassification to profit or loss 4,195 5,024 Valuation of actuarial provisions (51) (59) remeasurement for the current period (51) (59) Other components of other comprehensive income (6) - remeasurement for the current period (6) - Income tax attributable to other components of other comprehensive income 5,798 16 accrued for the current period 6,596 883 reclassification to profit or loss (798) (867) Other comprehensive income net of tax (24,725) 69 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 24 4. INCOME TAX, DEFERRED TAX ASSETS AND LIABILITY Accounting policy Current tax receivables and liabilities for the current and prior periods are measured in the amount of the expected tax amount to be paid to tax authorities (recoverable from tax authorities) using tax rates and tax laws that are legally or substantively enacted at the reporting date. 4.1. MAIN COMPONENTS OF TAX EXPENSE The main components of tax expense include: THE MAIN COMPONENTS OF TAX EXPENSE (TAX INCOME) 01.01.-31.12.2020 01.01.-31.12.2019 Current income tax (15,088) (3,331) Income tax for the reporting period (14,449) (1,842) Adjustment to tax for previous years (639) (1,489) Deferred tax (7,968) (23,364) Origination/reversal of temporary differences 7,120 (23,364) Unrecognized deferred tax assets (15,088) - INCOME TAX RECOGNISED IN STATEMENT OF PROFIT OR LOSS (23,056) (26,695) For a detailed description of proceedings concerning tax settlements, see note 9.2 to these financial statements. INCOME TAX RECOGNISED IN OTHER COMPREHENSIVE INCOME 01.01.-31.12.2020 01.01.-31.12.2019 Cash flow hedge 5,788 5 Valuation of actuarial provisions 10 11 TOTAL 5,798 16 4.2. EFFECTIVE TAX RATE The following represents a reconciliation of income tax calculated by applying the currently enacted statutory tax rate to the Company’s pre-tax financial result to income tax calculated based on the effective tax rate: `EFFECTIVE TAX RATE 01.01.-31.12.2020 01.01.-31.12.2019 Profit (loss) before tax 177,890 79,111 Tax calculated at the applicable tax rate (33,799) (15,031) Difference resulting from the application of tax rates applicable in other countries* (1,152) (1,469) Tax effect of revenues that are not revenues according to tax regulations (permanent difference) 53,735 9,008 Tax effect of costs that are non-deductible according to tax regulations (permanent difference) (24,842) (16,191) Deferred tax asset from tax losses from previous years 1,470 - Tax losses from statment periods from which deferred tax asset was not included (15,961) - Income tax for the previous years recognised in the statement of profit or loss (2,421) (1,488) Other (86) (1,524) Income tax recognised in statement of profit or loss (23,056) (26,695) Effective tax rate 13% 34% The Branch of CIECH S.A. in Romania is subject to a tax rate of 16% and the Branch of CIECH S.A. in Germany – to a tax rate of 30.88%. The tax rates were applied continuously in both periods. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 25 The main items included in the amount of revenues which are not revenues according to tax regulations result from dividend income, reversal of impairment losses on investments in subsidiaries. The main items included in the amount of non-tax deductible expenses result from the recognition of provisions and impairment losses on investments in subsidiaries (including those resulting from the applicable IFRS 9). 4.3. DEFERRED INCOME TAX Accounting policy Deferred tax is recognised in respect of temporary differences between the tax values of assets and liabilities and the carrying amounts recognised in the financial statements. Deferred tax liability is recognised for all taxable temporary differences, unless: ✓ the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit, or ✓ the investor is able to control the timing of the reversal of temporary differences in respect of investments in subsidiaries, associates and joint ventures, and it is probable that the temporary differences will not reverse in the foreseeable future. A deferred tax asset is recognised for all deductible temporary differences and for unused tax credits and tax losses carried forward to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and losses can be utilised: ✓ unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit, and ✓ deductible temporary differences in respect of investments in subsidiaries, associates and joint ventures are recognised in statement of financial position only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of a deferred tax asset is reviewed at the end of every reporting period and is reduced to the extent that it is no longer probable that sufficient taxable income will be available against which the asset can be utilised. Any previously unrecognised deferred tax asset is reassessed at each reporting date and is recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the tax rates and laws that have been enacted at the reporting date or whose application in the future is certain at the reporting date. Income tax related to items recognised outside profit or loss is itself recognised either in other comprehensive income, when it relates to items recognised in other comprehensive income, or directly in equity, when it relates to items recognised directly in equity. Deferred tax assets and liabilities are offset solely if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity. The entity does not create deferred tax on lease contracts. Judgements and estimates Deferred income tax is based on the assumption that future taxable profit will allow for its usage. In determining the amount of deferred tax assets, CIECH S.A. bases its calculations on estimates related to the term and amount of future taxable income. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 26 Deferred income tax is attributable to the following items: DEFERRED INCOME TAX ASSETS AND DEFERRED INCOME TAX LIABILITY 31.12.2020 31.12.2019 Total asset Total liability Net value Total asset Total liability Net value Property, plant and equipment 40 3,407 (3,367) 40 74 (34) Financial assets 6,399 10,197 (3,798) 641 9,971 (9,330) Inventory - 70 (70) - 177 (177) Trade and other receivables 117 - 117 118 - 118 Provisions for employee benefits 187 - 187 240 - 240 Tax losses carried forward 15,088 - 15,088 331 - 331 Foreign exchange differences - 4,073 (4,073) 2,593 46 2,547 Liabilities 10,954 47 10,907 8,378 - 8,378 Other 93 - 93 93 - 93 Deferred tax assets/liability 32,878 17,794 15,084 12,434 10,268 2,166 Set - off of deferred tax assets/ liability (17,790) (17,790) - (10,268) (10,268) - Unrecognized deferred tax assets (15,088) - (15,088) - - - Deferred tax assets/liability recognised in the statement of financial position - 4 (4) 2,166 - 2,166 The Company estimates that within more than 12 months from the period of the financial statements presentation the deferred tax asset will be utilised in the amount of PLN 533 thousand. In the same period, the estimated amount of settlement of the deferred tax liability will be PLN 11,251 thousand. The Company creates a provision and determines deferred income tax assets based on temporary differences between the value of assets and liabilities shown in the books and their tax value and tax loss possible to deduct in the future and other unused corporate income tax reliefs. Temporary differences may be: • positive that gives rise to taxable amounts that will be taken into account in determining taxable profit (tax loss) in future periods when the carrying amount of the asset or liability will be recovered or settled, or • negative ones that give rise to amounts that are deductible in determining taxable profit (tax loss) in future periods when the carrying amount of the asset or liability will be recovered or settled. CHANGE IN TEMPORARY DIFFERENCES IN THE PERIOD 01.01.2020 Change in temporary differences recognised in the statement of profit or loss Change in temporary differences recognised in the other comprehensive income 31.12.2020 Property, plant and equipment (181) (17,540) - (17,721) Financial assets (49,105) (1,352) 30,466 (19,991) Inventory (930) 562 - (368) Trade and other receivables 621 (5) - 616 Provisions for employee benefits 1,263 (336) 57 984 Tax losses carried forward 1,740 77,672 - 79,412 Foreign exchange differences 13,405 (34,842) - (21,437) Liabilities 44,584 12,820 - 57,404 Other 489 - - 489 TOTAL 11,886 36,979 30,523 79,388 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 27 CHANGE IN TEMPORARY DIFFERENCES IN THE PERIOD 01.01.2019 Change in temporary differences recognised in the statement of profit or loss Change in temporary differences recognised in the other comprehensive income 31.12.2019 Property, plant and equipment (181) - - (181) Financial assets (48,603) (390) (112) (49,105) Inventory (1,068) 138 - (930) Trade and other receivables (800) 1,421 - 621 Provisions for employee benefits 541 663 59 1,263 Tax losses carried forward 83,770 (82,030) - 1,740 Foreign exchange differences 13,221 184 - 13,405 Liabilities 86,337 (41,753) - 44,584 Other 1,105 (616) - 489 TOTAL 134,322 (122,383) (53) 11,886 The company did not recognize the deferred tax asset in the amount of PLN 15,088 thousand due to the tax loss generated on the capital source in 2019-2020 (PLN 79,412 thousand), as it determined that recovery of this asset over the next 5 years is less than more probable. In the light of provisions of the General Anti-Avoidance Rule (“GAAR”), applicable as of 15 July 2016 and aimed at preventing the origination and use of factitious legal structures designed to avoid payment of taxes in Poland, the Management Board of CIECH S.A. considered the impact of transactions which could potentially be subject to the GAAR regulations on the deferred tax, tax value of assets and deferred tax provisions. In the opinion of the Management Board, the analysis conducted did not demonstrate the need to adjust the reported current and deferred income tax items. However, in the opinion of the Management Board, there is an inherent uncertainty arising from GAAR that tax authorities will interpret these provisions differently, will change their approach to their interpretation or the rules themselves will change, which may affect the ability to utilise the deferred tax assets in future periods and the possible payment of an additional tax for past periods. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 28 5. NOTES TO ASSETS REPORTED IN THE STATEMENT OF FINANCIAL POSITION 5.1. PROPERTY, PLANT AND EQUIPMENT Accounting policy Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and all other costs directly attributable to the acquisition of the asset and bringing it to a working condition for its intended use. The cost also includes the cost of replacing components of machinery and equipment when incurred if the recognition criteria are met. Subsequent expenditure The cost of replacing a part of an item of property, plant and equipment are capitalised. Other costs are capitalised only to the extent that it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. Other subsequent costs are recognised in the profit or loss statement as incurred expenses. A separate component of an item of property, plant and equipment, requiring replacement at regular intervals, is depreciated over its economic useful life. The Company increases the value of property, plant and equipment by the value of outlays for periodic major overhauls, necessary for the functioning of a given item of property, plant and equipment. These expenditures are treated as a separate item of property, plant and equipment and depreciated through the anticipated period to the next planned overhaul. Upon capitalisation of new costs of overhauls, the non-depreciated value of previous repairs is allocated to operating expenses. Upon the acquisition or creation of an item of property, plant and equipment, the Company separates from the cost a value equal to the expenditures that need to be made during the next overhaul of a given item of property, plant and equipment and depreciates it through the anticipated period left until the next planned overhaul. Depreciation Items of property, plant and equipment, and also their significant and separate components, are depreciated on a straight-line basis over their respective estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Judgements and estimates Depreciation rates are determined on the basis of the expected useful lives of property, plant and equipment, and are subject to annual verification. Any adjustments resulting from the verification are made prospectively as a change in estimate. Impairment losses on non-financial assets — detailed principles of estimation of impairment losses are described in accounting policies, in note 3.4. Buildings 5-7 years Machinery and equipment 2-5 years Other 5 years FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 29 01.01.-31.12.2020 Buildings offices and land and water engineering facilities Machinery and equipment Means of transport Other tangible fixed assets Tangible fixed assets under construction TOTAL Gross value of property, plant and equipment at the beginning of the period 550 24,612 138 1,732 3,785 30,817 Purchase/ Adoption of investment - 1,472 - 312 5,336 7,120 Reclassification - - - - (1,784) (1,784) Sales - (191) - (319) (3,040) (3,550) Deficiencies revealed during the inventory - (813) - (114) - (927) Other (7) (7) 4 (95) (14) (119) Gross value of property, plant and equipment at the end of the period 543 25,073 142 1,516 4,283 31,557 Accumulated depreciation at the beginning of the period (184) (15,107) (31) (1,364) - (16,686) Depreciation for the period (91) (3,217) (68) 310 - (3,066) Annual depreciation charge (97) (4,183) (69) (213) - (4,562) Sales - 190 - 319 - 509 Deficiencies revealed during the inventory - 776 - 111 - 887 Other 6 - 1 93 - 100 Accumulated depreciation at the end of the period (275) (18,324) (99) (1,054) - (19,752) Impairment losses at the beginning of the period - - - - - - Impairment losses at the end of the period - - - - - - Carrying amount of property, plant and equipment at the beginning of period 366 9,505 107 368 3,785 14,131 Carrying amount of property, plant and equipment at the end of the period 268 6,749 43 462 4,283 11,805 01.01.-31.12.2019 Buildings offices and land and water engineering facilities Machinery and equipment Means of transport Other tangible fixed assets Tangible fixed assets under construction TOTAL Gross value of property, plant and equipment at the beginning of the period 413 23,273 60 1,696 501 25,943 Purchase/ Adoption of investment - 1,498 44 136 1,678 3,356 Investment outlays - - - - 3,427 3,427 Reclassification 137 - 93 (93) (1,815) (1,678) Sales - (159) (59) (4) (6) (228) Liquidation - - - (3) - (3) Gross value of property, plant and equipment at the end of the period 550 24,612 138 1,732 3,785 30,817 Accumulated depreciation at the beginning of the period (128) (11,035) (60) (1,169) - (12,392) Depreciation for the period (56) (4,072) 29 (195) - (4,294) Annual depreciation charge (60) (4,169) (30) (225) - (4,484) Sales - 90 59 3 - 152 Other 4 7 - 27 - 38 Accumulated depreciation at the end of the period (184) (15,107) (31) (1,364) - (16,686) Impairment losses at the beginning of the period - - - - - - Impairment losses at the end of the period - - - - - - Carrying amount of property, plant and equipment at the beginning of period 285 12,238 - 527 501 13,551 Carrying amount of property, plant and equipment at the end of the period 366 9,505 107 368 3,785 14,131 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 30 Depreciation of property, plant and equipment was charged to the following line items in the statement of profit or loss: PROPERTY, PLANT AND EQUIPMENT DEPRECIATION CHARGES 01.01.-31.12.2020 01.01.-31.12.2019 General and administrative expenses (4,562) (4,484) TOTAL (4,562) (4,484) In the current period changes in accounting estimates did not have a material impact and it is not expected that they will have a material impact in future periods. In 2020, CIECH S.A. did not receive from third parties for impaired property, plant and equipment (in the corresponding period: PLN 180 thousand). As at 31 December 2020, all items of property, plant and equipment at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Future commitments arising from agreements concerning acquisition of property, plant and equipment amounted to PLN 83 thousand in 2019; there are no such commitments in the current period. 5.2. RIGHT-OF-USE ASSETS Changes in carrying amounts of right-of-use assets in the period of 12 months ended 31 December 2020 are as follows: Accounting policy Initial measurement of right-of-use assets At the commencement date, the Company measures the right-of-use asset at cost. The cost of the right-of-use asset comprises: a) the amount of the initial measurement of the lease liability, b) any lease payments made at or before the commencement date, less any lease incentives received; c) any initial direct costs incurred by the lessee; and d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. Subsequent measurement of right-of-use assets After initial recognition, the Company measures the right-of-use asset at cost less any accumulated depreciation and any accumulated impairment losses, and adjusted for any remeasurement of the lease liability. In the case of leasehold improvements, expenditures on the purchase or production of third-party fixed assets, once incurred, do not result in the necessity to make payments in the future, and therefore do not meet the definition of lease. The recognition of these expenditures is regulated by IAS 16. If the lease transfers ownership of the underlying asset to the Company by the end of the lease term or if the cost of the right-of-use asset reflects that the Company will exercise a purchase option, the Company depreciates the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the Company depreciates the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right- of-use asset or the end of the lease term. The Company applies IAS 36 Impairment of Assets to determine whether the right-of-use asset is impaired and to account for any impairment loss identified. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 31 01.01.-31.12.2020 Buildings offices and land and water engineering facilities Means of transport TOTAL CHANGE OF RIGHTS TO USE ASSETS Gross value at the beginning of the period 32,906 1,051 33,957 Conclusion of new lease agreements - 3,401 3,401 Modification of the leasing contract (962) 14 (948) Closing of the contract (30) (90) (120) Gross value at the end of the period 31,914 4,376 36,290 Accumulated depreciation at the beginning of the period (3,959) (662) (4,621) Depreciation for the period (4,139) (1,473) (5,612) Annual depreciation charge (4,139) (1,473) (5,612) Accumulated depreciation at the end of the period (8,098) (2,135) (10,233) Net value of rights to use assets at the beginning of the period 28,947 389 29,336 Net value of rights to use assets at the end of the period 23,816 2,241 26,057 01.01.-31.12.2019 Buildings offices and land and water engineering facilities Means of transport TOTAL CHANGE OF RIGHTS TO USE ASSETS Adjustment of the opening balance (IFRS 16) 31,616 902 32,518 Gross value at the beginning of the period 31,616 902 32,518 Modification of the leasing contract 1,290 - 1,290 Conclusion of new lease agreements - 204 204 Closing of the contract - (55) (55) Gross value at the end of the period 32,906 847 33,957 Accumulated depreciation at the beginning of the period - - - Depreciation for the period (3,959) (662) (4,621) Annual depreciation charge (3,959) (662) (4,621) Accumulated depreciation at the end of the period (3,959) (662) (4,621) Net value of rights to use assets at the beginning of the period 31,616 902 32,518 Net value of rights to use assets at the end of the period 28,947 389 29,336 In 2019, CIECH S.A. implemented IFRS 16 “Leases”. Under this standard, leases of office and warehouse space, as well as leases of passenger cars were identified in the company as lease agreements. CIECH S.A. is a lessee of office and warehousing space, in which the largest item (approx. 2 thousand m 2 ) is the office in Warsaw at Wspólna Street, where the Company’s registered office is located. The term of the lease agreement expires in 2028. CIECH S.A. also leases passenger cars. The value of cars includes the value of discounted lease fees as at the conclusion of the lease agreement, less the accumulated amortization for a given group of fixed assets. Some agreements are denominated in foreign currencies and indexed to price indices. Some agreements contain an extension option. For detailed information on lease liabilities, see Note 7.4. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 32 5.3. INTANGIBLE ASSETS Accounting policy Intangible assets acquired by the company are measured at cost less accumulated amortisation and accumulated impairment losses. Any expenditure on internally generated goodwill and brands, is recognised in the profit or loss as incurred. Subsequent expenditure Subsequent expenditure on existing intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other subsequent expenditure is expensed as incurred. Amortisation Intangible assets are amortised on a straight-line basis over their estimated useful lives. The estimated useful lives of the following categories of intangible assets are as follows: Judgements and estimates Amortisation rates are determined on the basis of the expected useful lives of intangible assets, and are subject to periodical verification. Any adjustments resulting from the verification are made prospectively as a change in estimate. Impairment losses on non-financial assets — detailed principles of estimation of impairment losses are described in accounting policies, in note 3.4. Patents and licences 8 years Other 2-5 years 01.01.