ANNUAL REPORT 2007 - MEzinárodní · PDF fileANNUAL REPORT 2007. ANNUAL REPORT FOR 2007. Mero ČR, a.s. ... Jiří Suchomel – member Mgr. Martin Turnovský, MBA – member Ing

Mero ČR, a.s.Kralupy nad Vltavou

Annual Report 2007

ANNUAL REPORT 2007

ANNUAL REPORTFOR 2007

Mero ČR, a.s.Annual Report for 2007

Page 2 / 3Základní údaje společnosti

IN ORDER SUCCESSFULLY TO PERFORM THE TASKS IMPOSED UPON IT, THE COMPANY’S LONG-TERM STABILITY AND DEVELOPMENT PROSPECTS MUST BE ASSURED. WE ARE FIRMLY CONVINCED THATTHE RESULTS PRESENTED TO YOU INTHIS ANNUAL REPORT PROVIDE JUSTSUCH A GUARANTEE.

WE CONTINUE TO BE AWARE OF OUR SOCIAL RESPONSIBILITY TO OUR EMPLOYEES AND THE GREATERCOMMUNITY. WE PROVIDE FINANCIALSUPPORT TO A NUMBER OF HUMANI-TARIAN PROJECTS BOTH REGIONALLYAND NATIONWIDE.


Page 2 / 3Table of contents

A) Company background 41. Administrative and executive bodies 62. MERO ČR, a.s. organisation chart 93. Foreword by the Board of Directors Chairman 10

B) Board of Directors report on Company business activities and property 121. Financial results for 2007 132. Business activities 163. Company assets and financial position 18

C) Basic capital 19

D) Securities 20

E) Remuneration of Board of Directors and SupervisoryBoard members and management received from the Company in 2007 22

F) Persons responsible for the annual report and the financial statements audit 24

G) Other Company information 251. Operation of the IKL and Družba pipelines

and Nelahozeves Central Oil Tank Facility 262. Investments 283. Corporate Social Responsibility 294. Integrated management system 315. Risk management strategy 326. Emergency and fire safety 33

H) MERO Pipeline GmbH (a subsidiary) 34

I) Report of the Supervisory Board 36

J) Auditors’ Report on the Company annual report and financial statements at 31 December 2007 37

K) Report on Relations Between Related Persons at 31 December 2007 pursuant to § 66a(9) of the Commercial Cod 67

TABLE OF CONTENTS


Page 4 / 5A / Company background

04A / COMPANY BACKGROUND

Corporate name: MERO ČR, a.s.Legal form: joint-stock companyRegistered office: Veltruská 748, Kralupy nad VltavouIncorporation date: 1 January 1994Shareholder: Czech Republic – Ministry of Finance (100%)Basic capital: CZK 8,430,921 thousandBusiness registration No. (IČ): 60193468Tax registration No. (DIČ): CZ60193468

Company object (pursuant to Article 6 of the Company Statutes):

– lease and lending of movables– provision of technical services– establishment, assembly, maintenance and servicing of tele-

communication facilities– surface finishing and welding of metals and other materials– technical advisory in the field of oil pipeline and product line con-

struction and conditions for the storage of oil and oil products– purchase, sale and storage of fuels and lubricants, including im-

ports (except for the operation of fuelling stations and exclusivepurchase), sale or storage of fuels and lubricants in retail pac-kaging of up to 50 kg per unit

– preparation and elaboration of engineering designs– specialized construction work– preparatory work for construction projects– pipeline transport– civil engineering in capital construction– construction of civil engineering structures, including alteration,

maintenance and removal of such structures– design work in civil engineering

The Company was established under Czech law and the Commer-cial Code and is registered in the Commercial Register administe-red by the Municipal Court in Prague, Section B, Entry No. 2334.

Ownership interests:

Company name: MERO Pipeline GmbHRegistered office: MERO-Weg 1, Vohburg an der Donau, GermanyMERO ČR share in basic capital: CZK 271,305 thousand (100%)

Company object:

– operation and maintenance of the IKL oil pipeline in Germany– pipeline construction in Germany– transport and storage of oil– provision of telecommunication services in Germany

MERO ČR, a.s. (mezinárodní ropovody, meaning “international oilpipelines”), the owner and operator of the Czech sections of the Družba and IKL pipeli-nes, is the only entity transporting oil to the Czech Republic andthe most important company storing strategic emergency oil re-serves. Both pipelines run into the central oil tank facility in Ne-lahozeves, which has a total of 14 oil tanks with an aggregate sto-rage capacity of 1,300,000 m3.

MERO ČR, a.s. was established on January 1, 1994 by a merger ofPETROTRANS, a.s. Kralupy nad Vltavou and MERO IKL, a.s., Kra-lupy nad Vltavou. As a result, the operation of the Družba pipelineand what at the time was the construction of IKL were integrated into one unit.

MERO ČR, a.s. has been re-certified by the renowned firm DNVCzech Republic s.r.o. for ISO 9001 (quality management system),ISO 14001 (environmental management system) and OHSAS18001 (occupational safety and health protection system) norms,which together make up an “integrated management system”that also comprises a personnel management system, financialmanagement system, data protection management system, pi-peline integrity management system and other subsystems.

History of MERO ČR, a.s.

1964 – 1965 Construction and commissioning of Družba, a pipelineoperated by Benzina (state-run enterprise) until 1991,

1991 Establishment of Transpetrol, a.s., Bratislava, a companyoperating the transport system of the Družba pipeline in the ter-ritory of what was still Czechoslovakia at the time until the end of1992,

1992 Establishment of Chemopetrol IKL, spol. s r.o., a companyfounded by the refinery owners Chemopetrol, s.p. and Litvínov andKaučuk, s.p. Kralupy nad Vltavou, for the construction of the In-golstadt - Kralupy nad Vltavou - Litvínov (IKL) pipeline and theNelahozeves Central Oil Tank Facility,


Page 4 / 5A / Company background

05

1 January 1993 Establishment of Petrotrans, a.s., founded by theMinistry of Industry and Trade of the Czech Republic (Transpetrol,a.s. was divided into two entities upon the split of Czechoslovakia– Transpetrol, a.s. in Slovakia and Petrotrans, a.s. in the Czech Re-public); the company's task was to ensure the transport of oil torefineries in the Czech Republic via the Družba pipeline,

1 October 1993 Transformation of Chemopetrol IKL, spol. s r.o. intoa joint-stock company called MERO IKL, a.s. in accordance withthe government's policy of restructuring refineries and the petro-chemical industry and with the objective of enabling the NationalProperty Fund to become involved in funding the IKL pipeline con-struction project,

1 November 1993 The assets of Petrotrans, a.s. transferred to theNational Property Fund, which became the sole shareholder,

1 January 1994 MERO ČR, a.s. established by merging Petrotrans,a.s. and MERO IKL, a.s.,

1 January 2006 Pursuant to Act No. 178/2005 Coll., on the win-ding-up of the National Property Fund of the Czech Republic andthe powers of the Ministry of Finance in the privatisation of pro-perty of the Czech Republic, the National Property Fund ceases toexist. All NPF property is transferred to the government and theFund’s powers pass to the Ministry of Finance at the date of theFund’s winding-up.

History of MERO Pipeline GmbH (a subsidiary)

24 April 1991 The Czech Ministry of Industry and Trade establishesChemopetrol Pipeline, GmbH, headquartered in Munich, which isresponsible for construction of the IKL pipeline in Germany,

February 1993 Ownership of Chemopetrol Pipeline, GmbH transfer-red to Chemopetrol IKL, spol. s r.o.; after the transformation of Che-mopetrol IKL, spol. s r.o., ownership is transferred to MERO IKL, a.s.,

1 January 1994 MERO ČR, a.s. becomes the sole partner in Che-mopetrol Pipeline, GmbH,

December 1996 The name Chemopetrol Pipeline, GmbH, changedto MERO Pipeline GmbH and the company head office transferredfrom Munich to Vohburg an der Donau, a Bavarian town near Ingol-stadt, where an oil tank facility and office building had been built.

Družba pipeline

– total length in the Czech Republic: 358 km,– length in the Czech Republic including doubled sections and

branch lines: 506 km,– transport capacity: 9 million tonnes of oil/year.

IKL pipeline

– total length (Vohburg an der Donau – Nelahozeves centraltank facility): 348 km,

– length in Czech territory: 169 km,– transport capacity: 10 million tonnes of oil/year,– storage capacity of the oil tank facility in Vohburg an der

Donau: 200,000 m3.

Nelahozeves Central Oil Tank Facility

– total storage capacity of 1,300,000 m3 as of 31 December 2007:• 4 tanks of 50,000 m3 each• 6 tanks of 100,000 m3 each• 4 tanks of 125,000 m3 each

– short-term interim storage of oil transported by the Družbaand IKL pipelines,

– various types of oil blended as required by customers – refineries,– storage of strategic emergency oil reserves.

MERO ČR, a.s. – selected indicators (CZK thousand)

2007 2006

Non-current tangible assets (Property, plant and equipment) 7,891,270 7,464,920Financial investments including in subsidiaries 2,816,412 3,248 057Cash and cash equivalents 1,169,087 1,552,693Basic capital 8,430 921 8,430,921Liabilities 3,478,426 3,432,493of which: loans – –Total revenue 1,769,220 1,839,213Total expenses 1,501,560 1 640,633Net profit for current period 305,245 244,799Average number of employees 114 115


Page 6 / 7A1 / Administrative and executivebodies at 31 December 2007

06A1 / ADMINISTRATIVE AND EXECUTIVE BODIES AT 31 DECEMBER 2007

Board of Directors:

Ing. Jaroslav Pantůček – chairmanIng. Vít Tůma – vice-chairmanIng. Vlastimil Boura – memberJUDr. Ing. Mgr. Libor Lukášek, Ph.D. – member

Supervisory Board:

JUDr. Jiří Korb, MBA – chairmanTomáš Čumpelík – 1st vice-chairmanIng. Ondřej Šmolík – 2nd vice-chairmanBc. Pavel Lang – memberIng. Pavel Louženský – memberIng. Petr Mach, Ph.D. – memberIng. Alexandr Pešta – memberZdeněk Petříček – memberJiří Suchomel – memberMgr. Martin Turnovský, MBA – memberIng. Jiří Vitha – memberIng. Jan Zaplatílek – member

The foregoing Board of Directors and Supervisory Board membersrepresent that no conflict of interest arises from their members-hip on MERO ČR, a.s. statutory bodies.

No personnel changes occurred in the Board of Directors or Supervisory Board in the period between the 2007 year-end andthe annual report date.

Vedení Společnosti

Ing. Jaroslav Pantůček – General Manager ( 1 )Ing. Vít Tůma – Operations and Technology Manager ( 2 )Ing. Vlastimil Boura – Finance Manager ( 3 )JUDr. Ing. Mgr. Libor Lukášek, Ph.D. ( 4 )Company Strategy and Administration Department Manager and IMS Management Representative (position established as of 1 January 2008)Hana Fuxová – Head of Human ResourcesJiří Hájek – Risk ManagerIng. Vladimír Vořech – Head of Internal Audit


Page 6 / 7A1 / Administrative and executivebodies at 31 December 2007

07

( 2 )

( 1 )

( 4 )

( 3 )


Page 8 / 9A1 / Administrative and executive bo-dies at 31 December 2007

08

Name Membership in other Date of Birth Education Residence Employer business companies

Ing. Jaroslav Pantůček University of Economics Věžická 2446 MERO ČR, a. s.3 February 1960 Praha 9 Kralupy nad Vltavou

Ing. Vít Tůma Mining University Generála Klapálka 436 MERO ČR, a. s.20 January 1956 Kralupy nad Vltavou Kralupy nad Vltavou PANTAF,a.s.

Ing. Vlastimil Boura University of Economics Sosnovecká 578/2 MERO ČR, a. s.20 August 1955 Praha 8, Troja Kralupy nad Vltavou

JUDr. Ing. Mgr. Masaryk University, Faculty of Law Okružní 1956/48 MERO Pipeline GmbHLibor Lukášek, Ph.D. and Pedagogical Faculty Žďár nad Sázavou 3 Vohburg a. d. Donau, SRN17 September 1973 University of Economics

JUDr. Jiří Korb, MBA Charles University, Čs. Armády 714/3020 March 1950 Faculty of Law Praha 6 GFOCP

Tomáš Čumpelík Secondary school Výletní 364/6 Ministry of Industry and OSINEK, a.s.27 May 1975 Praha 4 Trade of the Czech Republic Thermal-F, a.s.

RWE Gas Storage, s.r.o.

Ing. Ondřej Šmolík West Bohemia University – Velvary 720 MERO ČR, a. s. PANTAF,a.s.18 June 1969 Faculty of Mechanical Engineering Kralupy nad Vltavou

Bc. Pavel Lang University of Hospitality Krušnohorská 737/10 Karlovy Vary Secondary HALLAN, s.r.o.6 February 1954 Management, Prague Karlovy Vary Vocational School (SOU)

Ing. Pavel Louženský Czech Technical University, U Pramene 430/9 MERO ČR, a. s.4 March 1951 Faculty of Mechanical Engineering Praha 4 Kralupy nad Vltavou

Ing. Petr Mach, Ph.D. University of Economics Bozděchova 8/758 CEP Praha 6 May 1975 Praha 5 Czech Republic

Ing. Alexandr Pešta University of Economics Na Pokraji 540/2 Ministry of Finance 1 August 1942 Praha 9 of the

Zdeněk Petříček Secondary vocational Revoluční 530/19 MERO ČR, a. s.30 March 1950 Kralupy nad Vltavou Kralupy nad Vltavou

Jiří Suchomel Industrial High School Hůrka 1028 MERO ČR, a. s.20 February 1952 – electro-technology Kralupy nad Vltavou Kralupy nad Vltavou

Mgr. UK, Drachkov 61 Ministry of Industry andMartin Turnovský, MBA Sheffield Hallam okr. Strakonice Trade of the Czech Republic20 July 1972 University

Ing. Jiří Vitha University of Economics Lamačova 862/26 Česká exportní30 June 1949 Praha 5 banka a.s.

Ing. Jan Zaplatílek Czech Technical University, Zelená 743/2 Ministry of Industry and RWE Transgas Net, s.r.o.4 July 1963 Faculty of Building Praha 6 Trade of the Czech Republic

Basic information about members of MERO ČR, a.s. statutory and supervisory bodies at 31 December 2007


Page 8 / 9A2 / MERO ČR, a.s. organisation chart(at 1 January 2008)

09 A2 / MERO ČR, a.s. ORGANISATION CHART(AT 1 JANUARY 2008)

Operations and TechnologyDepartment Finance Department

General Meeting

Supervisory Board

Board of Directors

General Manager

Company Secretary

Risk Manager

Internal Audit

Company Strategic Development & Administra-

tion Department

Human Resources Department personální


Page 10 / 11A3 / Foreword by the Boardof Directors Chairman

10A3 / FOREWORD BY THE BOARD OF DIRECTORS CHAIRMAN

Dear Business Friends,I am honoured to be able to present you with the annual reportfor 2007 on behalf of our Board of Directors.

The annual report allows us to take a moment in these hurriedtimes to reflect upon events that had a significant impact onMERO ČR, a.s. in the period under review.

The year 2007 began with a dispute over transit fees for oil delive-ries between Belarus and the Russian Federation. This contentioussituation resulted in a temporary shutdown of the entire Družba pi-peline. Although short-lived, this incident caused a furore amongall the customers who depend on this pipeline for oil supplies. Thisonce again brought to the fore the national security issue of powersupplies in individual countries supplied via the Družba pipeline.

The foresight of our governments, which decided in the early 90sto construct an independent transport source for eastern oil deli-veries, played a positive role here.

The IKL pipeline, connected with the port of Trieste via the TALpipeline, is able to transport crude oil not only from Central Eu-rope, but also from Africa, the North Sea and even Russia. Thereis no question today that we must own two mutually indepen-dent distribution channels guaranteeing the secure developmentof all associated industries in our economy. Each pipeline has suf-ficient reserve capacity fully to cover the nation’s oil consumption. In response to the above mentioned incident, the Company’s ma-nagement immediately took operative steps to enable extraordi-nary refinery supplies of this raw material in excess of non-con-tractually assured transport volumes in the event of a protractedcrisis. Management is also working on the adoption of conceptualsolutions that would create delivery algorithms in future to en-sure no threat is posed to the economy in the event of a perma-nent or long-term shutdown of one of the systems.

In addition to oil transport, our Company also serves to protect andstore state strategic emergency oil reserves, making us an activeparticipant in helping the nation meet EU legislative requirements.In the given year, work progressed on the building of two high-ca-pacity storage tanks, each with a capacity of 125 thousand m3.

Yet another important capital investment, and not only from thefinancial perspective, is the upgrade of the IKL pipeline manage-ment and control system, which will ensure 100% reliable and safepipeline operation for years to come. This is what ranks the pipe-line among the most modern and reliable in all of Europe.

It is with great satisfaction that I can say to you, dear businessfriends, that aside from assuring its strategic goals, the Companyalso managed to generate extraordinarily good financial results,the best of the past 12 years.

In so doing, we continued the long-term trend of year-on-yeargrowth in key parameters. We should mention year-on-year netprofit growth of 25.49% (pursuant to CAS) to CZK 298.69 million[or 24.69% (CZK 305.24 million) according to International Finan-cial Reporting Standards]. This result is all the more remarkablefor the fact that in the given period a shutdown at the Litvínov re-finery (of which we were given advance warning) unexpectedlydragged on for several weeks. This had negative ramifications notonly for oil transport volume, but also the Company’s income.

I would like here to note that the decisive source of the Company’sincome – oil transport revenues – is derived from the transport ta-riff that has remained unchanged since 1996 and fails to accountfor year-on-year inflation growth affecting virtually all inputs. Onone hand, the fixed tariff plays a positive role for the national eco-nomy by at least partially offsetting price shocks on the oil mar-kets. But on the other hand, it exerts tremendous pressure to cutcosts and find new revenue streams. To that end, we successfullyexecuted our first international engagement, a storage tank clea-ning commission in Rotterdam.

We continue to be aware of our social responsibility to our em-ployees and the greater community. We provide financial supportto a number of humanitarian projects both regionally and nation-wide.

