RNS Number:9232W
Petrol AD
21 May 2007
ANNUAL REPORT 2006
ACCOMPANIED BY
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
April 2007
Table of contents
Selected performance indicators........................................... 3
Management Board's message........... .......................................5
Group profile................................................................6
Operating and financial review............................................. 17
Outlook .................................................................. 35
Corporate governance....................................................... 37
Environmental commitments.................................................. 40
Independent auditor's report............................................... 42
Consolidated financial statements as of December 31, 2006.................. 46
Notes to the consolidated financial statements............................. 52
Selected performance indicators
2006 2005 2004 2003
Financial highlights
Revenue BGN mln 1,293.2 1,437.4 995.3 457.6
EUR mln 661.2 734.9 508.9 234.0
Gross margin BGN mln 124.5 136.2 113.1 83.6
EUR mln 63.7 69.6 57.8 42.7
% 9.6 9.5 11.4 18.3
EBITDA BGN mln 42.0 46.4 60.2 25.7
EUR mln 21.5 23.7 30.8 13.1
% 3.3 3.2 6.0 5.6
EBIT BGN mln 23.0 24.5 32.5 4.4
EUR mln 11.8 12.5 16.6 2.2
% 1.8 1.7 3.3 1.0
Net profit BGN mln 13.1 18.4 19.3 4.8
EUR mln 6.7 9.4 9.9 2.5
% 1.0 1.3 1.9 1.0
Earnings per share BGN 0.12 0.17 0.18 0.04
EUR 0.06 0.09 0.09 0.02
Share price (1) BGN 4.33 3.78 3.16 3.96
EUR 2.21 1.93 1.62 2.02
Assets BGN mln 612.1 442.5 409.5 380.7
EUR mln 313.0 226.2 209.4 194.7
Debt (2) BGN mln 265.9 160.5 103.1 97.9
EUR mln 136.0 82.1 52.7 50.0
Shareholders' equity BGN mln 175.5 161.5 201.6 182.0
EUR mln 89.7 82.6 103.1 93
Working capital BGN mln 101.7 (8.3) 132.7 (7.5)
EUR mln 51.9 (4.3) 67.8 (3.8)
Capital expenditure BGN mln 22.4 9.4 54.2 88.5
EUR mln 11.5 4.8 27.7 45.2
Financial ratios 2006 2005 2004 2003
Return on equity (ROE) (%) 7.76 10.15 10.05 2.71
Return on average capital employed (ROACE) (%) 7.33 9.41 11.83 1.90
Return on assets (ROA) (a %) 4.36 5.76 8.23 1.26
Debt to assets ratio (%) 43.45 36.27 25.17 25.69
Shareholders' equity to Total assets (%) 28.67 36.50 49.24 47.80
Debt to equity ratio (%) 151.56 99.37 51.12 53.75
Debt to EBITDA (%) 632.64 345.68 171.32 380.83
Current ratio 1.46 0.96 2.05 2.39
Inventory turnover (in days) 34 16 14 33
Accounts receivable collection period (in days) 19 17 18 22
Operating data 2006 2005 2004 2003
Volume of fuel sales (million litres) 877 1,044 765 246
Volume of fuel sales (thousand tonnes) 50 75 80 357
Market share in retail fuel sales 19% 17% 18% 15%
Market share in wholesale fuel sales 18% 23% 17% 15%
Number of fuel stations, including 492 460 451 446
Renewed fuel stations 99 83 81 71
Number of storage facilities, including 82 82 83 83
Storage facilities operating during the period 13 13 10 10
Number of fuel tank truck 34 28 31 67
Percentage of credit card sales 22% 17% 14% 13%
Number of personnel (at the end of the period) 3,630 3,859 3,890 3,889
Management Board's message
Dear Shareholders,
In 2006 the Bulgarian fuel market has witnessed the continuing trend, started in
the previous year, for intensifying of the competition among the main market
players and consequently for reduction of gross trade margins. Distributors of
petroleum products in the country faced serious challenges because of the
volatility of crude oil prices on the international commodity markets.
During the current year, which was difficult for the oil industry, the Group
(Petrol AD and its subsidiaries) accounted for good results regarding the sales
of fuels and other goods. On the retail market the volume of sales of fuels in
litres increased by 18% compared to the previous year, the income from sales of
lubricants and other goods increased by 29%. Total income from retail sales in
BGN increased by 20% compared to the previous year. As a result of the change in
our pricing strategy on the wholesale market connected with the transition to
prices based on international quotations, the volumes of fuel sold decreased by
32% by the end of the year, which led to a 10% decrease in the Group's
consolidated sales revenue. Nevertheless, in 2006 the Group's gross margin
stayed stable on a level of 9.6% (2005: 9.5%).
In 2006 Petrol AD has launched a wide-range advertising campaign, which included
successful promotions organised jointly with leading national and international
brands as Coca Cola, Procter & Gamble, Carlsberg, Prista Oil, M-tel, etc. 38,000
clients took part in the national campaign held under the motto "Evaluate Me!".
During the year we have started selling items for cars under the new brand
Perfect. The results from this initiative showed that clients have trust in the
Petrol brand and are willing to buy fuels and goods, offered under our brand
name. Petrol GT Racing team won the national car racing championship in 2006. In
2006 we signed 35 franchise contracts with independent operators and our network
expanded to 492 objects. We sold 8.9 million litres of fuels in these new
outlets, which is 2% of our total retail sales. During the current year we
attracted 1,007 new corporate clients, which bought 32.7 million litres of fuels
(7.8% of our total retail sales).
During the year 16 fuel stations were renewed. New liquid petroleum gas (LPG)
modules were installed to 9 fuel stations. The Group made additional investments
in 107 fuel stations in order to meet the environmental requirements. In 2006
three new trade centres were designed and their construction will start in 2007.
We would like to thank for the strong performance of the Group in 2006 to our
shareholders, clients and partners for their support and trust, and last but not
least, to the whole management staff and to all our colleagues from all
companies in the Group for the shared values and for their contribution to the
achievement of our common mission and objectives.
The Management Board of Petrol AD
April 21, 2007
Group profile
Petrol - energy for people
Petrol AD has a leading role in petroleum products distribution in Bulgaria.
At the end of 2006 the company is among:
* The first Bulgarian private companies in terms of sales income;
* The four largest companies operating on the market of petroleum
products in the country;
* The major private investors in Bulgaria;
* The companies with highest capitalization on Bulgarian Stock Exchange
- Sofia;
* The biggest private taxpayers;
* The ten largest employers in the country.
The Group (Petrol AD and its subsidiaries) is the owner of the most
well-developed network for distribution of petroleum products in the country,
both wholesale and retail, which includes 492 retail stations, operating under
the brands of "Petrol" and "Lukoil", 82 petrol storage facilities and 3 petrol
port terminals, all evenly spread throughout the country's territory. In 2004
the Group completed the modernisation of 80 of Petrol's retail stations which
makes it the owner of the biggest number of reconstructed sites of modern
European style. According to the investment programme, till the end of 2007 168
stations should be reorganised into new modern sites offering quality services.
All kinds of unleaded gasoline and Euro diesel are sold in all trade sites of
Petrol AD, LPG is offered in 185 retail stations. Other products available
include the full range of Bulgarian and imported motor and transmission
lubricants, brake and antifreeze fluids, automobile cosmetics, spare parts and
accessories. In many sites additional facilities are placed such as car washes,
inspection/service pits, pits for dismounting, mounting and balance of tyres and
other services.
The company builds up its new retail stations as service stations. In part of
the sites modern kiosk terminals are installed to provide internet access. Debit
and credit cards are accepted, withdrawal/deposit operations with these cards
are also allowed. In terms of offering this package of services and means of
communication and payment Petrol AD has no real competitor on the domestic
market. The newly built retail stations are commercial sites with convenience
stores and fast-food places, furnished with professional machines and equipment.
The range of products in the stores goes from automobile products to food and
beverage (over 4,000 items of leading domestic and foreign producers),
cosmetics, accessories, magazines and newspapers, etc.
The adopted technical and ecological standards in the company's sites exceed
those required within the European Union. All products in the stations and
storage facilities comply with all technological requirements and quality
standards. High quality of products is a priority for the management. Company
policy does not tolerate deviations from technology or ecological standards. The
retail stations are in conformity with all valid standards and the best European
and international practices.
Petrol AD is the sole petrol company in Bulgaria maintaining 5 laboratories for
current fuel quality control. The laboratory in Varna is licensed to perform
examinations on state level, thus able to provide internationally acknowledged
certificates. Own stations are being tested 4 to 6 times annually. Other large
companies operating on Bulgarian fuel market also examine their products in
Petrol AD laboratories. The company works in close co-operation with a number of
state institutions involved in fuel quality control.
History
The beginning of the 20th century saw an industrial boom in the biggest
Bulgarian cities as a result of established trade contacts with European
countries and the enthusiasm of well-educated young men. This economic boom was
most obvious in Rouse - a town on the Danube River - where the Bulgarian petrol
industry was born. The Veshkovi brothers invested their own capital to build a
refinery and established First Bulgarian Petrol Industry. In 1921 in Bourgas, a
city on the Black Sea coast, Standard Oil opened the first factory for the
production of barrels and packaging.
The origins of Petrol AD as a supplier of petroleum products date back to 1
April 1932 when the predecessor of the Company was incorporated as a joint stock
company under Bulgarian law. Initially, the company used the warehouse
facilities of one of its shareholders and gradually over time the company
invested in the construction of its own facilities.
In 1947, the Bulgarian government nationalised the Bulgarian petrol industry and
the Bulgarian parliament created a state monopoly through the passage of the Law
on the State Monopoly on Petrol Products in February 1948. The following month,
the assets of a number of private companies were amalgamated to form a state
owned petrol supply monopoly. During the period after nationalisation, the
petrol supply monopoly gradually expanded its operations, with petrol stations
and storage facilities being constructed throughout Bulgaria. In 1986, the
petrol supply monopoly was restructured to form a part of the Chimsnab chemical
products monopoly.
In 1990, the business was restructured and reorganised pursuant to Article 11(2)
of Decree No. 56 and was incorporated on 14 March 1990 as a state owned company,
registered with the Sofia City Court under company court file number 1358/1990.
In July 1992, the retail fuel supply monopoly was transformed into Petrol EAD, a
joint stock company wholly owned by the state. During the period from 1992 to
1997, approximately 25% of Petrol's share capital was distributed to
privatisation funds and private individuals as part of the Bulgarian
government's voucher privatisation policy.
As part of this policy, Petrol EAD was re-registered as Petrol AD, a joint stock
company, on 10 June 1997 and, on 1 July 1998, was registered as a public company
in the Public Register of the Financial Supervision Commission. Following a two
year privatisation process, in 1999 a 51% stake in Petrol AD was sold by the
Bulgarian government to International Consortium Bulgaria AD (which was
subsequently renamed Naftex Petrol), a consortium comprising Naftex Bulgaria
Holding AD, a company engaging in oil trading, OMV AG, an oil and gas group and
Petrol Holding Group AD, a company established by former members of the
management of Petrol AD.
In 2001, Naftex Bulgaria Holding AD acquired the interests of the other members
in the consortium. The consideration for the acquisition included the sale by
Petrol AD of 25 retail stations to OMV, who remain one of the Group's
competitors in Bulgaria. One of the obligations imposed on the Company at the
time of its privatisation was that the Company establish an investment programme
under which USD 60 million (EUR 48.4 million) of certain recognised investments
would be made between 2000 and 2004. The Company has since satisfied this
obligation. In December 2003, Naftex Bulgaria Holding AD was renamed Petrol
Holding AD.
Mission
The company's mission is to accomplish a stable growth on shareholders' return
in the long term along with commitment to its clients, employees, partners and
generally to the society.
In achieving its corporate goals, the company's management relies significantly
on professional behaviour, ethics and business integrity towards its partners.
All projects in the investment programme are being implemented on an innovative
basis and complied with the highest international standards for business
management and environmental protection.
The company management believes in Petrol AD's development of a large public
company as a leader in Bulgarian capital market. Clear sight for the future
development and dividend policy, working with bond market instruments, standing
by international standards and practices, together with implementation of modern
high-technology information and communication decisions, prove Petrol AD to be a
modern company with substantial opportunities for further development.
Strategy
The Group's main strategic objective is to maintain its leading position in the
Bulgarian fuel distribution market, while providing shareholders with a stable
long-term return. In achieving this Management Board is pursuing a strategy with
five main elements:
* Asset rationalisation and enhanced efficiency;
* Expansion of retail network;
* Expanded product offering;
* Investment in network and brand; and
* Increase third party storage fees.
Asset rationalisation and enhanced efficiency
The Group plans to continue its streamlining of the business with further
non-core assets disposals, excess capacity closure and technology-based
productivity improvements.
In addition to the Group's two primary business lines, retail and wholesale fuel
distribution; it also engages in a number of other businesses and owns several
assets which are unrelated to these core business lines. In order to maximise
the value of the Group's assets, it has already disposed of some of, and intends
further to dispose of, certain non-core assets which do not relate to these
primary business lines. The Management Board of Petrol AD has disposed of its
interests in Transat AD and Trans Telecom OOD which have been moved to Transhold
AD (a subsidiary of Petrol Holding AD. On June 2006 the Management Board has
reached a decision for Transloto AD to be transferred to Transhold. Vratzata
EOOD is intended to be disposed of, along with certain other assets to
Eurocapital Bulgaria AD which will operate as an asset holding company for the
Group's non-core assets which are to be retained. On June 5 2006, on a regular
annual General Meeting of the shareholders in Petrol AD, the Management Board
was authorised to dispose of all fixed assets owned by Petrol AD, such as land,
building and machinery not necessary for carrying out the core Company's
activities. It was as well authorised to enter into contracts for the sale of
shares/interests in the following Petrol AD subsidiaries - Vratsata EOOD,
Transloto AD, Eurocapital Bulgaria EAD, Petrol Cart Service EOOD, Petrol
Engineering AD, Varna Business Services OOD, BPI EAD and Petrol Trade EOOD.
The Group has reduced the number of storage facilities that it maintains over
the last few years from 67 to 34, so as to maintain facilities commensurate with
anticipated long-term demand.
The Group has invested in Very Small Aperture Terminal technology (VSAT),
allowing individual petrol stations to communicate with each other via a hub
station. The Group has also invested in a SAP/R3 enterprise resource system that
combines all single integrated software programme using a single database. The
advantages of this system to the Group include management centralization, staff
cost savings, accelerating the process of decision-taking and an opportunity for
prompt price changes in petrol stations.
The Group has also reduced cost on railway infrastructure as a result of the
subsided share of this kind of fuel transportation in favour of the automobile
transport. The Group's auto-park amounts to 27 tanker trucks with bigger tonnage
and higher efficiency than the old auto-park of 67 automobiles. Over the last 3
years the Group has reduced administrative staff to approximately 5% (340
people).
Expansion of retail network
The Company intends to increase its sales and market share by increasing the
size of its site retail network by up to 140 stations by 2010. This will be via
a combination of opening new sites in new high throughput locations (e.g. on
Bulgaria's new motorway network) and via consolidation of its smaller
independent competitors through franchise/ dealership arrangements and outright
acquisition. The Group believes that substantial profitable growth can be
achieved over the medium-term in the retail sector by consolidating the large
number of independent fuel retailers, which together currently account for
approximately 50% of retail sector fuel sales.
Expanded product offering
In conformity with the Group's plans to expand its retail product offering,
particularly of higher margin non-fuel products and services, since 2000 the
company has increased the number and renovated the existing mini-markets (in 52
stations), convenience stores (in 131 stations), automotive service facilities
(in 104 stations) and car washes (in 27 stations). The Group also intends to
increase the number of stations offering internet access to customers through
electronic kiosks, as well as other ancillary services, such as the Transcard
credit card.
On the fuel side, the Group places a high priority on being at the forefront of
customer demand for cleaner and improved performance fuels and plans for
example, to rapidly increase its sales of compressed natural gas (CNG).