-31.12.2020 Licences,patents, permits, etc. obtained Intangible assets under development Other intangible assets TOTAL Gross value of intangible assets at the beginning of the period 73,672 6,173 18,979 98,824 Investment outlays - 11,736 - 11,736 Reclassifications 4,943 (4,943) - - Liquidation (20,931) - - (20,931) Gross value of intangible assets at the end of the period 57,684 12,966 18,979 89,629 Accumulated amortisation at the beginning of the period (33,204) - (10,996) (44,200) Amortisation for the period 14,971 - (2,762) 12,209 Annual amortisation charge (5,903) - (2,762) (8,665) Exchange differences (39) - - (39) Liquidation 20,913 - - 20,913 Accumulated amortisation at the end of the period (18,233) - (13,758) (31,991) Impairment losses at the beginning of the period - (210) - (210) Impairment losses at the end of the period - (210) - (210) Net value of intangible assets at the beginning of the period 40,468 5,963 7,983 54,414 Net value of intangible assets at the end of the period 39,451 12,756 5,221 57,428 01.01.-31.12.2019 Licences,patents, permits, etc. obtained Intangible assets under development Other intangible assets TOTAL Gross value of intangible assets at the beginning of the period 37,373 29,823 18,979 86,175 Purchase 145 145 - 290 Investment outlays - 12,504 - 12,504 Reclassifications 36,154 (36,299) - (145) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 33 01.01.-31.12.2019 Licences,patents, permits, etc. obtained Intangible assets under development Other intangible assets TOTAL Gross value of intangible assets at the end of the period 73,672 6,173 18,979 98,824 Accumulated amortisation at the beginning of the period (31,879) - (8,029) (39,908) Amortisation for the period (1,325) - (2,967) (4,292) Annual amortisation charge (1,325) - (2,967) (4,292) Accumulated amortisation at the end of the period (33,204) - (10,996) (44,200) Impairment losses at the beginning of the period - (210) - (210) Impairment losses at the end of the period - (210) - (210) Net value of intangible assets at the beginning of the period 5,494 29,613 10,950 46,057 Net value of intangible assets at the end of the period 40,468 5,963 7,983 54,414 In 2020, the capitalisation rate applied to determine the amount of borrowing costs to be capitalised was approx. 2,5%, whereas in 2019 it amounted to approx. 3,2%. CIECH S.A. is the owner of all intangible assets held. The largest item in the Company’s intangible assets is the SAP accounting system with the gross carrying amount of PLN 41,189 thousand (net carrying amount: PLN 36,429 thosuand). As at 31 December 2020, all intangible assets at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. An increase in capital expenditure in 2020 was driven by expenditure related to the implementation of the SAP system. Amortisation of intangible assets was included in the following line items of the statement of profit or loss: AMORTISATION CHARGES ON INTANGIBLE ASSETS 01.01.-31.12.2020 01.01.-31.12.2019 General and administrative expenses (5,917) (1,543) Selling costs (2,748) (2,749) TOTAL (8,665) (4,292) The Company does not have intangible assets with indefinite useful life. In the current period changes in accounting estimates did not have a material impact and it is not expected that they will have a material impact in future periods. As at 31 December 2020, future commitments arising from agreements concerning acquisition of intangible assets amounted to PLN 411 thousand (in the comparable period: PLN 3,221 thousand). In the reporting period and in the presented comparable period, the Company did not incur any expenditure on development activities. 5.4. LONG-TERM FINANCIAL ASSETS Accounting policy Shares in subsidiaries and associates are stated at purchase price less any impairment losses. Loans are measured at their nominal value increased by the value of interest and decreased by any impairment losses due to the small difference to measurement at amortized cost. Accounting policy concerning financial instruments is presented in note 8.1. Judgements and estimates Accounting policy concerning judgements and estimates is presented in note 3.5. NON-CURRENT FINANCIAL ASSETS 31.12.2020 31.12.2019 Shares 2,137,655 2,172,271 Loans granted 400,413 239,817 Derivatives 574 4,879 TOTAL 2,538,642 2,416,967 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 34 Change in long-term stocks and shares 01.01.-31.12.2020 01.01.-31.12.2019 Gross value at the beginning of the period 2,328,605 2,325,395 Purchase 17,752 3,210 Writing-off / redemption (1,012) - Transfer to assets held for sale (30,015) - Sales/liquidation (78,000) - Gross value at the end of the period 2,237,330 2,328,605 Impairment update at the beginning of the period (156,334) (140,927) Recognition (21,839) (15,407) Reversal/usage 77,436 - Transfer to assets held for sale 50 - Other 1,012 - Impairment update at the end of the period (99,675) (156,334) Net value of the shares at the beginning of the period 2,172,271 2,184,468 Net value of the shares at the end of the period 2,137,655 2,172,271 CHANGE IN LIABILITIES DUE TO LONG-TERM LOANS 31.12.2020 31.12.2019 Gross value at the beginning of the period 243,123 144,995 Grant - 100,240 Repayment - (585) Reclassification to long-term positions 160,153 - Foreign exchange differences - (1,527) Gross value at the end of the period 403,276 243,123 Impairment update at the beginning of the period (3,306) (2,134) Recognition (1,422) (1,218) Reversal 1,865 46 Closing balance (2,863) (3,306) Carrying amount of loans at the beginning of period 239,817 142,861 Carrying amount of loans at the end of the period 400,413 239,817 * Reclassification to long-term loans in connection with the signing of annexes to loan agreements postponing the repayment date by another year. Change in the gross value of long-term shares results primarily from: • shares in CIECH Żywice Sp. z o.o. in the amount of PLN 30,015 thousand were reclassified to assets held for sale due to the planned sale of the company, • purchase of shares in CIECH Vitro Sp. z o.o. (PLN 400 thousand) and CIECH Services Sp. z o.o. (PLN 5 thousand), • acquisition of shares in the increased share capital of CIECH Salz Deutschland GmbH – PLN 12,898 thousand (EUR 3,000 thousand), • acquisition of shares in the increased share capital of CIECH Nieruchomości Sp. z o.o. – PLN 4,000 thousand, • acquisition of shares in the increased share capital of CIECH Serwis i Remonty Sp. z o.o. – PLN 450 thousand, • write-off of shares in Chemia.com in the amount of PLN 1,012 thousand, • recognition of impairment losses on shares held by CIECH S.A. in CIECH Trading Sp. z o.o., CIECH Nieruchomości Sp. z o.o. and Ciech Group Financing AB, • sale of shares in JANIKOSODA S.A. in the gross amount of PLN 78,000 thousand and the reversal of the write-down on shares in this company in the amount of PLN 77 436 thousand. The change in long-term loans granted resulted from unrealised foreign exchange differences on the revaluation of loans as at the balance sheet date. As at 31 December 2020, all long-term receivables from loans at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. CIECH S.A. analyses its involvement in the subsidiaries on the basis of their net assets as at the balance sheet date (for the company CIECH Żywice Sp.z o.o. from the preliminary purchase agreement). If any evidence of impairment is identified, the Company estimates the recoverable amount. Due to the occurrence of premises, CIECH S.A. analysed the recoverability of FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 35 involvement in subsidiaries. The recoverable value applied was the value in use estimated based on the discounted cash flows determined based on five-year financial plans of the subsidiaries. The following assumptions were applied in the impairment tests: • the weighted average cost of capital for domestic companies was: 6.5% – for cash flows in PLN, 5.3% – for cash flows in EUR and 6.5% – for cash flows in USD; • the weighted average cost of capital for SDC GmbH and CIECH Salz Deutschland GmbH for cash flows in EUR was 4.6%; • the weighted average cost of capital for Proplan Plant Protection Company, S.L. was 5.2% – for cash flows in EUR and 6.6% – for cash flows in USD; • the assumed growth rate for the residual period was 2.0% for both the domestic and foreign companies. Based on analyses conducted, the Management Board of CIECH S.A. decided to recognise/reverse impairment losses on involvement in, among others, the following companies: • recognition of impairment losses: o CIECH Trading Sp. z o.o. – impairment loss on shares in the amount of PLN 21,615 thousand. In the first quarter of 2021, the Management Board of CIECH Trading Sp. z o.o. made a decision to discontinue business activity by the company. o CIECH Group Financing AB – impairment loss on shares in the amount of PLN 90 thousand, o CIECH Nieruchomości Sp. z o.o. – impairment loss on shares in the amount of PLN 134 thousand. CARRYING AMOUNT OF SHARES IN RELATED ENTITIES 31.12.2020 31.12.2019 The Company’s direct share in the share capital/ total number of votes as at 31 December 2020 The Company’s direct share in the share capital/ total number of votes as at 31 December 2019 Core activities Subsidiary (registered office) SDC GmbH (Stassfurt – Germany) 797,471 797,471 100% 100% Manufacture of other basic inorganic chemicals, wholesale of chemical products, power generation and distribution. CIECH Soda Polska S.A. (Inowrocław) 553,097 553,097 100% 100% Manufacture of other basic inorganic chemicals, wholesale of chemical products, power generation and distribution. CIECH Sarzyna S.A. (Nowa Sarzyna) 266,867 295,947 100% 100% Manufacture of resins, manufacture of pesticides and other chemical products. CIECH Soda Romania S.A. (Rm. Valcea , Romania) 111,000 111,000 98.74% 98.74% Manufacture of other basic inorganic chemicals, wholesale of chemical products. Manufacture of soda products was suspended in September 2019 due to discontinuation of supplies of process steam to the plant. CIECH Trading Sp. z o.o. (Warsaw) 22,441 44,056 100% 100% Wholesale and distribution of solid inorganic and organic chemicals, wholesale and distribution of raw materials for household chemicals, wholesale and distribution of raw materials for cosmetic and pharmaceutical products, wholesale and distribution of acids, bases and other liquid chemicals, distribution of fillers, pigments, raw materials for paints and varnishes, wholesale and distribution of feed additives and fodder CIECH Pianki Sp. z o.o. (Bydgoszcz) 57,451 57,451 100% 100% Manufacture of organic and other inorganic chemicals. VERBIS ETA Sp. z o.o. SKA (Warsaw) 37,971 37,971 100% 100% Financing activities, direct lending to the CIECH Group companies. CIECH R&D Sp. z o.o. (Warsaw) 47,915 47,915 100% 100% Granting licences to the CIECH Group companies to use the trademarks: “Ciech”, “Ciech Trading” and “Sól Kujawska naturalna czysta” for business activity purposes, research and developments activities. CIECH Vitrosilicon S.A. (Iłowa) 12,302 12,302 83.03% 83.03% Production of other basic inorganic chemicals, manufacture of hollow glass and technical glassware, FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 36 Value of shares at 31 December 2020 reported as non-current assets held for sale. 5.5. INVENTORIES Accounting policy Raw materials and goods are measured at cost being the purchase price increased by other costs incurred in bringing the asset to its present location and condition or place on the market but not higher than the selling price possible to achieve. The cost of inventory is measured using the weighted average method. Judgements and estimates CIECH S.A. recognises inventory impairment allowances for damaged and slow moving inventory. Inventory impairment allowances are also recognised for inventory with a carrying amount that exceeds the realisable net selling price. Reversal occurs as a result of the use or sales of inventory in the course of business activities while usage is the result of inventory being scrapped. INVENTORY 31.12.2020 31.12.2019 Materials 16 36 Goods 6,378 30,658 TOTAL 6,394 30,694 In the reporting periods, no inventories were written down to their net selling prices. manufacture of plastic packaging goods, manufacture of other plastic products. CIECH Vitro Sp. z o.o. 400 - 100% - Production of other basic inorganic chemicals, manufacture of hollow glass and technical glassware, manufacture of plastic packaging goods, manufacture of other plastic products. CIECH Transclean Sp. z o.o. (Bydgoszcz) 3,455 3,455 100% 100% International transport of liquid chemicals Gamma Finanse Sp. z o.o. (Warsaw) 2,889 2,889 100% 100% Financing activities. Ciech Group Financing AB (Sweden) 1,477 1,567 100% 100% Financing activities. VERBIS ETA Sp. z o.o. (Warsaw) 5 5 100% 100% Other activities. CIECH Serwis i Remonty Sp. z o.o. (Warsaw) 450 - 100% 100% Repair and maintenance of machinery. CIECH Nieruchomości S.A. (Warsaw) 3,866 - 99.33% 99.18% Buying and selling of own real estate. Proplan Plant Protection Company S.L. (Madrid) 203,866 203,866 100% 100% Production and sales of crop protection chemicals. Janikosoda Sp. z o.o. (formerly Janikosoda S.A. (Warsaw) - 564 - 17.60% The company was sold on 31 December 2020. CIECH Żywice Sp. z o.o. (Nowa Sarzyna) - * 885 100% 100% Manufacture of plastics in primary forms. These activities were commenced on 2 January 2020. CIECH Salz Deutschland GbmH 13,022 125 100% 100% Production and sales of salt products. CIECH SERVICES Sp. z o.o. 5 - 100% - Provision of support services to CIECH Group companies. Other subsidiaries 842 842 Associates 863 863 Carrying amount of shares in related entities 2,137,655 2,172,271 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 37 The value of inventories (taking into account write-downs to net selling prices) recognised as costs in 2020 amounted to PLN 1,449,934 thousand (in the comparable period: PLN 1,837,919 thousand). As at 31 December 2020, all inventories at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. 5.6. SHORT-TERM RECEIVABLES Accounting policy After initial recognition, current trade and other receivables are measured at the amortised cost using the effective interest method less any impairment losses. Receivables denominated in foreign currencies are recognised at the average NBP exchange rate effective on the working day immediately preceding the date of the transaction, unless a different exchange rate was indicated in the customs declaration or another binding document. At the reporting date, receivables denominated in foreign currencies are translated at the average exchange rate established for that date by the NBP except for prepayments made for deliveries, which are translated using sell exchange rate of the bank effective on the payment date. Factoring The Company uses non-recourse factoring services. The factor transfers advance payments to the Company’s account in the full amount of invoices accepted for financing. The financing of receivables transferred is provided in various timeframes, therefore, as at the balance sheet date, there may be receivables which have not been financed yet and are reported as factoring receivables. Advance payments received are posted as factoring liabilities. In the statement of financial position, factoring receivables and liabilities are recognised on a net basis up to 95% of the value of advance payments received from the factor (the 95% limit results from the level of the receivables insurance). The remaining 5% of receivables value is reported as factoring receivables, and 5% of the value of advance payments received is reported as factoring liabilities. Judgements and estimates Impairment allowances are recognised on interest receivable on late payments of receivables, in the full amount of interest accrued. These allowances are recognised upon accrual, as at the due date or balance sheet date, and deducted from finance income from interest accrued. The Entity estimates allowances always at the amount of long-term expected credit losses, regardless of whether there is an evidence of a material increase in credit risk. At each balance sheet date, the Entity estimates allowances for all receivables regardless of their repayment status. The Entity estimates impairment allowances primarily on the basis of portfolio PD ratios estimated on the basis of historical observations for debt portfolios with similar characteristics. If it is not possible to estimate portfolio ratios, the Group permits the use of individual parameters (benchmark or expert parameters). In addition, regardless of the foregoing, the Entity recognises impairment allowances in respect of receivables: 1. from debtors in liquidation or bankruptcy, up to the amount not guaranteed or secured in another manner, as reported to a receiver or judge-commissioner during bankruptcy proceedings; 2. from debtors where a bankruptcy petition has been dismissed, if the debtor's assets are not sufficient to cover the cost of bankruptcy proceedings – in full; 3. contested by debtors (disputed receivables) and where payments due are delayed and either the debtor’s financial standing makes the collection no longer probable – up to the amount of receivables not guaranteed or secured in another manner; 4. receivables claimed in court. Moreover, allowances in the full amount of receivables are recognised in relation to receivables that are more than 180 days past their maturity as at the balance sheet date. The amount established as a result of the abovementioned allowances may be decreased if the Management Board is in possession of reliable documents, indicating that the receivables were secured and their payment is highly probable. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 38 Impairment allowances on receivables are charged to other operating expenses. TRADE AND OTHER RECEIVABLES 31.12.2020 31.12.2019 Trade receivables, including: 170,758 287,389 - up to 12 months 169,664 285,995 - prepayments for inventory 1,094 1,394 Public and legal receivables (excluding income tax) 8,621 33,244 Factoring receivables 35,946 30,856 Assets due to continuous involvement 513 2,035 Receivables from cashpool 7,992 6,496 Advance payments fro shares - 12,947 Other receivables 9,065 3,251 NET TRADE AND OTHER RECEIVABLES 232,895 376,218 Impairment allowances with respect to trade receivables including (20,733) (12,357) - impairment allowance recognized in the current reporting period (9,642) (290) Impairment allowances with respect to other current receivables including (16,114) (16,197) - impairment allowance recognized in the current reporting period (43) (2) GROSS TRADE AND OTHER RECEIVABLES 269,742 404,772 Fair value of trade receivables and other receivables does not differ significantly from their carrying value. As at the balance sheet date, continuing involvement is reported. It is calculated as a product of the financing received, interest and the period of delay in payments. As at 31 December 2020, the asset from continuing involvement amounted to PLN 513 thousand. The value of factoring assets derecognised from the statement of financial position is PLN 129,777 thousand (PLN 153,897 thousand in the comparable period). CHANGE IN IMPAIRMENT ALLOWANCES ON SHORT-TERM RECEIVABLES 01.01.-31.12.2020 01.01.-31.12.2019 Opening balance (28,554) (31,491) Recognized (9,685) (292) Reversed 869 3,170 Used 466 56 Exchange differences (292) 3 Other 349 - Closing balance (36,847) (28,554) The principles for recognising impairment allowances for short-term receivables are described above, in the “Accounting Policy” section. AGEING OF PAST DUE TRADE RECEIVABLES 31.12.2020 31.12.2019 Up to 1 month 17,657 30,786 Between 1 and 3 months 8,065 62,120 3 to 6 months 65 41,547 6 months to 1 year 303 3,572 Above 1 year 20,733 11,434 Total (gross) past due trade receivables 46,823 149,459 Impairment allowances on past due trade receivables (20,530) (12,200) Total (net) past due trade receivables 26,293 137,259 Terms of transactions with related entities have been presented in note 9.3. Commercial contracts concluded by CIECH S.A. include various terms of payment of trade receivables depending on the type of transaction, market characteristics and trade conditions. The most common payment terms are: 14, 30 and 60 days. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 39 As at 31 December 2020, all receivables (both long- and short-term) at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. 