In order successfully to perform the tasks imposed upon it, theCompany’s long-term stability and development prospects mustbe assured. We are firmly convinced that the results presented toyou in this annual report provide just such a guarantee.

11

Ing. Jaroslav Pantůček – General Manager

Mero ČR, a.s.Výroční zpráva 2007

Page 12 / 13B / Board of Directors report on Company business activities and property

12B / BOARD OF DIRECTORS REPORT ON COMPANY BUSINESS ACTIVITIES AND PROPERTY

The Company’s financial results for 2007 go hand in hand with pre-vious years’ successes. However, meeting planned financial targetswas no easy task.

Owing to the biggest operational shutdown in Czech refining in-dustry history, necessitated by technological modifications de-signed to step-up and modernize operating units, there wasa marked drop in processor demand for oil in the months of Se-ptember through November 2007. We must remember that, to-gether with the protection of oil reserves for the Czech Republic’sState Material Reserves Administration (henceforth also “ČR-SSHR), the transport of oil from the Družba and IKL foreign pipe-lines for domestic refinery processing is a key Company object

The total oil transport volume in 2007 was 7.382 million tonnes.This is a drop by a hefty 584 thousand tonnes compared to thepreceding year, when 7.966 million tonnes were transported. Oiltransport revenues make up some 79% of total MERO ČR, a.s. ear-nings. However, the decisive criterion from the perspective of as-sessing the Company’s basic mission is that we met all the vo-lume and quality requirements of the domestic refineries thatprocess this raw material into a broad range of products

Oil transport in the years 2000 - 2007

Earnings from storing and safeguarding oil reserves for ČR-SSHRaccount for the remaining 21% of total Company earnings. At 31December 2007, 881 thousand tonnes of oil was stored for ČR-SSHR needs, which represents the same volume as was stored at31 December 2006. A further increase in stored and safeguardedoil stocks can be expected in the years 2008 and 2009, when twoadditional high-capacity tanks, each with a capacity of 125,000 m3,will be introduced into use as part of the Nelahozeves Central OilTank Facility Expansion capital project

ČR-SSHR oil reserves at Nelahozeves

Although oil transports reported a significant drop compared to2006 as a result of the protracted refinery shutdown, which addi-tionally meant a substantial drop of CZK 85 million in oil transportrevenues, MERO ČR, a.s. managed in 2007 to achieve financial re-sults comparable to those of the year before, in particular by in-stituting stringent cost-cutting measures.


Page 12 / 13B 1 / Financial results for 2007

13 B 1 / FINANCIAL RESULTS FOR 2007

20000

1,000

2,000

3,000

4,000

5,000

6,000

8,000

th. tonnes

7,000

2001

DRUŽBA pipeline

2002 2003 2004 2005 2006 2007

IKL pipeline

2000

900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

tonnes

2001 2002 2003 2004 2005 2006 20075,782

479,022 479,022 499,022 479,022

599,193

781,191

881,190 881,190

6,003 6,1316,417

6,787

7,923 7,966

7,382



14The following overview attests to the above:

indicator year 2007 year 2006(CZK ths) (CZK ths) in %

Sales 1,769,220 1,839,213 96.2Value added 1,011,897 1,048,177 96.5Operating profit 487,102 489,804 99.4Profit before tax 317,463 325,649 97.5EBIT 523,463 531,649 98.5Net profit 305,245 244,799 124.7Average headcount (persons) 114.1 115.4 98.9Work productivity from value added 8,869 9,084 97.6

At roughly CZK 9 million, the achieved level of work productivityfrom value added per employee has long ranked the Companyamong the best in the country across all business sectors. TheCompany is also recognised as being one of the most successfulfirms by revenues per employee, net profit per employee and ear-nings-to-revenue ratio.

When it comes to managing financial risks, the Company’s objec-tive is to minimise the potential impact of foreign exchange ratefluctuations on its financial results while continuing to realise itscommercial potential. The Company minimises contingent foreignexchange risks arising from regular payments of foreign-denomi-nated purchase invoices using short-term forward purchases ofthe payment currency.

In previous years, the Company’s chief forex risk comprised its ca-pital contribution to subsidiary MERO Pipeline GmbH in late 2005.This contribution, which increased the subsidiary’s share capitalby EUR 97,456 thousand, arose from the transformation of a long-term loan provided to this company after 1993 for IKL pipeline con-struction in Germany at a translated amount of EUR 156.3 million.The subsidiary regularly repaid loan instalments to the Company;at the 2005 year-end the outstanding portion of the loan was EUR97,456 thousand. The primary objective in capitalising this loanwas to achieve a better financial picture of the subsidiary in the re-ported balance sheet and fairly present its assets.

The aforementioned capital contribution constitutes a financialinvestment in the Company balance sheet and, like the precedingloan, the subsidiary will gradually repay the contribution through2019. Considering projections of further Czech koruna apprecia-tion against the euro, the Company has weighed the options foreffectively hedging this foreign exchange risk.

In the first half of 2006, MERO ČR, a.s. managed gradually to se-cure a financial contract, which in its end effect fully eliminateslong-term foreign exchange risk. The Company executed a forwardexchange contract for the period 2006 through 2019 at a nominalvalue of EUR 97,460 thousand with annual increments of EUR 7,200 thousand to be realised. This forward transaction fully hed-ges potential foreign exchange risk arising from CZK appreciationagainst the euro in the period from 2006 to 2019. Nor in futureyears will forex losses – with their attendant negative impact onCompany result – arise from the foreign-denominated contribu-tion to the subsidiary’s capital fund.

The benefit of the executed hedge transaction was already fullymanifest in December 2006 and 2007, respectively, when the sub-sidiary repaid EUR 7,200 thousand in each of these years. Thebank translated these payments to CZK at the pre-agreed ex-change rate in accordance with the terms of the executed tran-saction. Any failure to have executed a hedge transaction in 2006would have meant a cumulative negative impact on the Compa-ny’s financial result quantifiable at CZK 27.2 million.

The fair value of remaining financial derivatives covering futureexpected payments through 2019 was assessed to be CZK 159,824thousand at 31 December 2007 and is reported in the Company’sfinancial assets.

MERO ČR, a.s. has drafted a risk management policy with the aimof minimising all financial risks. Regularly monitored limits havebeen set for individual financial risk types and areas.

External economic factors affecting Company operations and fi-nancial results include foreign currency exchange rates and thedevelopment of money market interest rates. The Company en-deavours as effectively as possible to valorise its temporarily un-committed funds (which are then used to cover investment acti-vities) by employing conservative deposit policies while adheringto strict internal rules for their administration. The Company rea-lised a significant yield of CZK 37,014 thousand in 2007 from theinvestment of its available funds.

An important aspect of achieving planned operating result is ad-herence to stipulated cost targets. Controlling plays an importantrole here by allocating individual costs according to where they ori-ginate and who is responsible for them. Pressure is placed onmeeting established criteria via regular cost analyses with the di-rect participation of the competent department heads.

Benchmarking is another tool used to assess the efficacy of in-curred costs. As a result of its monopoly position in its field of bu-siness, the Company has extremely limited options for compari-son with similar commercial subjects in the Czech Republic. Sobeginning in 2000, the Company opted to become an active par-ticipant in regular benchmarking projects, including comparisonsof individual cost categories, involving prominent European com-panies engaged in the transport and storage of oil and oil pro-ducts. The Company closely studies the benchmarking results anduses them to find internal reserves and savings opportunities.

Despite a significant year-to-year drop in total Company revenue in2007 as a result of a reduction in oil transports caused by the pro-tracted refinery shutdown, the optimisation of individual cost cate-gories was favourably reflected in the Company’s very good resultsof operation. In 2007, MERO ČR, a.s. generated pre-tax profit of CZK317,463 thousand. Gross business result is only 2.5% lower than in2006, which was an extraordinarily successful year for the Company.

The gradual corporate income tax rate reduction resulting fromthe new tax laws in effect as of 1 January 2008 were already fa-vourably reflected for the Company at 31 December 2007 in theform of a one-off deferred income tax reduction. Deferred incometax expense for 2007 is CZK 68.6 million less than in 2006. This le-gislative change also very much favoured the Company’s after-tax profit. At 31 December 2007, MERO ČR, a.s. reported net pro-fit of CZK 305,245 thousand, a 24.7% increase over 2006.



15 Results of operation in the years 2000-2007 (per Czech accounting standards)

The Company’s results of operation enabled its sole shareholder,the Czech Ministry of Finance, to pay a gross dividend for 2007 ofCZK 60 per share with a nominal value of CZK 1,000. Dividendswere distributed not only from profit earned in 2006, but also fromretained earnings of previous years. Dividends totalling CZK 505,855 thousand comprised an important contribution to thestate budget. The Company paid withholding tax on dividends to-talling CZK 75,878 to the financial authorities in October 2007, andpaid the remaining net dividend of CZK 429,977 thousand to theCzech Finance Ministry on 15 January 2008.

In total, CZK 1,601,947 thousand has been paid to the sole Company shareholder – the National Property Fund and then theMinistry of Finance – out of net Company profit for the years 2002through 2006.

Investment undertakings are a big part of keeping Company-ma-naged assets in good working order. Investment totalled an im-pressive CZK 842.6 million in 2007. Capital expenditure focusedon further enlargement of the Nelahozeves Central Oil Tank Faci-lity, construction and modernisation of existing pipeline fuellingstations and a new SCADA control and communication system forthe IKL pipeline. The Company is also carrying out an entire rangeof other major capital investments, their aim being not only tokeep assets in peak technical condition, but also to bolster safetyand promote environmental protection.

The Company’s strong financial position is underlined by the factthat all capital investment is self-financed.

Despite the appreciable negative impact of lower oil transport vo-lumes on the Company’s finances in 2007 as a result of themonths-long shutdown of domestic refineries and subsequentearnings drop, MERO ČR, a.s. managed to complete all relevanttasks while meeting all decisive business plan indicators for 2007.This once again confirmed the excellent basis in place for the Com-pany’s continued growth.

20000,00

50,00

100,00

150,00

200,00

250,00

300,00

Data in CZK mil.

350,00

2001 2002 2003 2004 2005 2006 2007

56,66 57,67 59,21 54,8562,69

140,75

238,02

298,69

The core business activities of MERO ČR, a.s. are the transport ofoil from abroad for domestic refineries via the IKL and Družba pi-pelines and the storage and safeguarding of oil for ČR-SSHR.

All stated sales are to business partners in the Czech Republic.

Sales by core activities (in CZK millions)

Activity 2007 2006Oil transport 1,396 1,482Oil storage 373 357Total 1,769 1,839

MERO ČR, a.s. has no branch operations.

Brief overview of real estate owned by MERO ČR, a.s.

Real estate Acquisition cost Area(in CZK thousands) (in m2)

Buildings 5,522,899 –Oil storage 44,490 1,414,431Total 5,567,389 1,414,431

The Company’s most important assets are the Nelahozeves Cen-tral Oil Tank Facility, the IKL and Družba oil pipelines including ar-mature shafts, the Uhy service centre, MERO ČR's office buildingin Kralupy nad Vltavou and the adjacent Company-owned lands.No property is mortgaged.

MERO ČR, a.s. is not dependent on any patents, licences or indu-strial contracts having a significant impact on its activity

Business contracts key to the commercial operations and profi-tability of MERO ČR, a.s.

In 1996 MERO ČR, a.s. concluded its first contract for the transportof oil via the IKL and Družba pipelines with Česká rafinérská,a.s. Under the contract, MERO pledges to take over oil of a certainquality and quantity, transport the oil by pipeline and blend it forcustomers. The contract also sets forth the maximum annual tran-sportable volume of oil, as well as the required minimum volume.The contract is valid until 2010, inclusive. The customer is obliged toprovide the Company in advance with a specification of the volumeexpected for each year, respecting the upper and lower limits of the

transported volume. Should the customer fail to buy the oil by a sti-pulated deadline, the specification may be set automatically pur-suant to the contract. Should MERO transport a lower volume of oilto the customer within a calendar year than is set forth in the spe-cification for the respective calendar year, then, except for cases offorce majeure or reasons for which MERO is culpable, the customershall be obliged to pay the difference between the agreed specifi-cation and the actually transported and purchased quantity of oil atthe end of the year against a detailed statement of account. Thetransport tariff is identical for both pipelines. Until the end of theyear 2005, the price could not fall below the tariff valid as at thecontract execution date. Now, it may only be changed in accordancewith agreed formulas based on input price fluctuations. The tariffincludes compensation for services provided by MERO ČR, a.s. andMERO Pipeline GmbH. Besides these tariffs, the customer is obligedto pay MERO for the actual cost of oil transported via the TAL pi-peline in the Trieste – Vohburg section as charged by the TAL pipe-line. The contract has been concluded for an indefinite period andcannot be terminated for 12 years after its execution date. It maythereafter be terminated with a three-year notice period.

A contract for the transport of oil via the IKL and Družba pipelines wasalso concluded with PARAMO, a.s. in 1996 for an indefinite period.

Another important contract is the Agreement on the Safeguar-ding of State Material Reserves concluded in 1994. The Companyundertakes to store and safeguard oil that can be processed in allCzech refineries for the benefit of the Czech Republic – State Ma-terial Reserve Administration. Agreement No. 2/94 on the Safe-guarding of State Material Reserves, including Addenda Nos. 1through 9, has been amended by means of Addendum No. 10concluded at the end of the year 2005. The Agreement containsspecific information about existing storage capacities as well asa commitment of MERO ČR, a.s. to build new storage capacitiesfor the needs of ČR-SSHR by 2008. ČR-SSHR pays the Companyagreed compensation to safeguard the oil. The contract has beenconcluded for a definite period and expires on 31 December 2035.

The Agreement on the Connecting of Moravské naftové dolyEquipment to the Družba Pipeline at the Klobouky u Brna Loca-tion, concluded with Moravské naftové doly, a.s. in 2003, is ano-ther important contract for MERO ČR, a.s.

The fourth component of the contract portfolio comprises a numberof insurance policies providing the Company's insurance coverage. Lia-bility insurance mainly includes natural disaster insurance for selectedbuildings and structures and insurance of movables and inventories.


Page 16 / 17B2 /Business activities

16B2 / BUSINESS ACTIVITIES


Page 16 / 17B2 /Business activities

17

Other insurance policies cover the Company's liability for damageincurred by third parties as a result of MERO ČR, a.s. operations,as well as liability for environmental damage and damage causedby serious accidents. The Company’s vehicles and fire protectiontechnology are also insured.

No court, administrative or arbitration proceedings that might sig-nificantly influence the Company's financial situation have beencommenced over the last three accounting periods.

All the foregoing investment projects in the given years have beenimplemented in the Czech Republic, with the exception of theNew Scada investment project, part of which is being carried outin Germany. The Company self-finances all investment projects.

The most important investment project is the Nelahozeves Cen-tral Oil Tank Facility Enlargement, which has so far increased sto-rage capacity by 500 thousand m3 and will continue in stagesV and VI. Another two storage tanks, each with a capacity of 125thousand m3, will be completed in 2008.

The Company has developed no significant new products or pro-cedures over the past two accounting periods, primarily owing tothe character of its core business. Nor have the Company's busi-ness operations been suspended at any time during the said pe-riod.

Financial investments (in CZK thousands)

2007 2006

Contribution to MERO Pipeline GmbH 2,673,279 2,881,503Loans to group companies – –

Key investment projects – performed and planned (in CZK thousands)

Project 2004 2005 2006 2007 2008 2009 2010 2011

Key projectsDružba pipeline rehabilitation 6,849 19,926 13,000

Kolín pipe relaying 5,627 1,698 161,043 2,355

CTR Nelahozeves enlargement 332,809 21,946 254,443 537,234 185,000 205,000

Družba pipeline fuelling station modernization 670 16,172 100,110 71,175 65,000 50,000

Benešovice fuelling station 1,661 16 ,300 76,074 95,904 28,000

New SCADA (IKL) 6,420 7,343 67,677 28,119 56,000

New SCADA (Družba) 30,000 30,000 60,000

DN 350 tunnel modernisation 1,858 37,600

Partial double-sectioning of Družba pipeline 2,448 4,000 65,000 80,000 222,000

Other projects 152,305 100,793 50,395 83,616 192,897 200,000 200,000 200,000

Total 506,341 164,252 709,742 842,635 581,497 550,000 310,000 482,000


Page 18 / 19B 3 / Company assets and financial position

18B 3 / COMPANY ASSETS AND FINANCIAL POSITION

Financial outlook

MERO ČR, a.s. regularly evaluates each component objective setin a long-term development strategy through 2010. The processcontinued in 2007 with an evaluation of external environmentalfactors fundamentally impacting Company operating result. Similarly, the Company’s internal resources, specifically itsstrengths, weaknesses and reserves, were evaluated.

Milestones set in strategic plans for the period through 2010 wereevaluated and specific tasks were determined for the following areas:

- Further Družba pipeline rehabilitation and modernization, - Introduction of the new IKL pipeline control and communication

system,- Storing and safeguarding of oil, including central oil tank capa-

city enlargement,- Securing of financial resources,- Further development and expansion of the risk management

system,- Further quality enhancement of the integrated management

system.

The MERO ČR, a.s. Board of Directors expects results of operationfor 2008 once again to meet planned targets. These favourableresults are contingent, however, on domestic refinery demand foroil transported by the Company for further processing. An oil tran-sport volume of 8 million tonnes is again attainable for 2008 in ac-cordance with the demands of individual refineries and bindingtransport timelines. In 2008, the per-tonne oil transport tariff re-mains at the level fixed in the long-term oil transport contract exe-cuted in 1996 pursuant to an agreement with refineries.

We can expect an increase in oil reserves for the needs of the state in2008 based on agreements with ČR-SSHR representatives. The cur-rent capacity of the 10 tanks at the Nelahozeves Central Oil Tank Fa-cility is being fully utilised for the purposes of state material reserves.Two new high-capacity oil tanks are under construction, and shouldbe ready for use in the latter half of 2008. One tank with a capacityof 125,000 m3 is expected to be ready for ČR-SSHR use in Q4 2008;a second tank with the same capacity is expected to commence beingused for ČR-SSHR purposes in the latter half of 2009. We may thusexpect to start seeing a significant increase in revenue from storageand safeguarding oil reserves in these new tanks in 2009.