Investment in network and brand
The Group plans to further increase sales of both petroleum and non-petroleum
products through continued investment in the upgrade of its retail stations,
including refurbishment and expansion of total shop-floor area. In addition,
increased resources will be invested in further developing the "Petrol" brand,
with increased advertising and the launch of Petrol branded goods and services
as well as carrying out the programme for loyal clients.
In 2005, the Group commenced a three-year programme (2006 - 2008) to re-position
the "Petrol" brand and modernise its retail network. The Group is planning to
reach investments amounting to approximately BGN 76.0 million ( 39.0 million) in
modernising 81 key sites, constructing 13 new petrol stations, placing 154
vapour recovery units, replacing underground infrastructure and fuel basins of
60 stations and installing 30 methane modules and 20 liquid petroleum gas (LPG)
modules to meet the growth in demand for LPG. In addition, in order to increase
the overall operating margins of its retail stations by increasing sales of
non-petroleum products, the Group has installed new or expanded convenience
stores in 131 retail stations and coffee bars in 52 retail stations since 2000.
The Group has also introduced service centres in 104 retail stations and car
washes in 27 retail stations. These additional services usually generate higher
margins than fuel sales.
Increase third party storage fees
The Group is planning to capitalise on the opportunity provided to it by its
dominant position in fuel storage capacity and the increased storage
requirements imposed on Bulgarian producers and importers by the implementation
of EU Stock Directives 68/414/EU and 98/93/EU through the Bulgarian Crude Oil
and Petroleum Products Mandatory Stocks Act 2003. This will require that all
producers and importers of certain oil related products operating in Bulgaria
maintain compulsory stocks of these products equal to 90 days of sales by 2012.
In addition, the expected amendment of the Excise Duty Act allowing for inland
bonded warehousing of petroleum products may result in greater demand for its
storage and distribution infrastructure in Bulgaria. The Group's strategy for
exploiting this opportunity has three components. First, a marketing campaign
among existing and potential customers to execute long-term storage contracts
with the Group which cater for their increasing storage needs under the above
legislation. Secondly, a gradual recommissioning of the 25 mothballed facilities
which have a capacity of 400,000 m3. Thirdly, investment in key hub storage
facilities over the next three years. In the short-term, there is sufficient
excess capacity (327,000 m3) in the 15 storage facilities currently in
operation, accounting for 827,000 m3 of the Group's capacity, to satisfy
anticipated increased demand.
Group structure
The diagram below sets out the principal subsidiaries and affiliates, which are
divided into five primary categories, comprising retail sales of oil products,
wholesale of oil products, storage, distribution and logistics in relation to
oil products, other assets and non-core assets and services.
As of year end 2006, Petrol AD has interests in 10 subsidiaries and 2 associated
companies:
* Naftex Petrol EOOD, a limited liability company incorporated under the
laws of Bulgaria and registered at the Varna District Court under company court
file 3464/2003, one of the leading suppliers of petroleum products to the
wholesale market in Bulgaria. Following the acquisition of Naftex Petrol AD by
Petrol AD, Naftex Petrol AD was transformed from a joint stock company to a
limited liability company, with the two tier board structure of a supervisory
board and management board being replaced by a single manager. As at 31 December
2006, the Petrol AD owned 100% of the issued share capital of Naftex Petrol
EOOD;
* Petrol Trans Express EOOD, a single person limited liability company
incorporated under the laws of Bulgaria and registered at the Bourgas District
Court under company court file number 3203/2000, specialising in the
transportation of fuels. Prior to 2001, the transportation of fuels was
performed in-house by Petrol AD. Petrol Trans Express EOOD was incorporated in
2001 and it now operates the largest fuel transportation fleet in Bulgaria, with
37 tanker trucks and capacity for delivering up to 1.5 million litres of fuel
per day throughout the country, including new petrol and LPG tanker trucks - 14
purchased from IVECO Spa for BGN 3.4 million (EUR 1.7 million) and 13 purchased
from Mercedes for BGN 4 million (EUR 2 million). In addition to transporting
fuel to Petrol AD's network of petrol stations, Petrol Trans Express EOOD has an
agreement to transport fuel to each of Opet's and Lukoil's retail networks, and
fuel to Naftex Petrol EOOD's wholesale customers. As at 31 December 2006, Petrol
Trans Express EOOD was wholly owned by Petrol AD;
* Petrol Technics EOOD, a single person limited liability company
incorporated under the laws of Bulgaria and registered at the Sofia City Court
under company court file number 3671/2001, specialising in construction,
maintenance and servicing of petrol stations and petrol storage facilities.
Petrol Technics EOOD provides services both to Petrol AD and to petrol stations
and storage facilities owned or operated by third parties. As at 31 December
2006, Petrol Technics EOOD was wholly owned by Petrol AD;
* Petrol Card Services EOOD, a single person limited liability company
incorporated under the laws of Bulgaria registered at the Sofia City Court under
company court file number 21254/1994, previously specialising in the provision
of card payment services. However, Petrol AD has transferred all clients of
Petrol Card Services EOOD to Transcard AD services and intends to put Petrol
Card Services EOOD into liquidation;
* Eurocapital Bulgaria EAD, a joint stock company incorporated under the
laws of Bulgaria and registered at the Sofia City Court under company file
number 2110/2001, owning certain property interests. As at 31 December 2006,
Petrol AD owned 100% of the issued share capital of Eurocapital Bulgaria AD;
* Petrol Storage EOOD, a single person limited liability company
incorporated under the laws of Bulgaria and registered at the Sofia City Court
under company court file number 5129/2001. As at 31 December 2006, Petrol
Storage EOOD was wholly owned by Petrol AD. Since this company generates no
revenues at present, the intention of management is to transfer the ownership of
the Zhrebchevo hydroelectric power plant to Petrol Storage EOOD in 2007;
* Petrol Trade EOOD, a single person limited liability company incorporated
under the laws of Bulgaria and registered at the Sofia City Court under company
court file number 9351/2001, specialising in foreign trade, such as the import
and export of oil products such as of jet fuel, and which provides services both
to the Group and Petrol Holding AD, Petrol AD's controlling shareholder. As at
31 December 2006, Petrol Trade EOOD was wholly owned by the parent company;
* BPI EAD, a single shareholder joint stock company incorporated under the
laws of Bulgaria and registered at the Sofia City Court under company court file
number 5390/1997, which owns certain property interests, including the head
office of Petrol AD in Sofia. As at 31 December 2006, BPI EAD was wholly owned
by Petrol AD;
* Transloto AD, a joint stock company incorporated under the laws of
Bulgaria and registered at the Sofia City Court under company court file number
6385/2003, established to offer gambling products such as an on-line lottery.
Transloto AD changed its name and object of activity under decision of Sofia
City Court since 23 April 2007. The new name of company is Trans Operator and
its activities do not include offering of gambling products. As at 31 December
2006, Petrol AD owned 99.99% of the issued share capital of Transloto AD, with
the remainder being held by Mitko Sabev, Chairman of the Supervisory Board of
Petrol AD. Negotiations are taking place for the sale of Transloto AD to
Transhold AD but no formal agreement has yet been reached;
* Vratzata EOOD, a limited liability company registered at the Varna
Regional Court under company file number 1279/1998, with certain property
interests north of Varna, Bulgaria. As at 31 December 2006, Petrol AD owned 100%
of the issued share capital in Vratzata EOOD. The parent company intends to
transfer the assets of Vratzata EOOD to Eurocapital Bulgaria AD but no formal
agreement has yet been reached;
* Petrol Engineering AD, a joint stock company incorporated under the laws
of Bulgaria and registered at the Sofia City Court under company court file
number 1617/1996, specialises in providing services for fiscal systems for
retail stations. As at 31 December 2006, Petrol AD held 40% of the issued share
capital. The other shareholders are Petrol International AD with 25% of the
issued share capital and Systemcommerce AD with 35% of the issued capital; and
* Varna Business Services OOD, a limited liability company incorporated
under the laws of Bulgaria and registered at the Varna Regional Court under
company court file number 2923/2002, specialising in offering management
training courses, including SAP training, efficient communication skills, team
management and team interaction techniques, conflict management, presentation
skills, time and stress management and sales management. From its offices in
Varna, Varna Business Services OOD provides training courses to the employees of
the Group and third parties. As at 31 December 2006, Petrol AD held a 42.69%
interest in the issued share capital of Varna Business Services, with the
remaining 57.31% being held by Petrol Holding, the majority shareholder in
Petrol AD.
Management bodies
The parent company has two-tier board structure, which includes Management Board
(MB) and Supervisory Board (SB). Further down are presented the names and the
functions of the members of the Supervisory Board and Management Board of Petrol
AD. For each member is presented short biographical information.
Supervisory Board
Mitko Sabev Chairman
Stoyan Krastev Member
Ivan Neykov Member
Management Board
Denis Jersov Chairman
Svetoslav Yordanov Chief Executive Officer
Tsvetan Dimitrov Executive Director, Finance and Economics
Ivan Kostadinov Executive Director, Sales and Marketing
Kaloyan Karshev Executive Director, Investments and Technical Support
Mitko Sabev was born on 8 October 1961. He graduated the Naval Academy in Varna
and worked as a capitan's mate at Navigation Maritime Bulgare. He is the
co-founder and Manager of Festa Holding AD. He has been Executive Director of
Yukos Petroleum Bulgaria AD and a Chairman of the Supervisory Board of Naftex
Bulgaria Holding AD. During the period 2003 - 2005 is Chairman of the
Supervisory Board of Eurobank AD (currently known as Piraeus Bank Bulgaria AD).
Nowadays he is Chairman of the Board of Directors (BD) of Petrol Holding AD,
Professional Sport and Football Team Chernomorets Bourgas AD and Transloto AD,
Member of the Board of Directors of Transcard Payment services EAD and
Transinvestment ADSIC and Managing Director of Ros Oil EOOD.
Stoyan Krastev was born on 8 August 1956 in Sofia. He graduated Law School at
Sofia University St. Kliment Ohridski. He has been working for the biggest
companies and banking institutions in Bulgaria. He is Chairman of the Board of
directors of Jurex Consult AD. He has been member of the Supervisory Board of
United Bulgarian Bank and member of the Management Board of Bulgarian
Association of Licensed Investment Intermediaries.
Ivan Neykov was born on 17 April 1955 in Haskovo. He graduated Law School at
Sofia University St. Kliment Ohridski. Expert in Law of Labour and Insurance
Law, additional qualification in industrial relations, collective labour
disputes, and pension funds management. He is Chairman of the Management Board
of Balkan Institute for Labour and Social Policy. He was Minister of Employment
and Social Affairs, vice chairman of Confederation of independent trade unions
in Bulgaria - CITUB. At this time he is municipal councillor of Sofia
Municipality. Chairman of the Standing Committee for Budget and Finances, member
of the Standing Committee of Economical Policy and Public Property and of the
Standing Committee of Engineering Infrastructure, Water Supply and Energy
Efficiency. He is the author of a number of publications in the national press
and publications of the International Labour Organization about different
aspects of social policy, labour law, collective labour bargaining and
agreements, labour disputes. He has working level knowledge of Russian language.
Denis Jersov was born on 12 April 1966 in Cheliyabinsk, Russia. In 1988 he
graduated the Tumen Industrial University as mine engineer - expert in
developing oil fields. In 1989 he started business activities and during the
period 1990 - 1991 held the position Vice-president of foreign trade company
Conex, where the majority share is held by Russian state-owned oil trust, being
one of the biggest Russian crude oil exporting companies in those days. In the
end of 1991 he founded the Naftex Group.
Svetoslav Yordanov was born 28 May 1960 in Bourgas. He graduated the University
of Economics in Varna in Accounting and control. He worked in Neftochim Bourgas
as Deputy Chief accountant, Financial Director and Commercial Director. He has
been Executive director of Multigroup AD. From 1999 is Executive Director of
Petrol AD. He is fluent in Russian and English languages.
Tsvetan Dimitrov was born 10 August 1974. He has Master's degree in Economics
and Industrial management at the University of National and World Economy in
Sofia. For 5 years holds different positions in finances in the management of
Petrol AD. His previous position was Head of Controlling Department.
Ivan Kostadinov was born 28 May 1974. He has Master's degree in Insurance and
Social Work at the University of National and World Economy in Sofia. For 4
years held different positions in the Commercial Department. His previous
position was Sales Supervisor.
Kaloyan Karshev was born 5 November 1969. He has Master's degree in Oil
Technology at the University of Chemical Technology and Metallurgy in Sofia and
Master's degree in Ecology and Sustainable Development in Queen Mary University
in Great Britain. He works since 11 years in Petrol AD where holds different
positions, his previous position was Head of Technical Department. He occupies
the fuels quality control.
Operating and financial review
1. Analysis of the market environment
The Group's results of operations are affected by a number of factors, including
macroeconomic conditions in Bulgaria, competition, fluctuation of gross margins,
product mix, relationships with suppliers, legislative changes, changes in
currency exchange rates, weather conditions, seasonality and fluctuations in
crude oil and petroleum product prices.
Macroeconomic conditions in Bulgaria
The operations of the Group are influenced by the overall economic situation in
the country, the successful implementations of market-driven economic reforms,
GDP growth and changes in purchasing power of Bulgarian consumers. In general
the variation of consuming fuels is commensurate with the variation of GDP.
Increase in GDP in 2006 is 6.1% (2005: 6.2%), and the increase of the real
income of the consumers in the current year is 3.6% (2005: decrease of 1.4%)(3)
The running economical reforms after Bulgaria became a member of the European
Union at 1st January 2007 should have a beneficial impact on the Bulgarian
economy and consequently there are expectation for improvement of the
microeconomic environment in which the Group operates.
Competition
In 2006 the retail market of fuels in Bulgaria continued the trend of growing
competition, decrease of retail prices and gross trade margins. In the current
year investors' exodus from gaining one or several market object has appeared.
There are trends toward small independent player leaving the business with
fuels, which is confirmed by the very good results of the franchising programme
of the Group. Economies of scale were found to be fatal for the small businesses
and they started to look for survival in selling or franchising schemes. Two of
the big competitors - Lukoil Bulgaria EOOD and Eko Elda Bulgaria EAD announced
large investments programmes and built significant number of new objects and
thus, expanded their gas stations network. Over the year new big competitor
entered the market - Rompertol Bulgaria AD. Through franchise and buying objects
at the end of the year Rompertol Bulgaria AD already owns a chain of 35 gas
stations.
The major competitors on the wholesale market of fuels are Lukoil Bulgaria EOOD,
as exclusive distributor of Lukoil Neftohim Burgas AD, Rompetrol Bulgaria AD,
OMV Bulgaria EOOD. The wholesale market prices are traditionally linked with the
monopole pricing of the only fuel producer in the country Lukoil Neftohim Burgas
AD. In August 2006 the subsidiary Naftex Petrol EOOD changed the pricing basis
of its fuels on the wholesale market, applying the international market daily
quotation as reported at the (E)latt's European Marketscan Bulletin. In this way
the Management of Naftex Petrol EOOD, which is one of the leading importers of
fuel in the country, considers change in the practicing of non-market pricing
techniques, under the influence of monopole structures.
Trade margins
In spite of the increasing volume of sales gross profit per litre keeps the
trend of decrease in 2006. This is due, on one hand, to the gradual increase of
excise duties and government charges, which raise the cost price of the fuels,
and on the other hand, to the increasing prices of the producers, decrease of
gross trade margins as a result of strong competition and striving for new
customers. The competition between the companies in relation to different
discounts for paying with credit cards and other promotions puts extra pressure
on the profits in the business.
Product mix
The Bulgarian transportation fuels market has witnessed over the recent years a
shift from gasoline to diesel and LPG. There is a clear trend in decline of
consumption of 92 octane gasoline for account of increase of lower priced LPG.
Diesel consumption also increases, though in slower pace, following the
appearance of modern diesel engines and the fact that the transportation
industry uses mainly diesel as fuel.
Relationships with suppliers
The Group has maintained long lasting relationships with its major suppliers.