5.7. SHORT-TERM FINANCIAL ASSETS Accounting policy Loans after initial recognition are measured at amortised cost using the effective interest method less any impairment losses. Accounting policy concerning financial instruments is presented in note 8.1. Judgements and estimates Accounting policy concerning judgements and estimates is presented in note 3.5. SHORT-TERM FINANCIAL ASSETS 31.12.2020 31.12.2019 Derivatives 1,261 13,236 Loans granted 1,187,901 780,995 Total (net) short-term financial assets 1,189,162 794,231 Impairment of short-term financial assets (8,494) (14,382) Total (gross) short-term financial assets 1,197,656 808,613 CHANGE IN LIABILITIES DUE TO SHORT-TERM LOANS 31.12.2020 31.12.2019 Gross value at the beginning of the period 795,377 1,008,530 Grant 957,503 126,562 Change of liabilities presented (452,951) (337,173) Reclassification to long-term positions (160,153) - Exchange differences 56,619 (2,542) Gross value at the end of the period 1,196,395 795,377 Impairment update at the beginning of the period (14,382) (18,126) Recognition (1,228) (977) Reversal 7,116 4,682 Used - 28 Exchange differences - 11 Closing balance (8,494) (14,382) Carrying amount of loans at the beginning of period 780,995 990,404 Carrying amount of loans at the end of the period 1,187,901 780,995 As at 31 December 2020, all short-term receivables from loans at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Material items affecting the change in short-term loans including interests are as follows: • granting a loan to CIECH Soda Deutschland GmbH&CO KG in the amount of PLN 146,121 thousand (the nominal value of the loan granted is EUR 33,055 thousand), • granting a loan to CIECH Salz Deutschland GmbH in the amount of PLN 358,694 thousand (nominal value EUR 80,500 thousand), • granting a loan to CIECH Soda Polska S.A. in the amount of PLN 418,187 thousand (nominal value of PLN 402,000 thousand), • granting a loan to CIECH Nieruchomości Sp. z o.o. in the amount of PLN 32,107 thousand (nominal value of PLN 31,000 thousand), • granting a loan to CIECH Serwis i Remonty Sp. z o.o. in the amount of PLN 182 thousand (nominal value of PLN 171 thousand), • granting a loan to CIECH Services Sp. z o.o. in the amount of PLN 250 thousand (nominal value of PLN 250 thousand), • repayment of loans (with interest) by subsidiaries (CIECH Soda Polska S.A. in the amount of PLN 418,187 thousand, CIECH Nieruchomości Sp. z o.o. in the amount of PLN 32,957 thousand). FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 40 5.8. CASH AND CASH EQUIVALENTS Accounting policy Cash and cash equivalents include cash in hand and bank deposits repayable on demand. Current investments that are not subject to significant changes in value and that may be easily exchanged for a determinable amount of cash and that form an integral part of the Entity’s cash management are recognised as cash and cash equivalents for the purposes of the statement of cash flows. At the reporting date, any foreign currencies in bank accounts and on hand are measured at the average exchange rate for a given currency, quoted by the President of the NBP. For cash and cash equivalents, impairment allowances are estimated using individual parameters determined on the basis of benchmarks (using information on bank ratings). For cash and cash equivalents for which there is evidence of impairment due to credit risk, the Entity analyses recoveries using probability-weighted scenarios. CASH AND CASH EQUIVALENTS 31.12.2020 31.12.2019 Bank accounts 263,110 125,757 Short-term deposits 2,313 44,341 Cash in hand 14 13 Impariment in accordance with IFRS 9 (150) (128) Cash and cash equivalents – presented in the statement of financial position 265,287 169,983 Cash and cash equivalents – presented in the cash flow statement 265,287 169,983 The effective interest rates of short-term bank deposits are similar to the nominal interest rates, and fair value of short-term bank deposits is not significantly different from carrying value. Interest rates are based on WIBOR, EURIBOR and LIBOR. As at 31 December 2020, all cash and cash equivalents at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Restricted cash represented the funds in the VAT account due to the introduction of "split payment" procedures. As at 31 December 2020, they amounted to PLN 1,930 thousand. As at 31 December 2019, restricted cash in CIECH S.A. amounted to PLN 3,108 thousand. Cash and cash equivalents are covered only by an allowance for expected credit losses in accordance with IFRS 9. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 41 5.9. DISCONTINUED OPERATIONS, NON-CURRENT ASSETS AND LIABILITIES CONNECTED WITH NON- CURRENT ASSETS CLASSIFIED AS HELD FOR SALE As at 31 December 2020, the value of shares held in CIECH Żywice Sp. z o.o. was reported in CIECH S.A. as non-current assets held for sale, in connection with the signing of a preliminary agreement for the sale of shares in the aforementioned company to LERG S.A. The value of these shares is PLN 29,965 thousand. Discontinued operations The accounting principles applied in the preparation of the statement of profit or loss for discontinued operations are consistent with the Company's accounting policy. The results of discontinued operations include: For the period from 1 January to 31 December 2020 and for the period from 1 January to 31 December 2019, the figures for discontinued operations include the result of CIECH S.A. obtained from the transactions with CIECH Żywice Sp. z o.o., i.e. an entity reported under discontinued operations. Below are the figures for the period from 1 January to 31 December 2020 and for the period from 1 January to 31 December 2019 for the discontinued operations in the area of resins. Discontinued operations 01.01.-31.12.2020 01.01.-31.12.2019 Net sales revenues 151,432 200,550 Cost of sales (147,458) (194,120) Gross profit/(loss) on sales 3,974 6,430 Other operating income - 2 Selling costs (1,574) (792) General and administrative expenses - - Other operating expenses - (8) Operating profit/(loss) 2,400 5,632 Financial income 375 2,388 Financial expenses (2,322) - Net financial income/(expenses) (1,947) 2,388 Profit/(loss) before tax 453 8,020 Income tax - - Net profit/(loss) 453 8,020 Accounting policy Assets and liabilities classified as held for sale Non-current assets are classified as held for sale when their carrying amounts are expected to be recovered primarily through a sale transaction and when they are available for sale in their current condition with such transaction being highly probable. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 42 6. EQUITY 6.1. CAPITAL MANAGEMENT Capital structure management CIECH S.A.’s capital structure consist of its debts, including the credit facilities presented in note 7.1, cash and cash equivalents and equity, including shares issued, reserve capital and retained earnings. CIECH S.A. manages its capital in order to ensure its ability to continue as a going concern and, at the same time, maximize returns for stakeholders by optimising the debt to equity ratio. In 2019-2020 there were no changes in aims, principles and processes of capital management. 6.2. EQUITY Accounting policy CIECH S.A.’s share capital is disclosed at nominal value, adjusted by the effects of hyperinflation in the years 1989-1996. When shares are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a change in equity. The purchased shares are presented as a deduction from total equity. A liability for a dividend payable is recognised when authorised. Net profit (loss) is presented in equity under retained earnings. As at 31 December 2020, the carrying amount of the share capital of CIECH S.A. amounted to PLN 287,614 thousand and comprised the share capital from the share issues and from the hyperinflation adjustment. As at the date of adopting the IFRS, i.e. 1 January 2004, the share capital of the Company was adjusted for hyperinflation between 1989 and 1996. The hyperinflation adjustment of PLN 24,114 thousand was charged to retained earnings. The shares of CIECH S.A. are listed on Warsaw Stock Exchange and on Frankfurt Stock Exchange. The share capital of CIECH S.A. amounts to PLN 263,500,965 and is divided into 52,699,909 shares with a nominal value of PLN 5 each, including: • 20,816 A-series ordinary bearer shares, • 19,775,200 B-series ordinary bearer shares, • 8,203,984 C-series ordinary bearer shares, • 23,000,000 D-series ordinary bearer shares, • 1,699,909 E-series ordinary bearer shares. The shares of all series are ordinary shares and do not carry any additional rights, preferences or restrictions as to dividend distribution or return of capital. Share capital is fully paid up. To the best knowledge of the Company, as at the day of approving this report, entities holding significant blocks of shares (at least 5%) are the entities listed below: Shareholder structure of CIECH S.A. as at the date of approval of the report (according to the best knowledge of the Company) Shareholder Type of shares Number of shares Number of votes at the General Meeting of Shareholders Share in the total number of votes at the General Meeting of Shareholders Stake in share capital (%) KI Chemistry s. à r. l. with its registered office in Luxembourg Ordinary bearer 26,952,052 26,952,052 51.14% 51.14% Nationale-Nederlanden Otwarty Fundusz Emerytalny Ordinary bearer 2,729,507 2,729,507 5.18% 5.18% FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 43 Shareholder Type of shares Number of shares Number of votes at the General Meeting of Shareholders Share in the total number of votes at the General Meeting of Shareholders Stake in share capital (%) Aviva Otwarty Fundusz Emerytalny Aviva Santander *** Ordinary bearer 3,084,470 3,084,470 5.85% 5.85% Other Ordinary bearer 19,933,880 19,933,880 37.83% 37.83% * In accordance with information dated 9 June 2014 provided by Shareholder under Article 77(7) and Article 69(1)(1) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (CR 26/2014). ** on the basis of the list of shareholders holding at least 5% of votes at the Extraordinary General Meeting of Shareholders of CIECH S.A. on 15 March 2021, CR 6/2021 prepared and published pursuant to Article 70(3) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (Journal of Laws of 2009, No 185, item 1439). *** on the basis of the list of shareholders holding at least 5% of votes at the Extraordinary General Meeting of Shareholders of CIECH S.A. on 15 March 2021, CR 6/2021 prepared and published pursuant to Article 70(3) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (Journal of Laws of 2009, No 185, item 1439). The percentage share of above-listed shareholders in the share capital of CIECH S.A. equals the percentage share in the number of votes at the General Shareholders Meeting of CIECH S.A. From the date of the Extraordinary General Meeting of CIECH S.A. (information about the shareholders is based on the List of attendance at the EGM of 15 March 2021) for the submission of this report, from the shareholders of CIECH S.A. no information on a change in the ownership status of (+) or (-) resulting in a change in the ownership structure of significant blocks of shares of the issuer was affected. Treasury shares In 2020 and in the comparable period, CIECH S.A. did not purchase or hold treasury shares. Share premium The share premium arose from the surplus in excess of nominal value achieved upon the issue of C, D and E series shares. Other reserve capital The table below presents the balances of other reserve capital, consisting of the following items: OTHER RESERVE CAPITAL BY PURPOSE 31.12.2020 31.12.2019 Commercial risk fund 3,330 3,330 Fund for purchasing soda companies 15,200 15,200 Development funds 57,669 57,669 Fund for the purchase of treasury shares 346,500 - TOTAL 422,699 76,199 On 21 May 2020, the Annual General Meeting of CIECH S.A. authorised the Management Board of CIECH S.A. to purchase fully paid shares issued by CIECH S.A. from one or more of CIECH S.A.'s shareholders. Treasury Shares may be acquired in particular for the purpose of: ✓ their cancellation by way of reduction of the share capital of CIECH S.A., ✓ their resale against remuneration; ✓ using them to acquire or exchange shares or interest in any other companies. The maximum amount of remuneration for shareholders will not be higher than PLN 346,500 thousand and a reserve fund has been created for this purpose in this amount. For details, see current report No 24/2020. Cash flow hedge reserve The cash flow hedge reserve reflects the valuation and settlement of hedging instruments to which the hedge accounting applies. Detailed information is presented in note 8.2. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 44 Actuarial gains Actuarial valuation reserve comprises actuarial gains or losses, i.e. the effects of differences between the previous assumptions made in the valuation of employee benefit provisions and what has actually occurred and the effects of changes in assumptions for these provisions, including change in discount rate. 6.3. DIVIDENDS PAID OR DECLARED Until the date of approval of the report for publication, the Management Board of CIECH S.A. has not adopted a resolution on the proposed distribution of the net profit for 2020. On 21 May 2020, the Ordinary General Meeting resolved to distribute CIECH S.A.’s net profit for the financial year 2019, amounting to PLN 60,436 thousand, and to allocate the entire profit to CIECH S.A.’s supplementary capital. 6.4. BUSINESS COMBINATIONS AND ACQUISITION OF INTEREST There were no business combinations in the presented periods. In 2020, changes in the CIECH Group’s structure that occurred in relation to the companies in which CIECH S.A. held shares, either directly or indirectly, were related to, among others: • CIECH Żywice Sp. z o.o. The Court registered the increase of the share capital of CIECH Żywice Sp. z o.o. on 2 January 2020 and on this date CIECH S.A. became the holder of all newly created shares whilst remaining the sole shareholder of CIECH Żywice Sp. z o.o. The share capital was increased at the Extraordinary Shareholders' Meeting of CIECH Żywice Sp. z o.o. on 16 December 2019 which adopted a resolution on the demerger of CIECH Sarzyna S.A., following the adoption of the Demerger Plan of CIECH Sarzyna S.A., by deciding on: ✓ CIECH Żywice Sp. z o.o.’s participation in the demerger of CIECH Sarzyna S.A. effected through the spin-off of an organised part of the enterprise on the terms set forth in the Demerger Plan, ✓ approval of the Demerger Plan of CIECH Sarzyna S.A, as agreed by the Management Board of CIECH Sarzyna S.A. on 31 October 2019, ✓ increase the share capital of Ciech Żywice Sp. z o.o. from PLN 56 thousand by PLN 3,678 thousand, i.e. to PLN 3,734 thousand, through the creation of 73,567 new shares with a nominal value of PLN 50 per share and the total value of PLN 3,734 thousand. All newly created shares in the increased share capital of Ciech Żywice Sp. z o.o. were allotted to the sole shareholder of CIECH Sarzyna S.A., i.e. CIECH S.A., in the following manner: 8,490 thousand shares in CIECH Sarzyna S.A. entitle to the receipt of 73,567 shares in CIECH Żywice Sp. z o.o. As a result of the increase, the share capital of CIECH Żywice Sp. z o.o. amounts to PLN 3,734 thousand and is divided into 74,677 shares with a value of PLN 50 per share and a total value of PLN 3,734 thousand. On 20 July 2020, CIECH S.A. and LERG S.A. with its registered office in Pustków-Osiedle entered into a preliminary agreement for the sale of 74,677 shares representing 100% of the share capital in CIECH Żywice Sp. z o.o. The value of this transaction is approx. PLN 160 million. The final sale agreement was signed on 1 March 2021, and details are presented in Note 9.5 of this report. • CIECH Serwis i Remonty Sp. z o.o. (until 22 April 2020: BOSTEN S.A.; from 22 April 2020 to 15 December 2020: CIECH Serwis i Remonty S.A.) On 31 January 2020, the Extraordinary Shareholders’ Meeting of BOSTEN S.A. increased the Company's share capital by PLN 450, i.e. from PLN 100 thousand to PLN 550 thousand, by way of issue of 45,000 new C series shares with the nominal value of PLN 10 per share and total nominal value of PLN 450 thousand. The issue price of C series shares is equal to the nominal price per share and amounts to PLN 10 per share. C series shares were earmarked for acquisition by CIECH S.A. in exchange for a cash contribution of PLN 450 thousand, in a private placement. The Extraordinary General Meeting also changed the name of the company from BOSTEN S.A. to: CIECH Serwis i Remonty S.A. The court registered the share capital increase and change of the company’s name on 22 April 2020. On 15 December 2020, the company was transformed from a joint stock company to a limited liability company. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 45 • CIECH Salz Deutschland GmbH On 11 December 2019, the Shareholders' Meeting of CIECH Salz Deutschland GmbH increased the share capital from EUR 25 thousand to EUR 3,025 thousand, by creating 100 new shares with a value of EUR 30 thousand per share and a total value of EUR 3 million. New shares from the increase of the share capital of Ciech Salz Deutschland GmbH were acquired by CIECH S.A. in exchange for cash. The share capital increase was registered on 5 March 2020. • CIECH Vitro Sp. o.o. On 4 January 2020, the Deed of incorporation of CIECH Vitro Sp. z o.o., with its registered office in Iłowa and a share capital of PLN 5 thousand, divided into 100 equal and indivisible shares with a nominal value of PLN 50 each, was drawn up. The share capital was paid in full in cash of PLN 400 thousand by CIECH SA. The share premium of PLN 395 thousand was transferred to the supplementary capital. The Company was registered by the court on 7 May 2020. • CIECH Trading Sp. z o.o. (former name: CIECH Trading S.A.) On 27 March 2020, CIECH S.A. sold to BOSTEN S.A. 100 series A registered shares in CIECH Trading S.A. with a total nominal value of PLN 900, for a total price of PLN 300. On 30 March 2020 the Management Board of CIECH Trading S.A. notified the shareholders of its intention to adopt a resolution on the transformation of CIECH Trading Spółka Akcyjna into a limited liability company under the name of CIECH Trading Spółka z ograniczoną odpowiedzialnością and presented the Transformation Plan prepared on 30 March 2020. The court registered the transformation on 18 June 2020. On 22 June 2020, CIECH Serwis i Remonty S.A. (formerly: BOSTEN S.A.) sold 18 shares in the Company to CIECH S.A. for the total price of PLN 300 and ceased to be a shareholder of the Company. Extraordinary Meeting of Shareholders of CIECH Trading Sp. z o.o. on 2 March 2021, approved the decision of the Management Board of the Company to cease conducting business activities specified in the Company's agreement and obliged the Management Board of the Company to take all necessary actions aimed at ceasing and extinguishing business activities, and after completing the above-mentioned actions to decide on the dissolution of the Company pursuant to Art. 270 of the Commercial Companies Code. • Janikowskie Zakłady Sodowe JANIKOSODA Sp. z o.o. (former name: Janikowskie Zakłady Sodowe JANIKOSODA S.A.) On 16 June 2020, the Extraordinary Shareholders’ Meeting of Janikowskie Zakłady Sodowe JANIKOSODA S.A. adopted a resolution on the transformation of Janikowskie Zakłady Sodowe JANIKOSODA Spółka Akcyjna into a limited liability company under the name of Janikowskie Zakłady Sodowe JANIKOSODA Spółka z ograniczoną odpowiedzialnością. The share capital of JANIKOSODA Sp. z o.o. amounts to PLN 44,330 thousand and is divided into 2 shares of unequal nominal value, i.e. PLN 36,530 thousand – one share held by CIECH FINANCE Sp. z o.o. and PLN 7,800 thousand – one share held by CIECH S.A. The court registered the transformation on 2 October 2020. On 31 December 2020, the shareholders of JANIKOSODA Sp. z o.o. entered into an agreement to sell their shares in the company to two Buyers for a total price of PLN 590 thousand, including: ✓ CIECH S.A. sold its 1 share, representing 17.6% of the share capital, with a nominal value of PLN 7,800 thousand, for PLN 103.84 thousand. The legal title to the share passed to the Buyers on the date of payment of the price, i.e. on 31 December 2020, and on that date CIECH S.A. ceased to be a shareholder of JANIKOSODA Sp. z o.o; ✓ CIECH FINANCE Sp. z o.o. sold its 1 share, accounting for 82.4% of the share capital, with a nominal value of PLN 36,530.5 thousand, for PLN 486.16 thousand. The legal title to the share passed to the Buyers as of the date of payment of the price, i.e. on 31 December 2020, and on that date CIECH FINANCE Sp. z o.o. ceased to be a shareholder of JANIKOSODA Sp. z o.o. • CIECH Nieruchomości Sp. z o.o. (former name: CIECH Nieruchomości S.A.) On 28 May 2020, the General Meeting of CIECH Nieruchomości S.A. resolved to increase the share capital by issuing 200,008,926 series E shares with a total nominal value of PLN 4,000 thousand and an issue price equal to the nominal value of the shares. Series E shares were earmarked to and acquired by CIECH S.A. The agreement to take up series E shares was concluded on 2 June 2020. The court registered the increase of the share capital on 2 September 2020. On 2 November 2020, the Extraordinary General Meeting of CIECH Nieruchomości S.A. resolved to transform the joint-stock company into a limited FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 46 liability company. The court registered the transformation on 22 December 2020. The share capital of CIECH Nieruchomości Sp. z o.o. amounts to PLN 22,148.5 thousand and is divided into 221,485 shares with a nominal value of PLN 100 per share. The shareholders of the Company are its existing shareholders, i.e.: ✓ CIECH S.A. – holding 220,001 shares, with a value of PLN 100 per share, with a total value of PLN 22,000.1 thousand, representing 99.33% of the share capital, ✓ CIECH FINANCE Sp. z o.o. – holding 1,484 shares, with a value of PLN 100 per share, with a total value of PLN 148.4 thousand, representing 0.67% of the share capital. • CIECH SERVICES sp. z o.o. – new company On 14 September 2020, the Deed of incorporation by CIECH S.A. of CIECH SERVICES sp. z o.o., with its registered office in Bydgoszcz and a share capital of PLN 5 thousand, divided into 100 equal and indivisible shares with a nominal value of PLN 50 each, was drawn up. The share capital was paid in full in cash of PLN 5 thousand. The new company is a special purpose vehicle and will become a shared service center. The Court registered CIECH SERVICES Sp. z o.o. on 19 October 2020. • CIECH Soda Romania S.A. On 17 September 2020, the Extraordinary General Meeting of Shareholders of CIECH Soda Romania S.A. (hereinafter referred to as “CSR”) resolved to reduce the share capital by RON 325,840 thousand, i.e. from RON 525,085 thousand to RON 199,245 thousand by reducing the number of shares by 1,303,360,796 shares, i.e. from 2,100,338,803 shares to 796,978,007 shares. The capital reduction was made from the assets of each shareholder by reducing the number of shares in proportion to their shareholding. The capital reduction was based on a calculation algorithm whose application resulted in fractional figures, so by decision of the General Meeting the fractional figures were rounded down to reflect the full share. Shares arising from fractional calculation parts – mainly small shareholders, representing a total of 5,835 shares, were taken over by CSR. The proceeds from the reduction of share capital were used to cover accumulated losses from previous years, as reported by CSR in its financial statements for the financial year ended 31 December 2019. The reduction of the share capital is effective from 15 December 2020. Following the share capital reduction, CIECH S.A.'s shareholding has not changed and amounts to 98.74%, resulting from the currently held 786,912,905 shares. 