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

3.1.5. Statement of comprehensive income

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

	2012	2011 (restated data)	Growth rate
Sales revenues	8,737.1	7,962.9	109.7%
Cost of products, materials and merchandise sold	(6,688.6)	(4,815.6)	138.9%
Gross sales profit	2,048.5	3,147.3	65.1%
Cost of sales	(259.7)	(127.0)	204.5%
Administrative costs	(509.1)	(433.0)	117.6%
Employee share ownership plan	-	(293.0)	-
Other income	97.4	50.5	192.9%
Disputed property tax on underground mine workings	(48.5)	359.7	(13.5)%
Other costs	(66.1)	(36.5)	181.1%
Other net profit	19.3	5.4	357.4%
Operating profit	1,281.8	2,673.4	47.9%
Financial income	106	104.3	101.6%
Financial costs	(116.8)	(133.2)	87.7%
Pre-tax profit	1,271.0	2,644.5	48.1%
Income tax	(275.1)	(581.5)	47.3%
Net profit	995.9	2,063.0	48.3%
Other comprehensive income:
Actuarial profit/(loss)	(229.6)	24.1	(952.7)%
Income tax	43.6	(4.6)	(947.8)%
Total other comprehensive income	(186.0)	19.5	953.8%
Total comprehensive income	809.9	2,082.5	38.9%

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In 2012, total sales revenues were PLN 8,737.1 million and were PLN 774.2 million higher than last year's revenues, representing a 9.7% growth. In 2012, revenues on sales of coal produced by JSW S.A. which constitute 77.1% of total revenues were PLN 6,736.7 million, i.e. 14.2% lower than in 2011, which was caused mostly by a decrease in unit prices of coking coal. In 2012, cost of products, materials and merchandise sold increased by PLN 1,873.0 million (38.9%), of which PLN 1,795.7 million was attributable to the cost of purchased coke and coal derivatives. In 2012, gross sales profit amounted to PLN 2,048.5 million and was 34.9% lower than in 2011.

In 2012, the total cost of sales was PLN 259.7 million, up by PLN 132.7 million from the previous year, representing a 104.5% increase. The increase in the cost of sales was mainly due to the implementation of the Trading Policy resulting in the emergence of the cost of sales of coke and coal derivatives, which in 2012 amounted to PLN 66.5 million. Furthermore, the volume of coal sales increased by 39.7% (+1,622.8 thousand tons), generating transportation costs for the Company with an offsetting effect of higher selling prices.

Administrative costs encompassing costs associated with execution of management and administrative functions were PLN 509.1 million which represents a 17.6% growth as compared to 2011. Due to the fact that personnel costs have the largest share in the structure of those costs, the decisions concerning salaries made in 2012 significantly influenced their level. The main reasons for an increase in these costs result from:

• the launch, in 2012, of an incentive-based bonus system (task and incentive bonuses),
• payment of bonuses for H2 2011 to the beneficiaries of the Management by Objectives program,
• an increase in the average headcount by 57 persons in the statistical groups charged to administrative costs.

Other income in 2012 were PLN 97.4 million which represents 92.9% growth as compared to the amount of PLN 50.5 million recorded in 2011. Growth of other income resulted from, among other things, higher dividends obtained than in the previous year.

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 29.6 million, partly as a result of higher interest expenses. In Q4 2012, charges were made for investment property (the Różany Gaj hotel in Gdynia) in the amount of PLN 5.0 million and property, plant and equipment in the amount of PLN 4.3 million. In 2012, other net profit was PLN 19.3 million, up by PLN 13.9 million from that generated in 2011, mainly due to foreign exchange gains.

In 2012, operating profit amounted to PLN 1,281.8 million and was PLN 1,391.6 million (52.1%) lower than in the previous year.

Financial income in 2012 was PLN 106.0 million, compared to PLN 104.3 million in 2011, at a comparable level of interest income on cash and cash equivalents, including term deposits for up to 3 months. Financial costs were PLN 116.8 million, i.e. PLN 16.4 million lower than in 2011, mainly due to lower interest expenses related to the settlement of the discount on long-term provisions (a decrease of PLN 15.1 million).