For the retail business the main supplier is Lukoil Bulgaria EOOD, by virtue of
the Retail Fuel Supply Agreement, concluded in 2001. Lukoil Bulgaria EOOD
supplies 433 retail stations within the scope of the agreement. The remaining 50
retail stations are supplied by the Group's wholesale arm Naftex Petrol EOOD.
On the wholesale side the Group has taken measures to diversify its supply base.
This happened in the course of 2005, when an agreement was concluded with
Rompetrol, one of Romania's major players in the oil sector. During 2005 most of
the supplies were effected by Lukoil Bulgaria EOOD and Rompetrol, while in 2006
the major suppliers are Rompetrol and Hellenic Petroleum, with some products
being sourced from other refineries in the region - Omnimpex Chemicals
(Romania), Petrom (Romania), Tupras (Turkey) and from international traders -
IPG (Kuwait). No products have been bought from Lukoil Bulgaria EOOD in 2006 as
the wholesale fuel supply agreement with Lukoil Bulgaria EOOD expired in
December 2005 and was not renewed.
Legislative changes
The Group's results of operations are affected by the amendments in the existing
legislation in Bulgaria. The most important piece of legislation which will
influence the Group's business is the Law on the Compulsory Reserves of Oil and
Oil Products requiring all importers and producers to accumulate and maintain
compulsory stock of products covering 90 days of their respective annual sales
for the preceding year. According to the law this process is gradual and starts
with 10 days in 2005 which has to reach 90 days by 2012. During 2006 the Group
stored 25,407 cubic meters of products in compliance with the law (2005:11,000
cubic meters).
In regard to admission of Bulgaria as a member of European Union from 1 January
2007 the requirements for the quality of the oil products and ecological
standards are heighten in accordance with Directive 1999/32/ of the EU Council.
Increase in excise duties
One of the conditions for Bulgaria's accession to the European Union is the
implementation of a step-by-step increase of excise duties on oil products in
order to reach the minimum levels permitted in existing EU member states. This
minimum level should be reached in Bulgaria in 2011. Such increased excise
duties may lower the gross margins of the Group
Weather conditions and seasonality
The Group's results of operations are affected by weather conditions and
seasonal variations in demand for certain oil products. The demand for heating
gas oil is typically highest in the first and last quarters of each year. The
demand for gasoline is highest in the second and third quarters due to annual
vacations. Therefore, the Group's results of operations in years with severe
winters and/or long summers reflect higher sales of heating gas oil and
gasoline.
Fluctuation in crude oil and oil product prices
Fluctuations in prices of crude oil and oil products affect the Group's sales
and cost of sales. Increases in crude oil prices leads to increased sales
figures, but at the same time may lead to reduction in demand for oil products
and to adjustment of margins to reflect this fall in consumer demand.
2. Results of operations
Revenue
Group's consolidated revenue for 2006 in the amount of BGN 1,301.3 million (EUR
665.3 million) decreased by 9.7% compared to 2005. The following table presents
the amounts of revenue for the period 2004 - 2006 on a consolidated basis and
also by separate business segments:
2006 2005 2004
Sales revenue BGN mln 1,293.2 1,437.4 995.3
EUR mln 661.2 734.9 508.9
Other income BGN mln 8.0 3.7 11.0
EUR mln 4.1 1.9 5.6
Total revenue, including BGN mln 1,301.3 1,441.1 1,006.3
EUR mln 665.3 736.8 514.5
Retail BGN mln 636.4 546.1 465.5
EUR mln 325.4 279.2 238.0
Wholesale BGN mln 648.3 887.4 534.5
EUR mln 331.5 453.7 273.3
Other activities BGN mln 16.5 7.6 6.3
EUR mln 8.4 3.9 3.2
The major part of Group's sales revenue is sales of goods (96% in 2006). Their
amount in 2006 is BGN 1,242.6 million (635.3 EUR million) and compared to 2005
they have decreased by 9.4%. Sales of goods comprise mainly of retail and
wholesale sales of fuel (97%). The amounts of sales of fuel (excluding
intra-Group sales) for the period 2004 - 2006 are, as follows:
2006 2005 2004
Retail BGN mln 577.0 483.7 401.0
EUR mln 295.0 247.3 205.0
Wholesale BGN mln 630.4 859.8 511.6
EUR mln 322.3 439.6 261.6
Total sales of fuel BGN mln 1,207.4 1,343.5 912.6
EUR mln 617.3 686.9 466.6
The overall decrease in sales of fuel of 10% during the current year compared to
2005 is due mainly to the decline in wholesale sales by 27%, which compensates
the achieved growth of 19% in retail sales (see also Retail market and Wholesale
market). During the current year the relative share of retail sales has
increased at the expense of the decreased share of wholesale sales. From 36% in
2005 retail sales rose to 48% of consolidated sales of fuel in 2006. This is due
to the growth of turnover in the retal network and also to the decline in
wholesale volumes.
The movement in revenue from sales of the major type of oil products traded by
the Group during the period 2004 - 2006 is presented on the following diagram:
Retail market
The Group's retail sales are made through a network of retail stations owned and
/or operated by Petrol AD. These retail stations are spread throughout Bulgaria
giving the Group comprehensive geographic coverage. As at the end of 2006 the
Group had 492 working retail stations (2005: 460).
The table below sets out sales of fuel in retail stations by volume and value
for the years 2004 to 2006.
2006 2005 2004
Volume of retail sales (million litres) 419 352 318
incl. corporate clients 86 49 21
Revenue from retail sales BGN mln 577.0 483.7 401.0
EUR mln 295.0 247.3 205.0
Market share(4) 19% 17% 18%
During the current year the volume of fuel sold through the retail stations rose
by 18% which led to an increase in revenue from retail sales to BGN 577 million
(EUR 295 million). This increase is mainly due to the reported growth in the
number of corporate clients (increase in the number of concluded client
contracts by 94%) and also to the increase of the average sales volumes per
client (76%). As a result of the overall increase in retail volumes, the Group
enlarged its presence in the retail market increasing its market share to 19% as
at the end of 2006.
The following table sets out the number of retail stations operated by the
Group, the ownership of those sites and the volume of fuel sold in 2005 and
2006:
2006 2005
number of million number of million
sites litres sites litres
Group owned and Group operated 405 388 436 343
Dealer owned and dealer operated 41 14 7 2
Group owned and dealer operated 44 11 12 2
Dealer owned and Group operated 2 6 5 5
Total 492 419 460 352
The retail stations owned and operated by the Group made the major contribution
(67%) to the increase of sales volumes during the year. In 2006 Petrol AD
continued developing its programmes for franchising (joining independent owners
of single stations or small chain of stations under the Petrol trade mark) and
for letting of own retail stations for operation by dealers. As a result from
these programmes, as at the end of 2006 the number of franchisee operated
stations has risen approximately 6 times and the number of dealer operated
retail stations has risen more than 3 times compared to the end of 2005. The
total volume of sales made through the franchisee and dealer retail stations in
2006 has risen more than 6 times compared to the previous year.
The following table sets out Group's retail sales of fuel by major types of oil
products.
2006 2005 2004
Gasoline 92* BGN mln 77.8 94.1 97.4
EUR mln 39.8 48.1 49.8
Gasoline 95* BGN mln 178.4 154.1 134.5
EUR mln 91.2 78.8 68.8
Gasoline 98* BGN mln 9.6 7.0 6.3
EUR mln 4.9 3.6 3.2
LPG BGN mln 63.2 47.9 33.0
EUR mln 32.3 24.3 16.8
Diesel oil BGN mln 245.8 176.8 127.2
EUR mln 125.7 90.4 65.0
Other fuel BGN mln 2.2 3.8 2.6
EUR mln 1.2 2.1 1.4
Total retail sales of fuel BGN mln 577.0 483.7 401.0
EUR mln 295.0 247.3 205.0
There was a continuous decline in the sales of gasoline 92 during the current
year (17%), which was a result of the trend witnessed over the recent years for
shift in the consumption from gasoline 92 to the higher octane gasoline 95 and
to the LPG. The growth in sales of gasoline 95 is 16% and in the sales of LPG is
31%. The increase in LPG sales volumes is also due to the newly built LPG
modules on 26 sites during 2005 and 2006. There was a significant increase in
sales of gasoline 98 during the current period (43%). This growth is due to the
continuous trend for renewal of the automobile park in the country with higher
class automobiles and also to the reported increase in the number of high-end
clients in the refurbished and newly built retail stations.
The most significant increase was in the sales of diesel oil, which had risen by
BGN 69 million (EUR 35.3 million) compared to 2005. The growth of 39% was in
line with the increase in the volume of sales of 34% and was a result from the
development of the corporate clients' network and is also due to the increasing
number of diesel engine automobiles in the country.
The movement in revenue from retail sales of the major type of oil products
during the period 2004 - 2006 is presented on the following diagram.
Wholesale market
The Group's wholesale sales are made through a network of storage facilities
operated by Naftex Petrol EOOD. During 2006 the Group used 13 of its storage
facilities for own trade activities and 2 other facilities were leased out to
third parties.The table below sets out the result of the period 2004-2006:
2006 2005 2004
Share of Group's wholesale sales 100% 100% 95%
Volume of wholesale sales (million litres)(5) 457 690 451
Volume of wholesale sales (thousand tonnes)(6) 50 77 74
Revenue from wholesale sales BGN mln 630.4 859.8 511.6
EUR mln 322.3 439.6 261.6
Market share(7) 18% 23% 17%
In August 2006 Naftex Petrol EOOD introduced a new pricing strategy based upon
international quotations for petroleum products, which led to a significant
decrease of wholesale volumes of 34% compared to 2005. In accordance with the
new strategy the wholesale prices for distributors on the domestic market are
calculated with reference to a formula based on the international daily
quotations as reported at the (E)latt's European Marketscan Bulletin plus fixed
premiums for different petroleum products. On the other side, in line with the
tradition of many years, the wholesale pricing of fuel products in Bulgaria is
made with reference to the base price of Lukoil Neftochim Bourgas AD, which is
able to manipulate the price levels being the only manufacturer in the country.
Thus, when the international prices rapidly shift up, the resulting prices of
Naftex Petrol EOOD automatically become higher than those of its competitors and
the Group experiences lower volume sales. As a result from the decline in sales
volumes, the Group's revenue from sales on the wholesale market decreased by BGN
229.4 million (EUR 117.3 million) compared to 2005.
The decrease in sales volumes is also due to the refusal of Lukoil Bulgaria EOOD
to renew the agreement for wholesale supply of fuels manufactured by Lukoil
Neftochim Bourgas AD, which expired in December 2005. This led to shortening of
the range of the supplied petroleum products.
The following table sets out Group's wholesale sales of fuel by major types of
petroleum products.
2006 2005 2004
Gasoline 92 BGN mln 42.9 87.6 52.1
EUR mln 21.9 44.8 26.6
Gasoline 95 BGN mln 112.1 154.8 66.8
EUR mln 57.3 79.1 34.2
Jet A1 BGN mln 48.0 3.1 1.0
EUR mln 24.5 1.6 0.5
Diesel oil BGN mln 380.6 509.4 326.5
EUR mln 194.6 260.5 166.9
Gas oil BGN mln 37.9 63.9 30.7
EUR mln 19.4 32.7 15.7
Heating oil BGN mln 7.8 29.5 32.2
EUR mln 4.0 15.1 16.4
Other fuel BGN mln 1.1 11.5 2.3
EUR mln 0.6 5.8 1.3
Total wholesale sales of fuel BGN mln 630.4 859.8 511.6
EUR mln 322.3 439.6 261.6
There was a decrease in volumes of sales of all types of fuel in 2006, except
for the sales of jet, which rose up more than 15 times, compared to 2005. This
significant growth in the sales of jet is due to the fact that by the end of
2005 the trade with aviation fuel had been performed exclusively by the Petrol
Holding AD. Since the beginning of 2006 the whole jet business has been
transferred to Naftex Petrol EOOD.
The movement in revenue from wholesale sales of the major type of petroleum
products during the period 2004 - 2006 is presented on the following diagram.
Gross margin
The Group's gross margin calculated as a percentage of consolidated revenue
remained at levels from the previous year, slightly increasing to 9.6% (2005:
9.5%). The management considers this trend as a positive development under the
current circumstances of intensified competition in the retail and wholesale
markets and constant increase in crude oil and petroleum product prices. During
2006 the average gross margin in the retail market declined to 3.2% (2005:
4.5%). The gross margin in the wholesale market also declined significantly -
from 16.1% in 2005 to 13.1% in 2006.
Operating expenses
Hired services
Hired services include various expenses as transport, commissions, repairs and
maintenance of assets, advertising, consulting and training expenses, rents,
security, communication and other expenses. In 2006 hired services decrease by
2.5 % to BGN 37.4 million (EUR 19.1 million), which is due mainly to the
reduction of consulting and training expenses. The lower amount of the latter is
a result of decrease in holding charges to Petrol Holding AD from BGN 14.1
million (EUR 7.2 million) for 2005 to BGN 2 million (EUR 1 million) for 2006.
This causes significant effect on the operating expenses and operating profit of
the Group. The decrease in hired services is caused also by the lower
communication and rental expenses, which decrease by BGN 0.6 million (EUR 0.3
million) and BGN 0.4 million (EUR 0.2 million) respectively in 2006. On the
other hand, during the current year the commissions increased by 353 % to BGN
6.7 million (EUR 3.5 million) as result of increase in commissions for sales
made by credit cards and commissions for aircraft fuel supply (supply of
aircraft fuel is a new activity for the Group that starts in 2006). The Group's
consolidated financial statements also show an increase in transport expenses by
57% to BGN 9.1 million (EUR 4.6 million), which is due to the increased volume
of transported fuels during the year. There is also significant increase in
advertising expenses - by 304% to BGN 3.9 million (EUR 2 million), due to the
aggressive advertising policy of the Group, started in 2006.
Staff costs
Staff expenses include remuneration, social expenses and other compensations,
paid to the Group's employees. Staff expenses for 2006 of BGN 27.1 millions (EUR
13.9 million) remain almost at the level of the previous year BGN 27.8 million
(EUR 14.2 million). The slight decrease by 2.5% in comparison with 2005 is a
consequence of the decrease in the average number of personnel of the Group,
lower rates of social security contributions and the implementation of corporate
policy for optimisation of operating expenses, adopted by the management.
Depreciation and amortisation
Depreciation and amortisation charges on fixed tangible and intangible assets
and investment property are calculated on the basis of the useful life of the
assets by applying a straight-line method (see also note 3.1. to the
consolidated financial statement). Depreciation expenses of the Group show a
decrease of 13% to BGN 19 million (EUR 9.7 million) in 2006, compared to BGN
21.9 million (EUR 11.2 million) in 2005.
Materials and consumables used
Fuels, advertising materials, spare parts, office consumables, public utilities
and other expenses are presented in the Group consolidated financial statements
as expenses for materials and consumables. In 2006 these expenses increased by
BGN 2.4 million (EUR 1.2 million) in comparison with 2005 from BGN 10.1 million
(EUR 5.2 million) to BGN 12.5 million (EUR 6.4 million). The increase is mainly
due to increase in advertising materials and consumables by 86 % to BGN 1.9
million (EUR 1 million) compare to BGN 1.0 million (EUR 0.5) for 2005. There is
also an increase in expenses for spare parts and fuels, which rose by BGN 0.6
million (EUR 0.3 million).
Other operating expenses
The expenses for penalties and defaults, shortages of assets, business trips,
sponsorship, withholding taxes and municipality taxes, scrapped goods and fixed
assets are presented as other expenses in the consolidated financial statements.
These expenses respectively amount to BGN 12.8 million (EUR 6.5 million) and BGN
7.9 million (EUR 4 million) in 2006 and 2005. The main reasons for the increase
are the increase in the shortages of assets amounting BGN 5.6 million (EUR 2.8
million) for 2006, which is with 190 % higher in comparison with the previous
year. The increase is explained by the larger volumes of shortages occurring on
import and storage of fuels in the petrol depots.
