Management Board Report on the activity of the JSW S.A. Capital Group for 2012

3.1. Discussion of economic and financial figures

The following financial data and ratios were presented on the basis of the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Capital Group for the financial year ended 31 December 2012 prepared in accordance with IFRS.

3.1.1. Assets

	31 Dec 2012	31 Dec 2011	Growth
Assets
Non-current assets
Property, plant and equipment	9,230.9	8,458.8	109.1%
Intangible assets	77.3	64.9	119.1%
Investment property	23.1	-	-
Investments in associates	10.8	9.1	118.7%
Deferred income tax assets	184.2	101.6	181.3%
Other long-term assets	265.7	239.2	111.1%
	9,792.0	8,873.6	110.3%
Current assets
Inventories	806.1	739.7	109.0%
Trade receivables and other receivables	1,020.4	1,363.2	74.9%
Income tax overpaid	4.2	22	19.1%
Financial derivatives	3.9	4	97.5%
Other short-term financial assets	948.9	24.6	3,857.3%
Cash and cash equivalents	1,490.7	2,589.0	57.6%
	4,274.2	4,742.5	90.1%
Non-current assets available for sale	0.9	0.9	100.0%
	4,275.1	4,743.4	90.1%
TOTAL ASSETS	14,067.1	13,617.0	103.3%

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Total assets as at 31 December 2012 were PLN 14,067.1 million, up by PLN 450.1 (3.3%) from the end of 2011. The most important movement in assets occurred in the following items: other short-term financial assets (up by PLN 924.3 million), property, plant and equipment (up by PLN 772.1 million), cash and cash equivalents (down by PLN 1,098.3 million).and other receivables (down by PLN 342.8 million).

Non-current assets

As at 31 December 2012 and as at 31 December 2011, the Group’s non-current assets amounted to PLN 9,792.0 million and PLN 8,873.6 million, respectively, and accounted for 69.6% and 65.2% of total assets. The value of non-current assets during the year increased by PLN 918.4 million.

The biggest non-current assets line item was property, plant and equipment which, as at the end of 2012, accounted for 94.3% of non-current assets. As at the end of 2012, their value stood at PLN 9,230.9 million, up by 9.1% during the year. The largest expenditures on non-current assets were incurred by the Parent Company. They amounted to PLN 1,467.6 million, while depreciation was PLN 806.0 million. The structure of expenditures incurred is presented in Item 2.5.1 of this report. Additionally, growth in property, plant and equipment was due to the activation of part of KK Zabrze’s court-awarded compensation to Zarmen Sp. z o.o. in the amount of PLN 36.7 million. Also activated was the investment project being executed by WZK Victoria in the form of construction of a coking gas purification system. Expenditures incurred on the execution of the project in 2012 amounted to PLN 17.6 million and expenditures on the construction of the Coal Derivative Unit conducted in 2007-2012 amounted to PLN 210.1 million.

In 2012, the Group reclassified USD 20.8 million worth of property, plant and equipment to investment property. Part of the investment property is the Różany Gaj hotel building, currently managed by a commercial operator. Further expenditures incurred in 2012 after the reclassification amounted to PLN 7.6 million. The property was commissioned for use in Q4 2012. The expected useful life of the property is 40 years. Valuation of the property by the Group is performed based on the purchase price model or the production cost model. Information on the methods and significant assumptions made in determining the fair value of investment property is described in Note 8 of the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Capital Group for the financial year ended 31 December 2012. The investment property is owned by the Parent Company.

Current assets

The Capital Group’s current assets as at 31 December 2012 and as at 31 December 2011 amounted to PLN 4,275.1 million and PLN 4,743.4 million, respectively, accounting for 30.4% and 34.8% of total assets, down by PLN 468.3 million, i.e. 9.9%. The decrease in current assets was mainly due to the fall in the balance of trade receivables and other receivables by PLN 342.8 million, i.e. 25.1%. The fall in trade receivables and other receivables is associated with the recorded lower volume of coal sales and the lower realized average selling price of coking coal and coke in 2012. The decrease in cash and cash equivalents by PLN 1,098.3 million (42.4%) is associated with the establishment of deposits with a maturity of 3 to 12 months, as a result of which other short-term financial assets increased significantly at the end of 2012 (up to PLN 948.9 million, i.e. by PLN 924.3 million).