As a result of aforedescribed factors, pre-tax profit for 2012 amounted to PLN 1,271.0 million compared to 2011 and was lower by PLN 1,373.5 million (51.9%). After the charge on account of income tax in the amount of PLN 275.1 million, net profit for 2012 was PLN 995.9 million, down by 51.7% compared to the previous year.

In 2012, Jastrzębska Spółka Węglowa S.A. decided to apply amendments to IAS 19 from 1 January 2012. In accordance with amendments to IAS 19, the Company 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 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 229.6 million and deferred tax in the amount of PLN 43.6 million, total comprehensive income amounted to PLN 809.9 million, i.e. PLN 1,272.6 million less than in 2011.

Costs by type

	2012	2011 (restated data)	Growth rate
Depreciation	806	685.8	117.5%
Consumption of materials and energy	1,020.7	958.8	106.5%
Third party services	1,383.5	1,215.6	113.8%
Employee benefits	2,978.4	2,789.0	106.8%
Employee share ownership plan	-	293	-
Taxes and fees	145	141.5	102.5%
Other costs by type	42.5	17.8	238.8%
Value of materials and merchandise sold	1,854.5	51.6	3,594.0%
– including: value of coke and coal derivatives sold	1,795.7	-	-
Total costs by type	8,230.6	6,153.1	133.8%
Cost of sales	(259.7)	(127.0)	204.5%
Administrative costs	(509.1)	(433.0)	117.6%
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	(565.0)	(413.4)	136.7%
Movement in products	(171.6)	(71.1)	241.4%
Cost of products, materials and merchandise sold	6,688.6	4,815.6	138.9%

* The difference of 11.9 between the amount of 48.5 presented in the statement of comprehensive income and the amount of 36.6 above results from interest on property tax liabilities calculated on an accrual basis.

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The level of costs incurred for production activity is largely determined by the specificity of conditions in which the Company's mines operate.

Total expenditures incurred by the Company in 2012 on production activity amounted to PLN 8,230.6 million, compared to PLN 6,153.1 million incurred in 2011, up by PLN 2,077.5 million, i.e. 33.8%. This increase was caused predominantly by the following:

• an increase in the value of materials and merchandise sold by PLN 1,802.9 million,
• an increase in the value of benefits paid to employees by PLN 189.4 million,
• and an increase in the value of third party services by PLN 167.9 million.

Benefits paid to employees constitute the largest share in the structure of costs by type, accounting for 36.2% of such costs, which in 2012 also included 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: value of materials and merchandise sold – 22.5%, costs of third party services – 16.8% and costs of consumed materials and merchandise – 12.4%. As compared to the previous year, the cost structure changed mostly with regard to the value of materials and merchandise sold whose share in total costs in 2012 increased by 21.7 percentage points. This change was associated with launching the sale of coke and coal derivatives under a new trading procedure. In accordance with the provisions of this new procedure, JSW S.A. sells coke and coal derivatives in place of the coking plants.

In 2012, the costs of benefits provided to the employees without payment of profit distribution to the staff (in 2012: PLN 130.0 million, in 2011: PLN 160.0 million) amounted to PLN 2,848.4 million, i.e. 8.3% more than in 2011. JSW S.A.’s employee compensation policy in 2012 was based on the implemented incentive compensation systems (an incentive bonus from March and a task-based bonus from April). The incentive bonus system was applied to the personnel of the excavation, preparation and reinforcement and liquidation units, the task-based bonus system was applied to all employees of JSW S.A. Furthermore, on 8 November 2012, an arrangement was made between the Jastrzębska Spółka Węglowa S.A. Management Board and the JSW S.A. Trade Unions Protest and Strike Committee on the collective dispute regarding an increase in base wages by 7%, which resulted in wage increases in 2012. The arrangement provided for an increase in base wages by with effect from 1 November 2012 by 3.4% compared to the previous level of base wages and payment of a non-recurring bonus in November. Moreover, the arrangement established the method of calculation of wage increases for JSW S.A. employees in 2013-2015 in line with the inflation rate assumed for the state budget act for the relevant year, to be adjusted for the actual inflation rate through negotiations between the JSW S.A. Management Board and the Social Party. The employee compensation growth rate in 2012 was 5.4%.