Profit from operations
The Group's earnings before interest, taxes, depreciation and amortisation
(EBITDA) decreased from BGN 46.4 million (EUR 23.7 million) in 2005 to BGN 42.0
million (EUR 21.5 million) in 2006. Decrease of EBITDA by BGN 4.4 million (EUR
2.3million) is mainly due to the reduction of gross profit by BGN 11.7 million
(EUR 5.9 million), which is a result from decrease in consolidated revenue.
Regardless of the decrease in operating expenses (excluding the amortisation and
depreciation) by BGN 2.9 million (EUR 1.5 million) and the increase in other
income by BGN 4.3 million (EUR 2.2 million) in 2006, these positive deviations
could not offset the negative effect of the overall reduction of turnover on the
wholesale market.
The lower value of EBITDA has negative effect on Group's earnings before
interest and taxes (EBIT), which reduced its value by BGN 1.5 million (EUR 0.7
million) to BGN 23 million (EUR 11.8 million) in 2006, compared to BGN 24.5
million (EUR 12.5 million) in 2005. Reduction of amortisation and depreciation
charges by 13% has a positive effect on EBIT (see also Operating expenses).
Net finance costs
The Group's finance income and costs consist of interest expenses and income,
gains and losses from foreign exchange rates and gains on dealing with
derivatives and other. Interest expense represents the interest paid by the
Group on loans from banks, debenture loans and finance leases. The contracted
margins on interest bearing short-term and long-term bank loans granted to the
Group varied in the range between 1% and 4.5% above SOFIBOR, LIBOR or EURIBOR.
The interest rate on the two debenture loans is fixed at 8.375%. In 2006 the
interest expense increased materially to BGN 11.2 million (EUR 5.7 million)
compared to BGN 7.6 million (EUR 3.9 million) in 2005. The basic reason for that
was the higher interest on Euro notes issue, which was used for refinancing of
existing bank loans, financing of working capital and capital expenditure.
During the current year Group's interest income increased by 101% to BGN 4.7
million (EUR 2.4 million) compared to BGN 2.3 million (EUR 1.2 million) in 2005.
The difference of BGN 2.4 million (EUR 1.2 million) is due to increased interest
income of Petrol AD on long-term loans granted to Petrol Holding AD.
In 2006 the Group started to deal with financial derivatives and at the end of
the year reported gain of BGN 1.7 million (EUR 0.9 million).
The trend in the Group's foreign exchange gains and losses generally follows
movements in the exchange rate of the U.S. dollar against the Euro and
consequently, against the Bulgarian lev as the Bulgarian National Bank has fixed
the exchange rate between the Bulgarian lev and Euro. Foreign exchange rate
gains increase from 0 in 2005 to BGN 1.5 million (EUR 0.8 million) which is due
mainly to the increase in volume of imported fuels and the continuing trend of
decreasing of the exchange rate of U.S. dollar against the Euro.
As a result of the above-mentioned changes in financial income and expenses,
Group's net financial costs decreased by BGN 1.3 million (EUR 0.7) in 2006.
3. Liquidity and capital resources
The Group's major capital requirements consist of general working capital needs,
service of indebtedness and funding of investments. The Group's main sources of
liquidity are cash balances, internal cash flows, long-term and short-term
borrowings and leases, reduction of the periods of receivables and extension of
the periods of payables. Fluctuations in the foreign exchange and interest rates
have an impact on the liquidity and capital resources of the Group.
The main ratios, which describe the financial position of the Group, are
presented in the first part of this annual report Selected Performance
Indicators. As a whole the liquidity of the Group has improved during the year.
Only the inventory turnover period worsened its value as in 2006 the average
length of time necessary for the inventory to turn over increased to 34 days
compared with 16 days in 2005. This is mainly due to the higher balance of
inventory at the end of the current year. The management of the Group decided to
significantly increase the stock levels in order to be able to respond to the
risk of ceasing of retail fuel supplies by Lukoil Bulgaria EOOD, in view of the
deteriorated commercial relationships between the distributor and Petrol AD as
of the end of 2006.
Accounts receivable collection period remained on relatively constant levels
during the last 4 year (between 17 and 19 days). This is a result of the strict
credit policy adopted by the Group.
The current ratio improved in 2006 after its sharp decrease in 2005. Increase in
liquidity is a result of the fact that the Group's current assets increased
faster (65%) than current liabilities (8.8%). Besides the above-mentioned
enlargement of inventory, growth of current assets is due to increase in cash
and cash equivalents and related party receivables with total amount of EUR 77.4
million (EUR 39.6 million). This rise is a result of the proceeds received from
the issue of Euro notes at the end of October 2006. The free funds from this
issue as of the end of 2006 have been invested in highly liquid short-term debt
securities.
In 2006 the total amount of Group's current liabilities increased with BGN 17.9
million (EUR 9.2 million), which is mainly due to increase of payables to
suppliers from BGN 55.7 million (EUR 28.5 million) for 2005 to BGN 95.9 million
(EUR 49 million) in 2006. During the period VAT and excise duties rose with BGN
55.2 million (EUR 28.2 million), which is a result from the changes in Excise
Duties and Tax Warehouse Act. The portions of related party payables and current
interest bearing loans decrease as the latter are refunded by the proceeds from
Euro notes issue. The increase of current assets and relatively constant current
liabilities result in greater working capital as at the end of 2006 - BGN 101.7
million (EUR 51.9 million). In 2005, as a comparison, the working capital of the
Group has negative value.
Euro notes issue of Petrol AD at the amount of EUR 100 million increases
long-term gearing of the Group. Part of proceeds of issue is used for
refinancing of existing bank loans, including the short-term ones. This leads to
change in the structure of interest bearing liabilities of the Group as the
long-term liabilities increased on the account of short-term liabilities.
Increased long-term gearing of the Group results in greater amount of Group's
total debt (in the amount of debt are included short-term and long-term interest
bearing non-trade loans and finance lease liabilities). This have influenced on
Debt to EBITDA and Debt to equity ratios which significantly increased their
values in 2006. Nevertheless, the Debt to assets ratio is close to the optimal
ratio between the financing with own funds and borrowings.
The consolidated indebtedness, which represents all interest-bearing loans of
the Group (including trade loans), significantly changed its level throughout
the current year(8). As of the end of 2006 its value is BGN 271.1 million (EUR
138.6 million) while at the end of 2005 it is BGN 165.9 million (EUR 84.8
million). The main reason for the increase of 63.4% is the additional debt
attracted in the Group after the Euro notes issue of Petrol AD.
4. Share capital
The registered and fully paid-in share capital of Petrol AD as at 31 December
2006 amounts to BGN 109.25 millions (EUR 55.73 millions) and is distributed into
109,249,612 ordinary registered shares with voting rights, with a par value of
BGN 1 each. The shares, issued by the Company are transferable with no
limitations or conditions, by its owner's free will, in accordance with the
Bulgarian legislation, and according to the rules of Central Depository AD
concerning the acquiring and ordering with registered shares, as well as in
compliance with the regulations of the market they are traded on. Detailed
information about the rules and procedures for trading Petrol's shares is
available in the published prospectuses of the Company.
The following table sets out information about the changes in the structure of
share capital:
In percentage 2006 2005 2004 2003
Petrol Holding AD 71.75 76.03 83.44 78.24
Naftex Oil Shipping Corporation Limited (UAA) 18.84 18.84 - -
Ros Oil EOOD - - 9.31 14.22
Ministry of Economics 0.94 1.03 1.19 3.42
Other minor shareholders 8.47 4.1 6.06 4.12
Total 100.00 100.00 100.00 100.00
Shares owned by other minor shareholders are held by investors, which have
acquired them through trading at the regulated stock market and there is none of
them who owns more than 5% of Company's shares. Petrol AD does not have
shareholders with special controlling rights.
Petrol AD did not grant any options over the shares in favour of the members of
the MB and the SB. There are no agreements about participation of employees in
share the capital of Petrol AD, including through issuing stocks, options or
other financial instruments.
Through the year Petrol AD did not aquire or transfer ownership of its own
stocks.
Persons or entities directly or indirectly controlling Petrol AD
Under paragraph 1, point 13 of the Public Offering of Securities Act, one person
or entity exercises directly or indirectly control over the company, when that
person or entity holds over 50% of the votes of the GMS or may appoint directly
ot indirectly more than half of the members of the company's bodies, or may
otherwise exercise a decisive influence on decision-making in relation to the
business of the legal entity. Petrol Holding AD, with address of registered
office 22A Bratya Miladinovi Street Varna, registered under company file No.
3320/1995 in the Varna District Court, holds directly voting shares equal to
71.75% of the votes of the GMS of the Company.
Stock market information
In 2006 the shares of Petrol AD were traded on the "C" segment of the Official
market of the Bulgarian Stock Exchange - Sofia. On 12 January 2007, as a result
of changes in Rules and Regulations of the Bulgarian Stock Exchange - Sofia the
"C" segment of the Official market was closed down. Upon request of the
management of Petrol AD representatives of the stock exchange made an analysis
of Company's shares, which ascertained the fact that the shares of the Company
are in compliance with the requirements for listing in the upper segment in the
official market. As a result, on 15 January 2007 the shares of Petrol AD were
listed and are now traded on the "B" segment of the Official market of the
Bulgarian stock exchange - Sofia. The shares of Petrol AD are included in both
Bulgarian stock exchange indices SOFIX and BG-40
The following table sets out summarised market information about the trading of
Company's shares on the Bulgarian Stock Exchange - Sofia:
2006 2005 2004 2003
Share capital as at 31 December BGN mln 109 109 109 109
EUR mln 55.73 55.73 55.73 55.73
Share price as at 31 December BGN 4.33 3.78 3.16 3.96
EUR 2.21 1.93 1.62 2.02
Market capitalisation as at 31 December BGN mln 473 413 345 433
EUR mln 242 211 176 221
Average daily volume of traded shares number 29,476 128,98 459,44 17,196
Highest price throughout the year BGN 4.43 4.44 3.95 67.00
EUR 2.27 2.27 2.02 34.26
Lowest price throughout the year BGN 3.20 3.00 2.00 1.20
EUR 1.64 1.53 1.02 0.61
The price of shares of Petrol AD rose from 3.78 BGN (1.93 EUR) in the beginning
of 2006 to 4.33 BGN (2.21 EUR) as at the end of the year, which accounts for an
increase in the market capitalisation of the company by BGN 60 million (EUR 31
million). One of the reasons for this increase of 15% is that in the passed year
the capital market in Bulgaria showed an overall upward trend and the shares of
Petrol AD as a part of market were following these trends. Other reason for the
positive trend is the issuance of Eurobond notes at the end of October 2006 on
the London Stock Exchange. After the issue the rate of recognition of the
company on the market and the positive bias of potential investors about its
financial performance have risen, this had a favourable effect over the share
prices.
5. Human resources
Management of Human Resources of the Group
The Management believes that the employees of the Group play key role in the
development of the business and the achievement of common corporate goals.
Consequently, special attention is paid to elaboration and development of
general strategy and policies regarding human resources management. The policies
in this field are oriented towards achieving of responsibility and commitment of
the personnel during its performance of assigned tasks and goals. Simultaneously
the senior executive staff makes efforts to support the mid-level management and
the employees in order to fulfil the Group's management priorities.
The goals of the human resources development strategy and policies are:
* Keeping the employees with a high potential and assisting their
professional growth by planning their careers and introducing bonus package
systems;
* Selection of new employees with significant potential and
result-oriented personality;
* Broadening the scope of the traineeship programmes;
* Improvement of communications between the separate organizational
bodies;
* Development and introducing of new systems for career management of
the key employees;
* Development of programme for introducing training for newly employed
personnel.
The Group applies adequate criteria for selection of personnel and has a
professional and motivated team, which is capable for pursuing the defined
strategic and operational goals. An organization network has been created for
fair evaluation of the personnel's individual and collective contribution, as
well as for evaluation of its content grade. The Group invests in its employees
by offering them adequate programmes for training and development of the
necessary professional and management skills. The Group's policy is oriented
towards providing of safe healthy work conditions, adequate remuneration and
motivation system, and opportunities for professional growth.
The number of average payroll staff has been relatively constant during the
years with the exception of 2006 when this number decreased significantly
(5.9%). By the end of 2006 the average payroll staff of the Group was 3, 630
employees, most of whom worked for the parent company (3,026 employees). Among
the other companies in the Group the one with the second largest staff was
Naftex Petrol EOOD (326 employees).
Information about the Group's senior executive staff
Complying with the requirements of Art. 187d and Art. 247 from the Commerce Act,
Petrol AD presents the following information about its management bodies
members:
* The total amount of remuneration sums paid to the members of the
Management Board and the Supervisory Board is BGN 1 million (EUR 0.5 million)
for 2006 and BGN 0.74 million (EUR 0.38 million) for 2005;
* Kaloyan Karshev owns 3,480 shares of Petrol AD. None of other members
of management bodies own shares of Petrol AD;
* The Management Board and Supervisory Board members unlimited liability
partnership in other companies, their ownership of more than 25 % of the capital
of other companies, as well as their participation in the management of other
companies and cooperatives as procurators, managers or board members are, as
follows:
- Mitko Sabev - Chairman of Supervisory Board of Petrol AD, Chairman of
Board of Directors (BD) of Petrol Holding AD, Chairman of BD of Transloto AD,
Chairman of Supervisory Board of Chernomorets Burgas PSFC AD, member of BD of
Sportelit AD, member of BD of Forina AD, member of BD of Transcard Financial
Services EAD, member of BD of Transcard Payment Services EAD, Manager of Ros Oil
EOOD, Manager of Civil Partnership (Under the Obligations and Contracts Act
(OCA) Balkan Petrol Consortium. Mitko Sabev owns indirectly (through Petrol
Holding AD) 47.5% of the capital of Petrol AD and 51% of the capital of Forina
AD;
- Stoian Krastev - member of Supervisory Board of Petrol AD. Deputy
Chairman of BD of Petrol Holding AD, Chairman of BD of Jurex Consult AD,
Chairman of BD of Eurocapital Bulgaria EAD, Chairman of "Union of Private Petrol
Companies" Association, member of Management Board (MB) of "Family" National
Association, member of MB of Almina AD. He owns directly 50% of the shares of
Pas Consult OOD, indirectly (through Pas Consult OOD) 50% of the shares of
Consult -98 EOOD, 50% of the shares of Consult 2002 EOOD, and 50% of the shares
of Pas Consult Prim EOOD;
- Ivan Neykov - member of Supervisory Board of Petrol AD. Chairman of MB
of "Balkan Labor and Social Policy Institute" Association, member of MB of "
Institute for Regional Economic Research" Association. He does not own more than
25% of other company capital;
- Denis Jersov - Chairman of MB of Petrol AD. Mr. Ershov is neither a
member of any management or supervisory bodies of other companies nor a
procurator of other legal entities. He owns indirectly (through Petrol Holding
AD) 47.5% of the capital of Petrol AD;
- Svetoslav Yordanov - member of MB of Petrol AD, member of the MB of "
St. Nikola" Foundation, member of MB of "St. Panteleymon" Foundation, member of
MB of Bulgarian-Romanian Chamber of Commerce and Industry. He owns directly 50.%
of the capital of Albatros Tours OOD and 50% of the capital of "St. Panteleymon"
Specialized Surgery Clinic;
- Tzvetan Dimitrov - member of MB of Petrol AD, Manager of Adakta OOD and
ET Star-99-Tzvetan Ivanov. He owns 100 % of the capital; of ET Star-99-Tzvetan
Ivanov and 50% of the capital of Adakta OOD;
- Kaloian Karshev - member of MB of Petrol AD. He is not a member of
management or supervisory bodies of any other company and he is not a procurator
of other legal entity. Mr. Karshev does not own more than 25% of other company
capital;
- Ivan Kostadinov - member of MB of Petrol AD. He is not a member of
management or supervisory bodies of any other company and he is not a procurator
of other legal entity. Mr. Kostadinov does not own more than 25% of other
company capital.