Inventories formed another significant line item of current assets. Their share in current assets in 2012 was 18.9%, reaching PLN 806.1 million, i.e. 9.0% more than at the end of 2011. The biggest share in the inventories were finished products (84.6%), followed by materials (13.1%), merchandise (1.8%) and semi-finished products and production in progress (0.5%).

3.1.2. Financing of assets

In 2012, equity was the primary source of the Group’s asset financing, and its value increased by 1.5% compared to 2011. In the period under analysis, the Group used financing in the form of loans the balance of which as at the last day of the reporting period decreased in relation to the comparative period by 38.1%.

	31 Dec 2012	31 Dec 2011	Growth
Equity
Equity attributable to shareholders of the Parent Company
Share capital	1,251.9	1,260.9	99.3%
Share premium account	905	905	100.0%
Retained earnings	6,245.6	6,070.4	102.9%
	8,402.5	8,236.3	102.0%
Non-controlling interest	171.4	207.1	82.8%
Total equity	8,573.9	8,443.4	101.5%
Liabilities
Long-term liabilities
Loans and advances	189.9	241.2	78.7%
Deferred income tax liabilities	47.4	-	-
Employee benefit liabilities	2,084.7	1,774.3	117.5%
Provisions	502.9	436.6	115.2%
Trade liabilities and other liabilities	211.2	208	101.5%
	3,036.1	2,660.1	114.1%
Short-term liabilities
Loans and borrowings	75.7	187.6	40.4%
Financial derivatives	0.3	0.1	300.0%
Current income tax liabilities	40.4	3.6	1,122.2%
Employee benefit liabilities	269.7	239.7	112.5%
Provisions	286.7	246.4	116.4%
Trade liabilities and other liabilities	1,784.3	1,836.1	97.2%
	2,457.1	2,513.5	97.8%
Total liabilities	5,493.2	5,173.6	106.2%
TOTAL EQUITY AND LIABILITIES	14,067.1	13,617.0	103.3%

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As at the end of 2012 and 2011, the Group’s total equity amounted to PLN 8,573.9 million and PLN 8,443.4 million, respectively, which accounts for 61.0% and 62.0% of total equity and liabilities, respectively. An increase in equity attributable to shareholders of the Parent Company by PLN 166.2 million, i.e. by 2.0%, was associated primarily with an increase in retained earnings by PLN 175.2 million, i.e. 2.9% in relation to 31 December 2011. A decrease was recorded in share capital by PLN 9.0 million, which was related to the Shareholder Meeting’s decision to retire the surplus of series C shares. This event is described in Items 1.4.3 and 1.4.7 of this report.

As at the end of 2012, total liabilities constituted 39.0% of total equity and liabilities. The level of long-term liabilities increased during 2012 by PLN 376.0 million, i.e. 14.1%, to PLN 3,036.1 million, primarily due to the increase in employee benefit liabilities by PLN 310.4 million, i.e. 17.5%, the increase in liabilities on account of provisions by PLN 66.3 million, i.e. 15.2%, and the increases in deferred income tax liabilities of PLN 47.4 million and trade liabilities and other liabilities by PLN 3.2 million, i.e. 1.5%. In turn, a decrease was recorded in loans and borrowings by PLN 51.3 million, i.e. 21.3%.

Short-term liabilities in 2012 remained at a level similar to that of 31 December 2011 and amounted to PLN 2,457.1 million, down by only 2.2%. The following deviations occurred within the structure of short-term liabilities: current income tax liabilities increased by 1,022.2%, financial derivatives increased by 200.0%, employee benefit liabilities increased by 12.5% and liabilities on account of provisions increased by 16.4%. In turn, decreases were recorded in loans and advances (by 59.6%) and trade liabilities and other liabilities (by 2.8%).

The decrease in liabilities on account of loans and advances was caused, among other reasons, by a reduction in loan exposure of one of the Group’s companies, namely Polski Koks S.A., in relation to the exposure as at 31 December 2011. This situation was the result of changes in the Group’s organization of trade. Since 1 March 2012, JSW S.A. has been gradually taking over the rights and obligations of the seller (in respect of both coal and coke) and Polski Koks S.A. has been performing commercial contracts for and on behalf of JSW S.A.