The Company’s long-term goal is to maintain its position as a lea-der in its field. It is fully equipped and prepared to respond to newassignments arising from government economic policy and thegrowing demands of refineries.

Changes in equity (in CZK thousands)2007 2006

9,202,676 9,397,225

MERO ČR, a.s. is the sole (100%) owner of its subsidiary MERO Pipeline GmbH based in Vohburg an der Donau, Germany.

The subsidiary’s company object is the construction and opera-tion of oil pipelines and oil storage facilities and provision of tele-communication services. The total subscribed basic capital of CZK271,305 thousand has been paid in full.

In accordance with International Financial Reporting Standardsmethodology and the accounting policies of the parent, MERO Pipeline GmbH reported net profit for 2007 of EUR 3 393 thousand(CZK 94,186 thousand) and reports accumulated profit of EUR 11,137 thousand (CZK 303,344 thousand) at 31 December 2007.

The Company’s financial results for the period per one one-thou-sand-crown share over the last two years were as follows (in CZK):

2007 200636.21 29.04

On 21 June 2007, the Company shareholder decided to pay divi-dends totalling CZK 505,855 thousand for 2006 (of which: wi-thholding tax of CZK 75,878 thousand and net dividends of CZK429,977 thousand payable on 15 January 2008), i.e. a gross divi-dend of CZK 60 per share with a nominal value of CZK 1,000.

Pursuant to a shareholder decision of 20 June 2006, dividends for2005 were paid out in the same amount as for 2006, i.e. CZK 505,855 thousand.

The Company records no unpaid bank loans in its balance sheetat 31 December 2007.

MERO ČR, a.s. reported long-term liabilities of CZK 2,573 millionat 31 December 2007. These primarily comprise unsecured issuedbonds of CZK 2 billion payable on 15 April 2011.

The Company has not provided any guarantees to third parties.

The Company acquired neither treasury shares nor interim certifi-cates in 2007.

In 2007, there were no ongoing state, court or arbitration procee-dings that could, or recently did, have a significant impact on theCompany’s or Group’s financial situation or profitability.


Page 18 / 19C / Basic capital

19 C / BASIC CAPITAL

MERO ČR, a.s., an independent joint-stock company, is not part ofany larger corporate structure.

MERO ČR, a.s. basic capital totals CZK 8,430,921,000, has beenpaid in full. The ordinary shares are structured as follows:

7 pc registered shares, nominal value CZK 1,000,000,00013 pc registered shares, nominal value CZK 100,000,000130 pc registered shares, nominal value CZK 1,000,000921 pc registered shares, nominal value CZK 1,000

There were no changes in basic capital or in the number or type ofshares constituting basic capital in 2007 or over the previous threeyears.

The sole 100% Company shareholder is the Czech Republic – theMinistry of Finance.


Page 20 / 21D / Securities

20

The Company has issued no securities establishing the right to ex-change the same for other shareholding securities or pre-emptiveright to the subscription of other shareholding securities.

The Company holds no treasury shares.

Income generated by shares and bonds is subject to taxation pur-suant to Act No. 586/1992 Coll., as amended.

MERO ČR, a.s. shares

The Company is entitled to issue bulk shares. A bulk share is a sharesubstituting a number of the Company's shares of the same typeand the same nominal value. The Company is obliged, upon a writ-ten request, to provide the owner of the bulk share with the indivi-dual shares that are substituted by the bulk share within 90 days.

The shares have been issued in the form of certificated securitiesand are not publicly tradable.

The registered shares are only transferable with Board of Direc-tors consent. This consent must be received before the shares areoffered to other shareholders.

All shares issued by the Company constitute a share in its basiccapital.

No public offers by third parties to take over the Company’s sha-res or public offers by the Company to take over other companieswere made in 2007 or the previous year.

Shareholder rights and obligations are provided for in the Statu-tes as follows:

1. A shareholder is understood to be an owner of Company sharesor holder of interim certificates.

2. The shareholders' rights and obligations are stipulated by therelevant legislation and the Company Statutes. Company share-holders may be domestic and foreign legal entities and individuals.

3. Every shareholder is entitled to a share of Company profit (a di-vidend) that the General Meeting decides to distribute based onthe financial results. This share is determined by the ratio of thenominal value of shares held by the shareholder to the nominalvalue of shares held by other shareholders on the day the dividend

payout is decided on. The shareholder is not obliged to return di-vidends to the Company that were received in good faith.

4. For the duration of the Company's existence, as well as in theevent of its dissolution, the shareholders are not entitled to re-quest that ownership interests be returned. Every shareholder isentitled to a share in the liquidation balance upon the Company’sliquidation. The amount of such a share shall be fixed in a manneridentical to that applied to the shareholder's share of profits (di-vidend).

5. The shares bear the shareholders' right to take part in the ma-nagement of the Company. Shareholders assert this right exclu-sively at the General Meeting, and must respect the relevant or-ganisational measures relating to General Meetings. Shareholderrights at the General Meeting include the right to request expla-nations, present proposals and vote.

The Statutes do not specifically provide for the establishment ofthe right to a dividend and the time limit for the payment thereof.Nor do the Statutes address the question of to whom the right toa dividend is transferred if not claimed by a shareholder.

The conditions set forth in the foundation documents for changesin the amount of the basic capital are as follows:

1. Any increase in or reduction of the basic capital (not affecting theBoard of Directors' authorisation pursuant to Section 210 of theCommercial Code) of the Company and the method of carrying outthe same are decided by the General Meeting. The General Meetingdoes so under conditions stipulated by generally binding legislation,in particular the Commercial Code. Basic capital may not be reducedby means of a withdrawal of shares from circulation based on a lot-tery. Any basic capital reduction by means of a proposed withdra-wal of shares from circulation is decided by the General Meeting andsuch decision must comply with the Commercial Code.

2. If an increase in the Company's basic capital is to be effected bya new share subscription, the General Meeting selects the methodand sets the conditions for the subscription and payment thereof.

3. If the Company's basic capital is increased by transferring a partof profit, the General Meeting selects the method for the increase,i.e. either an issue of new shares and free distribution thereof toshareholders according to the proportion of the nominal value oftheir shares or an increase in the nominal value of existing shares.

D / SECURITIES


Page 20 / 21D / Securities

21

4. When deciding on a reduction of the Company's basic capital,the General Meeting is not allowed to reduce the basic capital tobelow the minimum limit set by the generally binding legislation.

Security transfers are effected pursuant to the Commercial Code(513/1991 Coll.) and the Securities Act (591/1992 Coll.). Registeredshares are only transferable with Board of Directors consent. Con-sent must be obtained before the shares are offered to other sha-reholders. Other details are governed by the Statutes

MERO ČR, a.s. bondsThe total value of bonds issued by MERO ČR, a.s. is CZK 2,000,000,000; the bonds mature in 2011, ISIN CZ 0003500605.

The bonds are bearer bonds. They have been issued in certifica-ted form and have coupon sheets attached to them at the time oftheir issue. Their nominal value is CZK 100,000 each. The totalnumber of bonds is 20,000. The issue price equals 100% of thenominal value of the bonds.

The rights to the bonds and coupons are transferred upon theirhand-over. The owner of a bond or coupon shall be considered (ex-cept where otherwise stipulated by law) the exclusive owner ofthe respective bond or coupon, regardless of whether the bond orcoupon is already mature and regardless of any claims regardingownership or shared ownership rights to such bond or coupon andregardless of any written information provided on the bond or cou-pon or announcements of the previous loss or alienation of thebond or coupon.

No party shall be subject to liability for treating the owner ofa bond or coupon as described above.

The first administrator of the issue is Česká spořitelna, a.s. withits registered office at Na Příkopě 29, Prague 1, through which thebond owners can assert their security-related ownership rights.The first designated office of the administrator is the Head Officeof Česká spořitelna, a.s. at Evropská 2690/17, Praha 6. The payoutsites are selected branch offices of the administrator, a list ofwhich shall be published in accordance with the conditions of the13th prospectus.

The bonds are accepted for trading on the free bond market of thePrague Stock Exchange.

Unless the bonds are paid prematurely or purchased and rescin-ded, they shall be redeemed at their nominal value on 15 April2011. The bonds' value is stated in CZK.

The bonds have borne a fixed interest rate of 10.30% since April 15,1996 and interest shall be paid for each preceding year, always asat April 15.

The bond interest shall only be paid against the submission andacceptance of a coupon at one of the administrator's payout sites

a) by means of bank transfer to the recipient's account at a bankin the Czech Republic reported by the recipient to the admini-strator not later than concurrently with the submission andtake-over of the coupon, or

b) in cash, against the submission and acceptance of a coupon.

The right to payment of the nominal value of a bond and the re-spective interest shall lapse if bonds or mature coupons are notsubmitted for payment and taken over within 10 years of the dateon which the respective payment becomes due.

Neither the prospectus nor any other document stipulates anymethod or scope of third-party guarantee for the payout of thebonds and the interest on the same.

The prospectus does not specify any method for appointing a re-presentative of the owners' meeting and does not include any pro-vision regarding the order of rights to bond satisfaction in relationto other current or contingent liabilities on the part of the Com-pany.

The issue of the bonds was effected under Czech law and is go-verned by the Bonds Act (Act No. 530/1990 Coll.), as amended,and the Securities Act (Act No. 591/1992 Coll.), as amended.

Any and all disputes arising from the bond issue conditions shallbe referred to the Court of Arbitration at the Commercial and Ag-rarian Chamber of the Czech Republic for a final decision in com-pliance with the Chamber's applicable Arbitration Rules. No ap-peal shall be accepted until the respective arbitration award is dulydelivered. A duly delivered arbitration award shall be executable bythe competent court. This arbitration clause is enforceable inde-pendently.


Page 22 / 23E / Remuneration of members of the Board of Directors, Supervisory Boardand management received from the Company in 2007

22E / REMUNERATION OF MEMBERS OF THE BOARD OF DIRECTORS, SUPERVISORYBOARD AND MANAGEMENT RECEIVEDFROM THE COMPANY IN 2007Information on all pecuniary and in-kind income received by mem-bers of the Board of Directors, Supervisory Board and manage-

ment from the Company and from persons controlled by the Com-pany in 2007:

Principles of Board of Directors, management and SupervisoryBoard remuneration

The chairman, vice-chairman and members of the Company Boardof Directors are remunerated for their work as members of thisstatutory body under a contract on the discharge of office appro-ved by the Supervisory Board. Remuneration is paid in a fixedmonthly amount determined by the Company General Meeting.Where a Board of Directors member has privately concluded a ca-pital life assurance policy, he may also be provided with a capitallife assurance contribution in accordance with the contract on thedischarge of office. This contribution forms a part of the respec-tive member’s pecuniary income.

The general manager, who is at the same time a Board of Direc-tors member and a Company employee, is remunerated for hiswork as an employee under a management contract approved bythe Supervisory Board. The Company pays the general manager inmonthly salary instalments in a total annual amount determinedby the Supervisory Board. The Company also pays the general ma-nager a variable salary component (bonus) of up to 75% of theannual gross salary in connection with the fulfilment of specific

targets proposed by the Board of Directors and approved by theSupervisory Board.

Responsibility for the following specific targets was assigned tothe Board of Directors for 2007: results of operation before tax,ready liquidity, return on equity (ROE), meeting the planned per-formance targets of MERO Pipeline GmbH, adherence to the ti-metable and budget of the “Central Oil Tank Facility Expansion”investment project, adherence to the timetable and budget of theproject “SCADA control system exchange for the IKL pipeline, in-cluding an automation and communication system” and assuringsuccessful completion of the re-certification audit of the inte-grated management systems in place at MERO ČR, a.s. and MEROPipeline GmbH and obtaining certificates valid though 2010. Theevaluation of fulfilment of these specific targets is approved bythe Supervisory Board based on the Company’s audited financialstatements.

The Company furnishes the general manager with a company carfor both business and personal use for the duration of his tenure.

(in CZK thousands) Pecuniary Income In-kind Income Total

Board of Directors total 15,683 374 16,057

of which: remuneration for Board membership 828 – 828

of which: management 252 – 252

employment salary 14,855 374 15,229

of which: management 4,290 49 4,339

Supervisory Board total 7,721 165 7,886

of which: remuneration for Board membership 3,366 – 3,366

employment salary 4,355 165 4,520


Page 22 / 23E / Remuneration of members of the Board of Directors, Supervisory Board and management received from the Company in 2007

23

In-kind income provided to the general manager includes a mealallowance and limited personal fuel reimbursement.

The chairman, vice-chairman and members of the Company Su-pervisory Board are remunerated for their work as members of thisstatutory body under a contract on the discharge of office appro-ved by the Supervisory Board. Remuneration is paid in a fixedmonthly amount determined by the Company General Meeting.

When a Supervisory Board member ceases to discharge this of-fice, he is provided with severance in an amount of six-month’sremuneration in consideration of the non-compete clause in thecontract on the discharge of office.

Supervisory Board members who are at the same time Companyemployees are paid an employee salary in addition to their remu-neration for the discharge of office. In-kind income provided tothese Company employees includes a meal allowance and, insome cases, a limited personal fuel reimbursement.

Remuneration paid to auditors and consultants for the 2007 accounting period (exclusive of VAT):

Audit of IAS/IFRS standalone financial statements for 2006 CZK 673 thousand

Audit of IAS/IFRS consolidated financial statements for 2006 CZK 332 thousand

Interim audit of IAS/IFRS standalone financial statements for 2007 CZK 516 thousand

Interim audit of IAS/IFRS consolidated financial statements for 2007 CZK 254 thousand

IT security advisory services CZK 990 thousand

Total payment to auditors CZK 2,765 thousand


Page 24 / 25F / Persons responsible for the annual reportand the financial statements audit

24F / PERSONS RESPONSIBLE FOR THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS AUDIT

Persons responsible for the annual report

Ing. Jaroslav Pantůček, Board of Directors Chairman and General Manager

Ing. Vlastimil Boura, Board of Directors Member and Finance Manager(person responsible for the accounting)

Ing. Věra Vlasáková, Head of the Accounting and Tax Department(person responsible for the financial statements)

Sworn AffidavitHaving exercised all due care, we represent that to the best of ourknowledge and awareness the data set forth in this annual reportare correct and no facts were concealed that could, if disclosed,alter the sense or meaning hereof.

The financial statements for the last two periods have been audi-ted by an auditor; the auditor's report attached to the annual re-port accords with the facts.

Ing. Jaroslav Pantůček

Ing. Vlastimil Boura

Ing. Věra Vlasáková

Persons responsible for the financial statements audit

For 2007:Ernst & Young Audit & Advisory, s.r.o., člen koncernuPraha 2, Karlovo náměstí 10Licence č. 401Ing. Josef Pivoňka, dekret č. 1963

For 2006:Ernst & Young Audit & Advisory, s.r.o., člen koncernuPraha 2, Karlovo náměstí 10Licence č. 401Ing. Josef Pivoňka, dekret č. 1963


Page 24 / 25G / Other Company information

25 G / OTHER COMPANY INFORMATION

In 2007 the Družba and IKL pipelines transported a total of 7,381,690 tonnes of oil, a year-on-year decrease of 584,553 tonnescaused by the 40-day shutdown of the Litvínov refinery and sub-sequent interruption of Litvínov petrochemical operations, whichprevented the Litvínov refinery from starting up for normal ope-rations (due to a hydrogen supply deficit).

The Družba pipeline carried a total of 4,804,390 tonnes includingdelivery of 198,319 tonnes of oil produced by Moravské naftové dolyHodonín (MND), a decrease of 624,920 tonnes compared to 2006(of which: a decrease in MND-produced oil by 14,034 tonnes).

The IKL pipeline carried 2,577,300 of oil, an increase by 40,367 ton-nes compared to 2006. Throughout the year, oil was transportedvia the Central Oil Tank Facility (CTR) by means of just three smalltanks and at the end of the year transport was reduced to onlytwo tanks (the third tank was used to store REB oil from Českárafinérská, a.s. carried by the DRUŽBA pipeline – the result of anaccident at the Litvínov petrochemical operations and the needto draw off oil from the Slovak company Transpetrol, a.s. to freeup tanks in Slovakia for the intake of Russian oil).

Oil transport via the Družba pipeline experienced no problems in2007 and all oil was delivered to customers in the required volumeand quality, including oil from Moravské naftové doly a.s.

In 2007, a system for level transfers from tanks in the Česká rafi-nérská, a.s. refinery in Kralupy was installed in the Družba pipelinecontrol system. Once the system is successfully tested, it will betaken over in Q1 2008. The system allows around-the-clock mo-nitoring of surges in the level of oil drawn by the Družba pipelineand DN350 into the Kralupy refinery.

An investment project was completed in the course of the year toassure the set-up of a backup control centre for the Družba pipe-line and CTR Nelahozeves. This control centre is designed to takeover when the CTR Nelahozeves control centre is non-operational.

An investment project designed to create a CMS (Content Mana-gement System) assuring the transmission of information aboutIKL and Družba pipeline and CTR Nelahozeves operations to everycompany PC was launched and completed in the course of theyear. In future, this system will also convey required informationto ČR-SSHR staff.

Oil was transported via the IKL pipeline in compliance with Tran-sport Planning Department and customer requirements.

There were no extraordinary incidents in the course of the yearthat would have presented a threat to oil transport via either pi-peline.

In 2007, the Company completed an investment project to createan employee training simulator for Družba pipeline and CTR Nelahozeves control and management and accident responsetechniques.

Nelahozeves Central Oil Tank Facility operations experienced noproblems that would pose a threat to oil transport and storage de-spite implementation of the “Security System Modernisation” in-vestment project, which primarily entailed modification of thecontrol system, switching centres and some EPS (electric firealarm) and SHZ (stationary extinguishing equipment) devices. The EPS and EZS (electric security alarm) systems were separa-ted. The project was strictly monitored to avoid any security andfire safety threats at CTR while some EPS and SHZ devices wereout of operation. While the EPS and SHZ systems were being mo-dified, the entire CTR security and fire safety system was linked tothe CTR Expansion II unit, and therefore had to be re-certified bygovernment agencies.