* In 2006 no deals have been contracted with any members of the boards
that are out of the scope of the ordinary activities of the parent company or
materially deviate from normal market conditions.
Outlook
The management of the Group expects during the next few years the competition
between the main players in fuel trade to become more intensive and some of the
minor independent traders to drop gradually out of business. Legislative changes
with regard to excise duties on fuels and increase in crude oil price on the
international markets will continue to influence fuel end prices in the
following years, which will lead to continuous reduction of gross trade margins.
The management of the Group assumes that based on the expected gradual GDP
growth and the low elasticity of demand the fuel consumption in the country will
increase during the following years.
Group's plans for future development are closely connected with the expectations
for changes in market conditions. In 2007 restructuring of the Group will
continue as the management aims to focus its effort in its main activities -
retail and wholesale fuel distribution. The management intends to transfer all
assets which do not relate to these primary business lines to specialised
companies. Thus, the Group could focus on the expansion and growth of fuel
sales.
In the next few years results of the Group will depend to a great extent on the
amount of investments and successful completion of new projects. In 2007 Group's
investment programme will be focused mainly on the transformation of the retail
stations to modern places for complex services. The management plans to continue
the programme for urgent repairs of old retail stations. In 2007 under this
programme 50 outlets will be refurbished at a cost of BGN 25 million (EUR 13
million). The refurbishment will be accomplished by the producer of the new
equipment Kalvacha Engineering AD and the selection of stations will be based on
the condition of fuel tanks and commercial buildings.
The Group plans to invest BGN 4 million (EUR 2.1 million) in building of new
co-branded retail stations under the Lukoil/Petrol programme and new stations
from the Petrol Perfect type. The latter will be built on new locations in the
major cities of the country and will be direct competitors to the outlets of the
other big chains. In view of the trend of increase in the consumption of lower
priced LPG and CNG, the Group intends to install 10 new LPG modules and 5 CNG
modules at a total cost of BGN 3 million (EUR 1.5 million).
The Group intends to expand its retail market share by increasing of its network
of fuel stations. In order to achieve this objective in 2007 the Group will
expand and develop its dealership programme and will offer about 200 fuel
stations for operation by independent dealers. Furthermore, the Company plans to
attract 30 more petrol stations beneath the flag of Petrol under the franchising
programme.
With regard to the completion of the corporate programme on quality and
environment, the management will continue to construct vapour recovery systems.
In 2007 such systems will be installed in 90 fuel stations at a cost of BGN 0.8
million (EUR 0.4 million). Other investment goal of the Management is the
introduction of an information system for active sales management within the
implemented SAP R/3 enterprise resource planning system.
The Group plans to invest BGN 34 million (EUR 17 million) in order to fulfil its
investment programme for the retail business line. In addition, the Group will
invest BGN 32.75 million (EUR 16.74 million) in the wholesale business line
during the period 2007 - 2009. This includes investments amounting to BGN 20.7
million (EUR 10.6 million) that will be made in order to meet the environmental
requirements. The investments in storage facilities are aimed to fulfilling of
the legislation requirements, reduction of technological arising on usage of
equipment and development and maintenance of the storage services rendered to
third parties. The Group plans to finance all the above mentioned investments by
its accumulated retained earnings and by the proceeds received from the Euro
notes issued in October 2006.
In addition to its ambitious investment programme, the management of the Group
will direct its efforts to the fulfilment of active marketing strategy. One of
its main lines will be launching and development of Petrol branded goods and
services. With regard to the clients, the guidelines for future development are
attraction of new client target groups and creation of group of loyal clients.
Group's strategy for 2007 is focusing on the end customer. This includes
wide-range marketing activities - games, promotions and other, supported by
media events. The management also will look forward for possibilities for
development of the Transcard card system and a client loyalty programme.
Corporate governance
In its activity the Management of the Group follows the approved Programme for
applying of international standards for good corporate governance (the
Programme). The management believes that such standards are essential to
business integrity and performance.
The Programme is developed in accordance with the Bulgarian business law, the
principles for corporate governance of the Organization for Economic
Co-operation and Development, the International standards for good corporate
governance adopted by the Financial Supervision Commission, The Code for
Corporative Governance adopted by the Board of Directors of the Bulgarian Stock
Exchange - Sofia, the By-laws of Petrol AD and the rules and procedures for
functioning of the management bodies of the parent company.
The Programme is approved by a decision of the Management Board (MB) on 10 April
2003(9) and its implementation is monitored and controlled by the Supervisory
Board (SB) of Petrol AD. The Programme sets out the main principles and policies
that the management bodies should comply with in order to achieve the goals set
in the Programme, namely:
* Protection of the shareholders' rights and guaranteeing equity amongst
them (including minor and foreign shareholders);
* Timely and accurate disclosure of information about all issues
relevant to Petrol AD in compliance with the Public Offering of Securities Act,
Law on Measures against Market Abuse with Financial Instruments and the other
acts;
* Providing strategic management of the parent company, efficient
control of the work of the MB and reporting of the MB and the SB to the General
Meeting of the Shareholders (GMS);
* Creating interactive connection between the Management of Petrol AD
and its shareholders and potential investors.
The main principles of the Programme are set below.
Shareholders' rights
The Programme sets clearly the rights of the shareholders of Petrol AD and the
main goal of the managers' team is to ensure their observation. The shareholders
have the right to:
* Participate and vote in the GMS;
* Be equally treated in the GMS;
* Request convocation of regular or extraordinary GMS;
* Access the materials in writing, relevant to the agenda of the GMS;
* Access to the records of the previous sessions of the GMS;
* Make proposals for election of members of the SB and to vote for their
electing;
* Take part in the distribution of the company's profit commensurably to
their participation of the share capital;
* Receive regularly and timely information about corporate events
related to the activities and condition of Petrol AD;
* Participate in the increase of the capital of Petrol AD and in tender
offers.
Board Structure
Petrol AD has two-tier board structure, which includes Management Board (MB) and
Supervisory Board (SB).
Management Board
The parent company is managed and represented by a MB, whose 5 members are
elected by the SB for a 5-year period.
The MB has the authority to prepare and the annual report and financial
statements of the company submit them for approval by the GMS; to adopt projects
and programmes for the activity of the company; to make proposals for increase
or decrease of the company's capital to the GMS; to elect and dismiss the
executive directors; to approve the organisational and management structure of
the company and other internal regulations; to open and close down branches and
to make decisions to acquire or terminate participations in the capital of other
domestic or foreign companies etc.
For all MB resolutions is needed qualified majority of 3/4 of all members,
unless consensus is needed. MB holds its sessions at least once a month and
reports for its activity to the SB at least on a quarterly basis.
The MB authorises the rules for its activities, which strictly determine all the
rights, obligations and functions of the members of the MB.
Supervisory Board
The SB administrates and controls the activities of the MB in view of the
conformity of its actions with the legislation, the By-laws of the Petrol AD and
the decisions of the GMS. The SB is a collective body, elected by and directly
reporting to the GMS.
SB's is mandate is 5 years, at least 1/3 of its members should be independent
persons under the definition of the Public Offering of Securities Act.
The SB controls generally and continuously the activities of the company,
revises the annual reports and financial statements of the company, submits
written annual reports for the final results from the audits and analyses of the
business to the GMS, elects and dismisses the members of the MB, approves the
financial plans and investment programmes of the Company, etc.
The SB holds its sessions at least on a quarterly basis and reports for its
activity to the GMS. The SB takes its decisions in accordance with the
authorities given to it by the GMS, the By-laws and the current legislation.
GMS determines the remuneration of the members of the SB and the MB, taking into
consideration the responsibility, the engagement and the involvement of each
board member with the management of the company.
Disclosure of information
Being a public company Petrol AD submits to the Financial Supervision Commission
and the Bulgarian Stock Exchange - Sofia periodical reports and notifications
about insider information under the Law on Measures against Market Abuse with
Financial Instruments. The company submits individual and consolidated quarterly
financial statements, annual report and individual and consolidated annual
financial statements.
According to the requirements of the published prospectus for the Euro notes
issue made at the end of October 2006, the company prepares and submits to the
Trustee (The Bank of New York) and to the Noteholders consolidated quarterly and
annual financial statements and annual report.
The management bodies of the parent company and the Investor Relations Director
should provide easy and timely access of the shareholders and investors to the
information, to which they are legally entitled being shareholders and/or
investors in order to take informed and adequate investment decisions.
Control over the fulfilment of the Programme
The control over the Programme is exercised by the MB. The effectiveness and
efficiency of the Programme is assessed annually by the MB. The results of this
assessment and further measures proposed should be included be noticed in the
annual report provided to Financial Supervision Commission and to the Bulgarian
Stock Exchange - Sofia.
Environmental commitments
Following its privatisation in 1999, Petrol AD started the implementation of an
investment programme aimed to bring the Group's facilities in line with the
requirements of the best environmental practices in European Union. The Group's
operations include a number of activities which are governed by environmental or
health and safety laws in Bulgaria, which also cover historic environmental
liabilities associated with past environmental damage, storage and handling of
petroleum products, soil and groundwater contamination, waste management, water
supply, waste water management, atmospheric emissions, use and disposal of
hazardous materials and land use and planning requirements, including community
issues, associated with the development of new green field retail stations.
The principal legislation acts in Bulgaria which set out the framework for
environmental protection and sustainable development are the Law on Environment
Protection, the Law on Waste Management and sector-specific legislation,
including the Law on Ambient Air Purity, the Law on Water, the Law on Soil
Protection, the Law on Underground Resources and various regulations on their
implementation. As part of Bulgaria's preparation for accession to the European
Union, each of these laws has been brought into line with European Union
standards, with the new standards being phased in over time. Any failure by the
Group to comply with such laws may be a ground for civil and/or administrative
liability.
With regard to the Group's retail stations, Bulgarian law requires that a number
of air, water, land and noise emissions are monitored and recorded and processes
established for minimising such emissions and rendering them harmless. The
following are monitored pursuant to these obligations:
* Air emissions are monitored for dust, hydrogen sulphide, sulphurous
dioxide, nitrogen dioxide, lead aerosols, ammonia, carbolic acid and
hydrocarbon;
* Water emissions are monitored for temperature, pH, dissolved oxygen,
conductance, turbidity, phosphates, copper, zinc, lead and oil products;
* Surrounding soil is monitored for pH, nitrate nitrogen, copper,
chlorides, phosphates, zinc, lead and oil products; and
* Noise levels are monitored.
The Group is in compliance in all material respects with environmental
requirements currently applicable to its operations and, with the planned
additional investment, believes it will be able to maintain compliance with
known forthcoming requirements. The Group's intention is to continue to ensure
environmental compliance and pollution prevention in advance of regulatory
requirements.
Vapour recovery systems
One of the major areas in which the Group has invested, and will continue to
invest, is the meeting of the Bulgarian and European Union requirements for the
control of volatile organic compounds (known as VOCs). VOCs are compounds
containing carbon that evaporate into the air, such as vapour arising from
certain petroleum products. European Union Directive 94/63/EC Directive on VOCs
emissions resulting from storage and distribution of petrol set limits on the
permitted levels of such emissions. The Directive has been implemented in
Bulgarian legislation in the form of Ordinance No. 16 dated 12 August 1999,
which limits the emissions of VOCs connected with the storage, loading or
unloading and transportation of petrol.
The legal acts set up very strict requirements to fuel stations, fuel storage
terminals, and fuel tank trucks. Pursuant to these standards the tanks of fuel
stations are made with double walls willed with inert liquid. The Group
installed level measuring systems reacting to the slightest changes in the level
of fuel, as well as systems for sending vapours back into the fuel tank truck
during unloading of the fuel. Thus all dangers of fuel leaks and pollution with
carbon oxides are minimized.
In order for the group to be in line with the environmental criteria, the
loading and storage terminals are currently being reconstructed. Floating roofs
limiting the vapours to a minimum are installed, new mounting platforms for down
filling of fuel trucks and vapour recovery system are built.
European Directive 94/63/EC also requires that fuel tanker trucks used to
transport fuels must meet certain ecological criteria which aim to keep VOC
emissions into the atmosphere at a minimum level during loading and unloading.
In order to comply with these requirements, the Group acquired 27 new fuel tank
trucks from IVECO Spa and Mercedes for the total cost of BGN 7.4 million (EUR
3.7 million), which meet the requirements of the Directive and Euro 3 emission
standards. This standard requires compliance with significant restrictions on
noise and nitrogen, carbon oxides and hydrocarbon emissions.
The Group will continue to invest in environmental expenditures in its retail
network and on its storage facilities within the next five years in order to
meet European Union requirements for the control of VOC air emissions. More
detailed information for the amount of expected additional investments with
regards to the fulfilment of Group's environmental commitments can be found in
note 40 to the consolidated financial statements.
ISO Certification
In December 2004, the Management Board of Petrol AD resolved to obtain ISO
certifications for its quality management standards under ISO 9001:2000 and its
environmental management system under ISO 14001:1996. This intention confirms
the commitment of the Management to implement the best European practice in
process management. This process entails the preparation, documentation and
implementation of written rules and procedures and an audit of the procedures by
an independent third party. The Company's intention is to obtain ISO
certification by the end of 2007.