In the structure of liabilities as at 31 December 2012, the biggest items were employee benefit liabilities (42.9% of the value of liabilities), including mainly liabilities on account of coal allowances for old age and disability pensioners (PLN 1,360.7 million), trade liabilities and other liabilities (36.3% of liabilities), including primarily trade liabilities (PLN 598.5 million), liabilities for social security and other taxes (PLN 440.6 million), investment liabilities (PLN 353.0 million) and liabilities for payroll (PLN 242.4 million).

3.1.3. Description of the structure of assets and liabilities from the standpoint of Capital Group’s liquidity

The positive cash flows on operating activity generated by the Group in 2012 covered the vast majority of expenditures on the Group’s non-current assets. The Group’s asset financing structure is correct. The structure of assets, including the amount of the most liquid assets, i.e. cash and short-term investments, secures the Group’s ability to settle its liabilities in a timely manner. The Group maintains a safe level of liquidity.

The following table presents selected data from the consolidated cash flow statement for the financial year ended 31 December 2012 and 31 December 2011.

	2012	2011	Growth
Net cash flow on operating activity	2,359.4	2,835.3	83.2%
Net cash flow on investing activity	(2,634.3)	(1,667.2)	158.0%
Net cash flow on financing activity	(821.5)	(436.9)	188.0%
Change in the net balance of cash and cash equivalents	(1,096.4)	731.2	(149.9)%

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The Group’s cash flows from the distinct types of activity reflect the high profitability of its business, and the financial surpluses generated are spent on development (investing activity) and repayment of liabilities.

Cash flow on operating activity

The value of cash flow on operating activity amounted to PLN 2,359.4 million in the period from January to December 2012, predominantly as a result of generated pre-tax profit of PLN 1,276.9 million adjusted for such factors such as:

• depreciation,
• change in the balance of trade liabilities and other liabilities, provisions and employee benefit liabilities,
• change in the balance of inventories,
• interest and profit-sharing,
• change in the balance of receivables,
• other adjustments.

The exact impact of changes in the above items is presented in Note 35 of the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Capital Group for the financial year ended 31 December 2012.

Cash flow on investing activity

The value of cash used in investing activity amounted to PLN (2,634.3) million, compared to PLN (1,667.2) million in the previous period. The main components of net cash flow on investing activity were expenditures on the acquisition of property, plant and equipment in connection with the ongoing capital expenditure program (PLN 1,804.8 million) and the acquisition of financial assets (PLN 926.9 million), i.e. time deposits with a maturity of more than 3 months. At the same time, interest income was PLN 115.1 million, income from sales of property, plant and equipment was PLN 6.5 million and dividends received amounted to PLN 0.5 million.

Cash flow on financing activity

In 2012, net cash flow on financing activity amounted to PLN (821.5) million, compared to PLN (436.9) million in 2011, which resulted predominantly from the amount of dividends paid to the Parent Company’s shareholders (in 2012: PLN 631.7 million, in 2011: PLN 298.0 million).

As a result of the aforedescribed events, having taken into account foreign exchange differences from the conversion of cash and cash equivalents (PLN 1.9 million), the balance of cash and cash equivalents decreased by PLN 1,098.3 million compared to the 2011 end-of-year balance and as at 31 December 2012 stood at PLN 1,490.7 million, of which PLN 18.8 million is restricted cash, mainly including tender deposits and accrued interest.

Taking into account the amount of other short-term financial assets as at 31 December 2012 (term deposits with a maturity of 3 to 12 months), the level of the Group’s available funds is comparable to that of the previous year.

3.1.4. Material off-balance sheet items

Material off-balance sheet items include:

Contingent assets

Until 2008 the Parent Company in its property tax declarations included a tax on underground infrastructure. In 2008-2010 the Parent Company gradually adjusted the declarations filed and submitted applications to assert an overpayment. Since the municipalities rejecting these applications and on account of the dispute pending with the municipalities on this subject, the Parent Company recognizes payments for the underground infrastructure tax as contingent assets. Contingent assets concerning the overpayment of the property tax on underground infrastructure as at 31 December 2012 are PLN 14.6 million and did not change compared to the same period of the previous year.

Furthermore, the disbursed amounts of the disputed property tax on underground mine workings together with interest of PLN 204.8 million (in 2011: PLN 56.6 million, in 2010: PLN 37.8 million, in 2009: PLN 56.5 million, in 2008: PLN 53.9 million), recognized as receivables after the posting of a revaluation charge of PLN 41.0 million, remain at PLN 163.8 million.