CTR operations continued to be influenced by construction of theH11 and H12 tanks as part of the CTR Expansion II investment pro-ject, in particular hydrostatic testing of the new tanks. All workwas executed according to the timetable including the release ofused river water back into the Vltava in a manner ensuring projectcompletion before the onset of the first frosts.

The Company also made a series of minor operational improve-ments to CTR Nelahozeves, some of which were inspired by em-ployee feedback. MERO ČR, a.s. employees are motivated to offersuch suggestions by the Company’s longstanding Continuous Im-provement System.

In 2007 the “Operátor 21” training system continued with the sys-tematic training of dispatchers, operators and servicing person-nel at CTR. A succession of MERO ČR, a.s. operating staff was trai-ned in this system and these employees are now able to assumepipeline and CTR Nelahozeves servicing duties in the event of thecompetent employee’s absence owing to long-term illness ortransfer to another position as a result of organisational changes.

To ensure safe and trouble-free operation of the Družba and IKLpipelines, pipes are regularly cleaned and their interiors are in-spected. In 2007 the length of the DN 200 was surveyed with an


Page 26 / 27G1 / Operation of the IKL and Družba Pipelinesand Nelahozeves Central Oil Tank Facility (CTR)

26G1 / OPERATION OF THE IKL ANDDRUŽBA PIPELINES AND NELAHOZEVESCENTRAL OIL TANK FACILITY (CTR)


Page 26 / 27G1 / Operation of the IKL and Družba Pipelinesand Nelahozeves Central Oil Tank Facility (CTR)

27

emphasis on inspecting the pipeline’s soil coverage (GEOPIG).Based on survey (measurement) results, pipe is exposed and,where necessary, sleeves are installed or a pipe section is replaced.

Work continued during the year on construction of the IKL pipelinefuelling station in Benešovice: pipe systems, including new cham-bers for PIG extraction and insertion, and the installation of 3pumps, including electric motors.

Pressure transmitters were exchanged on the IKL pipeline for thenew SCADA.

Early in the year, work began on the second stage of replacingpumps “C” and “D” at PC 26 Klobouky, including their fuelling sta-tion installation. All work was performed so as not to disruptDRUŽBA pipeline operation; outages were always kept to a mini-mum to avoid restricting oil supplies to refineries. The new pumpsare extremely cutting edge and, with their speed-changing device,enable far more economical operation than the original pumps.

Late in the year preparatory work began on reconstruction of thePC 28 Nové Město fuelling station, which is to be furnished withthe same types of pumps (including a speed-changing device) aswere used at the Klobouky fuelling station.

In September 2007, 32 tubes measuring 11m were replaced alonga 10 km stretch of the Klobouky – Moutnice section of theDRUŽBA pipeline, which restricted pipeline performance. The re-placement involved the use of new pipe draining technology. Airpressure forced oil into a sludge tank and the full 10 km of pipe-line was chemically scoured. The replacement could therefore becarried out with a minimal shutdown (96 hours), so as to avoid re-stricting refinery oil supplies. Having proven itself, this same me-thod will be used for similar pipeline jobs in future (pipeline reha-bilitation, Benešovice fuelling station hook-up).

Negotiations began in 2007 concerning reconstruction of the VelkáBíteš PC 27 fuelling station, which is to be furnished with newtypes of pumps that include a speed-changing device.

In 2007, the Company once again carried out regular control in-spections of the Družba and IKL pipelines both in the field and inMERO ČR, a.s. buildings (shut-off valves, pumps and delivery sta-tions). Regular controls of both pipelines from the air were alsoperformed throughout the year.

The Company continued insulating electrical equipment cabinsalong the IKL pipeline. This has increased operational safety andreduced electricity consumption in these buildings.

In the course of 2007, corridors along the DRUŽBA and IKL pipeli-nes were cleared of self-seeding within a protective zone. Dama-ged stakes (marking out the pipeline route) were replaced alongthe pipeline on an ongoing basis.

A new slewing mobile crane enabling PIGs to be extracted fromand inserted into chambers was installed at the PC 27 Velká Bítešfuelling station to ensure safe and easy handling of cleaning PIGS.

At the end of the year, shut-off valves were installed on the IKL pi-peline by means of new gasometric probes, which enable bettercontrol of soil and underground water in the immediate vicinity ofshut-off valves. In order to ensure safe IKL pipeline operation, co-verage was increased in the LV 50 – 51 Zlonice stretch of the pi-peline.

Work related to delivery of a new SCADA control system for the IKLpipeline, including an automation and communication system,began in 2006. The lion’s share of the work was done in 2007, cul-minating at the year-end with the factory testing of the new con-trol system, which will comprise the most up-to-date componentsand rank among the best in the world. In contrast to the systemcurrently in place, it will enable remote maintenance and more pre-cise and transparent conditions for managing pipeline operation.The system should have its trial run in the first half of 2008.


Page 28 / 29G2 / Investments

28G2 / INVESTMENTS

Investments totalled CZK 842.6 million in 2007.

Several key strategic building projects were implemented in 2007,including “Nelahozeves Central Oil Tank Facility Expansion II”, “Be-nešovice fuelling station construction”, “Družba fuelling stationintensification” and the “IKL pipeline new SCADA” project. Prepa-ratory and design work was also performed for other “small-scale”projects and purchases of tangible and intangible fixed assets.

Key building projects:

Work on construction of the “Nelahozeves Central Oil Tank Faci-lity Expansion II, construction stages V and VI – tanks H 11 and H12” began in 2006. The Central Oil Tank Facility storage capacitywill be expanded by another 250,000 m3 with the creation of moresteel tanks. Once construction is completed, total storage capacitywill be 1,550,000 m3 of oil.

In addition to all underground engineering networks and othertechnology structures, the installation of both tanks was alsocompleted in 2007. Hydrostatic testing was performed success-fully, demonstrating the tanks’ impermeability and quality. Allbuilding work on the “CTR Nelahozeves Expansion” is slated forcompletion in Q2 or Q3 2008.

The CTR Nelahozeves Expansion building work included the “Se-curity system modernisation” investment project for existing tankfacilities. This primarily entailed modernising the control systemand modifying switching centres and part of EPS (electric firealarm) and SHZ (stationary extinguishing equipment) devices. TheEPS and EZS systems were separated to assure enhanced opera-tional safety. The new tanks will be hooked up to the new systemin the course of 2008.

Construction began on the “Benešovice fuelling station” in the lat-ter half of 2006. The project is soon to be completed. Preparationsare underway for individual and integrated testing. Connection ofthe fuelling station to the IKL pipeline is planned for mid 2008.

As part of the Družba pipeline “Fuelling station intensification”project (new pumps) the Klobouky fuelling station was conveyedand introduced into operation in June 2007. Preparatory and im-plementation work continued throughout the year on intensifica-tion of the Nové Město and Velká Bíteš fuelling stations.

Work on the project “SCADA control system exchange for theIKL pipeline, including an automation and communication sys-tem” began in 2006. The lion’s share of the work was done in2007, culminating at the year-end with the factory testing of thenew control system, which will comprise the most up-to-datecomponents and rank among the best in the world. In contrast tothe system currently in place, it will enable remote maintenanceand more precise and transparent conditions for managing pipe-line operation. The final deadline for introduction into trial opera-tion is projected for the first half of 2008.

Other investment projects:

Small-scale investment projects implemented in 2007 primarilycontributed to greater pipeline operational safety, control andcommunication systems modernisation, and enhanced environ-mental protection and fire safety.


Page 28 / 29G3 / Corporate Social Responsibility

29 G3 / CORPORATE SOCIAL RESPONSIBILITY

“We think ahead”

As a socially responsible firm, MERO ČR, a.s. undertakes to con-duct itself in a manner that emphasises the social and ethical im-pacts of its activities, including on the environment, and believesthat a responsible approach to forging relationships betweenfirms and the global and local communities in which they operate,is an essential requirement for success.

By adhering to the principles of social responsibility, the Companygains an opportunity to influence the future with its current con-duct, strengthen its competitive ability, increase company valuefor shareholders, boost the effectiveness of corporate risk mana-gement, bolster its public image and meet the strictest ethical,professional and legal standards. The Company is fully aware ofthe social responsibility that its prominent position entails anddevotes a not insignificant portion of its profits to support bene-volent and charitable projects. We concentrate on projects thatreflect a society-wide requirement and are of greatest value tospecific groups of individuals most in need outside help.

In 2007, all MERO ČR, a.s. gifts and sponsorships complied withthe Company Statutes and:

- the provision of § 20(8) of Act No. 586/1992 Coll. on incometaxes, as amended, and

- Czech Government Decision No. 816 of 9 December 1998 and re-lated Czech Government decisions stipulating procedural rulesfor the provision of gifts and sponsorships by state-owned en-terprises and business companies with a majority state interest.

In 2007, the Company’s donor policy and provided gifts focussedon the areas of culture, education, science, youth welfare and he-althcare, all concentrated in those regions in which MERO ČR,a.s. operates.

In its charitable, humanitarian and social undertakings, MERO ČR,a.s. provided financial support to improve the quality of providedcare and better equip social welfare institutions and other facilitiesand to organise activities for children and youth from socially disen-franchised communities. Projects that the Company supports on anongoing basis include the Our Children Foundation, the EndangeredChildren Fund, the Sense and Sensibility Endowment Fund and theFriends of Children’s Homes Club headquartered in Nové Strašecí.

MERO ČR, a.s. provided cultural support in collaboration with theOffice for the Preservation of Historical Monuments on a project

to refurbish state-owned Veltrusy Chateau, which suffered seriousflood damage in 2002.

In the area of education, science and youth welfare, the Companyfunded, among others, a prevention project to combat the negativeimpacts of drug addiction and bullying, the purchase of equipmentfor school facilities and children’s centres, the development ofextra-curricular activities for children and youth and also activitiesdesigned to better integrate handicapped children and youth.

The Company considers environmental protection a priority andis fully aware that despite all preventive measures the transportand storage of oil represent a major source of environmental risk,in particular for underground and surface water and bedrock.

The Company’s primary objective is to prevent all negative envi-ronmental impacts and, in particular, to avoid oil spills. We en-deavour to reduce or eliminate all the significant environmentalaspects of our operations that could seriously impact (or have al-ready affected) the environment.

The Company’s strategy includes adherence to the standards ofits environmental management system pursuant to internationalISO 14 001 norms. The system is subject to regular audits perfor-med by DET NORSKE VERITAS.

We also expect our business partners to take a responsible ap-proach to protecting the environment. Indeed, the assurance ofenvironmental protection is a key criteria when the Companychooses service providers.

For Company employees, environmental stewardship is a self-evi-dent part of the work they do every day. We focus on their ongo-ing environmental education, their familiarisation with new envi-ronmental protection legislation and their training in theprevention and liquidation of industrial accidents.

Consideration of the environment is expected of every single Com-pany employee.

In terms of overall organisational structure and employee head-count, the year 2007 was a stable one, though in the course of theyear there were personnel changes in several key positions resul-ting in new hires with a wealth of long-term experience in theirrespective fields. At 31 December 2007, the Company had a totalof 115 employees, 31 women and 84 men.

The following tables illustrate the qualification and age struc-ture of Company employees:

Employee qualification structure 2007 2006number % number %

University 23 20.0 26 22.4Secondary education with graduation diploma 41 35.6 38 32.8Secondary education with apprenticeship 47 40.9 50 43.1Elementary education 4 3.5 2 1.7

Employee age structure 2007 2006number % number %

up to 19 0 0.0 0 0.020 – 29 7 6.1 7 6.030 – 39 25 21.7 29 25.040 – 49 33 28.7 32 27.650 – 59 45 39.1 44 37.960 and older 5 4.4 4 3.5

The average employee age is 45.

The environmentally-oriented union organisation – ZO OS ECHOMERO ČR, a.s. – has been active in the Company since 1995 and in2007 represented more than 35% of all employees. Managementand the union worked together very closely and through collectivebargaining agreed on all the conditions of their cooperation be-fore concluding a collective agreement for the 2007 – 2010 period.Cooperation is geared, inter alia, toward employee welfare, work-place safety and the protection of employee health and the envi-ronment. The collective agreement regulates labour-law relations,remuneration and employee benefits and professes mutual un-derstanding between the employer and unions.

The Company deems employee welfare an integral part of its so-cial policy and provides its staff with above-standard employeebenefits. Aside from wage valorisation, this also includes shorterworking hours, an extra week of paid vacation, paid personal daysexceeding the statutory requirements, catering contributions,pension and life insurance contributions, interest-free housingloans, social assistance in emergencies, special compensation forworking anniversaries as well as contributions for cultural or athle-tic and rehabilitation services. In terms of caring for its emplo-yees’ health, the Company arranges special medical examinations

for women and is preparing to offer specialised care for male em-ployees in the near future.

The Company generously supports the professional developmentof its employees; indeed, at MERO ČR, a.s. investing in educationand training is considered one of the most important paths to ful-filling strategic objectives. Employees are provided with conditi-ons and support enabling individual and team career advance-ment and the development of their professional knowledge,capabilities and talent. Considerable funds are spent on educa-tion, including statutory periodic training courses, professionaland language courses, conferences and apprenticeships.

In safeguarding employee health and safety, MERO ČR, a.s. en-deavours to meet the highest possible standards. The Companyunfailingly devotes its attention to workplace health and safety.The competent Company personnel regularly check on adherenceto the valid norms and directives. The Company must always takenational and European Union legislation into account when carry-ing out its operations. The chief objective here is to avoid or limitrisks to the lives and health of employees while on the job.

The workplace health and safety system in place was favourablyevaluated by State Professional Oversight representatives for in-dividual regions during routine annual controls. Proof of this wasconfirmed on 26 December 2007 when the Company reached “3,500 days” with no reported work injuries


Page 30 / 31G3 / Corporate Social Responsibility

30


Page 30 / 31G4 / Integrated managementsystem

31 G4 / INTEGRATED MANAGEMENT SYSTEM

In accordance with the timetable for integrated management sys-tem implementation and ongoing improvement, on 18 – 21 June2007 a re-certification audit pursuant to ISO 9001:2000; ISO14001:2004 and BS OHSAS 18001:2007 norms was performed bya team of auditors from the well-known international certifica-tion agency DNV Czech Republic s.r.o. The audit identified no de-viations from the requirements of system norms and specificati-ons that would prevent re-certification: 13 observations, 17opportunities for improvement and 6 noteworthy efforts were re-corded. At MERO Pipeline GmbH, 2 observations, 7 opportunitiesfor improvement and 1 noteworthy effort were recorded. All re-ported items were investigated at regular meetings and subse-quently addressed in an action plan. The Company thus receivedcertificates valid through 29 June 2010 in all the above mentionedareas.

The certified IMS currently in place is gradually being expanded tocomply with ISO 27001:2005 requirements, which address issuesconcerning information security. Processed documents are gra-dually being incorporated into the certified IMS, after which thesystem will be certified.

Tools created and used in the IMS lead to ongoing system-wideimprovement. The IMS has become an integral part of the Com-pany’s control process.

One IMS component is security documentation processed in com-pliance with the requirements of Act No. 59/2006 Coll., on theprevention of serious accidents, as amended. This documentationis processed for CTR Nelahozeves, re-fuelling stations (Klobouky,Nové Město and Velká Bíteš) and processing facilities. Securitydocumentation reviews are performed in accordance with amend-ments of the generally valid Czech legislation.


Page 32 / 33G5 / Risk management strategy

32G5 / RISK MANAGEMENT STRATEGY

The most important assets that MERO ČR, a.s. has are its people,property and good name, customer satisfaction and the ability togenerate profit. Preserving and protecting these assets is essen-tial to the Company’s ongoing growth and long-term existence.

Risk management is a decision-making process that incorporatesthe identification and assessment of a risk (its probability and po-tential damage) and the introduction of cost-effective measuresto handle risks in a manner that either eliminates them or at leastreduces the damage they cause.

The risk management approach of MERO ČR, a.s. is based on thecomprehensive application of risk management principles whilespecific approaches are broken down into separate strategies andexpressed in strategic objectives in individual areas. The degreeof risk acceptability is determined in a risk capacity threshold inthe same manner as optimal risk level is expressed in what isknown as risk appetite. Both values were set pursuant to Com-pany analyses and audits and create the platform for determiningthe risk management tools to be used. These tools are then in-troduced into use in areas where unacceptable risk exposureexists.


Page 32 / 33G6 / Emergency and fire safety

33

“Prevention is the right way to avoid accidents and minimisetheir impacts”

When storing and transporting oil, MERO ČR, a.s. is responsiblefor devoting extraordinary care to emergency and fire safety in allbuildings. In this light, accident prevention is a top priority of theCompany’s emergency system. The basic MERO ČR, a.s. strategyis to achieve a level of safety ensuring that Company operationsin no way pose a threat to the lives and health of employees orthe surrounding population, to property or the environment.

Fire safety

The Company outsources Družba and IKL pipeline accident ma-nagement to Fire and Rescue Corps (HZS) squads. For a numberof years now, MERO ČR, a.s. has successfully co-operated withthe Ministry of the Interior – the General Directorate of the Fireand Rescue Corps of the Czech Republic (GŘ HZS ČR) – in addres-sing tasks stemming from accident management.

The strategy that was introduced into the accident managementsystem for the IKL pipeline and assures a high level of accidentprotection has been gradually introduced into the Družba pipelineaccident management system. Damage control work and so-cal-led first-line emergency clean up of oil spills along the Družba pi-peline are secured by Fire and Rescue Corps squads operating inthe 6 adjacent regions.

Fire safety at CTR Nelahozeves and its stationary fire-fightingequipment are top-notch and are kept in perfect working orderthrough routine checks. In 2007 the control system for the statio-nary anti-fire system and electrical fire alarm signalling were mo-dernised, raising the level of safety and fire-fighting equipmentat CTR and RCTR Nelahozeves. Emergency and damage controlplan enforcement has been contracted out to the HZS Kaučuk(SYNTHOS), a.s. squad and Central Bohemian HZS squads. TheCompany has achieved a high level of fire protection safety by in-troducing a tailor-made fire protection system, through the rea-diness and pro-active approach of partner fire squads and by trai-ning and educating all employees and collaborators and testingtheir preparedness and ability to act in emergency situations.