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
CONSOLIDATED INCOME STATEMENT
For the year ended December 31, 2006
Notes December 31, December 31,
(1) 2006 2005
BGN'000 BGN'000
Revenue 6 1,293,221 1,437,396
Other income 7 8,032 3,703
Total operating revenue 1,301,253 1,441,099
Cost of goods sold 8 (1,168,710) (1,301,170)
Materials 9 (12,476) (10,088)
Hired services 10 (37,488) (38,436)
Employee benefits expenses 11 (27,125) (27,817)
Depreciation and amortization expenses 12 (19,033) (21,888)
Impairment of assets 13 (631) (9,266)
Other expenses 14 (12,789) (7,893)
Total operating expenses (1,278,252) (1,416,558)
Finance income 15 8,034 2,631
Finance costs 15 (12,536) (8,370)
Share of loss of associates 20 (231) (306)
Finance costs, net (4,733) (6,045)
Profit before tax 18,268 18,496
Income tax expense 16 (5,191) (67)
Net profit for the year 13,077 18,429
Earnings per share (BGN) 33 0.12 0.17
These consolidated financial statements have been approved on behalf of Petrol
AD by:
Svetoslav Yordanov Desislava Todorova
Executive Director Chief Accountant
April 21, 2007
(The accompanying notes from page 52 to page 94 are an integral part of these
consolidated financial statements)
CONSOLIDATED BALANCE SHEET
as of December 31, 2006
Notes December 31, December 31,
(1) 2006 2005
BGN'000 BGN'000
Non-current assets
Property, plant and equipment 17 201,614 202,817
Intangible assets 18 1,400 1,581
Investment property 19 18,252 19,594
Investments in associates and other investments 20 1,816 2,074
Goodwill, net 21 20,309 20,309
Interest-bearing loans granted 22 44,698 -
Total non-current assets 288,089 246,375
Current assets
Inventories 23 137,968 82,290
Trade and other receivables, net 24 81,901 80,821
Interest-bearing loans granted 22 39,746 21,498
Cash and cash equivalents 25 62,987 11,490
Non-current assets, held for sale 26 1,387 -
Total current assets 323,989 196,099
Total assets 612,078 442,474
Current liabilities
Trade and other payables, net 27 163,056 109,018
Interest-bearing loans 28 56,953 91,580
Finance lease liabilities 29 1,955 428
Current income tax 30 328 3,396
Retirement benefits obligations 34 32 -
Total current liabilities 222,324 204,422
Non-current liabilities
Interest-bearing loans 28 207,217 73,503
Finance lease liabilities 29 4,955 384
Deferred tax liabilities 16 1,689 2,660
Retirement benefit obligations 34 438 -
Total non-current liabilities 214,299 76,547
Net assets 175,455 161,505
Equity
Share capital 31 109,250 109,250
Retained earnings 26,723 12,901
Revaluation reserve 32 28,817 28,865
Other reserves 10,665 10,489
Total equity 175,455 161,505
These consolidated financial statements have been approved on behalf of Petrol
AD by:
Svetoslav Yordanov Desislava Todorova
Executive Director Chief Accountant
April 21, 2007
(The accompanying notes from page 52 to page 94 are an integral part of these
consolidated financial statements)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the year ended December 31, 2006
Share Revaluation Other Retained Total
capital reserve reserves earnings
BGN'000 BGN'000 BGN'000 BGN'000 BGN'000
Balance at January 1, 2005 109,250 58,529 9,005 2,465 179,249
Change in the accounting policy,
resulting from adoption of a change
in IAS 27 - - - 3,136 3,136
Balance at January 1, 2005, restated 109,250 58,529 9,005 5,601 182,385
Transfer of revaluation reserve of
disposed assets - (29,664) - 29,664 -
Net income, recognized directly in
equity - (29,664) - 29,664 -
Net profit for the year - - - 18,429 18,429
Total income (expenses) recognized in
the period - (29,664) - 48,093 18,429
Allocation of profit to the reserves - - 1,484 (1,484) -
Dividends - - - (13,030) (13,030)
Loss from redemption and sale of
treasury shares (Note 31) - - - (26,286) (26,286)
Expired dividends written off - - - 7 7
Balance at December 31, 2005 109,250 28,865 10,489 12,901 161,505
Transfer of revaluation reserve of
disposed non-current assets - (1,648) - 1,648 -
Change in the tax rate of deferred
tax liabilities, recognized in equity - 1,600 - - 1,600
Net income, recognized directly in
equity - (48) - 1,648 1,600
Net profit for the year - - 13,077 13,077
-
Total income (expenses) recognized in
the period - (48) - 14,725 14,677
Allocation of profit to the reserves - - 176 (176) -
Dividends - - - (727) (727)
Balance at December 31, 2006 109,250 28,817 10,665 26,723 175,455
These consolidated financial statements have been approved on behalf of Petrol
AD by:
Svetoslav Yordanov Desislava Todorova
Executive Director Chief Accountant
April 21, 2007
(The accompanying notes from page 52 to page 94 are an integral part of these
consolidated financial statements)
CONSOLIDATED CASH FLOW STATEMENT
For the year ended December 31, 2006
December 31, December 31,
2006 2005
BGN'000 BGN'000
Cash flows from operating activities
Net profit before taxation 18,268 18,496
Adjustments for:
Depreciation (amortization) of non-current assets and goodwill 19,033 21,888
Interest expenses and bank fees and commissions, net 7,852 5,783
Shortages and normal loss, net of excess assets 4,484 1,076
Provisions for unused annual paid leave and retirement benefits 1,733 1,351
Impairment of assets and write-off of receivables 631 9,363
Loss on liquidation of assets 373 367
Net effect from applying the equity method 231 306
Loss on acquisition of subsidiaries and associates 32 31
Gain on sale of derivatives (1,661) -
Gain on sale of non-current assets (4,709) (621)
Gain on sale of financial assets held for trading (73) -
Unrealized foreign exchange loss - 150
Cash flows provided by operating activities 46,194 58,190
Interest and bank fees and commissions paid (9,794) (7,939)
Income taxes paid (7,630) (5,521)
Operating profit before changes in working capital 28,770 44,730
Increase in trade payables 50,814 718
Increase in inventories (60,221) (49,861)
Decrease in trade receivables 16,240 53,451
Net cash provided by operating activities 35,603 49,038
Cash flows from investing activities
Proceeds on sale of financial assets held for trading 43,105 -
Purchase of financial assets held for trading (43,032) -
Acquisition of non-current assets (16,500) (9,038)
Proceeds on disposal of non-current assets 7,864 1,507
Interest received on investment loans and deposits 3,528 2,282
Net proceeds on sale of derivatives 1,916 -
Cash paid for investment deposits and granted loans, net (75,529) (57,112)
Payments for acquisition of subsidiaries (32) (26)
Net cash provided by/(used in) investing activities (78,680) (62,387)
CONSOLIDATED CASH FLOW STATEMENT (continued)
For the year ended December 31, 2006
December 31, December 31,
2006 2005
BGN'000 BGN'000
Cash flows from financing activities
Proceeds on bank and trade loans and bond issue 1,018,147 1,014,850
Bank and trade loans and bond issue repaid (921,442) (957,742)
Net cash flows on redemption and sale of treasury shares - (26,286)
Dividends paid (700) (13,030)
Finance lease capital cost payments (1,431) (838)
Net cash provided by /(used in) financing activities 94,574 16,954
Net increase in cash and cash equivalents for the year 51,497 3,605
Cash and cash equivalents at the beginning of yaar 11,490 7,885
Cash and cash equivalents at the end of year 62,987 11,490
(see also note 25)
These consolidated financial statements have been approved on behalf of Petrol
AD by:
Svetoslav Yordanov Desislava Todorova
Executive Director Chief Accountant
April 21, 2007
(The accompanying notes from page 52 to page 94 are an integral part of these
consolidated financial statements)
Notes
to the consolidated financial statemenets
as of December 31, 2006
1. Legal status
Petrol AD (the Parent company) is registered in Sofia. The headquarters of the
Parent company is located at 43, Cherni Vruh Blvd. Sofia. As of December 31,
2006 the majority shareholder of
Petrol AD is Petrol Holding AD with 71.75 % ownership of the share capital. The
remaining part of the Parent company's share capital is owned by other legal
entities, the State - through the Ministry of Economy and by individual
shareholders (see note 31).
Effective from July 1, 1998 Petrol AD is registered as a public company in the
Public Register of the Financial Supervision Commission.
The main activities of Petrol AD and its subsidiaries (the Group) comprise
retail and wholesale of oil and non-oil products, rendering of transport
services and maintenance. The Parent company is one of the oldest commercial
companies in Bulgaria and owns the largest network of fuel stations in the
country.
These consolidated financial statements have been approved for issue by the
management on April 21, 2007.
2. Basis for preparation of the consolidated financial statements and
accounting principles
2.1. Basis for preparation of the consolidated financial statements
The Group prepares and presents its consolidated financial statements in
accordance with International Financial Reporting Standards (IFRS), issued by
the International Accounting Standards Board (IASB) and the interpretations,
issued by the International Financial Reporting Interpretations Committee
(IFRIC), approved by the European Commission and applicable in the Republic of
Bulgaria. IFRS as adopted by the European Commission do not differ from IFRS,
issued by the IASB, and are effective for reporting periods ended as of December
31, 2006, except for certain requirements for hedge reporting in accordance with
the IAS 39 Financial Instruments: Recognition and Measurement, which has not
been adopted by the Commission. The management believes that if the hedge
requirements has been approved by the Commission it would have no influence on
the consolidated financial statements.
The Bulgarian Accountancy Act (the Act), effective in 2006 requires the
application of IFRS, adopted by the European Union Commission. They should be
officially translated in Bulgarian language, approved by the Council of
Ministers of the Republic of Bulgaria and published in State Gazette (SG). As of
the date of these consolidated financial statements the official edition in
Bulgarian language, approved by the Council of Ministers with Decree No207/
07.08.2006 (the Decree) and published in SG, issue 66 of August 15, 2006, is the
one of the core International Financial Reporting Standards as of January 1,
2005. Based on the amendments of the Act, effective January 1, 2007 the
requirement for compulsory publication of official translation of IFRS, adopted
by the Council of Ministers is cancelled, which allows direct application of the
updated version of IFRS.
During 2006 the Group has adopted all new and revised IFRS by the International
Accounting Standards Board (IASB), approved by the European Union Commission and
the related Interpretations, applicable for reporting periods, starting after
January 1, 2006, which refer to the Group's business. Management believes that
the application of IFRS (the original 2006 edition in English) is appropriate
under these circumstances and accordingly provides the users of the consolidated
financial statements with useful and reliable information regarding the
financial position and the performance of the Group.
2.1. Basis for preparation of the consolidated financial statements
(continued)
The Group's management has not identified material differences between the
carrying amounts of assets and liabilities and the amounts in the income
statement as reported in these consolidated financial statements and as they
would have been reported according to IFRS, 2005 edition, under the Decree.
Additionally, the application of revised IFRS has not resulted in material
changes in the accounting policy adopted by the Group.
The adoption of IFRS, effective from January 1, 2005, has necessitated a change
in the opening balance of retained earnings of the Group as of this date. In
accordance with IFRS 3 Business Combinations, the goodwill arising from a
business combination, is stated in the balance sheet net of impairment loss,
according to the requirements of IAS 36 Impairment of Assets, and is not subject
to amortisation. The standard does not allow the recognition of negative
goodwill. Accordingly, after reassessment of the initial recognition, any
subsequent excess of the acquirer's interest in the net fair values of the
acquired identifiable assets, liabilities and contingent liabilities over the
cost of the business combination, should be recognised immediately in the income
statement.
Until December 31, 2004, in accordance with the requirements of the then
applicable IAS 22 Business Combinations, the Group has adopted the policy of
amortising the goodwill on a systematic basis over its useful life, estimated at
5 years, based on an estimate of the period during which future economic
benefits are expected to flow to the enterprise. Negative goodwill has been
recognized in the consolidated income statement on a systematic basis over its
useful life, fixed at 5 years.
With regard to the requirements of the transitional provisions of IFRS 3
Business Combinations, the Group has effected changes in its accounting
policies, resulting from the issuance of a new standard, applicable for future
periods - from January 1, 2005, due to which these changes have no effect on the
consolidated financial statements for prior reporting periods.
As of January 1, 2005 the accumulated amortisation of goodwill is eliminated
with a corresponding decrease in goodwill and the carrying amount of negative
goodwill is derecognised with a corresponding adjustment to the opening balance
of retained earnings. As of the same date the Group discontinues amortising
goodwill.
In accordance with the previous revision of IAS 27 Consolidated and Separate
Financial Statements, the Group has adopted the policy not to consolidate
subsidiaries, if control is intended to be temporary because the subsidiary is
acquired and held exclusively with a view to its subsequent disposal in the near
future. Following the provisions of the standard, in prior periods the Group
reported its interest in such subsidiaries in accordance with IAS 39 Financial
Instruments: Recognition and Measurement. In the revised IAS 27 Consolidated and
Separate Financial Statements, applicable since January 1, 2005, the texts
concerning the exclusion of subsidiaries from consolidation have been removed.
Accordingly, subsidiaries, on which the Group has exercised temporary control,
and which have not been disposed of as of December 31, 2005, are consolidated
retrospectively - as they would have been reported, had the same accounting
policy been applied in prior reporting periods.
These financial statements are prepared under the historical cost convention,
except for the assets (liabilities), which are stated at fair value - financial
assets (liabilities), including derivatives, reported at fair value in the
income statement and represent consolidated financial statements, the
preparation of which is required by the Bulgarian accounting legislation and IAS
27 Consolidated and Separate Financial Statements.
2.2. Functional and presentation currency of the consolidated
financial statements
Functional currency is the currency of the primary economic environment in which
an entity operates and in which it primary generates and expends cash. An
entity's functional currency reflects the underlying transactions, events and
conditions that are relevant to it.
The Group keeps its records and prepares its financial statements in the
national currency of the Republic of Bulgaria - the Bulgarian Lev, which is
adopted by the Company as its functional currency. Effective January 1, 1999,
the Bulgarian Lev is fixed to the EUR at the rate of
BGN 1.95583 = EUR 1.
These consolidated financial statements are presented in thousand Bulgarian
Levs.
2.3. Foreign currency
Transactions in foreign currency are initially recorded at the official rate of
exchange of the Bulgarian National Bank (BNB) as of the date of the transaction.
The foreign exchange rate differences, arising upon the settlement of these
monetary positions or at restatement of these positions at rates, different from
those when initially recorded, are reported as financial income or financial
expenses in the income statement for the period in which they arise.
The monetary positions denominated in foreign currency as of December 31, 2006
and 2005 are stated in these consolidated financial statements at the closing
exchange rate of BNB. The closing exchange rates of BGN against USD as of the
respective reporting period are as follows:
December 31, 2006 1 USD = BGN 1.48506
December 31, 2005 1 USD = BGN 1.65790
2.4. Subsidiary companies and consolidation
The consolidated financial statements incorporate the financial statements of
the Parent company and its subsidiaries. A subsidiary is an entity that is
controlled by the Parent company. Control is the power to govern the financial
and operating policies of an enterprise so as to obtain benefits from its
activities.
For consolidation purposes, the separate financial statements of the Parent
company and its subsidiaries have been combined on a line-by-line basis by
adding together like items of assets, liabilities, equity, income and expenses.
For consolidation purposes all intragroup balances and intragroup transactions,
as well as all intragroup profits and losses, including unrealised profits and
losses as of December 31, 2006 and 2005 are eliminated in full.
The carrying amount of the Parent company's investment in each subsidiary and
the Parent company's portion of equity of each subsidiary are eliminated
The results of subsidiaries, which have been acquired or disposed during the
year, are included in the consolidated income statement from the date of the
acquisition, till the date at which control ceases.
2.5. Associates
An associate is an enterprise over which the Parent company has significant
influence. Significant influence is the right of participation in, but not
control over, the financial and operating policy decisions of the investee.
Interests in associates are presented in the balance sheet in accordance with
IAS 28 Investments in Associates, using the equity method of accounting,
according to which the investment is recorded initially at cost as adjusted by
post-acquisition changes in the investor's share in the net assets of the
associate.
2.6. Business combinations
In accordance with IFRS 3 Business combinations, a business combination is the
bringing together of separate enterprises or businesses into one reporting
entity. If an entity obtains control over another entity, which does not
represent a separate business, the bringing together of these enterprises is not
a business combination. When there is no business combination, the purchase
method cannot be used and instead of this the transaction should be presented as
a merger.
If the transaction meets the criteria for a business combination, it should be
determined if the business combination is involving companies under common
control. According to IFRS 3, two enterprises are under common control, when the
combining enterprises or businesses are ultimately controlled by the same party
(parties) both before and after the business combination and when the control is
not temporary (transitional).
IAS 22 Business Combinations (replaced by the effective IFRS 3 Business
Combinations) and IFRS 3 Business Combinations, applicable as of the date of the
present consolidated financial statements exclude from their scopes business
combinations involving entities under common control. IFRS do not provide
guidance for the accounting treatment of business combinations involving
companies under common control.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors effective
from January 1, 2005, requires that upon absence of a specific Standard or
Interpretation, management should develop accounting policy, which is reliable
and relevant to the economic decision making needs of the users of the financial
statements. The acquirer should take into consideration the requirements and
guidance of standards and pronouncements of other international standard setting
bodies, other accounting literature and established best practices, treating
similar issues, to the extent that they do not conflict with sources of
directions of the IASB (including IFRS, Interpretations and Framework for
preparation and presentation of financial statements).
On the basis of these sources, management should select an appropriate policy
for reporting of business combinations involving entities under common control
and apply it consistently.
The present international practices provide guidance for two alternative methods
of accounting for business combinations involving entities under common control
- the purchase method and the method of uniting of interests.
Management believes that the use of the method of uniting of interests is not
appropriate, since its application for business combinations is not allowed by
IFRS 3. In addition, according to the international practices, the method of
uniting of interests can be applied in exceptionally rare circumstances, mostly
in the cases when it cannot be determined which of the combining enterprises is
the acquirer. According to IASB in most of the business combinations, as well as
in the particular situation, the acquirer can be identified.
2.6. Business combinations (continued)
Taking into account the above arguments, management has decided to adopt the
purchase method and apply it consistently for all similar transactions within
the Group for the current and prior reporting periods.