Contingent liabilities

Under the agreement of 7 December 2010 between the State Treasury and JSW S.A. on the sale of a 90.59% stake in PGWiR, JSW S.A. undertook to procure, within a period not longer than 5 years from the date of the agreement, the acquisition by PGWiR of property, plant and equipment of a total value as at the date of acquisition of not less than PLN 20.0 million and to make an in-kind contribution of property, plant and equipment remaining in use by PGWiR as at the date of the agreement, under the lease agreements entered into with JSW S.A. acting as the lessor, for an amount of at least PLN 12.0 million.

As at 31 December 2012, PLN 9.9 million was earmarked for the purchase of property, plant and equipment, accounting for 49.5% of the aforementioned total amount of liabilities. As at 31 December 2012, JSW S.A. did not increase PGWiR’s share capital by an in-kind contribution of property, plant and equipment. On 22 February 2013, an agreement was signed to transfer the title to real properties, the perpetual usufruct right to land and the title to buildings, equipment and other property, plant and equipment, between JSW S.A. and PGWiR.

On 29 September 2011, the State Treasury Minister signed a share sale agreement for an 85% stake in PEC with SEJ, a Capital Group company. Based on the agreement, SEJ took an unconditional obligation to procure and ensure that, by 31 December 2014, PEC acquires property, plant and equipment components for the overall amount of PLN 71.7 million.

The Management Board of SEJ requested the State Treasury Minister to change the terms and conditions of performance of the investment commitment related to the development of the “Business Plan of the SEJ Group – Power 2016” Investment and Modernization Program aimed at harmonizing the investment plans of SEJ and PEC in order to generate synergies resulting from the operation within the SEJ Capital Group and from the implementation of a modernization and development program based on a coherent vision for the conduct of a common business in the regional market. Eventually, the Parties agreed that the time limit for the performance of their commitments cannot exceed the duration of performance of the guaranteed investments in property, plant and equipment, i.e. 31 December 2014. As at 31 December 2012, investments were realized for an amount of PLN 11.7 million, accounting for 16.3% of the aforementioned total amount of liabilities.

On 5 October 2011, the Parent Company and the State Treasury concluded an agreement on the sale of 399,500 shares constituting 85% of the share capital of WZK Victoria seated in Wałbrzych for PLN 413.9 million. As a result of entering into the above agreement, an investment commitment was established under which the Buyer (JSW S.A.) undertakes to procure that, in the period of 60 months from the Closing (19 December 2011), WZK Victoria will carry out investment projects worth at least PLN 220.0 million. At the same time, in connection with the acquisition of the WZK Victoria shares, JSW S.A. submitted a statement on submission to enforcement for a maximum amount of PLN 300.0 million.

As at 31 December 2012, investments were realized for an amount of PLN 36.8 million, accounting for 16.7% of the aforementioned total amount of liabilities.

As a result of discussions conducted with the social side in the Voivodship Social Dialog Commission pertaining to, among others, guarantee of employment and matters associated with the public offering, on 5 May 2011, the JSW S.A. Management Board signed and the unions operating in JSW S.A. initialed a memorandum of agreement with the Management Board ("Memorandum of Agreement"). In the Memorandum of Agreement, the parties agreed among others that by principle the employment guarantee period for JSW S.A. employees is 10 years from the date JSW S.A. shares are made public. If JSW S.A. does not fulfill its employment guarantee, it will be obligated to pay compensation equal to the product of the average monthly remuneration in JSW S.A. in the year preceding the termination of employment and the number of months remaining until the expiration of the employment guarantee period (in the case of administrative employees – no more than 60 times the average salary in the previous year). The provisions relating to the employment guarantee came into force on the date the shares of JSW S.A. were made public on the Warsaw Stock Exchange.

Moreover, on 18 May 2011, KK Zabrze and the Parent Company concluded a memorandum of agreement with the trade unions operating in KK Zabrze regarding the social guarantee package for KK Zabrze employees; its content with respect to employment guarantees is the same as the content of the Memorandum of Agreement agreed upon in JSW S.A. The Parent Company took the responsibility of a guarantor of KK Zabrze's commitments.