As addressing accidents in linear pipeline sections and at CTR Ne-lahozeves requires co-ordination of a number of Integrated Res-cue System components, the Company performs regular modularchecks of the emergency information system and possible types

of accidents. This exercise enables the Company, in collaborationwith Fire and Rescue Safety Corps squads, to create an increa-singly fine-tuned system supporting accident prevention and li-quidation.

In 2007, 5 training drills were performed at CTR and RCTR Nela-hozeves. On 3 October 2007, the Company performed a check ofthe interoperability and accident preparedness of all IntegratedRescue System rescue units in the Czech Republic (fire and rescuesafety corps, rescue and medical corps, the Czech police, munici-pal and regional crisis response teams) under whose competencesuch incidents fall. Comprehensive tactical training drills generatepractical experience for all these units, which may then be appliedin the event of an actual emergency – large-scale accidents, na-tural disasters, terrorist attacks and so on. This makes them bet-ter able to protect citizens, their property and the key strategicnational assets concentrated in large enterprises.

Preventing serious accidents

The Company has a total of 6 buildings for which it was obliged todraft security documentation pursuant to the Act on the Preven-tion of Serious Accidents. All pertinent safety documentation hasbeen approved by the regional authorities and approval certifica-tes have been issued.

MERO ČR, a.s. has implemented a safety management systemand the Company management regularly inspects the serious ac-cident prevention system (PZH). PZH system testing is performedthrough audits of PZH management and control systems.

The Company reported no serious accidents as defined by the Acton the Prevention of Serious Accidents in 2007.

G6 / EMERGENCY AND FIRE SAFETY

Financial information

MERO Pipeline GmbH is exclusively engaged in the transport andstorage of oil for parent company MERO ČR, a.s. and for ČESKÁRAFINÉRSKÁ, a.s. In 2007 some 2,456 million tonnes of oil wastaken over from the TAL pipeline for transport. The IKL pipelinecarried 2,549 million tonnes of oil to CTR Nelahozeves. The IKL pi-peline transport target was 94.90% met.

MERO Pipeline GmbH generated after-tax profit of EUR 101,628for 2007, thus reporting a profit for the second consecutive year.This trend may be expected to continue.

(Financial data are taken from the audited financial statements ofMERO Pipeline GmbH prepared in compliance with German ac-counting regulations.)

Revenues

Revenues totalled EUR 21.9 million in 2007, of which total ear-nings were EUR 21.6 million. Oil transport earnings were EUR 21.3million, which corresponds to 98.5% of total earnings. Other in-come of EUR 0.3 million primarily represents the rebilling of porttolls for tankers in Trieste and of a portion of costs to the parentcompany in connection with the planning work for the “SCADAsystem replacement for the IKL pipeline” project. Financial reve-nues comprising interest revenue totalled EUR 0.3 million in 2007.

Expenses

Expenses totalled EUR 21.8 million in 2007, of which variable ex-penses accounted for 42.8%, fixed expenses 57% and financialexpenses 0.2%. Variable expenses were EUR 9.33 million and pri-marily comprise expenses connected with the transport of oil viathe TAL pipeline from Trieste to the tank facility in Vohburg andelectricity used in the Vohburg a. d. Donau tank facility. Other va-riable expenses comprise port tolls for tankers in Trieste and there-billing of an aliquot part of expenses. Fixed expenses totalledEUR 12.42 million in 2007 and primarily comprise asset deprecia-tion charges (61.8%), personnel costs (18.7%) and other overhead(operating and administrative) costs (19.5%). Financial expensestotalled EUR 0.03 million and primarily comprise paid interestconnected with easements on lands along the IKL pipeline and in-terest expense.

MERO Pipeline GmbH capital expenditure totalled EUR 1.8 millionin 2007. The primary objective of parent-company approved capi-tal expenditures was to keep IKL pipeline and Vohburg a. d. Donautank facility operations running at the highest technical and qua-lity standards while rendering them more effective. The ongoingcapital investment in the “SCADA system replacement for the IKLpipeline” was of primary importance to the investment policy in2007. Other significant investments included the cleaning and re-pair of the double bottom of tank No. 2 at the Vohburg tank faci-lity, repair of the roof seal at tank No. 2, optimisation of the ul-trasound detectors for PIG pass-throughs in the IKL pipeline, theacquisition of new EDAG PIG electronic boxes and interpretivesoftware, modification of the motor at main pump No. 2, moder-nisation of laboratory equipment, software optimisation andmany others.

Personnel matters

MERO Pipeline GmbH had an average of 31.5 employees in 2007,of which 13 (shift operators) are directly responsible for pipelineoperation and control. The majority of these employees is voca-tionally trained and works in three-shift operation. Most otheremployees are university educated. All employees further theirknowledge through in-house or outsourced training. The averageemployee age is 45.4. In the course of 2007, staff headcount wasreduced by 1 employee owing to efficiency measures; thus, at 31December 2007, MERO Pipeline GmbH had a total of 32 emplo-yees, of which 3 are part-time. The Company also changed its or-ganisational structure, reducing from four to three the number ofits departments. This optimised the organisational structure andenhanced work productivity. Work continued in 2007 on elabora-ting and improving the corporate personnel policy, including theoptimisation of personnel management rules.

Safety and the environment

MERO Pipeline GmbH has long emphasised the operational sa-fety of the IKL pipeline and the Vohburg a. d. Donau tank facilityand adherence to the highest environmental standards. In order tocompensate for the environmental encroachment caused by IKLpipeline construction, MERO Pipeline GmbH has purchased some23 replacement land plots designated for forestation. The Com-pany manages these lands in compliance with the Ministry of La-bour, Family and Social Affairs’ so-called Associated Plan forLandscape Management and the Social Disposition of the State of


Page 34 / 35H / MERO Pipeline GmbH (a subsidiary)

34H / MERO PIPELINE GmbH (A SUBSIDIARY)


Page 34 / 35H / MERO Pipeline GmbH (a subsidiary)

35

Bavaria. All recultivation measures connected with IKL pipelineconstruction have been completed. In order to ensure pipeline andtank facility operational safety, the Company meets all obligati-ons arising from its pipeline operation license and undertakes ca-pital expenditure for further improvement.

Some 97 devices for scumboards and 18 devices to minimise da-mage caused by oil leaks were offered for use along the pipelineroute in co-operation with Integrated Rescue System units. All In-tegrated Rescue System units regularly verify the functionalityand readiness of these devices during drill exercises. These plan-ned drills are carried out with the participation of fire-fightingunits, the police, representatives of the competent Bavarian au-thorities and firms that provide MERO Pipeline GmbH with assis-tance and heavy machinery on a contractual basis.

The subsidiary has drafted emergency intervention plans for re-mote pipeline and tank facility management in the event of ex-traordinary situations. These plans are updated regularly and sentto the competent superior bodies. Their functionality is verifiedboth during planned drills and by independent inspection.

Operations and maintenance

In 2007 work continued on the “SCADA control system replace-ment for the IKL pipeline” investment project. The supplier on thisproject is Pichler Engineering GmbH. Project completion is sche-duled for 2008.

In the course of 2007, work was performed to eliminate a defectin the double bottom of tank No. 2 at the Vohburg tank facility.The Company immediately took all necessary steps to resolvethe situation. A task force of MERO Pipeline GmbH and MEROČR, a.s. representatives was created with the mandate of pro-posing the timing and content of further steps to be taken andthen implementing an appropriate solution. The tank was clea-ned and repaired and follow-up measures were taken. Based onnegotiations with the competent agencies and institutions, thetank is expected to be re-introduced into operation in the firsthalf of 2008.

The results of an intensive survey of insulation quality in 2005and of pipe exposures performed in 2006 gave rise to the adoptionof anti-corrosion measures carried out in 2007 for the cathodicprotection of the IKL pipeline. Insulation was repaired at exposedpoints along the pipeline and pipe wall thickness was tested with

TÜV assistance. No pipe material losses were revealed that wouldhave resulted in a reduced pipeline safety coefficient.

In 2007, work progressed on the testing of mechanical and ultra-sound detectors for pass-throughs of cleaning PIGs and the EDAGleak-detection PIG. After the results were evaluated, the appro-priate measures were adopted, including a decision to purchaseultrasound detectors. The “Building of protective flood walls atshut-off valves” project was completed in 2007 and the Companyalso started preparatory work related to extending the IKL pipelineoperating license.

Significant events

June 2007 saw the successful completion of a three-year re-certi-fication audit of ISO 9001:2000, ISO 14001 and OHSAS 18001norms performed by DET NORSKE VERITAS AS. These certificatesare thus valid through June 2010.

In October 2007 the MERO Pipeline GmbH headquarters in Voh-burg was visited by ČR-SSHR management and the General Con-sul of the Czech Republic in Munich. A contract for the possiblestorage of oil by ČR-SSHR at the Vohburg tank facility was conc-luded on this occasion. Subject to the fulfilment of technical re-quirements, the contract enables the storage of Czech emergencyoil reserves in Germany.


Page 36 / 37I / Report of the Supervisory Board

36I / REPORT OF THE SUPERVISORY BOARD

Report

of the MERO ČR, a.s. Supervisory Board on the review of the an-nual financial statements prepared pursuant to International Fi-nancial Reporting Standards, the proposal for profit distributionand the annual MERO ČR, a.s. Board of Directors report on theCompany’s business activity and property in 2007

The Supervisory Board has reviewed the accompanying auditedannual financial statements, familiarised itself with the auditors’report on the audit of the Company’s financial statements, the2007 profit distribution proposal and the annual MERO ČR,a.s. Board of Directors report on the Company’s business activityand property in 2007. At the same time, the Supervisory Board re-viewed the use of funds for financial and non-financial donationsprovided to political parties and movements in 2007.

The MERO ČR, a.s. Supervisory Board

a) states that

1. The standalone and consolidated financial statements wereprepared in the prescribed form and manner.

2. Profit distribution and business activities comply with theapplicable legal regulations, the Statutes and the Company’s stra-tegic plans. No deficiencies were detected in the Company’s fi-nancial and asset management.

3. The Company provided no financial or material donationsto any political parties or movements in 2007.

b) recommends

that the Ministry of Finance of the Czech Republic, the soleshareholder executing the powers of the General Meeting,

1. approve the standalone and consolidated financial state-ments for the year ended 31 December 2007 prepared in accor-dance with International Financial Reporting Standards and thedistribution of MERO ČR, a.s. profit for 2007 as specified in thesubmitted proposal and the annual MERO ČR, a.s. Board of Direc-tors report on the Company’s business activity and property in2007.

2. approve the Report on Relations Between Related partiesas at 31 December 2007 pursuant to Section 66a(9) of the Com-mercial Code.

Kralupy nad Vltavou, 22 April 2008

JUDr. Jiří Korb, MBAMERO ČR, a.s. Supervisory Board Chairman


Page 36 / 37J / Financial Statements for the year ended 31 December 2007 preparedin accordance with International Financial Reporting Standards

37 J / AUDITOR’S REPORT ON THE COMPANY ANNUAL REPORT AND FINANCIAL STATEMENTS AT 31 DECEMBER 2007


Page 38 / 39J / Zpráva auditora k výroční zprávě a účetnízávěrka Společnosti k 31. prosinci 2007

38


Page 38 / 39Financial part

39FINANCIAL PART


Page 40 / 41Financial Statement

40FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DEC. 2007 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDSIncome Statement for the year ended 31 December 2007

In CZK thousands Notes 2007 2006

Revenues 4 1,769,220 1,839,213

External transport (596,599) (611,419)Repair and maintenance (37,264) (39,995)Consumption of material and energy 4 (43,249) (41,689)Personnel expenses 4 (104,187) (105,010)Amortisation and depreciation 7,8 (407,738) (432,643)Other operating expenses, net 4 (93,081) (118,653)

Operating profit 487,102 489,804

Interest income 37,014 37,382Interest expense 16 (206,000) (206,000)Exchange rate gains / (losses) (1,224) (4,374)Other financial income, net 571 8,837

Profit before tax 317,463 325,649

Income tax expense 5 (12,218) (80,850)

Profit for the year 305,245 244,799



41 Balance Sheet as at 31 December 2007

31 DecemberIn CZK thousands Notes 2007 2006

Assets

Non-current assetsProperty, plant and equipment, gross 7 12,237,196 11,430,299Property, plant and equipment – Accumulated depreciation and impairment 7 (4,345,926) (3,965,379)Property, plant and equipment, net 7 7, 891,270 7,464,920

Intangible assets 8 1,631 2,244Investment in a subsidiary 10 2,673,279 2,881,503Investments 9 143,133 366,554Other non-current assets 11 238 29,075

Total non-current assets 10,709,551 10,744,296

Current assetsCash and cash equivalents 12 1,169,087 1,552,693Current financial assets 12 552,553 270,681Receivables and other assets 13 221,551 224,912Inventories 14 28,360 37,136

Total current assets 1,971,551 2,085,422

Total assets 12,681,102 12,829,718

Equity and liabilities

EquityShare capital 15 8,430,921 8,430,921Legal reserve fund 15 155,250 142,950Hedge reserve 128,957 121,895Retained earnings 487,548 701,459

Total equity 9,202,676 9,397,225

Non-current liabilitiesLong-term debt, net of current portion 16 2,000,000 2,000,000Trade payables, deferred income and other liabilities 17 291,091 280,784Deferred tax liability 5 282,062 277,476

Total non-current liabilities 2,573,153 2,558,260

Current liabilitiesTrade payables, deferred income and other liabilities 17 327,992 296,952Payable from unpaid dividends 6 429,977 429,977Current portion of long-term debt 16 147,304 147,304

Total current liabilities 905,273 874,233

Total equity and liabilities 12,681,102 12,829,718



42Statement of Changes in Equity

In CZK thousands Share Legal reserve Retained Hedgecapital fund earnings reserve Total

Balance as at 1 January 2006 8,430,921 135,450 970,916 0 9,537,287

Revaluation of hedging derivatives 0 0 0 160,388 160,388Tax effect of hedging derivatives revaluation 0 0 0 (38,493) (38,493)Net profit 0 0 244,799 0 244,799

Total income and expense for the year 0 0 244,799 121,895 366,694

Changes in reserve fund 0 7,500 (7,500) 0 0Dividends 0 0 (505,855) 0 (505,855)Other 0 0 (901) 0 (901)

Balance as at 31 December 2006 8,430,921 142,950 701,459 121,895 9,397,225

Revaluation of hedging derivatives 0 0 0 17,934 17,934Tax effect of hedging derivatives revaluation 0 0 0 7,632 7,632Profit taken to income statement 0 0 0 (18,504) (18,504)Net profit 0 0 305,245 0 305,245

Total income and expense for the year 0 0 305,245 7,062 312,307

Changes in reserve fund 0 12,300 (12,300) 0 0Dividends 0 0 (505,855) 0 (505,855)Other 0 0 (1,001) 0 (1,001)

Balance as at 31 December 2007 8,430,921 155,250 487,548 128,957 9,202,676



43 Cash Flow Statement for the year ended 31 December 2007

In CZK thousands 2007 2006

Cash flows from operating activities:Profit before income taxes 317,463 325,649Adjustment for:Amortisation and depreciation 407,738 432,643Change in allowance for impairment (284) 4,134Interest expense/(interest income) 168,986 168,618(Gain)/loss on disposal of property, plant and equipment (728) (1,066)Adjustments in fair value of investments in financial assets (8,106) (6,765)Release of subsidy (13,606) (13,606)Other non-cash (gains)/charges 22,376 13,813

Operating cash flow before working capital changes 893,839 923 420

Decrease/(Increase) in receivables and other assets 31,634 (415)Decrease/(Increase) in inventories 8,709 (4,396)Increase/(Decrease) in payables and other liabilities (47,205) 68,762Increase in current financial assets (50,000) –

Cash generated from operations 836,977 987,371

Interest paid (206,000) (206,000)

Net cash flows (used in)/from operating activities 630,977 781,371

Cash flows from investing activities:Purchase of non-current assets (745,842) (608,935)Proceeds from sale of property, plant and equipment 733 1,215Change in non-current financial investments 208,224 208,224Interest received 29,317 29,982

Net cash flows used in investing activities (507,568) (369,514)

Cash flows from financing activities:Increase/(Repayment) of finance lease obligations – (124)Income tax paid on dividends (75,878) (75,878)Dividends paid (429,977) –Other (1,001) (901)

Net cash flows from financing activities (506,856) (76,903)

Net increase in cash and cash equivalents (383,447) 334,954Cash at the beginning of the year 1,552,693 1,217,799Net foreign exchange difference (159) (60)

Cash at the end of the year 1,169,087 1,552,693

The financial statements were approved by the Board of Directors on 14 April 2008 and signed on behalf of the Company by:

Ing. Jaroslav Pantůček Ing. Vlastimil BouraBoard Chairman Board Memberand Managing Director and Finance Director



441. Základní informace o společnosti

MERO ČR, a.s. (“the Company”) is a joint stock company incorpo-rated under the laws of the Czech Republic. The Company com-menced its operations on 1 January 1994 following the merger ofPETROTRANS, a.s. and MERO IKL, a.s. The registered office of theCompany is located at Kralupy nad Vltavou, Veltruská 748, CzechRepublic. The Company is involved in the pipeline transport ofcrude oil, crude oil storage and pipeline operation. The Companyowns and operates the Czech section of the Družba and IKL pipe-lines. It is the Czech Republic’s most significant transport con-tractor for crude oil and its most important storage provider foremergency strategic crude oil reserves.

Shareholders of the Company who hold a 10% or greater interestin its share capital are as follows:

Ministry of Finance of the Czech Republic 100%

2. Summary of Significant Accounting Policies

a) Accounting standardsThe principal accounting policies applied in the preparation ofthese financial statements are set out below. These policies havebeen consistently applied to all years presented, unless otherwisestated.

The financial statements have been prepared in accordance withInternational Financial Reporting Standards (hereinafter “IFRS”)as adopted by the European Union. IFRS comprise standards andinterpretations approved by the International Accounting Stan-dards Board (IASB) and the International Financial Reporting In-terpretations Committee (IFRIC).