In October 2003 the Ultimate parent company, Petrol Holding AD, performs
reorganization of the companies and the business within the economic group, as a
result of which the Parent company acquires Naftex Petrol EOOD through purchase
from the Ultimate parent company. The cost of acquisition amounts to BGN 100,966
thousand, and is based on market valuation of BGN 1.058 per share, made by a
licensed appraiser, in compliance with the requirements of art. 114 of the
Public Offering of Securities Act. The performed reorganization meets the
criteria for a business combination, as Petrol AD obtains control over the
business of Naftex Petrol EOOD - wholesale with fuels, which represents bringing
together of two separate businesses into one economic entity, within the meaning
of IFRS 3. As the Ultimate parent company before and after the transaction is
Petrol Holding AD, this is a business combination involving entities under
common control. The management accounted for that transaction in 2003, applying
the purchase method. The management considers that the use of the purchase
method of accounting is appropriate within the given circumstances.
International Accounting Standard Board has deferred till the second phase of
Business Combination Standard project to deal with accounting methods for
business combination of companies under common control. Depending on the outcome
of this project in the future, further considerations to the accounting method
used might be required.
2.7. Goodwill
Goodwill represents the excess of the cost of acquisition over the Group's
interest in the net fair value of identifiable assets, liabilities and
contingent liabilities of the acquired entity as of the date of the exchange
operation and is recognised as an asset. When the acquisition cost is lower than
the fair value of the net assets acquired by the Group, the acquirer should
reassess the identification and measurement of the acquiree's identifiable
assets, liabilities and contingent liabilities and the measurement of the cost
of the business combination and any excess remaining after that reassessment
should be recognized immediately in profit or loss
Subsequent to its initial recognition goodwill is not amortized, in compliance
with IFRS 3, applicable for reporting periods after March 31, 2004. At the end
of each reporting period a test for impairment is performed (see also note 4).
2.8. Accounting estimates and reasonable assumptions
The preparation of the consolidated financial statements in accordance with IFRS
requires management to make some accounting estimates and reasonable assumptions
that affect some of the reported amounts of assets, liabilities, revenues and
expenses. These estimates and assumptions are based on the best estimate of
management, taking into account historical experience and analysis of all
factors of significance in the circumstances as of the date of the consolidated
financial statements. The actual results could differ from those estimates,
presented in these consolidated financial statements.
2.9. Changes in accounting policy
The Group changes its accounting policy when this change is required by a
Standard or an Interpretation, or when the adopted change would lead to
presentation of reliable and more appropriate information about the effects of
transactions, other events or conditions, having effect on the entity's
financial position, financial performance or cash flows.
Change in accounting policy as a result of the application of a new Standard
should be accounted in accordance with the transitional provisions of the
respective IFRS (if any). Where there are no such provisions, the change is
applied retrospectively (see Note 2.1).
In the current year the Group has adopted the policy of reporting accrued and
unpaid interest on debenture loans in the balance sheet as a part of the
liabilities under interest-bearing loans. Management is convinced that the
adopted change complies with the requirements of IAS 32 Financial instruments:
Presentation and would improve the overall presentation of the consolidated
financial statements. For comparability purposes, prior year data have been
reclassified.
3. Definition and valuation of the balance sheet and income statement
items
3.1. Property, plant and equipment and intangible assets
Property, plant and equipment and intangible assets are recognized and initially
carried at cost, including the purchase price, import duties and non-refundable
taxes, as well as any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner
intended by management. Assets, acquired by means of a business combination are
carried at fair value. After initial recognition, property, plant and equipment
and intangible assets are stated at cost less accumulated depreciation
(amortization) and accumulated impairment loss, if any (see note 3.3).
Some tangible fixed assets, available at December 31, 2002, have been revalued
by coefficients, based on the accounting legislation, applicable as of the end
of 2001, as a result of which a revaluation reserve has been created. In
compliance with the changes in accounting legislation, management has reviewed
all material items of property, plant and equipment as of December 31, 2002 to
verify the measurement of their carrying amount. Those assets, for which the
carrying amount was materially different from their fair value, were revalued to
their fair value as of the same date. The so formed revaluation reserve was
added to the revaluation reserve, resulting from the accounting legislation
applicable as of December 31, 2001.
When property, plant and equipment include parts with different useful lives and
a cost that is significant in relation to the total cost of the item, such parts
are recognized as separate assets.
Subsequent costs, including costs for replacement of an item of property, plant
and equipment are recognized in the carrying amount of the asset, if they
satisfy the recognition principle. The carrying amount of the replaced item is
derecognized in accordance with the requirements of IAS 16 Property, Plant and
Equipment. All other subsequent costs are recognized as expense for the period
as incurred.
Depreciation and amortization are charged over the estimated useful lives, using
the straight-line method.
3.1. Property, plant and equipment and intangible assets (continued)
The assets' estimated useful lives are as follows:
Useful life 2006 2005
25 years 25 years
Administrative and trade buildings
Machines, fixtures and equipment 2, 3 and 25 years 2, 3 and 25 years
Vehicles 5 and 10 years 5 and 10 years
Office furniture 7 years 7 years
Intangible assets 2 and 7 years 2 and 7 years
Depreciation of an asset begins in the month following the month in which the
asset is available for use and ceases at the earlier of the date when the asset
is classified as held for sale, in accordance with IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations, and the date when the asset is
derecognized.
Land, works of art, assets under construction and fully depreciated assets are
not depreciated.
3.2. Investment property
Investment property is property held by the Group to earn rentals or for capital
appreciation, or for both.
Investment property is measured at cost less accumulated depreciation and
impairment loss, if any (see note 3.3).
When some properties comprise portion that is held to be used in Group's
operations, another portions to earn rentals, and these portions cannot be
reported separately, these properties are presented in compliance with IAS 16 -
Property, Plant and Equipment.
Depreciation on investment properties is charged to the income statement, by
applying the straight line method, on the basis of their estimated useful life,
as follows:
Useful life 2006 2005
25 years 25 years
Administrative and trade buildings
Machines, fixtures and equipment 2, 3 and 25 years 2, 3 and 25 years
Office furniture 7 years 7 years
3.3. Impairment of property, plant and equipment and intangible assets,
investment property and goodwill
At each balance sheet date, the management reviews the carrying amounts of its
property, plant and equipment, intangible assets, investment property and
goodwill to determine whether there is any indication for impairment of these
assets. If any such indication exists, the recoverable amount of the respective
asset is estimated. Where it is not possible to estimate the recoverable amount
of an individual asset, the Group estimates the recoverable amount of the
cash-generating unit, to which the asset belongs.
The recoverable amount is the higher of the asset's fair value less costs to
sell the asset and its value in use. If the recoverable amount of an asset (or
cash-generating unit) is estimated to be less than its carrying amount, the
carrying amount of the asset (cash generating unit) is reduced to its
recoverable amount. Impairment loss is recognized in the income statement
immediately, unless the asset is carried at a revalued amount, in which case the
impairment loss is treated as a decrease in the revaluation reserve (see note
3.1).
Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognized
for the asset (cash generating unit) in prior years. A reversal of an impairment
loss is recognized as income immediately, unless the relevant asset is carried
at a revalued amount, in which case the reversal of the impairment loss is
treated as an increase in the revaluation reserve.
An impairment loss is recognized for a cash-generating unit to which goodwill
was allocated if and only if the recoverable amount is lower than its carrying
amount. The impairment loss is allocated to reduce the carrying amount of the
assets in the cash-generating unit, first to reduce the carrying amount of
goodwill and then, the carrying amount of other assets in the unit, pro rata on
the basis of the carrying amount of each asset in the unit. The impairment loss
of goodwill could not be reversed..
3.4. Non-current assets, held for sale
Non-current assets are classified as held for sale if their carrying amounts
would be recovered principally through a sale transaction rather than through
continuing use. For this to be the case, the asset must be available for
immediate sale in its present condition and its sale must be highly probable.
These criteria are considered to be met only when the sale is very probable and
the asset is available for sale in its present condition.
Non-current assets, held for sale are measured at the lower of carrying amount
and fair value, less costs to sell.
3.5. Inventories
Inventories are stated at lower of cost and net realizable value. Cost comprises
purchase price, transportation, customs duties and other similar costs. Net
realizable value represents the estimated selling price less all estimated costs
to be incurred in selling.
Upon consumption, the cost of inventories is calculated using the following
methods:
Petroleum Specific identification price of each delivery
Fuel and other inventories Weighted average cost
Materials Weighted average cost
3.6. Financial instruments
A financial instrument is any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.
Financial assets (liabilities) are recognized in the consolidated balance sheet
only when the Group becomes a party to the contractual provisions of the
instrument. Financial assets are removed from the balance sheet after the
contractual rights for receiving cash flows are expired or the asset is
transferred and the transfer meets the derecognition requirements under IAS 39
Financial Instruments: Recognition and Measurement. Financial liability is
removed from the consolidated balance sheet when, and only when, it is
extinguished - that is when the obligation specified in the contract is
discharged, cancelled, or expires.
On initial recognition financial assets (liabilities) are measured at fair
value. Transaction costs, which are directly attributable to the acquisition or
issue of the financial assets (liabilities) are included in their value, except
when the financial assets (liabilities) are measured at fair value through
profit or loss.
For the purposes of subsequent measurement, the Group classifies the financial
assets and financial liabilities into the following categories: financial assets
and financial liabilities reported at fair value through profit or loss, loans
granted and other trade receivables and other financial liabilities (other than
those, measured at fair value through profit or loss). Classification under each
category depends on the purpose and term of the respective contract.
3.6.1. Financial assets (liabilities), measured at fair value through profit
or loss
This category of financial instruments are acquired with the purpose of trading.
This category includes derivatives, which comprises options and futures
contracts, concluded on the American stock exchanges (CME and NYMEX) by means of
an intermediary - a Bulgarian Bank, expect if derivatives are designated and
effective hedging instrument.
After their initial recognition these financial assets, are measured at fair
value as of the reporting date and differences from this value are recognized in
the income statement for the period when they arise.
3.6.2. Trade and other receivables, net
Trade and other receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They originate
when the Group provides cash, goods for sale or services having no intention to
trade them. Receivables are stated at amortized cost by applying the effective
interest method, excluding current receivables, which are not subject to
amortization..
3.6.3. Cash and cash equivalents
Cash and cash equivalents comprise short-term highly liquid investments that are
readily convertible to a known amount of cash and are subject to an
insignificant risk of change in value. For the purposes of cash flow
presentation, cash represents cash on hand and cash in bank accounts, cash in
transfer, as well as margin deposits, which are short-term collaterals on
options and futures contracts concluded by the Group. Cash in transfer comprise
cash, collected by the fuel stations as of the balance sheet date, but actually
received at the bank accounts of the Group at the beginning of the following
reporting period.
3.6.4. Trade and other payables, net
Trade and other payables incurred because of purchases of goods and services or
receipts of cash, which are not classified as financial liabilities measured at
fair value through profit and loss, are stated in the balance sheet at amortized
cost. Current liabilities are not amortized.
3.6.5. Interest bearing loans
Interest bearing loans are initially recorded at the fair value of proceeds
received, net of transaction cost. After initial recognition, interest bearing
loans are measured at amortized cost, as any difference between the initial cost
and maturity cost is recognized in income statement over the loan period, using
the effective interest method. If no transaction costs have been incurred in
negotiating an interest bearing loan, the loan is not subject to amortization.
The same applies to bank overdrafts, where the borrower is entitled to multiple
borrowings or repayments of the borrowed funds within a pre-determined overdraft
limit.
Financial expenses, including direct issue costs, are accounted for on an
accrual basis to the income statement using the effective interest method,
except for transaction costs on bank overdrafts, which are recognized in the
income statement on a straight line basis over the overdraft period.
Interest bearing loans are considered short-term when they should be settled no
later than twelve months after the balance sheet date.
3.6.6. Share capital and treasury shares
The share capital of the Parent company is presented at historical cost as of
the date of its registration.
When at the balance sheet date the Group has outstanding treasury shares, their
par value is deducted from share capital, and the difference paid below or above
the par value - in retained earnings, according to IAS 32 Financial Instruments:
Disclosure and Presentation.
3.6.7. Risk assessment and management
Market risk
Market risk arises when the value of financial instruments fluctuates as a
result of changes in market prices. Market risk relates to trading with
short-term financial assets, reported at fair value.
Currency risk
The Group performs transactions denominated in foreign currency. As a result it
is exposed to the risk of possible deviations of the USD / BGN ratio. The Group
does not use derivative financial instruments for currency risk hedging, but is
sufficiently insured against this risk, as the national currency is fixed to the
EUR (see note 2.2).
Interest rate risk
Financial instruments that potentially expose the Group to interest rate risk
are mainly bank loans received and loans granted. Most of them bear fixed
interest rate, due to which the Group is potentially exposed to fair value
interest rate risk, in case that market interest rates rise significantly over
or fall below the contracted rates. As the rest of the loans bear floating
interest rate with fixed margin over the base interest rate (BIR) and SOFIBOR,
respectively LIBOR/EURIBOR, the Group is potentially exposed to cash flow
interest rate risk. Management believes that due to the limited movement in
market interest rates, the Group is not exposed to significant fair value and
cash flows interest rate risks.
Information on the applicable interest rates is disclosed in the respective
notes.
Credit risk
Financial assets that potentially expose the Group to credit risk are primarily
its trade receivables. Basically, the Group is exposed to credit risk, in case
the clients do not meet their payment obligations. The Group's policy is
directed primarily to sales of goods and services in cash, in advance, as well
as sales on credit to clients with appropriate credit rating.
Credit risk of cash at banks is insignificant as the Group deals only with banks
with high credit rating
3.7. Deferred income and deferred expense
Deferred income and deferred expense represent income and expense, which are
paid in the current, but refer to future accounting periods - guarantees,
insurance, subscription, rent, etc.
3.8. Income tax
Income tax expense comprises current income tax and deferred tax.
The tax currently payable is based on the combined taxable profit (tax loss) for
the year of the Patent company and its subsidiaries, as reported in their
separate corporate tax returns, by applying the effective tax rate according to
the tax legislation as of the date of the financial statements. Deferred tax is
the income tax expected to be payable (recoverable) in future periods on taxable
(deductible) temporary differences. Temporary difference is the difference
between the carrying amount of an asset or liability in the balance sheet and
its tax base. Deferred income taxes are calculated using the balance sheet
liability method. Deferred tax liabilities are recognized for all taxable
temporary differences, whereas deferred tax assets are recognized for deductible
temporary differences, only to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can
be utilized.
Deferred tax assets (liabilities) are calculated at the tax rates that are
expected to apply in the period when the liability is settled or the asset
realized, based on the tax rates that have been enacted or substantively enacted
by the balance sheet date. Deferred tax is charged or credited in the income
statement, except when it relates to items charged or credited directly to
equity, in which case the deferred tax is also charged or credited in equity.
3.8. Income tax (continued)
Although income tax in Bulgaria is not calculated on a consolidation basis, the
Group has adopted the policy of accruing deferred tax assets (liabilities) on
all temporary differences, arising from the elimination of unrealized
intra-group income from sale of non-current assets, which are treated as timing
differences. These temporary differences are reversed by the subsequent
adjustments to depreciation expenses by the acquiring company or upon disposal
of the respective assets by the Group, when the profit on sale is realized for
the Group.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of all or a part of the
deferred tax asset to be utilized.
Deferred tax assets and liabilities are reported net when they are subject to an
unified tax regime.
In accordance with the tax legislation enforceable for 2006 and 2005, the tax
rate applied for the calculation of the Group's current tax liabilities is 15%.
Deferred tax assets and liabilities as of
December 31, 2006 are calculated by using the tax rate at 10%, applicable for
2007.
3.9. Revenue and expenses recognition
Revenue and expenses are accrued when they arise, regardless of cash receipts
and payments. They are reported in compliance with the matching concept.
Revenue is measured at the fair value of the consideration received or
receivable, less any discounts allowed by the Group.
Revenue from sales of goods is recognized when:
* The significant risks and rewards of ownership of the goods are
transferred to the buyer;
* The Group retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
* It is probable that economic benefits associated with the transaction
will flow to the Group;
* Income and expenses, directly arising from the transaction can be
measured reliably.
When the outcome of a transaction involving rendering of services can be
estimated reliably, revenue recognition is based on the stage of completion of
the transaction at the balance sheet date. If the outcome cannot be estimated
reliably, revenue is recognized only to the of the expenses recognized that are
recoverable.