On 6 September 2011, the Parent Company concluded a memorandum of agreement with the trade unions operating in WZK Victoria regarding the social package for WZK Victoria employees, including among others the guarantee of employment in the company for 7 years from the effective date of the WZK Victoria share purchase agreement.

WZK Victoria has a contingent liability resulting from a guarantee bond issued by insurance companies which secures the correct performance of the contract with ThyssenKrupp Metallurgical Products GmbH. As at 31 December 2012, the amount of the guarantee bond issued by insurance companies is EUR 15.0 million. The guarantee is secured on a blank promissory note with an assignment of receivables, an ownership transfer of property, plant and equipment and a registered pledge on coal.

Information about other off-balance sheet items is presented in Note 36 to the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Capital Group for the financial year ended 31 December 2012.

3.1.5. Consolidated statement of comprehensive income

The following table presents the items from the Capital Group's consolidated statement of comprehensive income recorded in 2012. These items and the resulting growth figures are quoted in accordance with the Consolidated Financial Statements of the Jastrzębska Spółka Węglowa S.A. Capital Group for the financial year ended 31 December 2012.

In 2011, JSW S.A. acquired the following subsidiaries: KK Zabrze, WZK Victoria and PEC. Due to the timing of the acquisition, the data in the consolidated statement of comprehensive income for the financial year ended 31 December 2011 do not include the figures from WZK Victoria or PEC, and KK Zabrze’s data are included only for the period from 1 July to 31 December 2011. However, the data for the current reporting period capture costs by type of these entities for the financial year ended 31 December 2012.

	2012	2011 (restated data)	Growth
Sales revenues	8,821.0	9,376.8	94.1%
Cost of products, materials and merchandise sold	(6,385.8)	(5,967.1)	107.0%
Gross sales profit	2,435.2	3,409.7	71.4%
Cost of sales	(361.9)	(272.2)	133.0%
Administrative costs	(662.5)	(508.9)	130.2%
Employee share ownership plan	-	(293.0)	-
Other income	53.5	49.4	108.3%
Disputed property tax on underground mine workings	(48.5)	359.7	(13.5)%
Other costs	(111.5)	(48.8)	228.5%
Other net profit	3.9	12.6	31.0%
Operating profit	1,308.2	2,708.5	48.3%
Financial income	119.8	118.1	101.4%
Financial costs	(153.1)	(152.7)	100.3%
Share in profits of affiliates	2	1.1	181.8%
Pre-tax profit	1,276.9	2,675.0	47.7%
Income tax	(288.8)	(589.0)	49.0%
Net profit	988.1	2,086.0	47.4%
Other comprehensive income
Actuarial profit/(loss)	(234.0)	24.1	(971.0)%
Income tax	44.4	(4.6)	(965.2)%
Total other comprehensive income	(189.6)	19.5	(972.3)%
Total comprehensive income	798.5	2,105.5	37.9%
Net profit attributable to:
- shareholders of the Parent Company	985.1	2,067.1	47.7%
- non-controlling stakes	3	18.9	15.9%
Comprehensive income attributable to:
- shareholders of the Parent Company	795.7	2,086.6	38.1%
- non-controlling stakes	2.8	18.9	14.8%
Earnings per share attributable to shareholders of the Parent Company (in PLN per share)	8.35	18.25	45.8%

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In 2012, total sales revenues were PLN 8,821.0 million and were PLN 555.8 million lower than last year's revenues, representing a 5.9% decrease. The decrease in unit prices of coking coal and coke had a significant impact on the above result, as is described in Item 2.2 of this report. The structure of revenues on sales in 2012 was as follows: sales of coal (46.9%), sales of coke and coal derivatives (48.8%), other activity (4.3%).

In 2012, costs of products, materials and merchandise sold increased by PLN 418.7 million, i.e. 7.0%, compared to the previous year. The merger of WZK Victoria and KK Zabrze into the Group had a direct impact on the amount of these costs. In 2012, gross sales profit amounted to PLN 2,435.2 million and was 28.6% lower than in 2011.

In 2012, total cost of sales, comprised mainly of costs of transportation services, was PLN 361.9 million which represents a 33.0% increase compared to 2011. The increase in these costs is directly associated with the increase in the volume of coke sales in 2012.