Effective from 1 January 2005, a change in Czech Act on AccountingNo. 563/1991 Coll. requires the Company to prepare its financialstatements in accordance with IFRS as adopted by the EU (EC Re-gulation No. 16906/2002). At this particular time, due to the acti-vities of the Company there are no differences between the IFRSpolicies adopted by the Company and those adopted by the EU.

The financial statements are standalone financial statements ofthe Company and meet the IFRS requirements concerning prepa-ration of the parent company’s financial statements. The Com-pany also issued consolidated financial statements for the sameperiod in accordance with IFRS, which were approved by the Boardof Directors on 14 April 2008 and are available for review at theCompany registered office.

The financial statements have been prepared under the historicalcost convention with the exception of financial derivatives, fi-nancial assets remeasured at fair value through profit or loss andavailable-for-sale financial investments (as described in the ac-counting policies below).

The preparation of financial statements in conformity with IFRS re-quires the use of certain critical accounting estimates. It also requi-res management to exercise its judgement in the process of applyingthe Company’s accounting policies. Areas involving a higher degree ofjudgement or complexity, or areas where assumptions and estimatesare significant to the financial statements, are disclosed in Note 2 y).

The amounts shown in these financial statements are presentedin Czech Crowns (“CZK”), if not stated otherwise.

Standards and interpretations newly adopted in 2007:

In 2007, the Company adopted the following new and revised IFRSand IFRIC interpretations which apply to its activities. Adoption ofthese new or revised standards and interpretations did not haveany effect on the financial statements of the Company. They didhowever give rise to additional disclosures.

Amendments to IAS 1 Presentation of Financial Statements - Ca-pital Disclosures (issued 2005, effective date 1 January 2007)

This amendment requires the Company to make new disclosuresto enable users of the financial statements to evaluate the Com-pany's objectives, policies and processes for managing capital.These new disclosures are shown in Note 15.

IFRS 7 Financial Instruments: Disclosures (issued 2005, effectivedate 1 January 2007)

This standard requires disclosures that enable users of the finan-cial statements to evaluate the significance of the Company's fi-nancial instruments and the nature and extent of risks arisingfrom those financial instruments. The new disclosures are inclu-ded throughout the financial statements. While there has beenno effect on the financial position or results, comparative infor-mation has been revised where needed.

IFRIC 8, Scope IFRS 2 (issued 2006, effective date 1 May 2006)

This interpretation requires IFRS 2 to be applied to any arrange-ments in which the Company cannot identify specifically some orall of the goods/services received, in particular where equity in-struments are issued for consideration which appears to be lessthan fair value. As the Company records no arrangements asso-ciated with its equity instruments, the interpretation has no im-pact on the financial position or performance of the Company.

IFRIC 9 - Reassessment of Embedded Derivatives (issued 2006,effective date 1 June 2006)

IFRIC 9 states that the date to assess the existence of an embed-ded derivative is the date that an entity first becomes a party tothe contract, with reassessment only if there is a change to thecontract that significantly modifies the cash flows. As the Com-pany has no embedded derivatives requiring separation from thehost contract, the interpretation has no impact on the financialposition or performance of the Company.

IFRIC 10 - Interim Financial Reporting and Impairment (issued2006, effective date 1 November 2006)

Interpretation requires that an entity must not reverse an impair-ment loss recognized in a previous interim period in respect ofgoodwill or an investment in either an equity instrument or a fi-nancial asset carried at cost. The adoption of the interpretationhad no significant impact on the financial position or presentedresults the Company.



45 Issued accounting standards and interpretations as adopted bythe European Union which the Company did not early adopt:

IFRS 8 Operating Segments (issued 2006, effective date 1 January2009)

IFRS 8 requires an entity to report information about its opera-ting segments based on information that is evaluated regularlyby the chief operating decision maker. The Company is still eva-luating the effect of this standard, i.e. whether the Company willdefine new segments replacing the current segments of crude oiltransportation and crude oil storage.

IFRIC 11 IFRS 2 - Group and Treasury Share Transactions (effectivedate 1 March 2007)

As the Company records no transactions of such type, adoptionof this interpretation will have no impact on the Company’s fi-nancial statements.

Issued accounting standards and interpretations as adopted bythe European Union which the Company did not early adopt:

IFRS 8 Operating Segments (issued 2006, effective date 1 January2009)

IFRS 8 requires an entity to report information about its opera-ting segments based on information that is evaluated regularlyby the chief operating decision maker. The Company is still eva-luating the effect of this standard, i.e. whether the Company willdefine new segments replacing the current segments of crude oiltransportation and crude oil storage.

IFRIC 11 IFRS 2 - Group and Treasury Share Transactions (effectivedate 1 March 2007)

As the Company records no transactions of such type, adoptionof this interpretation will have no impact on the Company’s fi-nancial statements.

Standards and interpretations issued, but not approved by theEuropean Union, which do not apply to the Company and whichthe Company did not early adopt

Amendments to IAS 1 Presentation of Financial Statements -Comprehensive revision including requiring a statement of com-prehensive income (issued 2007, effective date 1 January 2009)

The Company does not expect that adoption of this standard as ateffective date 1 January 2009 would have any significant effect onthe balance sheet and income statement. The adoption will haveeffect on certain information disclosed in notes to the financialstatements.

IAS 23 Borrowing Costs (issued 2007, effective date 1 January2009)

The amendment requires capitalization of borrowing costs thatare directly attributable to the acquisition, construction or pro-duction of a qualifying asset. The Company currently does not ca-

pitalise borrowing costs. The Company is still evaluating the effectof adoption of this amendment.

Amendments to IFRS 3 Business Combinations (issued January2008, effective date 1 July 2009) – The Company has not yet eva-luated the effect of adoption of these amendments.

Amendments to IAS 27 (issued January 2008, effective date 1 July2009) - The Company has not yet evaluated the effect of adop-tion of these amendments.

Amendments to IFRS 2 Share-based Payment - vesting conditionsand cancellations (issued January 2008, effective date 1 January2009)

The Company does not expect any significant impact in connec-tion with adoption of these amendments.

Amendments to IAS 32 Financial Instruments: Presentation andIAS 1 Presentation of Financial Statements — Puttable FinancialInstruments and Obligations Arising on Liquidation (issued Fe-bruary 2008, effective date 1 January 2009)The Company does not expect any significant impact in connec-tion with adoption of these amendments.

IFRIC 12 Service Concession Arrangements (effective date 1 Ja-nuary 2008)The Company does not expect any significant effect relating tothe adoption of this interpretation as from effective date 1 January2008.

IFRIC 13 Customer Loyalty Programs (effective date 1 July 2008)

As the Company does not have any customer loyalty programs, itdoes not expect any insignificant effects relating to the adoptionof this interpretation as from effective date 1 July 2008.

The Company does not intend to early adopt any of these stan-dards or interpretations.

b) Functional and presentation currencyItems included in the financial statements are measured usingthe currency of the primary economic environment in which theCompany operates (“the functional currency”). The financial sta-tements are presented in Czech Crowns (“CZK”), the Company’sfunctional and presentation currency.

c) Foreign currency transactions and balancesTransactions in foreign currencies are initially recorded at the func-tional currency rate ruling at the date of the transaction. Foreignexchange gains and losses resulting from the settlement of suchtransactions and from the year-end translation of monetary as-sets and liabilities denominated in foreign currencies are recogni-sed in the income statement, except when deferred in equity asqualifying cash flow hedges and qualifying net investment hed-ges. Balances of monetary items denominated in foreign currenciesare restated at year-end exchange rates. Balances of non-mone-tary items that are measured in terms of historical cost in a fore-ign currency are not translated at year-end, but are reported usingthe exchange rates as at the dates of the initial transactions.



46d) Property, plant and equipmentProperty, plant and equipment is initially stated at cost and, withthe exception of freehold land, is depreciated (see below). Netbook value includes impairment (if any) of assets. Land is mea-sured at cost less impairment charged subsequent to the date ofthe revaluation.

Property, plant and equipment acquired in a business combina-tion is stated at cost (which is equal to its fair value as at the dateof acquisition) less accumulated depreciation and accumulatedimpairment in value.

The cost of property, plant and equipment includes any costs di-rectly attributable to bringing the asset to a working condition forits intended use.

Production costs for self-constructed assets include materialcosts, direct labour costs and an appropriate share of productionoverheads.

The repairs and maintenance are expensed in the period in whichthey are incurred

An item of property, plant and equipment, including related ac-cumulated depreciation, is derecognized from the balance sheetupon disposal or when no future economic benefits are expectedfrom its use or disposal. Any gain or loss arising on derecognitionof the asset (calculated as the difference between the net dispo-sal proceeds and the carrying amount of the item) is included inthe income statement in the year the item is derecognised.

Depreciation of property, plant and equipment, other than free-hold land, is provided on a straight-line basis over its estimateduseful life from the date that it is available for use. Depreciationceases when an asset is derecognised or when an asset is classi-fied as asset held for sale, whichever occurs earlier. Property, plantand equipment is depreciated up to its residual value which is theestimated amount that an entity would currently obtain from di-sposal of the asset, after deducting the estimated costs of dispo-sal, if the asset were already of the age and in the condition ex-pected at the end of its useful life.

Depreciation does not cease when the asset becomes temporarilyidle or retired from active use unless the asset is fully depreciated.

The estimated economic useful lives are:

YearsBuildings and structures 30 – 45Machinery and equipment 5 – 30Vehicles 4 – 8Computer equipment 3 – 8

Land is not depreciated as its useful life is deemed to be indefi-nite.

The asset's residual values and useful lives are reviewed, and ad-justed if appropriate, at each financial year end.

Where the carrying amount of an asset exceeds its recoverableamount, the asset is considered impaired and is written down toits recoverable amount (see Note 2t Impairment of assets).

e) Intangible assetsIntangible assets are valued at their acquisition cost. Intangibleassets, excluding development costs, created within the businessare not capitalised and expenditure is charged against profits inthe year it is incurred.

The carrying values of intangible assets are reviewed for impair-ment when events or changes in circumstances indicate that thecarrying value may not be recoverable.

Intangible assets are amortised on a straight-line basis over theirestimated useful life.

f) Investments and other financial assetsThe Company classifies its financial assets into the following ca-tegories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets.

Financial assets that are acquired principally for the purpose ofgenerating a profit from short-term fluctuations in price are clas-sified as financial assets at fair value through profit or loss andare included in current assets.

Investments with a fixed maturity that the management has theintent and ability to hold to maturity are classified as held-to-maturity and are disclosed as current or non-current assets, de-pending on the period in which the settlement will take place.

Loans and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an activemarket. They are recognised at net book value in current or non-current assets, depending on the period in which there are settled,using the effective interest rate method.

Investments intended to be held for an indefinite period of time,which may be sold in response to needs for liquidity or changes ininterest rates, are classified as available-for-sale; these are inclu-ded in non-current assets unless the management has expressedthe intention of holding the investment for less than 12 monthsfrom the balance sheet date or unless they will need to be sold toraise operating capital, in which case they are included in currentassets.

The management determines the appropriate classification of itsinvestments at the time of purchase and re-evaluates such de-signation on a regular basis, as required under IAS 39.

All purchases and sales of investments are recognised on thetrade date, which is the date that the Company commits to pur-chase or sell the asset. The cost of purchase includes all transac-tion costs. Financial assets at fair value through profit or loss andavailable-for-sale investments are subsequently carried at fairvalue, whilst held-to-maturity investments are carried at amorti-zed cost using the effective interest rate method.

Realised and unrealised gains and losses arising from changes inthe fair value of financial assets at fair value through profit or lossare included in the income statement in the period in which theyarise. On the contrary, unrealised gains and losses arising fromchanges in the fair value of available-for-sale investments are in-cluded in equity in the period in which they arise, except for im-



47 pairment losses, until the financial assets are derecognised, atwhich time the cumulative gain or loss previously recognised inequity is recognised in the income statement.

Investments in subsidiaries are those investments where theCompany has control over the entity. Control is the power to go-vern the financial and operating policies of an entity so as to ob-tain benefits from its activities. Such investments in subsidiariesthat are not classified as held-for-sale in accordance with IFRS 5are carried at cost less provision for diminution in value.

Impairment of financial assets

The Company assesses at each balance sheet date whether fi-nancial assets or groups of financial assets are impaired.

(1) Assets carried at amortized costsIf there is objective evidence that an impairment loss on loans andreceivables or held-to-maturity investments carried at amortizedcost has been incurred, the amount of the loss is measured as thedifference between the asset’s carrying amount and the presentvalue of estimated future cash flows discounted at the financialasset’s original effective interest rate. The carrying amount of theasset is reduced either directly or through use of an allowance ac-count. The amount of the loss is recognised in the income state-ment.

The Company first assesses whether objective evidence of im-pairment exists individually for financial assets that are individu-ally significant, and individually or collectively for financial assetsthat are not individually significant. If it is determined that no ob-jective evidence of impairment exists for an individually assessedfinancial asset, whether significant or not, it is included in a groupof financial assets with similar credit risk characteristics and thatgroup of financial assets is collectively assessed for impairment.Assets that are individually assessed for impairment and forwhich an impairment loss is or continues to be recognised are notincluded in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss dec-reases and the decrease can be related objectively to an event oc-curring after the impairment was recognised, the previously re-cognised impairment loss is reversed. Any subsequent reversal ofan impairment loss is recognised in the income statement andonly to the extent that the carrying amount of the financial assetdoes not exceed its amortized cost at the reversal date.

In relation to trade receivables, a provision for impairment is madewhen there is objective evidence (such as the probability of insol-vency or significant financial difficulties of the debtor) that theCompany will not be able to collect all of the amounts due underthe original terms of the invoice. The carrying amount of the re-ceivable is reduced through use of an allowance account. Impaireddebts are derecognised when they are assessed as uncollectible.

(2) Available-for-sale financial assetsIf an available-for-sale financial asset is impaired, a cumulativeloss previously recorded in equity (loss on remeasurement to fairvalue) is transferred from equity to the income statement evenwhen the financial asset was not derecognised. The cumulativeloss transferred from equity to the income statement should equal

to an amount comprising the difference between its cost (net ofany principal payment and amortisation) and its current fair value,less any impairment loss previously recognised in the income sta-tement. Reversals of impairment losses on debt instruments arereversed through the income statement, if the increase in fair valueof the instrument can be objectively related to an event occurringafter the impairment loss was recognised in the income statement

Derecognition of financial assets

A financial asset is derecognised when:

a) the rights to receive cash flow from the asset have expired;

b) the Company retains the right to receive cash flow from the asset,but has assumed an obligation to pay this in full without materialdelay to a third party under a “pass-through” arrangement; or

c) the Company has transferred its rights to receive cash flowsfrom the asset and either has transferred substantially all therisks and rewards of the asset, or has neither transferred nor re-tained substantially all the risks and rewards of the asset, but hastransferred control of the asset.

g) InventoriesInventories are valued at the lower of cost and net realisable value.

Costs of inventories include the purchase price and costs incurredin bringing each product to its present location and condition andare accounted for using the “first-in, first-out” method (the firstprice for the valuation of the addition of stock is used as the firstprice for the valuation of its disposal).

Net realisable value is determined as the difference between theestimated selling price in the ordinary course of business and theestimated costs of completing and selling services or products.

h) Trade receivables and other receivablesTrade receivables are carried at original invoice amount less provi-sion for impairment of these receivables. Such provision for impair-ment of trade receivables is established if there is objective evidencethat the Company will not be able to collect all amounts due accor-ding to the original terms of receivables. Bad debts that are identi-fied by the Company are written off through the income statement.

i) Cash and cash equivalentsCash and cash equivalents comprise cash at bank and in hand andshort-term deposits and bills of exchange with an original matu-rity of three months or less.

For the purposes of the Cash Flow Statement, cash and cash equi-valents consist of cash and cash equivalents as defined above butdo not include outstanding bank overdrafts.

j) Financial liabilitiesAll loans and borrowings are initially recognized at cost, being thefair value of the consideration received net of issue costs asso-ciated with the borrowing.

After initial recognition, loans and borrowings are subsequentlymeasured at amortized cost using the effective interest rate me-



48thod. Amortised cost is calculated by taking into account any issuecosts and any discount or premium on settlement.

Loans are classified as current liabilities unless the Company hasan unconditional right to repay debt after 12 months

k) Employee benefits(1) Pension insurance and supplementary pension insurance

The Company makes fixed payments to the state budget to fi-nance government pension insurance using rates valid for the re-spective period based on gross wages. These payments are com-mensurate with the Company’s defined contribution plan. TheCompany has no further payment obligations once the contribu-tions have been paid. Payments are recognised in the income sta-tement in the same period as the respective salaries and disbur-sements to which they pertain. The Company also providesemployees with supplementary pension insurance in the form ofpayments to insurers within a valid pension scheme. These costsare recognised as expense in the period to which they pertain.

(2) Compensation

The Company recognises employee compensation attributable toa given accounting period in accordance with the anticipated ful-filment of Company targets reflecting selected key business indi-cators. The Company creates an estimated item for employeecompensation in cases where it is contractually bound to rendersuch compensation or if a current payable has been created in theordinary course of past business.

(3) Loyalty and retirement benefits

The Company has an obligation associated with loyalty or retire-ment benefits in accordance with an approved collective bargai-ning agreement. Benefits due after 12 months are discounted totheir present value and recorded as non-current liability.

l) LeasesThe determination of whether an arrangement is, or contains alease is based on the substance of the arrangement at inceptiondate of whether the fulfilment of the arrangement is dependenton the use of a specific asset or assets or the arrangement conveysa right to use the asset.

Leases in which a significant portion of the risks and rewards ofownership are retained by the lessor are classified as operatingleases. Payments made under operating leases (net of any incen-tives received from the lessor) are charged to the income state-ment on a straight-line basis over the period of the lease.

If an operating lease is terminated early, all penalty payments re-quired by the lessor for early termination are expensed in the pe-riod in which the operating lease terminated.