A significant item of costs by type is the value of materials and merchandise sold, which increased by PLN 1,802.9 million, i.e. 3,494.0%, compared to 2011 as a result of the implementation of the aforementioned Trading Policy in JSW S.A.

In 2012, costs of third party services were PLN 167.9 million higher than in 2011, up by 13.8%.

The following higher costs of third party services were the main contributors to this increase:

• transportation services (+) PLN 134.7 million – an increase by 88.3% caused by a change in JSW S.A.’s Trading Policy consisting of the realization of sales of coke and coal derivatives through Polski Koks S.A. and JSW S.A.’s taking over, starting in Q3 2012, of commercial contracts for the sale of coke from KK Zabrze and WZK Victoria, which sale is performed for and on behalf of JSW by Polski Koks S.A.,
• drilling and mining services (+) PLN 79.7 million – an increase by 37.5% caused primarily from an increase in the number of meters of performed drilling and mining work (by 1,840 m), an increase in the length of reconstructions of mining workings performed by external companies (by 1,072 m) and the taking over of maintenance and expansion of the scope of work related to the operation of conveyor belts,
• overhaul services (+) PLN 17.5 million – an increase of costs by 8.3% caused primarily by additional overhauls of longwall shearers and increased costs of maintenance of roadheaders. An increase in the costs incurred for the renovation of roof supports also had a significant impact on the increase in the cost of overhauls,
• leases of mining machines (+) PLN 5.5 million – an increase by 6.9% caused by, among other factors, a change in the form of acquisition of shearers and roadheaders and an increase in rents for roadheaders,
• methane removal services (+) PLN 2.6 million – an increase by 2.6% caused primarily by the conduct of mining operations in deposits with a higher methane content than in 2011,
• other services (+) PLN 31.6 million – an increase by 21.7%, caused by, among other factors, the entry into force of a new agreement on the cost of certificates, measurements and legalization of equipment in underground workings and an increase in fees for IT services related to the implementation of the Hyperion Planning controlling platform and the sharing of the Digital Maps system,
• other services related to coal production (+) PLN 10.0 million – an increase by 7.3% caused primarily by a greater quantity of stored rock due to growth in production and the performance, starting from 1 January, of all analyses of samples of dust, coal, air and waters by Centralne Laboratorium Pomiarowo-Badawcze Sp. z o.o. rather than by the mines as was the case previously.

In 2012, consumption of materials and energy was PLN 61.9 million higher than in 2011, up by 6.5%. The higher level of costs resulted from the increased scope of heading work (by 5,883 m) and reconstructions (by 1,634 m). The increase in the costs of energy was also attributed to higher than in 2011 unit fees for electricity, heat and cooling.

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 JSW S.A. staff of PLN 160.0 million, and after eliminating the profit sharing distribution to the JSW S.A. staff in 2012 of PLN 130.0 PLN, the level of operating expenses in 2012 amounted to PLN 8,100.6 million, compared to PLN 5,700.1 million in 2011, meaning that operating expenses increased by PLN 2,400.5 million, i.e. 42,1%. This increase was largely due to an increase in the value of materials and merchandise sold in connection with the implementation of JSW S.A.’s Trading Policy.

Statement of comprehensive income without taking into account the employee share ownership plan in 2011

In 2011, the Company ordered the execution of valuation of the employee share ownership plan 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 plan" item of the statement of comprehensive income. The following table presents selected figures from the statement of comprehensive income for the financial year ended 31 December 2012 and the financial year ended 31 December 2011 without taking this cost into account.

The net return on sales in 2012 was 11,4%, down by 18.2 percentage points from 2011 (without taking into account the effects of valuation of the employee share ownership plan which was a non-recurring event with no impact on the Company’s cash flow).

	2012	2011 (restated data)	Growth rate
Sales revenues	8,737.1	7,962.9	109.7%
Cost of products, materials and merchandise sold	(6,688.6)	(4,815.6)	138.9%
Gross sales profit	2,048.5	3,147.3	65.1%
Operating profit	1,281.8	2,966.4	43.2%
Pre-tax profit	1,271.0	2,937.5	43.3%
Income tax	(275.1)	(581.5)	47.3%
Net profit	995.9	2,356.0	42.3%
Total other comprehensive income	(186.0)	19.5	(953.8)%
Total comprehensive income	809.9	2,375.5	34.1%

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