Administrative costs encompassing costs associated with execution of management and administrative functions were PLN 662.5 million which represents a 30.2% growth as compared to 2011. The increase in these expenses is primarily the result of the Capital Group’s expansion in 2011 and merger of new subsidiaries: WZK Victoria and PEC. In addition, these expenses include KK Zabrze’s administrative costs for the whole year 2012, whereas administrative costs for 2011 were generated from the moment of entry of KK Zabrze into the Group, i.e. from mid-2011. Furthermore, revaluation charges were created in administrative costs for receivables due from FNsteel Oy A and Thermphos International B.V. in the total amount of PLN 13.1 million in connection with the bankruptcy of these companies. Personnel costs form the largest share in administrative costs. Decisions regarding employee compensation, training costs and travel expenses in 2012 significantly affected the amount of these expenses.

The Group’s other income in 2012 were PLN 53.5 million and remained at a similar level to that of 2011.

The “Disputed property tax on underground mine workings” item in 2012 amounted to PLN (48.5) million and resulted from recalculation of provisions. In 2011, revenues on the disputed property tax on underground mine workings recorded in the accounting ledgers in the amount of PLN 359.7 million, included receivables from municipalities by virtue of paid disputed property tax on underground mine workings in the amount of PLN 163.9 million and the dissolution of provisions for the disputed property tax on underground mine workings in the amount of PLN 195.8 million.

Other costs in the period under analysis increased by PLN 62.7 million. The increase in other costs results from, among other factors, an increase in interest costs by PLN 37.6 million, i.e. by 120.5%. Moreover, this item includes PLN 31.8 million on account of the judgment of 27 September 2012 concerning the court proceedings conducted in connection with the claim of ZARMEN Sp. z o.o., the leader of the “Concorde-Radlin II” Consortium, unrecognized by KK Zabrze, for payment for the performance of construction works agreement of 17 October 2006, as described in Item 4.9.3.

The effect of operating activity is a positive operating result of PLN 1,308.2, down by PLN 1,400.3 million, i.e. 51.7%, from 2011.

Financial income in 2012 was PLN 119.8 million, remaining at a similar level to that of 2011 (PLN 118.1 million). Its amount reflects interest earned on cash and cash equivalents (in 2012: PLN 115.1 million, in 2011: PLN 116.0 million). Similarly, financial costs in 2012 remained at a similar level to that of 2011, increasing only by 0.3%, i.e. PLN 0.4 million, to PLN 153.1 million. Interest expenses related to settlement of the discount on long-term provisions accounted for 80.5% of financial costs. As a result of the aforedescribed factors, pre-tax profit for 2012 amounted to PLN 1,276.9 million and was 52.3% lower than that generated in 2011.

Finally, after income tax, net profit for 2012 was PLN 988.1 million, down by 52.6% compared to the previous year.

In 2012, the Group decided to apply amendments to IAS 19 from 1 January 2012. In accordance with amendments to IAS 19, the Group recognized actuarial gains/losses on specific employee benefit liabilities (i.e. retirement and disability pension benefits, compensatory disability pensions, charge to the Company Social Benefit Fund for old age and disability pensioners, coal allowances for old age and disability pensioners) resulting from changes in actuarial assumptions in other comprehensive income (permanently outside the profit and loss account). These figures are not reclassified to profit or loss, but are recognized in retained earnings. Actuarial gains/losses are recognized as operating expenses in the statement of comprehensive income only in relation to provisions for jubilee awards. Due to the retrospective application of the amendments, the consolidated statement of comprehensive income for 2011 contains restated data. As a result of the recognition, in 2012, of actuarial losses in the amount of PLN 234.0 million and deferred tax in the amount of PLN 44.4 million, total comprehensive income amounted to PLN 798.5 million, i.e. PLN 1,307.0 million less than in 2011.

Costs by type

	2012	2011 (restated data)	Growth rate
Depreciation	1,066.6	844.3	126.3%
Consumption of materials and energy	1,661.4	1,399.2	118.7%
Third party services	1,542.8	1,410.1	109.4%
Employee benefits	3,562.6	3,194.2	111.5%
Employee share ownership plan	-	293	-
Taxes and fees	203.9	228	89.4%
Other costs by type	65.5	13	503.8%
Value of materials and merchandise sold	121.4	203.7	59.6%
Total costs by type	8,224.2	7,585.5	108.4%
Cost of sales	(361.9)	(272.2)	133.0%
Administrative costs	(662.5)	(508.9)	130.2%
Disputed property tax on underground mine workings*	(36.6)	-	-
Employee share ownership plan	-	(293.0)	-
Value of performances and property, plant and equipment created for own needs	(644.3)	(468.4)	137.6%
Movement in products	(133.1)	(75.9)	175.4%
Cost of products, materials and merchandise sold	6,385.8	5,967.1	107.0%

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The level of costs incurred for production activity is largely determined by the specificity of conditions in which the Group's mines and coking plants operate. In the period from January to December 2012, the Group incurred costs by type of PLN 8,224.2 million compared to PLN 7,585.5 million in 2011, up by 8.4%.