6.5. EARNINGS PER SHARE The table below presents profit and shares data used in the calculation of the basic and diluted earnings per share: 01.01.-31.12.2020 01.01.-31.12.2019 Net profit (loss) from continued operations 154,834 52,416 Net profit (loss) from discontinued operations 453 8,020 Basic and diluted earnings per share (continuing operations) 2.94 0.99 Basic and diluted earnings per share (discontinuing operations) 0.01 0.16 Weighted average number of issued ordinary shares used in calculation of basic and diluted earnings per share 52,699,909 52,699,909 Accounting policy Basic earnings per share is the net profit for the year attributable to ordinary shareholders of the parent entity divided by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is the net profit for the year attributable to ordinary shareholders of the parent entity divided by the weighted average number of ordinary shares outstanding during the year adjusted for the effects of all dilutive potential ordinary shares. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 47 7. LIABILITIES, PROVISIONS, EMPLOYEE BENEFITS 7.1. INFORMATION ABOUT FINANCIAL LIABILITIES LOANS, BORROWINGS AND OTHER DEBT INSTRUMENTS 31.12.2020 31.12.2019 LONG-TERM - 1,580,756 Loans and borrowings - 1,580,756 SHORT-TERM 2,238,619 301,762 Loans and borrowings 2,095,105 177,612 Cash pooling liabilities 143,514 124,150 TOTAL 2,238,619 1,882,518 Reconciliation of changes in liabilities resulting from financing activities – liabilities in respect of credits and loans 01.01.-31.12.2020 01.01.-31.12.2019 Opening balance 1,758,368 1,749,631 Proceeds from debt incurred 662,788 261,701 financing received 662,788 261,701 Accrual of interest 47,853 57,183 Repayment of debt (395,756) (309,293) repayment of principal (347,813) (256,500) interest paid (47,943) (52,793) Realised exchange differences on foreign currency debt - (6) Foreign exchange differences on measurement of liabilities 19,598 (1,454) Other 2,254 606 Closing balance 2,095,105 1,758,368 Debt financing The CIECH S.A.'s debt financing is secured mainly through loans made available to CIECH S.A. under the Facilities Agreement dated 9 January 2018: 1. The Facilities Agreement signed with a consortium of banks dated 9 January 2018: o term loan in the amount of PLN 1,212,520 thousand and EUR 30,000 thousand (the total amount of the loan as at 31 December 2020 was PLN 1,350,964 thousand), o revolving credit facility granted to CIECH S.A. in the amount of up to PLN 250,000 thousand (the amount of used credit as at 31 December 2020 was PLN 0 thousand). 2. Overdraft facilities up to PLN 100,000 thousand and EUR 10,000 thousand under agreements dated 28 and 29 August 2018 (as at 31 December 2020, the amount used was PLN 43,095 thousand), 3. Revolving credit facilities up to PLN 392,788 thousand and EUR 25,000 thousand, under three agreements dated 18 April 2019 (as at 31 December 2020, the amount used was PLN 508,158 thousand). The total value of facilities available under the aforesaid agreements is PLN 2,255,269 thousand; the limits are drown down in the amount of PLN 1,902,217 thousand. Accounting policy Financial liabilities are an entity’s liabilities to deliver financial assets to another entity or to exchange a financial instrument with another entity under conditions that are unfavourable. When a financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial liability. Interest accrued is recognised under finance costs or, if it is subject to capitalisation, to property, plant and equipment or intangible assets. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 48 Detailed information about loan liabilities is disclosed in the Directors’ Report for the CIECH Group and CIECH S.A. for 2020, in section 4.6. As at 31 December 2020, CIECH S.A. has a short-term liability on account of loans received in the amount of PLN 192,380 thousand, including: • a loan from Gamma Finanse Sp. z o.o. in the amount of PLN 105,000 thousand, • a loan from Verbis Eta Sp. z o.o. SKA in the amount of PLN 28,500 thousand, • a loan from CIECH Pianki Sp. z o.o. in the amount of PLN 35,000 thousand, • a loan from CIECH Vitrosilicon S.A. in the amount of PLN 20,000 thousand, • interest accrued on loans in the amount of PLN 3,880 thousand. Interest rate: The Term loans bear interest at a floating rate determined on the basis of the WIBOR / EURIBOR base rate, plus margin, the level of which depends on the level of the net debt to EBITDA. The current level of margin, set on the basis of financial ratios as at the end of the first half of 2020, is 1.50%. Information about the financial covenants included in loan agreements During the period covered by these financial statements, no loan agreement was called to maturity and there were no violations of payment terms for repayment of principal or interest due in relation to financial liabilities recognised in the balance sheet. Under the Facilities Agreement dated 29 October 2015 and under three revolving credit facilities agreements dated 18 April 2019, CIECH S.A. and its selected subsidiaries were obliged to, among others, maintain a certain level of: o net leverage ratio for the Group specified in the Facilities Agreement (the ratio of the CIECH Group’s consolidated net debt to consolidated EBITDA of the CIECH Group calculated according to the guidelines in the amount of at least 4.0, measured at the end of a year and first six months of a year). As at the balance sheet date, i.e. 31 December 2020, this ratio was maintained and amounted to 2.45. o the guarantor coverage ratio (share of subsidiaries being guarantors in the consolidated EBITDA of the CIECH Group, calculated according to the guidelines) at a level of at least 80%; this ratio was not met as at the balance sheet date: the share of the subsidiaries in the consolidated EBITDA value, which are guarantors, in the Facilities Agreement did not exceed the required threshold of 80% and amounted to 76.7%. Due to the breach of the ratio and failure to repeal the breach as at the balance sheet date, the total value of loans made available on the basis of the above-mentioned agreements, was reclassified into short-term loan liabilities in accordance with IAS 1. In connection with the occurrence of a breach of the guarantor coverage ratio, the Company asked the lenders to change the method of calculating the ratio, by: not taking into account the results of CIECH Soda Romania S.A. in the calculation. and not included in the calculation of the results of CIECH Żywice Sp. z o.o. and for lenders waiving their rights related to the occurrence of a breach of the index. The lenders being a party to the syndicated Loan Agreement of 29 October 2015 and the lenders of the revolving loan agreements (except for Banco de Sabadell, for a EUR 25 million loan), accepted the Company's application by 31 March 2021, i.e. during the recovery period (cure period) provided for in credit agreements. At the same time, on 16 March 2021, a new long-term loan agreement was signed for a total of PLN 2,115,000 thousand. Detailed information on the agreement can be found in the current report 7/2021. Under the new loan agreement, the guarantor coverage ratio will be tested for the first time according to the data as at the balance sheet date,30 June 2021. The catalog of guarantors has been changed in the new loan agreement and, in line with the Company's forecasts, the guarantor coverage ratio will be met. 7.2. OTHER NON-CURRENT LIABILITIES Accounting policy, judgements and estimates Accounting policy concerning financial instruments is presented in note 8.1. OTHER NON-CURRENT LIABILITIES 31.12.2020 31.12.2019 Derivatives 14,327 6,487 Liabilities due to purchase of shares and other financial assets 3,871 7,478 Other - 12,721 TOTAL 18,198 26,686 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 49 * At the end of 2020, we do not report the long-term portion of IRS transactions designated for hedge accounting. These transactions hedge the interest rate on loans that were recognized as short-term liabilities due to the breach of one of the covenants as at the balance sheet date. Details are described in point 7.1. Liabilities due to purchase of shares include the long-term portion of the deferred payment for the acquisition of Proplan Plant Protection Company, S.L., i.e.: • EUR 2,929 thousand of discounted deferred payment (the remaining 10% of the purchase price), payable in cash in 4 installments of EUR 1,115 thousand on subsequent anniversaries (in 2019-2022 respectively – the first payment was made in July 2019) of the takeover of control over Proplan (nominal value of EUR 4,461 thousand). In 2019, other long-term liabilities also included the corresponding portion of the estimated value of the three-year Long- term Incentive Plan of the CIECH Group for 2019-2021 for the key management personnel of the CIECH Group. The estimates made at the end of 2020 did not substantiate the payments under the above Plan, therefore as at 31 December 2020 there is no liability in this respect. 7.3. CURRENT TRADE AND OTHER LIABILITIES Accounting policy Trade and other liabilities are classified as current or non-current based on the following principles: ✓ trade liabilities are reported as current liabilities, regardless of maturity, ✓ other liabilities due to be settled within 12 months of the balance sheet date are classified as current liabilities, ✓ other payables, which do not meet the current liability conditions, are classified as non-current liabilities. Liabilities denominated in foreign currencies are recognised at the NBP’s average exchange rate effective on the last working day before the date of transaction. At the reporting date foreign currency denominated liabilities are translated at the average exchange rate announced for that day by the NBP except for received prepayments. Currency translation differences arising upon the repayment of a liability (realised) or its valuation (unrealised) are presented within financial income or expense. Prepayments for deliveries denominated in foreign currencies are recognised at the exchange rate applicable as at the transaction day. Factoring The Company uses non-recourse factoring services. The factor transfers advance payments to the Company’s account in the full amount of invoices accepted for financing. The financing of receivables transferred is provided in various timeframes, therefore, as at the balance sheet date, there may be receivables which have not been financed yet and are reported as factoring receivables. Advance payments received are posted as factoring liabilities. In the statement of financial position, factoring receivables and liabilities are recognised on a net basis up to 95% of the value of advance payments received from the factor (the 95% limit results from the level of the receivables insurance). The remaining 5% of receivables value is reported as factoring receivables, and 5% of the value of advance payments received is reported as factoring liabilities. Judgements and estimates At the reporting date trade payables are measured at amortised cost (i.e. they are discounted using the effective interest method) and increased by any applicable late interest accrued. Late interest is not accrued when a formal waiver is received from the counterparty. In all other cases such interest is accrued and recognised in accordance with the following principles: ✓ on an ongoing basis, based on interest notes received; ✓ in estimated amounts, with such estimates based on comparison of interest charged in the past by a counterparty to the related amounts owed. CURRENT TRADE AND OTHER LIABILITIES 31.12.2020 31.12.2019 Trade liabilities and advances taken 332,006 385,748 - in up to 12 months 332,006 382,909 - prepayments received for supplies - 2,839 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 50 CURRENT TRADE AND OTHER LIABILITIES 31.12.2020 31.12.2019 Public and legal liabilities (excluding income tax) 3,762 3,108 Liabilities for purchase of property, plant and equipment 8,401 1,905 Financial instruments liabilities 45,119 18,533 Liabilities to employees 4,136 1,195 Payroll liabilities 13,943 4,829 Holiday leave accrual 3,213 2,705 Social security and other employee benefits 2,258 824 Factoring liabilites 6,830 17,097 Liabilities due to purchase of shares, stocks and other financial assets 5,255 5,118 Other 13,913 10,253 TOTAL 438,836 451,315 Trade liabilities do not bear interest. Commercial contracts concluded by CIECH S.A. include various terms of payment of trade liabilities depending on the type of transaction, market characteristics and trade conditions. The most common payment terms are: 14, 30 and 60 days. 7.4. LEASES Accounting policy On 1 January 2019, CIECH S.A. adopted a new financial reporting standard, IFRS 16 Leases. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company combines two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counterparty), and account for the contracts as a single contract if one or more of the following criteria are met: a) the contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together; b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or c) the rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets conveyed in each of the contracts) form a single lease component. A contract contains a lease if: a) it concerns an identified asset that is explicitly specified in the contract (e.g. using an inventory number, address (for premises), etc.) or implicitly specified at the time that the asset is made available for use by the customer, and the supplier does not have the substantive right to substitute the asset throughout the period of use and b) the lessee receives essential all of the economic benefits from such assets during the period of use, i.e. both basic benefits and the benefits derived from it (if any); and c) the lessee has the right to specify the method in which it uses the identified asset. Initial measurement of the lease liability The lease payments included in the measurement of the lease liability comprise the following payments that are not paid: a) fixed payments (including in-substance fixed payments), less any lease incentives receivable; b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; c) amounts expected to be payable by the lessee under residual value guarantees; d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease and it is highly likely that this option will be exercised. Subsequent measurement of the lease liability After the commencement date, the Company measures the lease liability by: a) increasing the carrying amount to reflect interest on the lease liability; b) reducing the carrying amount to reflect the lease payments made; and FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 51 c) remeasuring the carrying amount to reflect any reassessment or lease modifications. The Company, as a lessee, recognises in profit or loss of the current period both: a) interest on the lease liability; and b) variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs, unless these costs are included in the carrying amount of another asset in accordance with the accounting policy for property, plant and equipment. In-substance fixed lease payments In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable. In-substance fixed lease payments exist, for example, if: a) payments are structured as variable lease payments, but there is no genuine variability in those payments. Those payments contain variable clauses that do not have real economic substance. Examples of those types of payments include: • payments that must be made only if an asset is proven to be capable of operating during the lease, or only if an event occurs that has no genuine possibility of not occurring; or • payments that are initially structured as variable lease payments linked to the use of the underlying asset but for which the variability will be resolved at some point after the commencement date so that the payments become fixed for the remainder of the lease term. Those payments become in-substance fixed payments when the variability is resolved, b) there is more than one set of payments that a lessee could make, but only one of those sets of payments is realistic. In this case, an entity considers the realistic set of payments to be lease payments. c) there is more than one realistic set of payments that a lessee could make, but it must make at least one of those sets of payments. In this case, an entity considers the set of payments that aggregates to the lowest amount (on a discounted basis) to be lease payments. Variable lease payments Variable lease payments that depend on an index or a rate include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate (such as WIBOR) or payments that vary to reflect changes in market rental rates (e.g. periodical changes in perpetual usufruct rates, in connection with the revision of a valuation report). Variable lease payments that do not depend on an index or a rate, i.e. depend on the use, are not included in the measurement of lease liabilities (e.g. fees for exceeding the mileage limit). Exemptions/ simplifications applied The Company applies the simplifications for short-term leases and low-value asset leases provided for in the standard. It is assumed that assets whose unit value does not exceed approximately PLN 20 thousand, which corresponds to approximately USD 5 thousand, are low-value assets. Short-term leases are those whose term is shorter than 12 months. The company also benefits from the practical exemption regarding the lack of separation of non-lease components. Judgements and estimates Adoption of IFRS 16 entailed also the need to make estimates and judgments which are reflected in the measurement of lease liabilities and right-of-use assets, including: • assessing whether a contract contains a lease in accordance with IFRS 16, • determining the duration of contracts (including contracts with an indefinite term or with an extension option): With respect to contracts for an indefinite term, the company, when estimating the irrevocable lease term, assumed the period in which it intends to use the underlying assets, also taking into account the parties' right to terminate and the occurrence of significant penalties in contracts. The lease term over which the lease liability is recognised also includes any periods resulting from an extension or early termination if any of the above scenarios is sufficiently certain in the entity's judgement. In the case of contracts with an extension option, the lease liability would be respectively higher, while termination options resulted in a reduction in the liability amount. • assessing lease payments as either fixed or variable, • determining depreciation and amortisation rates. • determining the interest rate to be used in discounting future cash flows: FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 52 Discount rate The present value of future lease payments is calculated using the lease rate. If the lease rate is not known, the Company applies the incremental borrowing rate for a given lease agreement, i.e. the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Assets used in CIECH S.A. under lease agreements include passenger cars and premises – mainly office and warehouse space. The lease agreement for cars is a renewable agreement, making it possible to acquire an asset at its estimated market value at the end of its use. The Company is not obliged to purchase the leased assets. To calculate discount rates for the purposes of IFRS 16, the Company assumes that the discount rate should reflect the cost that it would have to pay to borrow the funds necessary to purchase the leased asset.The calculation of interest rates took account of credit risk (reflected in the margin assumed), economic conditions in which the transactions took place (country, currency of the contract) and the duration of the contract (preparation of calculations for the relevant periods within which the Company holds lease contracts). Interest rates range from 1.91% to 5.07% (for PLN 1.91%-5.07%; for EUR 3.07%). A single discount rate was applied to the entire contract portfolio. The nominal value and the value lease interest are as follows: LEASE LIABILITIES Nominal payments Effective interest Discounted lease liability 31.12.2020 0–6 months 2,943 23 2,920 Up to 1 year 3,493 81 3,412 1–2 years 9,593 589 9,004 2–5 years 9,233 1,176 8,057 More than 5 years 5,836 1,105 4,731 TOTAL 31,098 2,974 28,124 31.12.2019 0–6 months 2,356 58 2,298 Up to 1 year 2,850 113 2,737 1–2 years 9,832 806 9,026 2–5 years 10,397 1,449 8,948 More than 5 years 8,171 1,740 6,431 TOTAL 33,606 4,166 29,440 Reconciliation of changes in liabilities resulting from financing activities – lease liabilities 01.01.-31.12.2020 01.01.-31.12.2019 Implementation of IFRS 16 as at 01.01.2019 - 32,518 Opening balance 29,440 - Modifications of agreements (962) 1,290 Signing new agreements 3,415 202 Early termination of agreement (120) (55) Interest accrued 1,109 1,132 Repayment of liability (6,607) (5,429) Foreign exchange differences 1,849 (218) Closing balance 28,124 29,440 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 53 The total cash outflow for the lease is as follows: 01.01-31.12.2020 01.01.