Leases of property, plant and equipment where the Company sub-stantially bears all the risks and rewards of ownership are classifiedas finance leases. Finance leases are capitalised in the fair valueof the leased asset at the inception of the lease or, if lower, at thepresent value of the minimum lease payments. Lease paymentsare apportioned between liabilities and finance charges so as tomaintain a constant balance. Finance charges are recognised in

other non-current liabilities (depending on maturity). The interestcomponent of finance charges is charged to the income statementover the entire lease period so as to achieve a constant rate of in-terest on the remaining balance of the liability. If a reasonable de-gree of assurance exists that the lessee will assume ownership ofan asset at the end of the lease period, the estimated useful lifeshall be the lifetime of the asset. In other cases, property, plantand equipment acquired under a finance lease arrangement is writ-ten off over the useful life or lease period, whichever is shorter.

m) ProvisionsProvisions are created when the Company has a present obliga-tion to be settled in the future and a reliable estimate can bemade of the amount of outflow of resources required to settle theobligation. Where the Company expects a provision to be reim-bursed, for example under an insurance contract, the reimburse-ment is recognised as a separate asset but only when the reim-bursement is virtually certain.

n) Revenue recognitionRevenue is recognised to the extent that it is probable that theeconomic benefits will flow to the Company and the revenue canbe reliably measured. The following specific recognition criteriamust also be met before revenue is recognized.

Provision of services

Revenues from the transport of crude oil are recognised when thecustomer receives delivery. In cases of transported but not yet re-ceived crude oil, the Company accounts for work-in-progressbased on stage of completion. The stage of transaction comple-tion is determined based on the stage of crude oil transportation.

Revenues from crude oil storage (government reserves) are ac-counted for monthly in accordance with valid contracts.

Interest

Revenue is recognised on an accrual basis (taking into account ef-fective asset yield).

o) Government subsidiesGovernment subsidies are recognised at fair value where reaso-nable assurance exists that a subsidy will be received and all as-sociated conditions will be met. Where the subsidy relates to anasset, the fair value is credited to a deferred income account andis released to the income statement over the expected useful lifeof the relevant asset in equal annual instalments.

In the years 1993-1996, the Company received a government sub-sidy to construct large-capacity crude oil tanks. This subsidy is re-flected in a deferred income account (see Note 18) and is releasedto the income statement over the expected useful life of the re-levant asset, i.e. 30 years.

p) Borrowing costsBorrowing costs are expensed as incurred and are not capitalised.

q) Current and deferred income taxIncome tax expense comprises current income tax and deferredincome tax.



49 Current income tax assets and liabilities for the current and priorperiods are measured at the amount expected to be recoveredfrom or paid to the taxation authorities. The tax rates and tax lawsused to compute the amount are those that are enacted or sub-stantively enacted by the balance sheet date.

Current income tax relating to items recognised directly in equityis recognised in equity and not in the income statement.

Deferred income tax is provided using the liability method ontemporary differences at the balance sheet date between the taxbases of assets and liabilities and their carrying amounts for fi-nancial reporting purposes. Deferred tax is calculated using taxrates and legal provisions that are expected to apply in the pe-riod when the respective asset is realized or respective liability issettled.

Principal temporary differences arise from differences betweenbook and tax value of property, plant and equipment, unused taxlosses and fair values of hedging derivatives.

Deferred tax assets arising from deductible temporary differen-ces are only recognised to the extent it is probable that there willbe sufficient taxable profits against which to utilise the benefitsof the temporary differences.

The Company accounts for tax consequences of transactions andother events in the same manner as it accounts for such transac-tions and other events themselves. Thus, for transactions andother events recognized in the income statement, any related taxeffects are also recognized in the income statement. For transac-tions and other events recognized directly in equity, any relatedtax effects are also recognized directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a le-gally enforceable right exists to set off tax assets against tax lia-bilities and the deferred taxes relate to the same taxable entityand the same taxation authority. The same provision applies tothe offset of current tax assets against current tax liabilities.

r) Derivative financial instrumentsThe Company uses derivative financial instruments such as for-ward exchange contracts to hedge risks associated with interestrate and foreign currency fluctuations.

The Company performs no speculative trades.

The finance department manages such risks pursuant to approvedrules. The Board of Directors defines the general principles of riskmanagement. In accordance with these principles, written rulesexist that pertain to specific areas such as foreign exchange risk,interest rate risk, credit risk, the use of derivative financial in-struments and the investment of surplus liquidity.

Accounting recognition of derivatives

Derivative financial instruments are initially recognised in the ba-lance sheet at acquisition cost and subsequently remeasured tofair value. The method of recognising the resulting gain or loss iscontingent on the nature of the hedged item. When a derivativecontract is executed, the Company designates certain derivativesas hedges of the fair value of recognised assets or liabilities or firm

commitments (fair value hedges) or hedges of highly probably fo-recast transactions (cash flow hedges).

Changes in the fair value of derivatives that are designated andqualify as fair value hedges are recorded in profit or loss imme-diately, together with any changes in the fair value of the hedgeditem that is attributable to the hedged risk.

The effective portion of changes in the fair value of derivativesthat are designated and qualify as cash flow hedges is deferred inequity. If a forecast transaction or firm commitment that is hed-ged results in an asset or liability, the gains and losses previouslydeferred in equity are transferred from equity and included in theinitial measurement of the cost of the asset or liability. In othercases, amounts previously deferred in equity are transferred tothe income statement and classified as revenue or expense in thesame periods in which the firm commitment is realised or the fo-recast transaction has an impact on the income statement.

When the hedge instrument expires or is sold, terminated or exer-cised, or no longer qualifies for hedge accounting pursuant to IAS39, any cumulative gain or loss deferred in equity at that time re-mains in equity and is recognised when the forecast transaction isultimately recognised in profit or loss. When a firm commitmentor forecast transaction is no longer expected to occur, cumulativegains or losses deferred in equity are immediately recognised inprofit or loss.

At the inception of the hedge relationship, the Company docu-ments the relationship between the hedging instrument and hed-ged item, along with its risk management objectives and its stra-tegy for undertaking various hedge transactions. This processincludes the attribution of derivatives designated as hedge deri-vatives to specific assets and liabilities or specific firm commit-ments or forecast transactions. Furthermore, at the inception ofthe hedge and on an ongoing basis, the Company documents whe-ther the hedging instrument that is used in a hedging relationshipis highly effective in offsetting changes in fair values or cash flowsof the hedged item.

Notes 9 and 12 contain details of the fair value of derivative in-struments used for hedging purposes. Movements in the hedgingreserve in equity are also detailed in the Statement of Changes inEquity.

The fair value of forward exchange contracts is determined on thebasis of current forward exchange rates applicable for contractswith similar maturities.

s) Segment reportingSegmental information is based on two segment formats. The pri-mary format represents business segments reflecting the Com-pany’s management structure. The secondary format representsthe Company’s geographical markets. Since the Company cur-rently sells its services exclusively to customers in the territory ofthe Czech Republic, the secondary format is not used.

Segment results include revenue and expenses directly attribu-table to a segment and the relevant portion of Company revenueand expenses that can be allocated on a reasonable basis to a seg-ment, whether from external transactions or from transactionswith other segments of the Company. Inter-segment transfer pri-



50cing is based on cost plus an appropriate margin, as specified bythe Company policy.

Segment assets and liabilities comprise those operating assetsand liabilities that are directly attributable to the segment or canbe allocated to the segment on a reasonable basis. Segment as-sets and liabilities do not include deferred income tax items.

Unallocated items mainly comprise corporate, general and admi-nistrative expenses that relate to the Company as a whole, assets(such as short- and long-term investments) not directly attribu-table to segment operations and liabilities that are incurred for fi-nancing rather than operating purposes.

Capital expenditure represents the total cost incurred during theperiod to acquire segment assets that are expected to be used du-ring more than one period.

t) Impairment of assetsAll non-current assets are reviewed for impairment at least oncea year at the balance sheet date.

Property, plant and equipment and other assets, including intan-gible assets, are reviewed for impairment losses whenever eventsor changes in circumstances indicate that the carrying amountmay not be recoverable, or at least on an annual basis for intangi-bles not yet in use. An impairment loss is recognised for theamount by which the carrying amount of the asset exceeds its re-coverable amount, which is the higher of an asset’s fair value lesscosts to sell and value in use. For the purposes of assessing im-pairment, assets are grouped at the lowest level for which sepa-rately identifiable cash flows exist (cash-generating units).

u) ContingenciesThe Company recognises contingent liabilities based on directors’best estimates of the amount and timing of the liabilities and theprobability of the outflow of resources representing the economicbenefit required upon settlement. Provisions are recognised whenthe Company has a present obligation (legal or constructive) as aresult of a past event, it is probable that an outflow of resourcesembodying economic benefits will be required to settle the obli-gation and a reliable estimate can be made of the amount of theobligation. Contingent liabilities are not recognised as their exis-tence will only be confirmed once one or more unspecified futureevents that the Company does not control do or do not occur. Con-tingent liabilities are reviewed on an ongoing basis so as to ascer-tain whether the outflow of resources representing economic be-nefit has become likely. Where it has become likely that anoutflow of resources representing economic benefit will occur dueto an item that was originally considered to be a contingent liabi-lity, a reserve for such liability is recognised in the accounts forthe period in which the change in probability occurred.

Contingent assets are not recognised in the financial statements.They are disclosed when an inflow of economic benefits is pro-bable.

v) Dividend distributionDividend distribution to the Company’s shareholders is recogni-zed as a liability in the Company’s financial statements in the pe-riod in which the dividend payment is approved by the Company’sshareholders.

w) Financial instrumentsFinancial instruments reflected in the balance sheet comprisecash and cash equivalents, cash with banks, financial assets, re-ceivables, payables, loans (including bonds) and derivatives.

x) Subsequent eventsPost-year-end events that provide additional information about acompany’s position at the balance sheet date (adjusting events)are reflected in the financial statements. Post-year-end events thatare not adjusting events are disclosed in the notes when material.

y) Significant accounting estimatesThe Company makes estimates and assumptions concerning thefuture. The resulting accounting estimates will, by definition, se-ldom correspond to the related actual results.

Estimates and judgments are continually evaluated and are basedon historical experience and other factors, including expectationsof future events that are believed to be reasonable under the cir-cumstances.

The estimates and assumptions that might have a significant riskof causing a material adjustment to the carrying amounts of as-sets and liabilities within the next year are discussed below.

(1) Income taxes and deferred taxes

The Company accounts for income tax and, in consideration oftemporary differences, for deferred income tax. There are manytransactions and calculations for which the ultimate tax determi-nation is uncertain during the ordinary course of business and themeasurement of deferred tax assets and liabilities reflects the taxconsequences that would follow from the manner in which theCompany expects to recover or settle the carrying amount of as-sets and liabilities. Where the final tax-deductible expenses aredifferent from the amounts that were calculated, such differenceswill impact the current income and deferred tax provisions in theperiod in which such determination is made. At 31 December 2007,the net amount of tax due is CZK 0 and the net deferred tax lia-bility is CZK 282,062 thousand.

In October 2007, the President of the Czech Republic signed a lawstipulating that the corporate income tax rate will drop from 24%to 21%, 20% and 19% for the tax period 2008, 2009 and 2010, re-spectively. A favourable tax effect on deferred tax liability wasCZK 66,569 thousand in 2007 (see Note 5).

(2)Leases

The Company assesses the character of an arrangement to deter-mine whether it contains a lease or whether it establishes a leaserelationship. It predominantly considers whether fulfilment of thearrangement is dependent on the use of a specific asset or whe-ther the arrangement conveys a right to use the asset. The afore-mentioned section “Lease” (see letter l) describes the methodused to determine finance or operating lease.

z) Investment in subsidiaryA subsidiary is an entity over which the Company has control. Con-trol is the power to govern the financial and operating policies ofan entity so as to obtain benefits from its activities.



51 The Company has an investment in only one subsidiary: MERO Pi-peline GmbH (the “subsidiary”, see Note 10).

Investments in subsidiaries and associates are accounted for atcost less provision for diminution in value.

As these financial statements are stand-alone, subsidiaries andassociates have not been consolidated. Pursuant to AccountingAct requirements, the Company also prepared consolidated fi-nancial statements under IFRS (see above).

aa) Operating profitOperating profit is defined as profit before financial results andtaxes and represents profit from regular business operations. Fi-nancial results consist of interest income, interest expense, otherfinancial expense (which include primarily bank charges), fair valuelosses and gains on remeasurement of financial instruments andrealized and unrealised exchange rate differences.

bb) Changes in accounting policyIn 2007, no material changes were applied in the accounting policies.

cc) Financial risk managementFinancial instruments reflected in the balance sheet comprisecash and cash equivalents, cash with banks, financial assets, re-ceivables, payables, loans and derivatives.

The Company’s activities expose it to a variety of financial risks,including the effects of changes in market values of loan capital,foreign currency exchange rates and loan interest rates, using ofloans to finance its own operation and net investments in foreigncompanies. The overall risk management program focuses on theunpredictability of financial markets and seeks to minimize po-tential adverse effects on the financial performance of the Com-pany. To hedge specific risks, the Company uses derivative finan-cial instruments (e.g. forwards and swaps) and non-derivativefinancial instruments (e.g. depository notes, other deposit-relatedproducts).

The Company performs no speculative trades.

The finance department manages the risks pursuant to approvedrules. The Board of Directors defines the general principles of riskmanagement. In accordance with these principles, written rulesexist that pertain to specific areas such as foreign exchange risk,interest rate risk, credit risk, the use of derivative financial in-struments and the investment of surplus liquidity.

(i) Foreign currency risk

The Company is exposed to foreign currency risk mainly with re-spect to EUR.

a balance sheet components (such as receivables, payables) de-nominated in foreign currenciesb probable/forecast transactions or payables (such as purchasesor sales) denominated in foreign currenciesc net investments in a German subsidiary (company currency dif-fers from CZK)

The Company seeks to minimise profit and cash flows volatilityarising from movements in foreign exchange rates.

The Company uses derivative financial instruments to hedge itsforeign currency risk associated with future forecast transactions.

(ii) Interest rate risk

The Company is exposed to interest rate risk associated with:

a floating interest rate used for financial investments, cash as-sets and debt instruments;b fair value of fixed rate borrowings

The Company’s income and operating cash flows are largely inde-pendent of changes in market interest rates. Cash assets andshort-term debt bear floating interest rates and long-term debtobligations bear fixed interest rates.

(iv) Liquidity risk

The Company’s primary objective is to raise finance for meeting allcash payment obligations by their maturity while preserving cer-tain flexibility in funding. The Company uses cash and cash in-struments, marketable securities and available committed creditlines to meet its cash needs.

The Company monitors its risk to a shortage of funds by conside-ring the projected cash flows from operations and the maturity ofboth its debt and financial investments in the next 12 month period.The Company's objective is to maintain a balance between conti-nuity of funding and flexibility through the use of bank overdrafts.

(iv) Credit risk

Due to the fact that the Company provides its services to a closecircle of customers, the concentrations of credit risk arising fromtrade receivables go with these customers (more than 95% oftrade receivables is concentrated with three main customers ofthe Company). Trade receivables are concentrated within theCzech Republic. Although the Company currently does not expectany higher credit risk associated with trade receivables, a custo-mer solvency is subject to the stability of both the national eco-nomy and the Company’s main customers.

Receivable balances are monitored on an ongoing basis with theresult that the Company’s exposure to bad debts is not signifi-cant. A maximum exposure equals to the carrying amount as disc-losed in Note 13.

With respect to credit risk arising from the other financial assetsof the Company, which comprise cash and cash equivalents, avai-lable-for-sale financial investments, financial assets remeasuredat fair value through profit or loss and certain derivative instru-ments, the Company’s exposure to credit risk arises from defaultof the counterparty, with a maximum exposure equal to the car-rying amount of these instruments. The Company trades only withrecognised, creditworthy financial institutions.

It is the Company’s policy that all customers who wish to trade oncredit terms are subject to credit verification procedures, includingmonitoring payment status of existing customers and analyzingage structure of receivables. These procedures are carried out bythe finance department which approves every customer.



523. Segment Information

a) Segment DescriptionThe MERO group activities may be divided in two main segments.The primary activity/segment is the transport of crude oil via theDruzba and IKL pipelines. The secondary segment of the Companyactivities is crude oil storage. This segment, however, becomesmore and more important.

Since the Company currently renders its services exclusively tocustomers on the territory of the Czech Republic the territory seg-ment format is not used.

b) Business SegmentsThe following tables present revenue and profit information andcertain asset and liability information regarding business seg-ments for the year ended 31 December 2007.