The increase in all comparable cost items was affected by acquisitions conducted in 2011, i.e. incorporation of the following companies into the Group: KK Zabrze in Q3, WZK Victoria and PEC S.A in Q4. Due to the timing of the acquisition, the data in the consolidated statement of comprehensive income for 2011 do not include the figures from WZK Victoria or PEC, and KK Zabrze’s data are included only for the period from 1 July to 31 December 2011. However, the data for the current reporting period capture costs by type of these entities. Therefore, the costs for 2012 and 2011 are incomparable. The total amount of costs by type (after consolidation adjustments) of WZK Victoria and PEC for the financial year ended 31 December 2012 and KK Zabrze for the first half of 2012 was PLN 793.6 million, including the costs of consumption of materials and energy of PLN 428.4 million.

Benefits paid to employees constitute the largest share in the structure of costs by type, accounting for 43.3% of such costs. Their amount increased compared to 2011 by 11.5%, reflecting decisions made by the Management Boards of the Group companies regarding the level of employee compensation and headcount in the Group. These costs also include the amount of profit distribution for 2011 paid to JSW S.A.’s employees in the amount of PLN 130.0 million. Other significant items include: costs of consumed materials and merchandise – 20.2%, costs of third party services – 18.8% and depreciation – 13.0%. A decline was also recorded in the costs of taxes and fees, by PLN 24.1 million, in connection with obtaining a positive judgment in the proceedings concerning property tax on coking furnace batteries by Koksownia Przyjaźń, as a result of which in 2012 Koksownia Przyjaźń dissolved its provisions for property tax in a total amount of PLN 21.2 million, as described in Item 4.9.2 of this report.

After eliminating the effects of the non-recurring events that occurred in 2011 in the form of the employee share ownership plan of PLN 293.0 million and the profit sharing distribution to the Parent Company’s staff of PLN 160.0 million, and after eliminating the profit sharing distribution to the Parent Company’s staff in 2012 of PLN 130.0 PLN, the level of operating expenses in 2012 amounted to PLN 8,094.2 million, compared to PLN 7,132.5 million in 2011, meaning that operating expenses increased by PLN 961.7 million, i.e. 13.5%.

After adjusting costs by type by cost of sales, administrative costs, disputed property tax on underground mine workings and the value of performances and property, plant and equipment created for own needs and the change in the balance of products, the resulting cost of products, materials and merchandise sold in 2012 was PLN 6,385.8 million, up by 7.0% from 2011.

Statement of comprehensive income without taking into account the employee share ownership plan

In 2011, the Parent Company ordered the execution of valuation of the employee share ownership program to a specialized entity. The consequences of valuation (after taking into account the adjustment resulting from reduction of the quantity of shares granted to the employees) in the amount of PLN 293.0 million were captured in the "Employee share ownership program" item of the statement of comprehensive income. The following table presents the selected figures from the consolidated statement of comprehensive income for the financial year ended 31 December 2011 without taking into account the foregoing cost.

The Group’s net return on sales in 2012 was 11.2%, down by 14.2 percentage points from 2011 (without taking into account the effects of valuation which was a non-recurring event with no impact on the Group’s cash flow).

	2012	2011 (restated data)	Growth rate
Sales revenues	8,821.0	9,376.8	94.1%
Cost of products and materials sold	(6,385.8)	(5,967.1)	107.0%
Gross sales profit	2,435.2	3,409.7	71.4%
Operating profit	1,308.2	3,001.5	43.6%
Pre-tax profit	1,276.9	2,968.0	43.0%
Income tax	(288.8)	(589.0)	49.0%
Net profit	988.1	2,379.0	41.5%
Total comprehensive income	798.5	2,398.5	33.3%

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