Gains or losses on sales of property, plant and equipment and intangible assets
are stated as other income or other expense.
Interest income (expense) is accrued by using the effective interest method.
Profit or loss arising from the exchange of assets is stated at the difference
between the fair value of the asset received and the carrying amount of the
asset exchanged.
3.10. Leases
A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset.
Assets acquired under finance lease are recognized at the lower of the fair
value of the leased asset and the present value of the minimum lease payments,
determined at the inception of the lease. The corresponding liability to the
lessor is included in the Group's balance sheet as finance lease obligations.
Lease payments are apportioned between interest charges and principal payments,
so as to achieve a constant rate of interest on the remaining balance of the
liability.
A finance lease gives rise to depreciation expense for depreciable assets, as
well as finance expense for each reporting period. The depreciation policy for
depreciable leased assets is consistent with that for depreciable assets that
are owned.
Costs incurred for assets leased under operating leases are recognized in the
income statement on a straight line basis over the lease term.
Lease income from operating leases is recognized as income on a straight line
basis over the lease term. Initial direct costs incurred in negotiating an
operating lease are added to the carrying amount of the leased asset and are
recognized as an expense on a straight line basis over the lease term.
3.11. Segment reporting
For the purposes of segment reporting, identifiable components from the Group's
activity (reportable segments) are established, each of them referring to the
provision of separate or group of products and services, which are subject to
risks and return, different from those of the other business segments.
The results, assets and liabilities of the segment comprise such elements, which
can be directly attributed to the segment, as well as elements, which can be
allocated to the segment on a reasonable basis.
Capital expenditures of the segment represent investments, made in the period of
acquisition of segment assets, which are expected to be used by the segment for
more than one reporting period.
4. Critical accounting estimates and key sources of estimation
uncertainty
In the application of the adopted accounting policy, management makes certain
estimates (other than the disclosed in note 2.8), which have significant effect
on these financial statements. Such estimates, by definition, may differ from
actual results. Due to their nature, they are subject to constant review and
update, and comprise the historical experience and other factors, including
expectation of future events, which the management believes are reasonable under
the present circumstances.
A critical accounting estimate, which includes significant risk of considerable
adjustments to the carrying amount of assets and liabilities in subsequent
reporting periods, is the test for impairment of goodwill, arising from a
business combination.
4. Critical accounting estimates and key sources of estimation
uncertainty (continued)
As disclosed in notes 2.7 and 3.3, goodwill is not subject to amortisation, but
is reviewed for impairment at each year end, as well as at any time when any
indications for impairment exist. According to IAS 36 Impairment of assets, the
most recent detailed calculation made in preceding period of the recoverable
amount of a cash-generated unit to which the goodwill has been allocated may be
used in impairment test of that unit in the current period provided that the
assets and liabilities, making the cash generating unit, have not changed
significantly since the most recent calculation; no events or circumstances with
possible negative effect have arisen in the current period; and upon current
calculation of the recoverable amount there is minimum probability that it might
be lower than the current carrying amount of the cash generating unit.
As of December 31 2006 management has not identified any indications of
impairment.
The impairment test of the goodwill from the acquisition of Naftex Petrol EOOD
(see also notes 2.6 and 21) has been performed as of December 31, 2006 by using
the methodology of the discounted net cash flows. This methodology is based on
current forecasts of net cash flows, prepared by management of the subsidiary
for a three-year period after December 31, 2005. The net cash flows for the
periods after the last forecast period, are calculated at a 3% increase towards
the latter, by applying the "eternal rent" method with constantly increasing
rate and discounting of the resulting terminal value by observing the above
stated methodology. The applied discount rate of 9 % is equal to the weighted
average cost of the subsidiary's equity. As of December 31, 2006, according to
the calculation performed under the above methodology, the estimated value of
the investment in the subsidiary exceeds the sum of carrying amount of the
investment before its elimination and the carrying amount of goodwill, goodwill
has not been impaired.
5. Changes in IFRS
The stated below IFRS, IFRS revisions, and IFRIC, have been approved by IASB and
IFRIC as of the date of the consolidated financial statements, but are effective
for annual periods beginning on or after March 1, 2006.
IFRS or IFRIC, effective date Title of IFRS or IFRIC
IAS 1 (revised 2005)- changes, related to share capital Presentation of Financial Statements
disclosures, effective January 1, 2007
IFRS 7, effective for reporting periods beginning on or Financial Instruments: Disclosures
after January 1, 2007
IFRS 8, effective for reporting periods beginning on or Operating Segments
after January 1, 2009
IFRIC 7, effective for reporting periods beginning on or Restatement in Compliance with IAS 29 Financial
after March 1, 2006 Reporting in Hyperinflationary Economies
IFRIC 8, effective for reporting periods beginning on or Scope of IFRS 2
after May 1, 2006
IFRIC 9, effective for reporting periods beginning on or Reassessment of Embedded Derivatives
after June 1, 2006
IFRIC 10, effective for reporting periods beginning on or Interim Financial Reporting and Impairment
after November 1, 2006
IFRIC 11, effective for reporting periods beginning on or IFRS 2 - Group and Treasury Share Transactions
after March 1, 2007
IFRIC 12, effective for reporting periods beginning on or Service Concession Agreements
after January 1, 2008
Amendment to IAS 23, effective for reporting periods Borrowing Costs
beginning on or after January 1, 2009
IFRS 8 Operating Segments, IFRIC 10 Interim Financial Reporting and Impairment,
IFRIC 11 IFRS 2 Group and Treasury Share Transactions and IFRIC 12 Service
Concession Service Agreements have been suggested, but as of the date on which
these consolidated financial statements have been approved for issue, are not
endorsed by the European Commission. No suggestion for endorsement of the
amendment to IAS 23 Borrowing Costs have been made as of the same date.
Most of the IFRS or IFRIC stated above will not applicable to Group's
activities. Therefore they will have no material effect on the consolidated
financial statements. The application of IFRS 7 will result in additional
disclosures about Group's financial instruments.
6. Revenue
December 31, December 31,
2006 2005
BGN'000 BGN'000
Sales of goods 1,242,643 1,371,636
Sales of services 47,449 58,930
Sales of finished goods 2,481 3,653
Income from investment properties - 1,987
Rental income 648 1,190
Total 1,293,221 1,437,396
Until December 31, 2005, according to the terms of a fuel supply agreement with
a counterparty (the Counterparty), in the revenue the Parent company has
recognized income, which represents increase of the remuneration of the Company
for incurred operating expenses and discounts given to customers. The management
believes that the total amount of BGN 25,830 thousand recognised up to December
31, 2005 is correct and is in accordance with the terms of the agreement.
Considering the fact that the above amount is disputed by the Counterparty, as
of December 31, 2005 the management believes there are indications this
receivable to be doubtful and in the near future it will be not paid by the
Counterparty due to which the Parent company has fully impaired it (see also
note 13 and 24).
Due to the intense disagreements with the Counterparty and the uncertainty the
receivables to be collected, as well as on the grounds of revenue recognition
principle of IAS 18 Revenue, from January 1, 2006 the Parent company excludes
these receivables and revenue from the income statement, respectively, and
presents this claim off balance. The increase of the remuneration for 2006,
which is not included in these consolidated financial statements as of December
31, 2006, amounts to BGN 7,263 thousand.
Revenue from sales of goods comprises:
December 31, December 31,
2006 2005
BGN'000 BGN'000
Light fuels (gasoline, diesel oil and gas oil) 1,198,728 1,306,871
Lubricants and other goods 35,225 28,162
Heavy fuels (heating oil) 8,690 36,603
Total 1,242,643 1,371,636
7. Other income
December 31, December 31,
2006 2005
BGN'000 BGN'000
Gain on sales of non-current assets, including: 4,709 621
Revenue from sales of non-current assets 7,472 1,025
Carrying amount of non-current assets written-off (2,763) (404)
Income from penalties 1,364 1,937
Surplus of assets 1,073 745
Insurance claims 584 -
Other 302 400
Total 8,032 3,703
8. Cost of goods sold
December 31, December 31,
2006 2005
BGN'000 BGN'000
Light fuels (gasoline, diesel oil and gas oil) 1,128,690 1,240,568
Lubricants and other goods 31,599 25,102
Heavy fuels (heating oil) 8,421 35,500
Total 1,168,710 1,301,170
9. Materials
December 31, December 31,
2006 2005
BGN'000 BGN'000
Fuels 3,094 2,508
Electricity 2,716 2,633
Advertising materials 1,935 1,040
Spare parts 1,897 1,307
Office consumables 1,329 1,323
Water supply 600 615
Working clothes 524 444
Heating 153 70
Other expense 228 148
Total 12,476 10,088
10. Hired services
December 31, December 31,
2006 2005
BGN'000 BGN'000
Transportation 9,062 5,778
Commissions 6,742 1,488
Maintenance and repairs 4,233 2,170
Advertisement costs 3,920 970
Consulting and training 3,618 16,347
Security 2,584 2,406
Communications 2,009 2,629
Collection 1,713 1,967
Rents 1,270 1,623
Insurances 1,050 1,193
State and municipal fees 804 869
Other expense 483 996
Total 37,488 38,436
11. Employee benefits expenses
December 31, December 31,
2006 2005
BGN'000 BGN'000
Wages and salaries 21,054 20,802
Social security contributions and benefits 6,071 7,015
Total 27,125 27,817
12. Depreciation and amortization expenses
December 31, December 31,
2006 2005
BGN'000 BGN'000
Depreciation of property, plant and equipment 17,807 20,108
Depreciation of investment property 714 1,218
Amortization of intangible assets 512 562
Total 19,033 21,888
13. Impairment of assets
December 31, December 31,
2006 2005
BGN'000 BGN'000
Impairment of non-current assets and investment property 575 724
Impairment of receivables 29 8,497
Impairment of investments 27 45
Total 631 9,266
The major part of the expenses for impairment of non-current assets in the
current period at the amount of BGN 549 thousand arises as a result of
impairment of an investment property - land, contributed in-kind by the Parent
company to one of the subsidiaries (see also note 19).
In the current period the investment in Petrol Engineering AD, an associate, is
fully impaired (see also note 20).
Expenses for impairment of receivables in 2005 are incurred as a result of
impairment of accounts with a Counterparty at the amount of BGN 7,929 thousand,
as disclosed in note 6 and impairment of trade and other receivables at the
amount of BGN 568 thousand.
14. Other expenses
December 31, December 31,
2006 2005
BGN'000 BGN'000
Shortages of assets 5,557 1,918
Penalties and indemnities 2,633 2,321
Taxes and tax charges 1,717 1,783
Entertainment expenses and sponsorship 998 658
Business trips 723 336
Loss on liquidation of non-current assets 373 367
Income from liquidation of non-current assets (793) (196)
Scraped inventories and non-current assets 1,166 563
Other 788 510
Total 12,789 7,893
15. Finance income and costs
December 31, December 31,
2006 2005
BGN'000 BGN'000
Finance income
Interest income 4,684 2,333
Gains on sales of financial assets 73 -
Gains from dealings with derivatives, including 1,661 -
Profit on dealings 1,916 -
Revaluations at fair value (255) -
Foreign exchange rate gains, net 1,519 -
Discount of purchased receivables and other income 97 298
Total 8,034 2,631
Finance costs
Interest expense (11,186) (7,597)
Loss from an in-kind contribution in an associate - (31)
Foreign exchange rate losses, net - (19)
Bank fees, commissions and other costs (1,350) (723)
Total (12,536) (8,370)
16. Taxation
Tax expense in the income statement includes the amount of current and deferred
income taxes in accordance with the requirements of IAS 12 Income Taxes.
December 31, December 31,
2006 2005
BGN'000 BGN'000
Current tax expense 4,562 6,590
Change in deferred taxes, including:
Temporary differences reversed during the year 1,014 (4,792)
Temporary differences originated during the year (760) (1,731)
Reduction in the tax rate 375 -
Total 629 (6,523)
Total tax expense 5,191 67
The change in the deferred tax, recognized in equity as of December 31, 2006 at
the amount of
BGN 1,600 thousand, results from a decrease in the corporate income tax rate for
2007 (see also note 3.8)
The deferred tax liability, presented net in the balance sheet, arises as a
result of the income tax charges on deductible and taxable temporary
differences, the effect of which is as follows:
16. Taxation (continued)
December 31, December 31,
2006 2005
BGN'000 BGN'000
Temporary Tax Temporary Tax
effect effect
difference difference
Balance at the beginning of the period
Tax loss to be carried forward 7,653 1,148 131 20
Impairment of assets 1,963 295 2,820 423
Depreciation/amortization of non-current assets 5,221 783 4,115 617
Liabilities related to unused paid leave 1,392 208
and retirement benefits 1,366 205
Revaluation reserve of non-current assets (33,959) (5,094) (69,653) (10,448)
Total (17,730) (2,660) (61,221) (9,183)
Originated during the period
Tax loss to be carried forward - - 7,653 1,148
Impairment of assets 32 3 559 84
Depreciation/amortization of non-current assets 5,827 584 1,994 299
Liabilities related to unused paid leave
and retirement benefits 1,726 173 1,339 200
Total 7,585 760 11,545 1,731
Reversed during the period
Tax loss to be carried forward (7,653) (1,148) (131) (20)
Impairment of assets (55) (8) (1,416) (212)
Depreciation/amortization of non-current assets - - (888) (133)
Liabilities related to unused paid leave
and retirement benefits (994) (149) (1,313) (197)
Revaluation reserve of non-current assets 1,939 291 35,694 5,354
Total (6,763) (1,014) 31,946 4,792
Adjustment originated from the change in tax rate
Tax loss to be carried forward - - - -
Impairment of assets - (96) - -
Depreciation/amortization of non-current assets - (260) - -
Liabilities related to unused paid leave
and retirement benefits - (19) - -
Revaluation reserve of non-current assets - 1,600 -
-
Total - 1,225 -
-
Balance at the end of the period
Tax loss to be carried forward - - 7,653 1,148
Impairment of assets 1,940 194 1,963 295
Depreciation/amortization of non-current assets 11,048 1,107 5,221 783
Liabilities related to unused paid leave 2,124 213 1,392 208
and retirement benefits
Revaluation reserve of non-current assets (32,020) (3,203) (33,959) (5,094)
Total (16,908) (1,689) (17,730) (2,660)
16. Taxation (continued)
The reconciliation of the tax expense to the accounting profit, and the
calculations of the effective tax rate as at December 31, 2006 and 2005, are as
follows:
December 31, December 31,
2006 2005
BGN'000 BGN'000
Consolidated accounting profit 18,268 18,496
Applicable tax rate 15 % 15 %
Income tax at the applicable tax rate 2,740 2,774
Combined tax effect on permanent differences 1,549 1,041
Combined effect from the application of different
tax rates for calculation of deferred taxes 175 -
Decrease in the tax rate 375 -
Recognized tax asset from prior years (46) -
Tax effect from the difference between the tax and
accounting revaluation reserve written off (79) -
Unrecognized tax asset in the current period 40 -
Tax effect on consolidation adjustments 437 (3,748)
Total tax expense 5,191 67
Effective tax rate 28.42% 0.36%
The tax effect from the consolidation adjustments as of December 31, 2006
includes mainly eliminations of dividend income, recognized by the Group, and
equity-method eliminations, on which deferred tax assets are not calculated in
the consolidated financial statements, because they are not temporary
differences. The tax effect consists also of the difference of application of
different tax rates for the purposes of calculation of the deferred taxes from
consolidation adjustments and the current tax rate.
The consolidation adjustments on the accounting profit in 2005, which are not
included in the calculation of the current tax expense consist mainly of
increase in accounting profit amounting to BGN 26,286 thousand arising on the
reacquisition and sale of treasury shares by a subsidiary and decrease of profit
due to eliminated dividends amounting BGN 709 thousand.
MORE TO FOLLOW
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR OKDKPABKKBPB
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Petrol 4.24% (LSE:74JJ)
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