-31.12.2019 Liabilities payments, including: 10,812 7,551 Equity 5,483 4,388 Interests 1,124 1,041 Variable fees other than those depending on the index/rate 3,268 1,220 Short-term leases - 2 Lease of assets with low initial value 937 900 The following table presents lease costs not included in the calculation of carrying amounts in accordance with IFRS 16 for the period: 01.01-31.12.2020 01.01-31.12.2019 Costs of short-term leases (concluded for a period of up to 12 months), - 2 Costs of lease of low-value assets (938) (900) Costs related to variable lease payments not included in the measurement of lease liabilities (3,269) (1,220) Detailed information on the right to use assets under lease agreements is presented in note 5.2. 7.5. PROVISIONS FOR EMPLOYEE BENEFITS Accounting policy Provisions for retirement and disability benefits Based on the Company’s remuneration plan, the employees of CIECH S.A. are entitled to retirement and disability benefits. The Company’s obligations in respect of the above benefits is the amount of benefit entitlement that employees have earned as a result of their service in the current and prior years. Net defined benefit liabilities are calculated separately for each plan by estimation of future payments required to settle the obligation resulting from employee service in the current and prior periods (discounted to its present value). The discount rate is the rate of return for low-risk debt securities with similar maturity date as the Company’s liabilities as at the end of the reporting period. An appropriate estimation is made by an authorised actuary with the application of forecast discounted unit right method. The use of such provisions results in a decrease in the provision, while the reversal of the said provision increases other operating income. The increase in the provision for employment costs is recognised respectively in other operating expenses. Changes in provisions resulting from the passage of time (i.e. the unwinding of the discount) and the effect resulting from changes in discount rates are always presented in financing activities. The Company recognises in other comprehensive income actuarial gains and losses – changes in provisions for retirement benefits resulting differences between the previous actuarial assumptions and what has actually occurred and the effects of changes in actuarial assumptions and change in discount rate. Judgements and estimates The amount of the provision for employee benefits is determined based on actuarial valuations performed by independent professional firms. By actuarial valuation estimates are made regarding the rotation in employment, wage growth, discount rates and inflation. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 54 PROVISIONS FOR EMPLOYEE BENEFITS LONG-TERM SHORT-TERM 01.01.-31.12.2020 01.01.-31.12.2019 01.01.-31.12.2020 01.01.-31.12.2019 Opening balance 1,089 574 2,312 421 Recognition - 456 - 2,329 Use and reversal - - (1,595) (438) Other (110) 59 109 - Closing balance 979 1,089 826 2,312 In 2019, within the short-term provision, a provision was recognised for the “voluntary redundancy programme” in the amount of PLN 2,099 thousand. During 2019, PLN 341 thousand was paid out on this account and during 2020, PLN 1,363 thousand was paid out. In addition, an amount of PLN 51 thousand (PLN 59 thousand in the corresponding period) was recognised in other comprehensive income. This is a change in provisions for retirement benefits resulting from differences between the previous actuarial assumptions and what has actually occurred as well as from changes in the parameters and assumptions used in the calculations, such as the discount rate, the salary growth rate, and assumptions concerning the future mobility of employees. Employee benefits are measured on the basis of actuarial valuations and including provision for retirement and disability benefits. A discount rate of 1.4% p.a. was applied in order to determine the current value of future liabilities due to employee benefits. The discount rate applied is established in nominal value. At the same time, future inflation in the amount of 2.5% per annum was taken into account. For 2021, the wage growth rate was adopted at the level of 6% and 2% in the following years. Staff turnover ratio is established based on historic data, adjusted for employment restructuring plans. According to the Company’s estimations, a change in actuarial assumptions will not have a significant impact on financial results. 7.6. OTHER PROVISIONS Accounting policy A provision is recognised if, as a result of a past event, the Company has a present obligation and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. A provision for restructuring is recognised when the Management Board has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly and a reliable estimate can be made. Judgements and estimates For measurement of the provisions, the Company is required to make estimates, assumptions regarding discount rates, expected costs and payment terms. CHANGE IN OTHER SHORT-TERM PROVISIONS Provision for liabilities and expected losses TOTAL 01.01.-31.12.2020 Opening balance 33,325 33,325 Recognition 1,435 1,435 Use and reversal (2,172) (2,172) Other 1,153 1,153 Closing balance 33,741 33,741 01.01.-31.12.2019 Opening balance 103,284 103,284 Recognition 2,513 2,513 Use and reversal (72,389) (72,389) Other (83) (83) Closing balance 33,325 33,325 The amount of provisions is an estimated value and may be subject to change during utilisation. Short-term provisions of PLN 33,741 thousand are related to potential claims (principal liability plus interest payable) resulting from litigation. In 2019, the utilisation of the provision in the amount of PLN 66,400 thousand relates to the payment of a tax liability together with overdue interest on CIT for 2012. More information on tax audits is provided in Note 9.2. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 55 8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT 8.1. FINANCIAL INSTRUMENTS Accounting policy Principles of measurement after initial recognition/at the end of reporting period and presentation of financial instruments in financial statements Category of assets or liabilities Measurement Recognition Assets at fair value through profit or loss At fair value Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Financial assets measured at amortised cost At amortised cost using the effective interest rate (EIR) Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Financial assets at fair value through other comprehensive income At fair value Changes from remeasurement at fair value are recognised in other comprehensive income. For debt instruments interest is recognised directly in profit or loss. Liabilities at fair value through profit or loss At fair value Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Impairment of financial assets At each balance sheet date, the Entity assesses whether there has been a significant increase in credit risk for a single financial asset (financial instrument) since its initial recognition (does not apply to assets measured through profit or loss or equity investments designated as options measured at fair value through other comprehensive income). If such a significant increase has taken place, the Entity estimates allowances in the amount of long-term expected credit losses. Otherwise, the Entity estimates allowances in the amount of 12-month expected credit losses, even if in previous periods allowances were recognised in the amount of long-term expected credit losses. The Entity assumes that in the case of financial instruments that meet the definition of a low credit risk instrument as at a given balance sheet date, there has been no significant increase in credit risk and therefore the allowance is estimated at the amount of 12-month expected credit losses. The credit risk on a financial instrument is considered low for these purposes, if: a) the financial instrument has a low risk of default, b) the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and c) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Entity considers that there has been a significant increase in credit risk for a given financial instrument, if there has been a delay in contractual payments of more than 30 days. For a financial asset that is credit-impaired at the reporting date, but that is not a purchased or originated credit-impaired financial (POCI) asset, the Entity measures the expected credit losses as the difference between the asset's gross carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. Any adjustment is recognised in profit or loss as an impairment gain or loss. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 56 a) significant financial difficulty of the issuer or the borrower; b) a breach of contract, such as a default or past due event; c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e) the disappearance of an active market for that financial asset because of financial difficulties; or f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired. Regardless of the above criteria, the Entity considers that there has been an impairment loss in the event of a delay in payment of more than 180 days, because, in company’s opinion, after this date, the risk of non-performance by contractors increases significantly. The amount established as a result of the abovementioned allowances may be decreased if the Management Board is in possession of reliable documents, indicating that the receivables were secured and their payment is highly probable. Impairment allowances are estimated using individual parameters determined on the basis of benchmarks (using information on bank ratings) or values provided by experts, scaled down to the horizon for estimating expected credit losses. For trade receivables the Entity uses a simplified approach whereby lifetime expected credit losses are estimated from the moment of initial recognition of exposures. The main financial instruments disclosed in the statement of financial position of CIECH S.A. as at 31 December 2020 include: Financial assets: • cash and cash equivalents, • loans granted, • financial instruments with positive valuation, • trade receivables, • factoring receivables, • cash pooling receivables. Financial liabilities: • term loan liabilities, revolving facility liabilities and overdraft liabilities, • trade payables, • financial instruments with negative valuation, • lease liabilities, • loan liabilities, • cash pooling liabilities, • factoring liabilities. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 57 Carrying amount of financial instruments CLASSES OF FINANCIAL INSTRUMENTS note 31.12.2020 31.12.2019 CATEGORIES OF FINANCIAL INSTRUMENTS Cash and cash equivalents 5.8 265,287 169,983 Loans measured at amortized cost Loans granted 5.4;5.7 1,588,314 1,020,812 Loans measured at amortized cost Trade receivables 5.6 169,664 285,995 Loans measured at amortized cost Factoring receivables 5.6 35,946 30,856 Loans measured at amortized cost Derivatives with positive value 5.4;5.7 1,835 14,377 Valued in fair value through income statement Derivatives recognized in financial assets designated as hedging instruments 5.4;5.7 - 3,738 Financial assets valued at fair value through other comprehensive income Cash pooling receivables 5.6 7,992 6,496 Loans measured at amortized cost ASSETS 2,069,038 1,532,257 Trade liabilities 7.3 (332,006) (382,909) Loans measured at amortized cost Loans and borrowings 7.1 (2,095,105) (1,758,368) Loans measured at amortized cost Lease liabilities 7.4 (28,124) (29,440) Loans measured at amortized cost Factoring liabilities 7.3 (6,830) (17,097) Loans measured at amortized cost Derivatives with negative value 7.2;7.3 (27,702) (20,005) Valued in fair value through income statement Derivatives recognized in financial liabilities designated as hedging instruments 7.2;7.3 (31,744) (5,015) Financial liabilities valued at fair value through other comprehensive income Cash pooling liabilities 7.1 (143,514) (124,150) Loans measured at amortized cost LIABILITIES (2,665,025) (2,336,984) Selected trade receivables in CIECH S.A. are subject to factoring. This is factoring with the assumption of insolvency risk whereby the factor assumes the risk in the amount specified in the insurance policy. CIECH S.A. also has reverse factoring. Due to the conditions included in the contracts, these liabilities are disclosed as trade liabilities. Revenues, costs, profit and loss recognised in the income statement by the category of financial instruments. Items of revenues, costs, profits and losses recognized in the statement of profit or loss 01.01.- 31.12.2020 01.01.- 31.12.2019 Categories of financial instruments Revenues/(costs) due to interests, including those calculated using the effective interest rate method (7,891) (25,630) 46,268 44,379 Financial assets valued at amortized cost (53,049) (68,877) Financial liabilities valued at amortized cost (1,110) (1,132) Financial liabilities excluded from IFRS 9 Profits/(losses) due to exchange differences 33,471 2,432 33,471 2,432 Financial liabilities valued at amortized cost Recognition of impairment losses (9,690) (295) Financial assets valued at amortized cost Reversal of impairment losses 675 3,171 Financial assets valued at amortized cost Income/expenses due to the use of derivative financial instruments (57,206) 25,606 (52,671) 26,152 Assets/financial liabilities valued in fair value through income statement (4,535) (546) Hedging instruments TOTAL (40,641) 5,284 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 58 8.2. FINANCIAL INSTRUMENTS DESIGNATED FOR HEDGE ACCOUNTING Accounting policy Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. Derivatives such as options, forwards, swaps are held to hedge the fair value of assets or liabilities or expected future cash flows. For the hedging instruments, the Entity may apply hedge accounting if, and only if, all the following conditions are met: ✓ the hedging relationship consists only of eligible hedging instruments and eligible hedged items. ✓ at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for entity the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements (including its analysis of the sources of hedge ineffectiveness and how it determines the hedge ratio). ✓ the hedging relationship meets all of the following hedge effectiveness requirements: a) there is an economic relationship between the hedged item and the hedging instrument; b) the effect of credit risk does not dominate the value changes that result from that economic relationship; and c) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. Cash flow hedge: A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. Cash flow hedge shall be accounted for as follows: a) the separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts): i. the cumulative gain or loss on the hedging instrument from inception of the hedge; and ii. the cumulative change in fair value (present value) of the hedged item (ie the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge. b) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (ie the portion that is offset by the change in the cash flow hedge reserve calculated in accordance with (a)) shall be recognised in other comprehensive income. c) any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve calculated in accordance with (a)) is hedge ineffectiveness that shall be recognised in profit or loss. The effective portion of the hedge is transferred to profit or loss as a reclassification adjustment in the period or periods when the hedged expected future cash flows affect profit or loss. The table below presents a summary of specific groups of relationships existing in 2020, designated for hedge accounting: FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 59 31.12.2020 31.12.2019 Type of instrument Hedged item Nominal value/Volume Maturity Average price obtained on the contract Value in financial assets Value in financial liabilities Value in financial assets Value in financial liabilities Derivative instruments – cash flow hedge Interest rate risk Interest rate swaps – 6M WIBOR to fixed rate Interest payments on term loan contracted by CIECH S.A. with initial nominal amount of PLN 1,212,520 thousand PLN 1,212,520 thousand 2022 Interest rate paid: 1.8% p.a. - (31 126) 3,453 (4,526) Interest rate swap – 6M EURIBOR to fixed rate Interest payments on term loan contracted by CIECH S.A. with initial nominal amount of EUR 30,000 thousand EUR 30,000 thousand 2022 Interest rate paid: -0.25% p.a. - (618) 118 (489) 31.12.2020 31.12.2019 Before tax Tax After tax Before tax Tax After tax Cash flow hedge reserve as at the beginning of the period (1,278) 243 (1,035) (1,391) 239 (1,152) Effective portion of gains/(losses) on hedging instruments: - currency risk - - - (4,825) 855 (3,970) - interest rate risk (34,661) 6,586 (28,075) (906) 172 (734) Reclassification to profit or loss: - currency risk (sales revenues) (166) 32 (134) 2,725 (518) 2,207 - interest rate risk (interest expense) 4,361 (830) 3,531 217 (41) 176 - closure of designation - - - 2,902 (464) 2,438 Cash flow hedge reserve as at the end of the period (31,744) 6,031 (25,713) (1,278) 243 (1,035) The aim of CIECH S.A. when taking the decision concerning the implementation of the principles of cash flow hedging was to reduce the influence of interest rate movements and exchange rates differences from valuation of financial instruments on the statement of profit or loss by reflecting their hedging nature in the financial statements. In the reporting period, there were no instances of identifying the inability to realise a future transaction in respect of which the cash flow hedge accounting was applied. However, in the third quarter of 2019, due to the discontinuation of production at CIECH Soda Romania S.A. and the absence of any further USD/RON exposure, part of the transaction was closed with a negative valuation, which was reflected in the consolidated financial statements. Sales revenues designated to hedge accounting are considered as highly probable. Their occurrence is anticipated in the Company’s long-term financial forecast. Additionally, majority of these transactions are concluded with regular customers of CIECH S.A., which supports the probability of their occurrence. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 60 In IRS transactions, in order to identify sources of ineffectiveness of the hedge, key parameters of the hedged credit and IRS transactions (nominal amount, interest rate, interest periods) were compared. Credit risk is considered negligible. No sources of ineffectiveness were identified. 8.3. FINANCIAL RISK MANAGEMENT Risk management principles CIECH S.A. actively manages operational and financial risk, striving to reduce the fluctuation of cash flows and maximise the companies’ market value. CIECH S.A.’s policy assumes natural hedging of imports and exports and hedging of up to 90% of net exposure to currencies exchange rate change by using derivatives and 100% exposure to interest rate risk. In 2020, forward currency and interest rate risk hedging transactions (forwards, IRSs and CIRSs) were entered into (or continued to exist after being entered into in previous years) at the company. Cash management CIECH S.A. cooperates with bank service providers of high credit rating and with substantial experience in the cash management area. Allocation of financial resources is performed through the use of intra-group loans, dividends payout by subsidiaries, participation in a cash management system (cash pooling) and increase of share capital in the subsidiaries. Quantitative and qualitative information on financial risks CIECH S.A. manages financial risks based on, among others, the developed and adopted market risk hedging strategy. The aim of the financial risk management policy is to identify areas requiring risk analysis to determine methods to identify and measure it, to determine activities undertaken in relation to identified risk areas and to define organisational solutions in the risk management process. In fulfilling its main goals, CIECH S.A. aims to avoid excessive market risk. This goal is realised by identifying, monitoring and hedging cash flow fluctuation risk and monitoring the size and costs of the Company’s debt. When assessing risk, the Company takes into account the risk portfolio effect resulting from the variety of conducted business activities. Effects of the risk are reflected in the financial statements. Financial risk management covers processes of identifying, measuring and establishing the manner of responding to that risk, including processes related to currency exchange rates and interest rate fluctuations. CIECH S.A. monitors risk areas which are most important for its activities. Interest rate risk CIECH S.A. finances its activity mainly through term loans. The amount of the costs of interest-bearing debt held by the Company depends on the reference rate. This refers to term loans made available under a facilities agreement dated 9 January 2018 in the amount of PLN 1,212 million and EUR 30 million, a revolving credit facility made available under a facilities agreement dated 9 January 2015 in the amount of PLN 250 million (as at the end of 2020, the debt amounted to PLN 0), overdraft facilities (as at the end: PLN 551,253 thousand) and a part of lease and factoring contracts. Therefore, the Company is exposed to risk of change in finance costs due to changing interest rates on existing debt. This may result in increased financial costs and, consequently, deterioration of the Company’s financial performance. The risk is partially reduced by: ✓ assets owned by CIECH S.A. (bank deposits), earning interest at variable interest rate, ✓ hedging transactions concluded. In 2020, CIECH S.A. used the following interest rate hedging transactions: • interest rate swap transaction to hedge the variable interest rate levels applicable to the calculation of interest on the term loan made available in November 2015 and annexed on 9 January 2018. The transaction hedges indebtedness in the amount of EUR 30 million, amortised in accordance with the schedule of the IRS transaction; • currency and interest rate swap transactions to hedge the variable interest rate levels applicable to the calculation of interest on the term loan made available in November 2015 and annexed on 9 January 2018. The transaction hedges indebtedness in the initial nominal amount of 1,212 million, amortised in accordance with the schedule of the CIRS transaction. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 61 The table below presents the consolidated statement of financial position items (without derivative instruments) exposed to interest rate risk: Total carrying amount 31.12.2020 31.12.2019 Fixed interest rate instruments 990,508 415,194 Financial assets 990,508 430,194 Financial liabilities - (15,000) Floating interest rate instruments (1,395,246) (1,129,861) Financial assets 871,331 767,097 Financial liabilities (2,266,577) (1,896,958) The table below shows the effects of a change in the interest rate by 100 basis points in relation to the floating interest rate instruments presented in the statement of financial position. Statement of profit or loss Equity increase by 100 bp decrease by 100 bp increase by 100 bp decrease by 100 bp 31.12.2020 Floating interest rate instruments (13,955) 13,955 - - Interest rate swaps (IRS) 2,617 (2,690) 15,878 (16,409) Sensitivity of cash flows (net) (11,338) 11,265 15,878 (16,409) 31.12.2019 Floating interest rate instruments (11,299) 11,299 - - Interest rate swaps (IRS) 7,517 (7,680) 24,901 (26,011) Sensitivity of cash flows (net) (3,782) 3,619 24,901 (26,011) * Do not include the impact of profit/loss on equity. Currency risk Currency risk is an inevitable component of commercial activity denominated in foreign currencies. Due to the nature of conducted import and export operations, CIECH S.A. is subject to currency exposure related to the significant lead of export over import. Sources of currency risk to which the Company was exposed in 2020 included: purchase of raw materials, product sales, loans taken out and cash in foreign currencies. Unfavourable changes in currency exchange rates may worsen the Company’s financial results. In 2020, CIECH S.A. used hedging contracts, such as forward options, to partially cover currency risk. CIECH S.A. tries to naturally hedge the foreign currency exposure, including matching of currency flows arising from sales and purchases as well as strategic debt denominated in EUR, in order to fit it to the expected exposure to currency risk in operations. The table below presents the estimated currency exposure of CIECH S.A. in EUR and USD as at 31 December 2020 and 2019 due to financial instruments: Exposure to currency risk in EUR (figures in EUR) 31.12.2020 31.12.2019 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Assets Loans granted sensitive to FX rate changes 215,955 102,400 x Trade and other receivables 7,849 24,926 x Cash including bank deposits 315 6,305 x Liabilities Trade and other liabilities (1,675) (10,876) x Term loan liabilities (30,000) (30,000) x Working capital facility liabilities (25,000) (25,000) x Other liabilities in respect of credits and loans (13,030) (9,441) x FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 62 Exposure to currency risk in EUR (figures in EUR) 31.12.2020 31.12.2019 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Hedging instruments: Forward - (36,784) x Forward not designated to hedge accounting) (214,025) - x CIRS (60,000) (186,880) x Total exposure (119,611) (165,350) * Measurement of financial instruments designated for hedge accounting is referred to other comprehensive income while ineffectiveness is recognised in the profit or loss statement. Exposure to currency risk in USD (figures in USD) 31.12.2020 31.12.2019 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Assets Trade and other receivables 29 1,630 x Cash including bank deposits 142 5,655 x Liabilities Trade and other liabilities (111) (5,619) x Forward not designated to hedge accounting) - (5,363) x Total exposure 60 (3,697) * Measurement of financial instruments designated for hedge accounting is referred to other comprehensive income while ineffectiveness is recognised in the profit or loss statement. The table contains an analysis of the sensitivity of individual statement of financial position items to exchange rate changes as at 31 December 2020. Figures in EUR Impact on the statement of profit or loss Impact on the statement of other comprehensive income Analysis of sensitivity to currency risk – EUR, 2020 Foreign-currency balance sheet items (1,196) (1,196) - Analysis of sensitivity to currency risk – EUR, 2019 Foreign-currency balance sheet items (1,286) (1,286) - Hedging instruments: Forward (368) - (368) * Increase of EUR/PLN exchange rate by 1 grosz. Figures in USD Impact on the statement of profit or loss Impact on the statement of other comprehensive income Analysis of sensitivity to currency risk – EUR, 2020 Foreign-currency balance sheet items 1 1 - Analysis of sensitivity to currency risk – EUR, 2019 Foreign-currency balance sheet items 17 17 - Derivatives: Forward (54) (54) - * Increase of EUR/PLN exchange rate by 1 grosz FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 63 Raw material price risk A significant portion of CIECH S.A.’s activity is the import and export of chemical raw materials. The raw materials markets are characterised by a cyclical nature related to fluctuations of the global economy. The growing prices of raw materials cause a decrease in margins of trade intermediaries and a decrease of demand generated by recipients. On the other hand, the falling prices are usually a symptom of a decreasing demand and the beginning of an economic downturn. On the domestic market, raw materials are subject to similar tendencies. The maintenance of a stable pace of economic growth and stable prices of chemical raw materials will have a positive impact on the commercial activity of CIECH S.A. Considerable fluctuations of demand and prices caused either by fast economic growth or economic stagnation will have a negative influence on the activity related to trading in chemical raw materials by the Company. CIECH S.A. reduces price risk through concluding agreements with suppliers with appropriate price formula. Credit risk Credit risk means a threat of the counterparty not fulfilling the obligations stipulated in the agreement, exposing the lender to financial loss. From the CIECH S.A.'s point of view, credit risk is linked to: • trade receivables from customers, • loans granted, • cash and bank deposits, • guarantees and sureties granted. CIECH S.A. is exposed to credit risk connected with the credit rating of customers being parties to products and goods sales transactions. That risk is limited by using internal procedures to establish amounts of credit limits for customers and to manage trade receivables (the Company uses securities in the form of a letter of credit, bank guarantees, mortgages, receivables insurance and non-recourse factoring). Customers’ creditworthiness is assessed and appropriate collateral is obtained from the borrowers, allowing for a reduction of potential losses in the case of failure to repay the debt. Credit risk assessment for customers is performed prior to concluding an agreement and periodically at subsequent deliveries of goods in accordance with the binding procedures. The risk of the receivables portfolio is assessed on a weekly basis. On selected markets, where more risky payment deadlines are applied, the Company makes use of services provided by companies specialising in insuring receivables. Credit risk connected with cash in bank and bank deposits is low as CIECH S.A. enters into transactions with high-rating banks with stable market position. The table below presents the maximum exposure of financial assets to credit risk as at the end of reporting period. 31.12.2020 31.12.2019 Cash and cash equivalents 265,287 169,983 Loans granted 1,588,314 1,020,812 Trade receivables 169,664 285,995 Factoring receivables 35,946 30,856 Cash pooling receivables 7,992 6,496 Assets due to valuation of derivatives 1,835 18,115 TOTAL 2,069,038 1,532,257 The fair value of financial assets exposed to credit risk is similar to their carrying amount. At the end of 2020, there was one loan granted to an unrelated party with a nominal value of PLN 120 thousand. The Company has no material items which would be uncollectible as at the reporting date and not covered by an impairment allowance. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 64 Information on guarantees and sureties granted is provided in Note 9.2 to these statements. Trade receivables and factoring receivables (net value) Loans granted (net value) 31.12.2020 31.12.2019 31.12.2020 31.12.2019 Poland 181,672 258,623 597,805 590,617 European Union 23,837 45,221 990,509 430,195 Other European countries 51 - - - Africa - 911 - - Asia 50 12,096 - - TOTAL 205,610 316,851 1,588,314 1,020,812 Trade receivables and factoring receivables (net value) Loans granted (net value) 31.12.2020 31.12.2019 31.12.2020 31.12.2019 Soda Segment 114,333 132,447 - - Agro Segment 8,294 45,978 - - Foams Segment 995 93,856 - - Resins Segment 64,890 4,747 - - Silicates Segment 4,224 3,870 - - Packaging Segment 83 - - - Other activities 12,791 35,953 1,588,314 1,020,812 TOTAL 205,610 316, 851 1,588,314 1,020,812 * Assets related to discontinued operations. Detailed information on discontinued operations is provided in Note 5.9 to this report. Impairment of financial assets Changes in the gross carrying amounts of trade receivables and loans with reconciliation of write-downs as at 31 December 2020 and as at 31 December 2019 to opening balances are presented in the table below: Trade receivables Loans Stage 2 Stage 3 TOTAL Stage 1 Stage 2 Stage 3 TOTAL Lifetime ECL – not impaired Lifetime ECL – impaired 12-month ECL Liftime ECL Lifetime ECL Gross carrying amount as at 01.01.2020 286,152 12,200 298,352 1,035,699 - 2,801 1,038,500 Recognised 1,036,789 9,596 1,046,385 918,823 - - 918,823 Interest accrued - - - 38,680 - - 38,680 Written-down - (829) (829) - - - - Repaid (1,152,447) (466) (1,152,913) (452,951) - - (452,951) Foreign exchange differences (627) 29 (598) 56,619 - - 56,619 Gross carrying amount as at 31.12.2020 169,867 20,530 190,397 1,596,870 - 2,801 1,599,671 Opening balance of write-downs as at 01.01.2020 (351) (15,048) (15,399) (14,887) - (2,801) (17,688) Change in write-downs 194 2,848 3,042 6,331 - - 6,331 Closing balance of write-downs as at 31.12.2020 (157) (12,200) (12,357) (8,556) - (2,801) (11,357) Net carrying amount as at 31.12.2020 169,664 - 169,664 1,588,314 - - 1,588,314 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 65 Trade receivables Loans Stage 2 Stage 3 TOTAL Stage 1 Stage 2 Stage 3 TOTAL Lifetime ECL – not impaired Lifetime ECL – impaired 12-month ECL Liftime ECL Lifetime ECL Gross carrying amount as at 01.01.2019 280,497 15,048 295,545 1,150,196 - 3,328 1,153,524 Recognised 1,221,893 290 1,222,183 236,737 - - 236,737 Interest accrued - - - 43,575 - - 43,575 Written-down - (3,079) (3,079) - - - - Repaid (1,216,388) (56) (1,216,444) (390,739) - (527) (391,266) Foreign exchange differences 150 (3) 147 (4,070) - - (4,070) Gross carrying amount as at 31.12.2019 286,152 12,200 298,352 1,035,699 - 2,801 1,038,500 Opening balance of write-downs as at 01.01.2019 (351) (15,048) (15,399) (16,931) - (3,328) (20,259) Change in write-downs 194 2,848 3,042 2,044 - 527 2,571 Closing balance of write-downs as at 31.12.2019 (157) (12,200) (12,357) (14,887) - (2,801) (17,688) Net carrying amount as at 31.12.2019 285,995 - 285,995 1,020,812 - - 1,020,812 The net carrying amount of trade receivables and loans reflects the maximum exposure to credit risk. Calculation of impairment losses on loans granted As at the date of initial application of IFRS 9, the Company, in accordance with the three-stage expected credit loss model, calculated the expected credit loss on the basis of the probability of default (calculated based on the assessment of credit risk, i.e. the Company's rating). All loans were classified by the Company in Stage 1 (loans for which no significant deterioration in credit quality was observed and expected credit losses are estimated in the period of 12 months after the reporting date). As at 31 December 2019 and 31 December 2020, loans were not reclassified to Stage 2 or Stage 3. The following tables present the reconciliation of impairment losses on financial assets. 31.12.2020 31.12.2019 Gross carrying amount 1,599,671 1,038,500 Write-off (11,357) (17,688) TOTAL 1,588,314 1,020,812 The following table presents an analysis of the credit risk stages of loans measured at amortised cost. 31.12.2020 31.12.2019 Rating Bakset 1 Basket 3 TOTAL Bakset 1 Basket 3 TOTAL 12-month ECL ECL in life 12-month ECL ECL in life Rating CIECH S.A. (Ba3 Moody’s) 1,599,671 - 1,599,671 1,035,699 2,801 1,038,500 Gross value 1,599,671 - 1,599,671 1,035,699 2,801 1,038,500 Impariment loss (11,357) - (11,357) (14,887) (2,801) (17,688) Net value 1,588,314 - 1,588,314 1,020,812 - 1,020,812 CIECH S.A.'s rating was estimated on the basis of Moody's methodology (Rating Scorecard) and the most recent financial data of CIECH S.A., according to which the calculated rating of CIECH S.A. is Ba3. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 66 Calculation of impairment allowances for trade receivables The following tables present the reconciliation of impairment allowances for financial assets in accordance with IFRS 9. TOTAL Not overdue 0-30 days 30-60 days > 90 days > 180 days Receivables as at 31.12.2020 190,397 143,575 17,657 8,064 65 21,036 Gross receivables - 0.07% 0.03% 0.36% 0.15% 100.00% Expected credit losses 20,733 101 5 29 - 20,598 Total expected losses 203 101 5 29 - 68 from group analysis 20,530 - - - - 20,530 TOTAL Not overdue 0-30 days 30-60 days > 90 days > 180 days Receivables as at 31.12.2019 298,352 141,173 30,786 62,117 48,640 15,636 Gross receivables - 0.03% 0.03% 0.03% 0.22% 100.00% Expected credit losses 12,357 42 9 19 87 12,200 Total expected losses 157 42 9 19 87 - from group analysis 12,200 - - - - 12,200 Liquidity risk CIECH S.A. is exposed to risk connected with maintaining liquidity due to the considerable share of external financing (due to the term loan, working capital facility and lease agreements) in relation to operating results, the limited ability to obtain new financing due to the existing high level of indebtedness and the risk of losing the existing long-term financing as a result of violating covenants stipulated in the bond issue terms and loan agreements. The following measures are applied to reduce liquidity risk: • current monitoring of liquidity of CIECH S.A., • monitoring and optimisation of the level of working capital, • adjusting the level and schedule of capital expenditure, • intragroup borrowings and sureties for the liabilities from the CIECH Group’s companies, • current monitoring of the settlement of liabilities under the loan agreements conditions. The CIECH S.A.’s debt financing is ensured by a term loan. In addition, a revolving credit facility in the amount of PLN 250 million, constituting an additional source of current liquidity and working capital financing (as at 31 December 2020, the facility was drawn down in the amount of PLN 0 million), and overdraft facilities (as at the end of 2020, they were drown down in the amount of PLN 551,253 thousand) have been made available to the Company. As at 31 December 2020, one of the ratios included in the loan agreement was not met: the share of subsidiaries in the consolidated EBITDA value, which are guarantors in the loan agreement, did not exceed the required threshold of 80%. Therefore, the total value of loans made available on the basis of the above-mentioned contracts has been reclassified into short-term loan liabilities. The table below presents financial liabilities at face value grouped by maturity. 31.12.2020 Carrying amount Contractual cash flows Below 6 months up to 12 months 1–2 years 3–5 years Over 5 years Other financial liabiliies: (2,577,455) (2,607,704) (2,424,637) (183,067) - - - Trade liabilities (332,006) (332,006) (332,006) - - - - Loans and borrowings (2,095,105) (2,125,354) (1,942,287) (183,067) - - - Factoring liabilities (6,830) (6,830) (6,830) - - - - Cash pooling liabilities (143,514) (143,514) (143,514) - - - - Lease liabilities (28,124) (31,098) (2,943) (3,493) (9,593) (9,233) (5,836) Derivative instruments with negative value (27,702) (27,739) (8,208) (5,167) (14,364) - - Hedging derivatives with negative value (31,744) (31,452) (31,452) - - - - Total financial liabilities (2,665,025) (2,697,993) (2,467,240) (191,727) (23,957) (9,233) (5,836) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 67 31.12.2019 Carrying amount Contractual cash flows Below 6 months up to 12 months 1–2 years 3–5 years Over 5 years Other financial liabiliies: (2,282,524) (2,378,658) (589,441) (143,984) (384,733) (1,260,500) - Trade liabilities (382,909) (382,909) (382,909) - - - - Loans and borrowings (1,758,368) (1,854,502) (65,285) (143,984) (384,733) (1,260,500) - Factoring liabilities (17,097) (17,097) (17,097) - - - - Cash pooling liabilities (124,150) (124,150) (124,150) - - - - Lease liabilities (29,440) (33,606) (2,356) (2,850) (9,832) (10,397) (8,171) Derivative instruments with negative value (20,005) (20,396) (40) (17,495) (2,861) - - Hedging derivatives with negative value (5,015) (4,812) (97) (862) (3,853) - - Total financial liabilities (2,336,984) (2,437,472) (591,934) (165,191) (401,279) (1,270,897) (8,171) Detailed information concerning revenues and costs pertaining to financial instruments, recognised in the statement of profit or loss has been presented in note 8.1. Liquidity of CIECH S.A. The liquidity ratios as at 31 December 2020 decreased significantly compared to the level on 31 December 2019. It is related to the failure to meet the level of the ratio under the loan agreement, described in point 7.1 of this report. As at 31 December 2020, the current ratio, calculated as the quotient of total current assets and total short-term liabilities, was 0.63 31.12.2020 31.12.2019 Current ratio 0.63 1,73 Quick current ratio 0.63 1,69 8.4. DETERMINATION OF FAIR VALUE The following list presents the fair value of financial instruments. 31.12.2020 31.12.2019 Carrying amount Fair value Carrying amount Fair value Cash and cash equivalents 265,287 265,287 169,983 169,983 Loans granted 1,588,314 1,588,314 1,020,812 1,020,812 Trade receivables 169,664 169,664 285,995 285,995 Assets due to valuation of derivatives 1,835 1,835 14,377 14,377 Derivative instruments recognized in financial assets designated as hedging instruments - - 3,738 3,738 Cash pooling receivables 7,992 7,992 6,496 6,496 Factoring receivables 35,946 35,946 30,856 30,856 ASSETS 2,069,038 2,069,038 1,532,257 1,532,257 Loans and borrowings (2,095,105) (2,089,233) (1,758,368) (1,760,399) Trade liabilities (332,006) (332,006) (382,909) (382,909) Liabilities due to valuation of derivatives (27,702) (27,702) (20,005) (20,005) Derivative instruments recognized in financial liabilities designated as hedging instruments (31,744) (31,744) (5,015) (5,015) Cash pooling liabilities (143,514) (143,514) (124,150) (124,150) Factoring liabilities (6,830) (6,830) (17,097) (17,097) LIABILITIES (2,636,901) (2,631,029) (2,307,544) (2,309,575) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 68 The fair value of financial assets and liabilities corresponds with the amounts for which these instruments may be exchanged in a market transaction between well informed parties. The following assumptions were made in establishing the fair value: • cash, trade receivables and liabilities are not measured at fair value – it is assumed that the carrying amount is the closest to fair value due to the short maturities of these instruments, • fair value of financial assets and liabilities recognised in the statement of financial position at amortised cost for which no active market exists was established as the present value of future cash flows discounted at market interest rate. The carrying amount is the net value, the loans are floating rate, commissions and fees are not amortized. Measurement at fair value is grouped according to three-level hierarchy: • Level 1 – fair value based on market listing stock exchange prices (unadjusted) offered for identical assets or liabilities on active markets – did not occur. • Level 2 – CIECH S.A. measures derivatives at fair value by using measurement models for financial instruments and applying generally available interest rates, currency exchange rates etc. • Level 3 – fair value estimated on the basis of various valuation techniques which are not based on observable market inputs - did not occur. Assets and liabilities measured at fair value 31.12.2020 31.12.2019 Level 2 Level 2 ASSETS 1,835 18,115 Hedging instruments - 3,738 Derivative instruments measured at fair value through profit or loss 1,835 14,377 LIABILITIES (59,446) (25,020) Hedging instruments (31,744) (5,015) Derivative instruments measured at fair value through profit or loss (27,702) (20,005) TOTAL (57,611) (6,905) As at 31 June 2020, CIECH S.A. held the following types of financial instruments measured at fair value: interest rate swap contracts, currency forward contracts EUR/PLN and CIRS (currency and interest rate swap) contract EUR/PLN. The IRS contract hedging the interest rate is designated for hedge accounting. The fair value of the interest rate swap contract is determined as a difference in the discounted interest rate cash flow (cash flow based on a floating rate, the so-called floating leg, and a fixed rate, the so-called fixed leg). The input data for the method is the market data for interest rates provided by Reuters. The fair value of the CIRS contract is determined as a difference in discounted interest and capital cash flows. The input data for the method is the market data for interest rates and cross currency basis-swaps quotations provided by Reuters. The fair value of the currency forward is determined as a difference between the transaction rate and the forward rate at the valuation date multiplied by the nominal value of the contract in the foreign currency. The input data for the method is the market data for interest rates and cross currency basis-swaps quotations provided by Reuters. Fair value of financial instruments Long-term financial assets Short-term financial assets Other long-term liabilities Trade and other liabilities TOTAL 31.12.2020 IRS EUR - - - (618) (618) IRS PLN - - - (31,126) (31,126) CIRS 574 1,261 (14,327) - (12,492) Forward EUR/PLN - - - (13,375) (13,375) TOTAL 574 1,261 (14,327) (45,119) (57,611) 31.12.2019 IRS EUR 118 - (29) (460) (371) IRS PLN 3,048 405 (3,711) (815) (1,073) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 69 Fair value of financial instruments Long-term financial assets Short-term financial assets Other long-term liabilities Trade and other liabilities TOTAL CIRS 1,713 12,664 (2,747) (17,217) (5,587) Forward EUR/PLN - 167 - - 167 Forward RON/PLN - - - (6) (6) Forward USD /RON - - - (35) (35) TOTAL 4,879 13,236 (6,487) (18,533) (6,905) * At the end of 2020, we do not report the long-term portion of IRS transactions designated for hedge accounting. These transactions hedge the interest rate on loans that were recognized as short-term liabilities due to the breach of one of the covenants as at the balance sheet date. Details are described in point 7.1. The above financial instruments were classified at level 2 of the fair value hierarchy. In 2020, there were no transfers within the fair value hierarchy of instruments measured at fair value. Financial instruments not measured at fair value CIECH S.A. has taken out term and revolving credit facilities whose book value, as at 31 December 2020, is PLN 1,902,725 thousand, and whose fair value amounts to PLN 1,902,917 thousand (Level 2 of fair value hierarchy). In the case of the remaining financial instruments held by CIECH S.A. (classified mainly as cash and cash equivalents, financial assets and liabilities measured at amortised cost), the fair value is close to the book value. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 70 9. OTHER NOTES 9.1. NOTES TO THE STATEMENT OF CASH FLOWS The tables below present the reasons for the differences between the changes of particular items of the statement of financial position and changes resulting from the statement of cash flows: 31.12.2020 31.12.2019 Change in receivables reported in the statement of financial position 144,972 22,663 Receivables from the purchase of shares (12,891) 171 Reclassification of cash pooling receivables 1,496 (35,702) Change in receivables due to increase in subsidiary's capital - 10,524 Reclassification of receivables from the sale of fixed assets (143) - Reclassification of income tax receivables (1,792) - Change in receivables – netting of interest on loan - 25,762 Change in receivables in the statement of cash flows 131,642 23,418 31.12.2020 31.12.2019 Change in liabilities reported in the statement of financial position 336,207 (30,474) Change in financial liabilities (336,571) (55,222) Change in income tax liabilities (2,396) 867 Change in liabilities relating to non-current assets (5,341) 2,716 Reclassification of cash pooling liabilities (19,364) - Measurement of financial instruments (34,426) 19,748 Change in lease liabilities 1,316 (24,011) Change in liabilities on account of purchase of financial assets 3,607 4,742 Other (153) 580 Change in liabilities in the statement of cash flows (57,121) (81,054) 31.12.2020 31.12.2019 Change in provisions and employee benefits (1,180) (67,553) Change in provision for income tax liability - 66,397 Change in receivables in the statement of cash flows (1,180) (1,156) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 71 9.2. INFORMATION ON CHANGES IN CONTINGENT ASSETS AND LIABILITIES AND OTHER MATTERS Accounting policy Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the Company. Contingent assets are not recognised in the statement of financial position since this may result in the recognition of income that may never be realised. A contingent liability is a possible future obligation, whose existence will be confirmed by the occurrence or non- occurrence of uncertain future events not wholly within the Company’s control. These are also liabilities that arose from past events but were not recognised in the financial statements because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or the amount of obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised in the statement of financial position. Significant disputed liabilities of CIECH S.A. As at 31 December 2020, CIECH S.A. did not have any significant disputed liabilities pursued in all types of proceedings before court, body appropriate for arbitration proceedings or public administration bodies, except for the cases described in section “Audits of tax settlements at CIECH S.A.” in this chapter. Significant disputed receivables of the CIECH Group As at 31 December 2020, CIECH S.A. did not hold any significant disputed receivables pursued in all types of proceedings before court, body appropriate for arbitration proceedings or public administration bodies,apart from the case disclosed below in section “Contingent assets and contingent liabilities including guarantees and sureties”. Contingent assets and contingent liabilities including guarantees and sureties 31.12.2020 31.12.2019 Contingent assets 18,864 18,864 Other contingent receivables 18,864 18,864 Contingent liabilities 1,150,213 739,506 Guarantees and sureties granted 1,150,213 739,506 *Contingent asset in the amount of PLN 18,864 thousand related to the action against GZNF “FOSFORY” Sp. z o.o. for the payment of compensation for making an alleged untrue declaration by GZNF “FOSFORY” Sp. z o.o. to CIECH S.A. about the condition of Agrochem Człuchów Sp. z o.o. with its registered office in Człuchów. Including: • guarantee granted up to the amount of 125% of liability related to term loan in the amount of PLN 1,212,520 thousand and revolving loan in the amount of PLN 250,000 thousand – contingent liability in the amount of PLN 365,630 thousand, • guarantee granted up to the amount of 125% of liability related to term loan in the amount of EUR 30,000 thousand – contingent liability in the amount of PLN 34,611 thousand, • guarantee granted up to the amount of 125% of liability related to short-term loan in the amount of EUR 50,000 thousand – contingent liability in the amount of PLN 12,500 thousand, • guarantee granted up to the amount of 125% of liability related to short-term loan in the amount of EUR 10,000 thousand – contingent liability in the amount of PLN 11,537 thousand. • guarantee granted up to the amount of 125% of liability related to revolving loan in the amount of EUR 25,000 thousand – contingent liability in the amount of PLN 28,843 thousand, • guarantee granted up to the amount of 125% of liability related to revolving loan in the amount of PLN 300,000 thousand – contingent liability in the amount of PLN 75,000 thousand, • guarantee granted up to the amount of 125% of liability related to revolving loan in the amount of PLN 92,788 thousand – contingent liability in the amount of PLN 23,197 thousand. As at 31 December 2020, contingent liabilities amounted to PLN 1,150,213 thousand and increased as compared to 31 December 2019 by PLN 410,707 thousand. The change was primarily attributable to a change in the value of guarantees related to loans (as described above) and change in the value of guarantees for liabilities of subsidiaries: • issue of new guarantees for the liabilities of subsidiaries in connection with a reverse factoring agreement in the amount of PLN 362,500 thousand, FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 72 • issue of new guarantees for the liabilities of the subsidiary CIECH Salz Deutschland GmBH in the amount of EUR 6,325 thousand (PLN 29,187 thousand), • issue of new guarantees for the liabilities of the subsidiary CIECH Sarzyna S.A. in the amount of PLN 3,000 thousand, • decrease in a contingent liability under a guarantee in the amount of EUR 1,300 thousand (PLN 5,999 thousand) following the expiry of a surety for liabilities of a subsidiary, Ciech Soda Deutschland GmBH & CO. KG. Sureties and guarantees granted as at 31 December 2020 Beneficiary’s name Total amount of liabilities covered by guarantee/surety in whole or in specific part Financial terms, including guarantee fee due to the company; guarantee period Principal currency PLN CIECH S.A. Landesamt fuer Geologie und Bergwesen Sachsen- Anhalt EUR 7,101 thousand 32,769 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to liability; no time limit CIECH Soda Deutschland GmbH&Co. KG. (subsidiary) MECALUX Sp. z o.o. EUR 4,000 thousand 18,459 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims related to the subsidy; until 2 July 2021 CIECH Salz Deutschland GmbH (subsidiary) Evatherm AG EUR 21,900 thousand 101,064 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to liability; until the liabilities arising from the agreement between Evatherm AG and CIECH Salz Deutschland GmbH have been settled CIECH Salz Deutschland GmbH (subsidiary) IP System Manufacturing Sp. z o.o EUR 6,325 thousand 29,187 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims related to the agreement; until 30 April 2021 CIECH Salz Deutschland GmbH (subsidiary) BNP Paribas S.A. PLN 62,500 thousand 62,500 thousand Commission of 0.55% p.a. of the guaranteed liability; supplier financing agreement; until all obligations have been repaid no later than 36 months after the date of termination CIECH Soda Deutschland GmbH & Co. KG; Ciech Energy Deutschland GmbH BNP Paribas Faktoring Sp. z o.o. PLN 150,000 thousand 150,000 thousand Commission of 0.55% p.a. of the guaranteed liability; supplier financing agreement; indefinite term CIECH S.A., CIECH Sarzyna S.A., CIECH Pianki Sp. z o.o., CIECH Soda Polska S.A., CIECH Vitrosilicon S.A. mFaktoring S.A. PLN 150,000 thousand 150,000 thousand Commission of 1.5% p.a. of the guaranteed liability; supplier financing agreement – security for repayment of claims; until 31 December 2021 CIECH Sarzyna S.A., CIECH Żywice Sp. z o.o. mBank S.A. PLN 3,000 thousand 3,000 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims under the Guarantee agreement; until 30 June 2023 CIECH Salz Deutschland GmbH (subsidiary) Total nominal amount of liabilities resulting from the contract for which guarantees and sureties were granted PLN 546,978 thousand FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 73 Letters of support As at 31 December 2020, CIECH S.A. was the obliged party in the letter of support (Patronatserklärung) regarding CIECH Soda Deutschland GmbH&Co. KG seated in Staßfurt (CSD) granted to Innogy Gas Storage NWE GmbH (“Innogy”) relating to liabilities of CSD resulting from the agreement dated 5 May 2009 on salt caverns construction for the purpose of natural gas storage on the Staßfurt mining field according to which CSD received payments of EUR 45.8 million from Innogy by 31 December 2020. In the letter of support, CIECH S.A. has committed, among other things, to ensure that CSD will have sufficient funds to fulfil its financial commitments against Innogy resulting from the above-mentioned agreement. Audits of tax settlements and related contingent liabilities In 2020, the following audits and proceedings were carried out at CIECH S.A.: 1. audit concerning Corporate Income Tax settlements for 2012 (CIT 2012) – court stage 2. audit concerning Corporate Income Tax settlements for 2013 (CIT 2013) – court stage 3. a customs and fiscal audit concerning Corporate Income Tax settlements for 2014 (CIT 2014). CIT audit for 2012 at CIECH S.A. was initiated by the Head of the Małopolskie Province Customs and Tax Office in Kraków on 5 April 2018. CIECH S.A. received the outcome of the audit on 4 July 2018. The tax authority challenged the transaction concerning the capital increase in a subsidiary. In the opinion of the authority, making a cash contribution by means of a contractual set-off of mutual receivables gives rise to income on the part of the Company for which, according to the auditors, the company cannot recognise a cost. The company's management board and its tax advisors do not agree with the findings made by the auditors In December 2018, the company received a decision of the Head of the Małopolskie Province Customs and Tax Office in Kraków, upholding the previous position of the authority. The Company contested the position and filed an appeal. In April 2019, the Company received a decision of the second instance, upholding the decision of the first instance. In April and May 2019, the Company paid up the outstanding tax along with interest in three tranches in the total amount of PLN 66.4 million (tax: PLN 43.7 million, interest: PLN 22.7 million). The disputed amount of tax and interest were covered by the provision created in 2018, which was used as a result of their payment. CIECH S.A. appealed against the decision of the second instance to the Provincial Administrative Court in Cracow. On 9 October 2019, the Provincial Administrative Court issued a ruling in which it confirmed the approach presented by the authority. The court indicated that the company was obliged to recognise the income and did not have the right to recognise the tax deductible cost. After receipt of a written statement of reasons, the company lodged a cassation complaint with the Supreme Administrative Court on 23 December 2019. Currently, the company is waiting for the date of the hearing to be set. CIT audit for 2013 at CIECH S.A. was initiated by the Tax Audit Office in Warsaw on 30 November 2016. The tax audit report was issued on 16 May 2017. The authority claims that the Company has overestimated the tax deductible cost of interest on cash obtained as a result of the issue of bonds and allocated to the reserve capital of CIECH Soda Deutschland GmbH & Co. KG. Moreover, the authority is of the opinion that the fee for the “CIECH” trademark should not be recognised by CIECH S.A. as a tax deductible cost. The tax base challenged by the authority is PLN 9.4 million (after taking into account the tax loss incurred in the audited year), which translates into a tax of PLN 1.8 million. The company and its advisors did not agree with the findings of the auditors and as a result of the tax proceedings, the Decision of the First Instance was issued, against which the company filed an appeal in 2017. On 14 March 2018 CIECH S.A. received the decision of the Second Instance in which the auditors upheld their findings contained in the Decision of the First Instance. The company appealed to the Provincial Administrative Court against this decision. Despite this, the company decided to pay tax in the amount of PLN 1.8 million and interest (PLN 0.3 million) on 10 April 2018. The Court made its decision on 6 June 2019. The Court complied with the CIECH S.A. appeal as regards the costs of trademark fees, repealing the decision of the second instance. However, as regards the costs of consulting and financing of Soda Deutschland, the Court adjudicated that said costs could not constitute tax costs. After receipt of a written statement of reasons, the company lodged a cassation complaint with the Supreme Administrative Court in September 2019. Currently, the company is waiting for the date of the hearing to be set. CIT audit for 2014 at CIECH S.A. was initiated by the Head of the Małopolskie Province Customs and Tax Office in Kraków (hereinafter: Head of the Małopolskie Province Customs and Tax Office in Kraków) on 13 November 2019. The Company received the outcome of the audit on 22 May 2020. The authority claims that the Company has overestimated the tax deductible cost by including interest on external financing contributed to the capital reserves of Soda Deutschland Ciech FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 74 GmbH (hereinafter: SDC) and the costs of obtaining this financing in tax deductible costs. Moreover, the authority is of the opinion that expenses incurred on account of trade mark fees paid to the CIECH Group company should not be recognised by CIECH S.A. as a tax deductible cost. The taxable amount challenged by the authority is PLN 32.5 million which translates into a potential tax liability of PLN 6.2 million. The Company does not agree with the findings made by the auditors As a result, the customs and fiscal audit was converted into tax proceedings. On 15 October 2020, the Company received a report on the audit of the books in which the Head of the Małopolskie Province Customs and Tax Office leaves only the charge that the company overestimated the tax deductible cost by including interest on external financing contributed to the capital reserves of SDC and the costs of obtaining this financing in tax deductible costs (the taxable amount is PLN 22.7 million which translates into a potential tax liability of PLN 4.3 million). Thus, the office has refrained from questioning the expenses incurred for trade mark fees as a tax deductible cost. In the same month, the company submitted objections to the report on the audit of the books. Tax proceedings are currently underway. In addition, on 6 October 2020 the company received from the Head of the Małopolskie Province Customs and Tax Office a notice of suspension, as of 1 September 2020, of the statute of limitations for tax liabilities for 2014 due to initiation of proceedings for fiscal offences. The Company estimated that the potential impact on the income tax burden (in the form of additional tax liabilities) in connection with the current or further possible questioning of the above-described events would be PLN 57.5 million, if it is no longer probable that the Company will be able to uphold its tax interpretations before the tax authorities. Out of the above-mentioned amount of PLN 57.5 million, in connection with the conducted inspections, despite an appeal to the court against the received measurement decisions, the Company paid PLN 45.5 million in tax. The remaining amount, ie PLN 12.0 million, is disclosed as a contingent liability. From the amount of tax paid, PLN 1.8 million is shown as receivable from the Tax Office. The company has created a write-down for this receivable. Additionally, the Company paid PLN 23.0 million in interest. 9.3. INFORMATION ON TRANSACTIONS WITH RELATED PARTIES 9.3.1. TRANSACTIONS WITH RELATED PARTIES IN TOTAL Detailed information about transactions between CIECH S.A. and other related entities (i.e. companies controlled by the parent company at the highest level in relation to CIECH S.A. — Kulczyk Investments S.A.) as well as subsidiaries and associates of CIECH S.A. is presented below: CIECH S.A.’S TRANSACTIONS WITH RELATED ENTITIES Subsidiaries Associates Other related parties TOTAL 01.01.-31.12.2020 Sales revenues 529,147 25,602 - 554,749 Financial income, including: 290,244 114 - 290,358 Dividend 181,789 114 - 181,903 Purchases of products, goods, materials and services , including: 1,169,256 13,041 6,002 1,188,299 KI One S.A. - - 242 242 Financial expenses 52,238 - - 52,238 31.12.2020 Trade receivables 128,907 372 - 129,279 Loans granted 1,588,191 - - 1,588,191 Trade and other liabilities 405,656 1,226 48 406,930 Loans received 192,380 - - 192,380 01.01.-31.12.2019 Sales revenues 668,950 48,781 - 717,731 Financial income, including: 60,167 153 - 60,320 Dividend 5,133 135 - 5,268 Purchases of products, goods, materials and services , including: 1,429,774 8,211 4,616 1,442,601 KI One S.A. - - 210 210 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 75 CIECH S.A.’S TRANSACTIONS WITH RELATED ENTITIES Subsidiaries Associates Other related parties TOTAL Financial expenses 45,165 - - 45,165 31.12.2019 Trade receivables 215,239 5,497 706 221,442 Loans granted 1,020,812 - - 1,020,812 Trade and other liabilities 400,818 428 - 401,246 Loans received 125,753 - - 125,753 Terms of transactions with related entities Material sales to and purchases from related entities are carried out on terms which do not differ from arm’s length terms. Overdue liabilities and receivables are not secured and are settled through bank transfers. No material non-standard or non-routine transactions were concluded with related entities in 2020 except for the ones presented in section 9.3.3. In the presented period, the key management personnel of CIECH S.A. did not conclude any material transactions with members of the CIECH Group. 9.3.2. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES OTHER THAN ON AN ARM’S LENGTH BASIS To the best of the Company’s judgement, there were no transactions with related entities in CIECH S.A. on other than market conditions in 2020. 9.3.3. DESCRIPTION OF NON-ROUTINE TRANSACTIONS WITH RELATED PARTIES Information on significant transactions with related parties is provided in note 6.4 to these financial statements. 9.3.4. TRANSACTIONS CONCLUDED WITH KEY MANAGERIAL PERSONNEL Key managerial personnel comprises persons who are authorised to and are responsible for direct and indirect planning, managing and controlling the activities of CIECH S.A. Remuneration of the Management Board of CIECH S.A. The following table presents the amount of remuneration and additional benefits paid or payable to particular Members of the Management Board in 2020 and in the comparable period. In the years 2019-2020, members of the Management Board of CIECH S.A. did not receive any remuneration for holding a position in the Supervisory Boards or any other functions performed in the subsidiaries of the CIECH Group. 31.12.2020 Short-term employee benefits Post-employment benefits Termination benefits TOTAL Management Board 6,231 - - 6,231 Former members of the Management Board 1,361 1,202 1,258 3,821 TOTAL 7,592 1,202 1,258 10,052 31.12.2019 TOTAL Management Board 3,900 - - 3,900 Former members of the Management Board 2,324 1,280 2,660 6,264 TOTAL 6,224 1,280 2,660 10,164 Members of the Management Board are employed based on employment contracts. Remuneration of the Management Board Members are set out in individual employment contracts. Members of the Management Board are also entitled to: • discretionary bonus in the amount determined by the Supervisory Board of CIECH S.A.; • annual bonus determined in individual employment contracts. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 76 Remuneration of the Managing Director The following table presents the amount of remuneration and additional benefits paid or payable to the Managing Director in 2020. During this period, the Managing Director received remuneration for serving on the Supervisory Boards of: Polsin Overseas Shipping Ltd. Sp. z o.o. and Proplan Plant Protection Company S.L. Short-term employee benefits 01.01 – 31.12.2020 01.06 – 31.12.2019 Rafał Czubiński 1,096 396 The Managing Director is employed on the basis of an employment contract which defines the base salary and the applicable rules for the bonus system. Remuneration of the Supervisory Board of CIECH S.A. Short-term employee benefits Salary received from CIECH S.A. CIECH S.A. in 2020 Salary received from CIECH S.A. CIECH S.A. in 2019 Sebastian Kulczyk - - Piotr Augustyniak 483 461 Artur Olech 387 369 Marek Kośnik 372 171 Łukasz Rędziniak 181 - Martin Laudenbach 118 - Tomasz Mikołajczak 88 215 Mariusz Nowak 24 369 TOTAL 1,653 1,585 From 1 April 2016, Chairman of the Supervisory Board, Mr. Sebastian Kulczyk does not receive any remuneration due to the waiver of the claim for remuneration for the position of the Chairman of the Supervisory Board. ** On 16 March 2021, Mr. Piotr Augustyniak resigned from the position of a member of the Supervisory Board of CIECH S.A. In accordance with a Resolution of the Extraordinary General Shareholders’ Meeting, as of 1 November 2017 Members of the Supervisory Board are entitled to a monthly gross remuneration computed as a percentage of the calculation base. The calculation base is the average monthly remuneration in the sector of enterprises with profit distributions for the month preceding the calculation, announced by the President of the Central Statistical Office. This remuneration is paid in the following amount: • to the Chairman of the Supervisory Board – 400% of the calculation base, • to the Deputy Chairman – 350% of the calculation base, • to a Board Member – 300% of the calculation base. The Chairman of the Audit Committee is entitled to an additional gross monthly remuneration amounting to 150% of the remuneration payable to a Member of the Supervisory Board. Members of the Audit Committee are entitled to an additional gross monthly remuneration amounting to 100% of the remuneration payable to a Member of the Supervisory Board. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 77 9.4. INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE FINANCIAL STATEMENTS OF CIECH S.A. The entity authorised to audit financial statements for the period from 1 January 2020 to 31 December 2020 was Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered office in Warsaw. On 14 May 2020, CIECH S.A. signed an agreement with Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. on the review of semi-annual and audit of annual financial statements for the years 2020 and 2021. Value of agreements concluded with Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. is presented below: 31.12.2020 31.12.2019*/ Audit of the annual financial statements and review of the semi-annual financial statements 529 662 Other attestation services 45 1 TOTAL 574 663 * The remuneration includes additional costs, such as travel, accommodation and nourishment costs – additional costs may amount to a maximum of approx. 10% of the agreement value. ** The figures for the comparable period refer to agreements with PricewaterhouseCoopers Sp. z o.o. Sp. k. who provided audit services in 2014-2019. 9.5. EVENTS AFTER THE BALANCE SHEET DATE Closing of the transaction for the sale of 100% shares in CIECH Żywice Sp. z o.o. On 1 March 2021, CIECH S.A. entered into an agreement for the sale of 74,677 shares in CIECH Żywice Sp. z o.o. with LERG S.A. with its registered office in Pustków-Osiedle, accounting for 100% of shares in the share capital of CIECH Żywice Sp. z o.o. The value of the Agreement (equal to the enterprise value being sold), taking into account, among others, the share disposal price, is approximately PLN 160 million. The final price of the Shares being sold will be determined in accordance with the rule arising from the Agreement. For details of the transaction, see current reports No 27/2020 and 4/2021. Conclusion of a loan agreement On 16 March 2021, a Loan Facility Agreement was concluded between, inter alia, CIECH S.A. (as the borrower and guarantor), its selected subsidiaries: CIECH Soda Polska S.A., CIECH Sarzyna S.A., CIECH Soda Deutschland GmbH & Co. KG, CIECH Energy Deutschland GmbH and CIECH Salz Deutschland GmbH (as borrowers and guarantors), BNP Paribas Bank Polska S.A. (as an agent), Powszechna Kasa Oszczędności Bank Polski S.A. (as a security agent) and banks: Powszechna Kasa Oszczędności Bank Polski S.A., mBank S.A., BNP Paribas Bank Polska S.A., Industrial and Commercial Bank of China (Europe) S.A. Branch in Poland, Bank Polska Kasa Opieki S.A., Bank Millennium S.A., Credit Agricole Bank Polska S.A., Société Générale S.A., Bank Handlowy w Warszawie S.A., Bank Ochrony Środowiska S.A. and Intesa Sanpaolo S.P.A. ARE. Branch in Poland (as lenders). The Facility Agreement provides for loans in PLN and EUR up to the total amount (expressed in PLN) of PLN 2,115,000 thousand. The agreement provides for an over 2-year grace period for the repayment of the term loan (the first repayment is required on 30 June 2023), during which the repayment of the loan principal will not be required. Detailed information on the agreement was included in the current report 7/2021. Resignation of the supervisor On 16 March 2021, Mr. Piotr Augustyniak resigned from the function of a member of the Supervisory Board of CIECH S.A. A new company of the CIECH Group On 25 February 2021, the Founding Act of CIECH VENTURES Sp.z o.o. was signed, the sole shareholder of which is CIECH S.A. The company was established with the share capital of PLN 1,000 thousand which is divided into 20 thousand shares with a nominal value of PLN 50 each. The shares are acquired by CIECH S.A. in return for cash. The company is being organized, we are waiting for registration in the National Court Register. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 78 Signing a letter of intent On 26 March 2021, between CIECH S.A., CIECH Soda Polska S.A., Budimex S.A., EEW Energy from Waste GmbH, EEW Energy from Waste Polska sp.z o.o., FBSerwis S.A. and the Janikowo Commune was signed: • letter of intent regarding the continuation of cooperation in the implementation of the investment consisting in the construction by EEW, EEW Polska and FBSerwis on real estate belonging to CIECH Soda Polska S.A. installations for thermal treatment of waste and • Memorandum of Understanding. Detailed information on the cooperation was included in the current report 9/2021. Division of the company On 25 February 2021, the Extraordinary General Meeting was held on the division of the Company by transferring part of the assets of the Divided Company, CIECH Vitrosilicon S.A. on the Acquiring Company CIECH Vitro Sp. z o.o. in return for the shares that the shareholders of the Divided Company will receive in the increased share capital of the Acquiring Company - division by spin-off. Separated from the company CIECH Vitrosilicon S.A. an organized part of the enterprise, which may be an independent enterprise that independently performs production and sales tasks, in particular glass packaging in the form of lanterns and utility jars ("Packaging Activity"). The Extraordinary Meeting of Shareholders of CIECH Vitro sp.z o.o., which due to the division of CIECH Vitrosilicon S.A. ("Divided Company"), increases the share capital of the Company from the amount of PLN 5 thousand up to the amount of PLN 1,135.5 thousand, that is by the amount of PLN 1 130.5 thousand by creating 22,610 new shares in CIECH Vitro sp.z o.o. with a nominal value of PLN 50 each share and a total nominal value of PLN 1,135.5 thousand, which will be granted to the shareholders of the Divided Company using the following share exchange ratio: 6,679,109 shares of the Divided Company entitles to receive 22,610 shares of CIECH Vitro sp.z o.o. ("Acquiring Company") (ie 295.4 shares of the Divided Company entitle to receive 1 share of the Acquiring Company), as follows: • CIECH Soda Polska S.A., in exchange for 1,133,246 shares in the Divided Company (constituting all shares in the Divided Company owned by CIECH Soda Polska S.A.), will take up 13,759 shares in CIECH Vitro Sp. z o.o., which will be covered by the acquired organized part of the enterprise from CIECH Vitrosilicon S.A., • CIECH S.A., in exchange for 728,982 shares of the Divided Company (constituting part of the shares in the Divided Company owned by CIECH S.A.), will take up 8,851 shares in CIECH Vitro Sp. z o.o., which will be covered with part of the organized part of the enterprise acquired from CIECH Vitrosilicon S.A. As of the date of registration by the court of the share capital increase, the capital structure will be as follows: • CIECH Soda Polska S.A. will own 13,759 shares, representing 60.59% of the share capital, • CIECH S.A. will own 8,951 shares, constituting 39.41% of the share capital. On 1 April 2021, the Court registered the division of CIECH Vitrosilicon S.A., a decrease in the share capital of CIECH Vitrosilicon S.A. and an increase in the share capital of CIECH Vitro Sp.z o.o. 9.6. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE COVID-19 CORONAVIRUS PANDEMIC ON THE OPERATIONS OF CIECH S.A. Due to the global COVID-19 pandemic, 2020 was a special year, the effects of which will also be felt in the coming years. The COVID-19 pandemic has caused an economic slowdown unprecedented in recent years. CIECH S.A. also experienced the adverse effects of the pandemic, which had an impact on the achievement of the Company's goals in 2020. The outbreak of the COVID-19 coronavirus pandemic and the resulting decisions and recommendations of state authorities influenced the functioning of the Company and the entire CIECH Group, causing temporary and limited to individual segments disruptions in the day-to-day operations. Since the outbreak of the COVID-19 pandemic, the Company has taken the necessary steps to prepare and implementation of solutions aimed at protecting the health and life of employees, third-party employees and business partners. When making decisions related to counteracting the effects of the pandemic, the Management Board was guided by care for the health of employees and care for the long-term value of the Company. The protection of the health and life of employees was the overriding goal for the Company. From March 2020, employees were allowed to remotely perform work. Along with introducing the possibility of remote work, the Company adapted internal procedures regulating the new solutions. The company has provided the necessary and FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 79 required protective measures to minimize the risk of infection and outbreaks. As a result of the implemented solutions, in 2020 the Company recorded only single cases of infection of employees. The key objective for the Management Board of the Company, in addition to ensuring the health and safety of employees, was to ensure the continuity of the Company's operations and due to the role that the Company plays in the structures of the CIECH Capital Group, individual segments and production plants of the Group. As a result of the introduced solutions, during the period of the greatest restrictions announced by the government, the Company conducted its operations on an ongoing basis. There were no cases of interruptions in the supply chain due to disruptions in transport, availability of raw materials, or temporary suspension of production in any of the Group's production plants. The consequence of the economic slowdown caused by the pandemic, however, was a decrease in sales in the main operating segment, ie the Soda Segment. The situation deteriorated especially in the second quarter of 2020. The second half of the year brought an improvement in the situation, along with the return to normality of individual countries and the unfreezing of economies in Poland and Europe. Key clients resumed operations, but the losses from the second quarter could not be recovered. Despite the drop in demand for soda products, under the contracts concluded back in 2019, the Company made deliveries at previously agreed prices. Strong price competition, caused by the oversupply of soda products on the market, was observed in spot transactions. The industries that were heavily affected by the effects of the pandemic were the hotel and restaurant industry (HoReCa) and the automotive industry of key importance for the Soda Segment. While the situation in the automotive industry has stabilized and started to return to equilibrium (car manufacturers resumed production and restored previously limited production capacity), the HoReCa industry until the end of 2020 in many European countries remained frozen or operated to a limited extent, making it impossible to fill previous contractual obligations. The expected collapse in demand and a quick V-shaped rebound did not take place. Finally, 2020 turned out to be weaker compared to 2019. In the entire 2020, the Group's consolidated revenues in the Soda Segment, compared to 2019, decreased by PLN 349 million to PLN 2 088 million, with about PLN 290 million of decrease resulting from the hibernation of the plant in Romania. Detailed information on the results of individual segments can be found in note 2 of the Consolidated Financial Statements of the CIECH Group for 2020 and in point 4.2.2. Management Board Report on the activities of the CIECH Group and CIECH S.A. for 2020. The Silicates Segment suffered a similar effect of the pandemic - the demand for silicates fell with the freezing of European economies. Major customers from the automotive sector either stopped production or significantly reduced it, thus reducing the demand for silicates. Nevertheless, since mid-year, when the automotive sector began to restore production capacity, demand for silicates returned to the pre-pandemic level. The breakdown in the Silicate Segment took a V-shape. The Foam Segment has been hit hard by the pandemic and freezing-related restrictions, in particular due to the closure of upholstered furniture factories. The reduction in demand and thus the production of foams at the Bydgoszcz plant took place in April and May 2020. In addition to the pandemic, the risk of shortage of basic raw materials for foam production, i.e. TDI and polyols, has materialized in the Foam Segment. In the second half of the year, the plant in Bydgoszcz, along with the unfrozen economies and the return to the operation of furniture factories, restored full production capacity. The slowdown in this Segment took the shape of a V. In addition, in the second half of 2020, suppliers also restored supplies of TDI raw materials and polyols, however, their prices at the end of 2020, compared to 2019, increased by 90%. However, the specificity of this industry made customers accept new, higher prices. The area of packaging production also felt the negative effects of the pandemic - compared to 2019, lower quantitative sales of glass packaging were recorded. The drop in sales was caused by the freezing of social life, including the closure of cemeteries. There has also been an increase in competition on the glass packaging market. As a result of unfavorable phenomena, the Company focused its sales activities on high-margin products. From the Company's perspective, the Agro Segment turned out to be the Segment that turned out to be immune to the negative effects of the pandemic. The pandemic did not negatively affect the demand for plant protection products. This Segment is much more dependent on natural and weather factors than pandemic events. The only unfavorable phenomena in this sector, in connection with the outbreak of the pandemic, took place at the turn of the first and second quarter of 2020, due to short-term difficulties in the availability of raw materials and an increase in the costs of logistics services from Asia (from where most raw materials for the production of the Agro Segment are imported). However, these were short-term difficulties which, in terms of the entire 2020, did not adversely affect the results of this Segment's operations. The occurrence of the COVID-19 pandemic and the analyzes carried out by the Company did not show any indications of a higher risk of impairment of the used tangible fixed assets and intangible assets, and investments in progress. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2020 (in PLN thousand) 80 The liquidity situation of the Company and the CIECH Group in 2020 remained stable. The company had sufficient cash and available sources of financing to meet its obligations on time. In 2020, CIECH generated a net cash flow from operating activities in the amount of PLN 66 million. As at 31 December 2020, the Company had cash in the amount of PLN 265 million and available limits under the granted credit lines in the amount of PLN 353 million. In 2020, the Company and the Group had access to funds provided under promised loan agreements (syndicated loan agreement and bilateral revolving loan agreements, with a total value of PLN 2,109 million) and additional sources of financing in the form of factoring agreements, reverse factoring and overdrafts. On 28 December 2020, taking into account the favorable conditions on the banking market regarding the availability of debt financing, the Management Board of CIECH S.A. decided to start negotiations on the conclusion of a new loan agreement with a value of PLN 2,115 million and a 5-year repayment period, in order to refinance the existing debt. The new loan agreement was signed on 16 March 2021. Under the new loan agreement, the following loans will be made available: a term loan amortized (PLN 560 million), a term loan without amortization (PLN 1,305 million) and a revolving loan with the value of PLN 250 million. The agreement provides for an over 2-year grace period for the repayment of the term loan (the first repayment is required on 30 June 2023), during which the repayment of the loan principal will not be required. Currently, the Company does not identify the risk of defaulting on debt repayment obligations under loan agreements or the risk of maturity due to failure to meet the level of ratios tested under loan agreements. The Group's consolidated net debt to consolidated EBITDA (adjusted) ratio tested under loan agreements was [2.45x] at the end of 2020 against the maximum level of 4.0x specified in the agreement. At the end of 2020, there was a breach of the guarantor coverage ratio tested under the existing loan agreements, but lenders agreed to waive the effects of the breach, including refinancing of the existing debt through a new loan agreement. There was no significant deterioration in the terms of payment of receivables by contractors. The share of receivables overdue by more than 7 days in total receivables remained at the end of the year at a level similar to that at the end of the previous calendar year. The vast majority of the Company's receivables were insured and financed through non-recourse factoring. It should be noted that the pandemic did not adversely affect the liquidity and working capital of the Company and the Company's availability to capital. In addition, as a result of the COVID-19 pandemic, the Company did not report the risk of non-performance of contracts at a higher level than in the course of ongoing operations in the absence of a pandemic. In 2020, an adverse impact of the pandemic on the Company's operations was observed, but the impact on the Company's results was not significant, in the opinion of the Management Board. As a result of the pandemic, no additional revaluation write-offs were made for fixed or current assets, and there was no need to recognize additional provisions apart from write-offs and provisions which are recognized in the course of the Company's regular operations. The Management Board estimates that in 2021 both the parent company and its subsidiaries will continue their operations in a substantially unchanged scope for a period of at least 12 months from the date of preparation of the report, except for CIECH Trading Sp. z o.o., for which a liquidation plan has been implemented. Nevertheless, it should be stated that the pandemic situation causes economic uncertainty and therefore it is not possible to fully predict its effects, including the impact of the pandemic on the financial statements, including the results and the valuation of individual items in the statement of financial position in subsequent reporting periods. REPRESENTATION BY THE MANAGEMENT BOARD REPRESENTATION BY THE MANAGEMENT BOARD These financial statements of CIECH S.A. for the financial year ended 31 December 2020 were approved by the Company’s Management Board on 22 April 2021. Warsaw, 22 April 2021. (signed on the polish original) ……………………………................................................ Dawid Jakubowicz — President of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) ……………………………………………………………………………… Jarosław Romanowski — Member of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) ……………………………………………………………………………… Mirosław Skowron — Member of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) …………………………………………………………………..………….. Katarzyna Rybacka — Chief Accountant of CIECH Spółka Akcyjna