Crude oil transport Crude oil storage Total 2007

RevenuesSales to external customers 1,396,371 372,849 1,769,220Inter-segment sales 0 0 0Total revenues 1,396,371 372,849 1,769,220

ResultSegment result 489,205 184,363 673,568

Unallocated expenses (186,466)Profit from operating activities 487,102Financial (expenses)/income: (169,639)Profit before income taxes 317,463Income taxes (12,218)Net profit 305,245

Assets and liabilitiesSegment assets 6,607,008 3,733,238 10,340,246Unallocated assets 2,340,856Total assets 12,681,102

Segment liabilities 118,623 116,530 235,153Unallocated liabilities 3,243,273Total liabilities 3,478,426

Other segment informationCapital expendituresProperty, plant and equipment 268,496 565,898 834,394Intangible assets 0 0 0

Depreciation of buildings and equipment 247,456 156,065 403,521Amortization 540 0 540Allowance creation 0 0 0Allowance release 351 0 351

The following tables present revenue and profit information and certain asset and liability information regarding business segments forthe years ended 31 December 2006.

as at 31 December 2006 Crude oil transport Crude oil storage Total 2006

RevenuesSales to external customers 1,481,829 357,384 1,839,213Inter-segment sales 0 0 0Total revenues 1,481,829 357,384 1,839,213

ResultSegment result 463,952 174,596 638,548

Unallocated expenses (148,744)Profit from operating activities 489,804



53 Financial (expenses)/income: (164,155)Profit before income taxes 325,649Income taxes (80,850)Net profit 244,799

Assets and liabilitiesSegment assets 6,695,732 3,313,253 10,008,985Segment assets Segment assets 2,820,733Total assets 12,829,718

Segment liabilities 128,750 30,541 159,291Unallocated liabilities 3,273,202Total liabilities 3,432,493

Other segment informationCapital expendituresProperty, plant and equipment 291,954 314,086 606,040Intangible assets 2,244 0 2,244

Depreciation of buildings and equipment 270,099 153,989 424,088Amortization 451 0 451Allowance creation 2,240 0 2,240Allowance release 84 0 84

4. Revenues and expenses

Revenues 2007 2006

Revenues from crude oil transport 1,396,371 1,481,829Revenues from crude oil storage 372,849 357,384Total 1,769,220 1,839,213

Consumption of material and energy 2007 2006Consumption of material 12,668 9,623Energy consumption 30,581 32,066Total 43,249 41,689

Staff costs 2007 2006Salaries and wages 69,677 68,641Social security costs 24,777 23,758Remunerations of board members 4,194 6,958Costs for binding future bonuses 2,429 0Other social expenses 3,110 5,653Total 104,187 105,010

In 2007 and 2006, the Company employed 114 and 115 employees, respectively in an average including management. The averagenumber of management members was 6 and 6 in 2006 and 2007, respectively

Other operating expenses, net 2007 2006

Insurance costs 29,224 33,782Costs associated with the Družba pipeline inspection 1,780 26,7 1 1Cathodic protection 8,770 8,480Other 53,307 49,680Total 93,081 118,653

Major components of income tax expense for the years ended 31 December are:

2007 2006

Current income taxCurrent income tax charge 0 0

Deferred income tax Relating to origination and reversal of temporary differences 12,218 80,850

Income tax expense reported in the income statement 12,218 80,850

A reconciliation of income tax expense applicable to profit before income tax at the statutory income tax rate to income tax expense atthe Company's effective income tax rate for the years ended 31 December was as follows:

2007 2006

Profit before income taxes 317,463 325,649Income tax rate 24% 24%Tax at statutory income tax rate 76,191 78,156

Tax effect of expenses that are not deductible in determiningtaxable profit (permanent differences) 6,133 6,231Effect on opening deferred income tax of reduction in income tax rates (66,569) 0Release of the grant – tax effect reversal (3,537) (3,537)

Tax expense 12 218 80,850

Effective tax rate 3.85% 24.83%

In accordance with legislation in force, Czech statutory income tax rate is as follows: 24% in 2006 and 2007, 21% in 2008, 20% in 2009and 19% the years after.

Deferred tax is computed on the basis of approved tax rate at a time when assets are to be realized and liabilities settled.

2007 2006

Deferred tax liability – as at 1 January 277,476 158,133

Income statement effect 12,218 80,850Equity effect (7,632) 38,493

Deferred tax liability – as at 31 December 282,062 277,476

Deferred income tax assets and liabilities may be offset when there is a legally enforceable right to offset current tax assets against cur-rent tax liabilities and when the deferred income taxes relate to the same fiscal authority.



545. Income TaxesThe Czech Republic currently has a number of laws related to vari-ous taxes imposed by governmental authorities. Applicable taxesinclude excise duties, value-added tax, corporate income tax andpayroll taxes together with others. In addition, laws related tothese taxes have not been in force for significant periods, in con-trast to more developed market economies; therefore, implemen-ting regulations are often unclear or nonexistent. Accordingly, fewprecedents with regard to issues have been established. Often, dif-fering opinions regarding legal interpretations exist both amongand within government ministries and organizations, thus crea-

ting uncertainties and areas of conflict. Tax returns, together withother legal compliance areas (e.g., customs and currency controlmatters), are subject to review and investigation by a number ofauthorities that are enabled by law to impose extremely severefines, penalties and interest charges. These facts create tax risks inthe Czech Republic substantially more significant than typicallyfound in countries with more developed tax systems. Managementbelieves that it has adequately provided for tax liabilities in the ac-companying financial statements; however, the risk remains thoserelevant authorities could take differing positions with regard tointerpretive issues and the effect could be significant.



55 Deferred income tax as at 31 December 2007 relates to the following:

Deferred tax items Base Tax rate Deferred Deferredtax asset tax liability

Difference between net book value of fixed assets for accounting and tax purposes (1,394,638) 19% 0 (264,982)Difference between net book value of fixed assets for accounting and tax purposes 5,078 21% 1,066 0Other temporary differences:Allowance for inventory 10,693 21% 2,245 0Allowance for fixed assets 1,915 19% 364 0Allowance for other assets 175 21% 37 0Liability arising from legal insurance 2,450 21% 515 0Intangible assets 11,951 19% 2,271 0Unused tax losses 38,329 19% 7,282 0Fair value of hedging derivative (16,691) 21% 0 (3,505)Fair value of hedging derivative (16,053) 20% 0 (3,211)Fair value of hedging derivative (127,074) 19% 0 (24,144)Total (1,483,865) 13,780 (295,842)Deferred tax recognized (282,062)

Deferred income tax as at 31 December 2006 relates to the following:

Deferred tax items Base Tax rate Deferred Deferredtax asset tax liability

Difference between net book value of fixed assets for accounting and tax purposes (1,190,610) 24% 0 (285,746)Other temporary differences:Allowance for inventory 9,125 24% 2,190 0Allowance for fixed assets 2,266 24% 544 0Allowance for other assets 1,676 24% 402 0Liability arising from legal insurance 1,643 24% 394 0Intangible assets 12,617 24% 3,028 0Unused tax losses 46,691 24% 11,206 0Unclaimed re-investment deduction 120,829 24% 28,999 0Fair value of hedging derivative (160,388) 24% 0 (38,493)Total (1 ,156,151) 46,763 (324,239)Deferred tax recognized (277,476)

Pursuant to tax legislation valid in the Czech Republic prior year tax losses may be transferred and used in next accounting periodsagainst taxable profit. The Company can carryforward tax losses brought forward for up to five years (seven years for losses incurred before 2004) in the Czech Republic. Tax loss recognised by MERO ČR, a.s., in the Czech Republic amounts to CZK 38,329 as at 31 December2007.

6. Retained Earnings/Dividends Paid and Proposed

On 21 June 2007, the Company’s Shareholder decided about the payment of dividends for 2006 at an amount of CZK 505,855 (withhol-ding tax of CZK 75,878 thousand, net dividend of CZK 429,977 thousand is due on 15 January 2008), i.e. gross dividend is CZK 60 pershare at a nominal value of CZK 1,000.

The 2005 dividends were paid at an amount of CZK 505,855 thousand on 15 January 2007 (withholding tax was CZK 75,878 thousand, netdividend paid to shareholder was CZK 429,977 thousand, on the basis of Shareholder’s decision dated 20 June 2006), i.e. gross dividendof CZK 60 per share at a nominal value of CZK 1,000.

Other non-current assets involve the first filling of the Druzba pipe-line and the minimum filling of storage tanks acquired and owned bythe Company. The filling is fully extrudable and is not a subject to de-terioration. The first and minimum filling shall be most probably ex-truded at the end of the Druzba pipeline and the tanks useful livesand therefore is classified as non-current assets. The filling is notdepreciated since its residual value, after the setting off of the costsnecessary for the extrusion, exceeds the original acquisition costs.

As at 31 December 2007 and 2006, the value of fully written-off pro-perty, plant and equipment and intangible assets totalled CZK672,236 thousand and CZK 661,244 thousand, respectively. Assetwhich are not being depreciated, (except for property, pant andequipment in progress) totalled CZK 440,889 thousand and CZK440,159 thousand, as at 31 December 2007 and 2006, respectively.

Property, plant and equipment in progress

Property, plant and equipment in progress includes particularlycosts and advance payment incurred in connection with the wide-ning of the central oil tank facility by four new large capacity crudeoil tanks with the total capacity of 250 thousand m3 and the con-struction of a new filling station in Benešovice. Advance paymentsprovided to customers for property, plant and equipment reportedwithin property, plant and equipment in progress amounted to CZK29,965 thousand and CZK 167,824 thousand as at 31 December2007 and 2006, respectively. The Company believes the advancepayments will be used against deliveries in the next twelvemonths. The Company has already signed contract which ensurefor long-term use of new tank capacities.



567. Property, Plant and Equipment

Freehold land Machinery Other Property, plant Totaland buildings and equipment non-current and equipment

assets in progress

Net book value at 31 December 2005 3,658,348 3,095,919 395,897 134,899 7,285,063Additions 0 897 0 607,185 608,082Transfers 128,382 50,793 0 (173,515) 5,660Sales and disposals (66) (150) 0 0 (216)Impairment (1,477) 0 0 0 (1,477)Amortization and depreciation (177,003) (255,189) 0 0 (432,192)Net book value at 31 December 2006 3,608,184 2,892,270 395,897 568,569 7,464,920


assets in progress

Net book value at 31 December 2006 3,608,184 2,892,270 395,897 568,569 7,464,920Additions 0 0 0 834,394 834,394Transfers 49,855 173,980 0 (223,835) 0Sales and disposals (1,106) (164) 0 0 (1,270)Impairment 351 0 0 0 351Amortization and depreciation (178,458) (228,667) 0 0 (407,125)Net book value at 31 December 2007 3,478,826 2,837,419 395,897 1,179,128 7,891,270


assets in progress

As at 31 December 2006Acquisition cost 5,518,982 4,946,851 395,897 568,569 11 ,430,299Accumulated amortization (1,908,532) (2,054,581) 0 0 (3,963,113)Impairment (2,266) 0 0 0 (2,266)Carrying amount 3,608,184 2,892,270 395,897 568,569 7,464,920

As at 31 December 2007Acquisition cost 5,567,389 5,094,782 395,897 1,179,128 12,237,196Accumulated amortization (2,086,648) (2,257,363) 0 0 (4,344,011)Impairment (1 915) 0 0 0 (1,915)Carrying amount 3,478,826 2,837,419 395,897 1,179,128 7,891,270


Page 56 /57Financial Statement

57 Assets no longer in useAs at 31 December 2007 and 2006, the Company reported in its ac-counts assets at a net book value of CZK 1,915 thousand and CZK2,266 thousand, respectively, which were no longer in use. These

assets comprise unused pipeline branch pipe. The Company esta-blished an allowance fully covering the net book value of assets nolonger in use.

8. Intangible assets

Patents and licenses Software Intangible assets Totalin progress

Net book value as at 31 December 2005 340 0 7,162 7,502Additions 195 658 0 853Transfers 0 1,502 (7,162) (5,660)Sales and disposals 0 0 0 0Amortization charge (46) (405) 0 (451)Net book value as at 31 December 2006 489 1,755 0 2,244


Net book value as at 31 December 2006 489 1,755 0 2,244Additions 0 0 0 0Transfers 0 0 0 0Sales and disposals 0 0 0 0Amortization charge (73) (540) 0 (613)Net book value as at 31 December 2007 416 1,215 0 1,631


As at 31 December 2006Acquisition cost 612 2,160 0 2,772Accumulated amortization (123) (405) 0 (528)Provision 0 0 0 0Carrying amount 489 1,755 0 2,244

As at 31 December 2007Acquisition cost 612 2 160 0 2,772Accumulated amortization (196) (945) 0 (1,141)Provision 0 0 0 0Carrying amount 416 1,215 0 1,631

Patents and licences which were put into use at the end of 2005 and in 2006 are being amortised evenly over their useful economic livesof 5 through 10 years Software put into operation in 2006 is amortized on a straight-line basis over four years.

9. Non-Current Financial Investments

31. 12.2007 2006

Euro Medium Term Notes – zero-coupon-bond 0 181,281Euro Medium Term Notes – financial derivative 0 37,120Hedging derivatives 143,133 148,153Total non-current investments 143,133 366,554



58The non-current financial asset Euro Medium Term Notes and therelated financial derivative were re-classified to current financialinvestments in 2007 – see Note 12, based on management deci-sion to reclassify the asset from held-to-maturity financial assetsto available-for-sale financial assets. The management intendsto sell the instrument in the course of 2008 and therefore the fi-nancial asset is classified as current asset as at 31 December 2007(see Note 12).

In 2006 Euro Medium Term Notes were classified as a held-to-maturity financial asset. Euro Medium Term Notes are securities(denominated in CZK) acquired in October 2004 and issued by So-ciété Générale Acceptance N. V. (SG). These securities purchasedat a nominal value of CZK 200,000 thousand are a combination ofa zero-coupon bond and financial derivative. At the acquisitiondate, i.e. as at 7 October 2004 the discounted value of the zero-coupon-bond amounting to CZK 165,180 thousand was separatedfrom the value of the derivative of CZK 34,820 thousand. The dis-counted value of bond redeemable in May 2009 was calculated atrate of 4.25% p.a. The financial derivative embedded in this in-

strument was valued at fair value and change in the fair value wasreflected in the income statement. As at 31 December 2006 thefair value of the asset was CZK 218,401 thousand and was deter-mined on the basis of information provided by SG.

Hedging financial derivatives are currency forwards. The forwardsat a nominal value of EUR 83,060 thousand, hedge currency riskson future payments in the years 2008 through 2019. As at 31 De-cember 2007, the fair value of these derivatives was CZK 159,824thousand, of that a long-term portion was CZK 143,133 thousandand the short-term portion was CZK 16,691 thousand (see Note12). As at 31 December 2006, the fair value of these derivativeswas CZK 160,388 thousand, of that a long-term portion was CZK148,153 thousand and the short-term portion was CZK 12,235thousand. These forwards are classified as derivatives to hedgecash flows, comply with the IAS 39 requirements and are highly ef-fective. Changes in the fair values of the derivative instrumentsare initially recognized in stockholders’ equity until the hedgedcash flows impact on the income statements and then they arereleased to the income statement.

10. Investment in Subsidiary

Shareholding in %Name of the subsidiary Country of incorporation 2007 2006

MERO Pipeline GmbH Federal Republic of Germany 100 100

31. 12.MERO Pipeline GmbH 2007 2006

Shareholding 2,673,279 2,881,503Total assets 2,906,789 3,106,473Shareholders’ Equity 2,711,569 2,905,382Profit for current year 94,186 172,811

MERO ČR, a.s. is a sole shareholder in MERO Pipeline GmbH, Germany, which was founded in 1993 in the form of capital contribution incash amounting to DEM 15 million (EUR 7.7 million). In 2005 the ownership interest in MERO Pipeline GmbH was increased by a contri-bution of CZK 2,818,422 thousand (EUR 97,456 thousand) in excess of basic capital, in 2006 the interest value was reduced returning ofa part of the contribution amounting to CZK 208,224 thousand (EUR 7,200 thousand). In 2007, another portion of the contribution at anamount of CZK 208,224 thousand (EUR 7,200 thousand) was returned.

The subsidiary MERO Pipeline GmbH is primarily engaged in operating of the German part of the IKL pipeline.

11. Other Non-Current Assets

31. 12.2007 2006

External costs for rebilling 0 28,913Operating advance payments 238 162Total other non-current assets 238 29,075

External costs to be re-billed reported as at 31 December 2006 are costs billed to a supplier which will be re-billed to the Company’s bu-siness partners in the course of 2008.



59 12. Cash and Cash Equivalents and Current Financial Assets

31. 12.2007 2006

Cash at bank and in hand 46,471 52,945Short-term notes and bonds 1,122,616 1,499,748Total cash and cash equivalents 1,169,087 1,552,693

Cash at bank and in hand earns variable interest based on daily bank deposit rates.

Short-term notes and bonds held as at 31 December 2007 were issued by Komerční banka, a.s., (CZK 342,517 thousand, due on 2 January2008), ČSOB Leasing, a.s., (CZK 249,976 thousand, due on 2 January 2008), Factoring, a.s., (CZK 229,789 thousand due on 7 and 14 January2008), ČEZ, a.s., (CZK 49,990 thousand, due on 3 January 2008) and UnitCredit Leasing CZ, a.s. (CZK 250,344 thousand, due on 21 January2008). These notes/bonds are not publicly tradable and, consequently, their market value is not available, Considering the short-termnature of these instruments and their issuers’ standing, the Company does not expect a significant difference between their book valueand market value.

Current financial assets as at 31 December:

31. 12.2007 2006

CREDIT SUISSE ASSET MANAGEMENT – open unit trust 267,499 258,446AXA – CZK KONTO – open unit trust 50,362 0Euro Medium Term Notes – zero-coupon-bond 188,981 0Euro Medium Term Notes – financial derivative 29,020 0Hedging derivatives 16,691 12,235Total current financial assets 552,553 270,681

Of the aforementioned current assets, investments to unit trusts CREDIT SUISSE ASSET MANAGEMENT and AXA CZK KONTO are clas-sified as financial assets revalued to fair value with the income statement effect. Fair value of these assets was determined on the basisof information provided by administrators of these trusts.

Current financial assets revalued to fair value with the income statement effect:

2007 2006

Opening balance 258,446 251,681

Additions 50,000 0Change in fair value 9,415 6,765Closing balance 317,861 258,446

Euro Medium Term Notes are securities (denominated in CZK) acquired in October 2004 and issued by Société Générale Acceptance N. V. (SG). They mature in May 2009. In 2006 Euro Medium Term Notes were classified as a held-to-maturity financial asset (see Note9). Euro Medium Term Notes purchased at a nominal value of CZK 200,000 thousand are a combination of a zero-coupon bond and fi-nancial derivative. At the acquisition date, i.e. as at 7 October 2004 the discounted value of the zero-coupon-bond amounting to CZK165,180 thousand was separated from the value of the derivative of CZK 34,820 thousand. The discounted value of bond redeemable inMay 2009 was calculated at rate of 4.25% p.a. The financial derivative embedded in this instrument was valued at fair value. At the endof 2007, based on management decision, these securities were re-classified from held-to-maturity financial assets to available-for-salefinancial assets with the intention to sell this financial investment in the course of 2008. The fair value of this asset was determined basedin information provided by SG. The resulting financial derivative was re-classified from non-current to current financial assets since it willbe sold together with zero-coupon-bond in 2008. The fair value of this financial derivative was determined based in information provi-ded by SG.

Hedging financial derivatives are hedging currency forwards (see Note 9).



60For the purposes of preparation of a cash flow statement, cash and cash equivalents as of 31 December comprised the following:

31. 12.2007 2006

Cash at bank and in hand 46,471 52,945Short-term notes 1,122,616 1,499,748Total cash and cash equivalents 1,169,087 1,552,693

As at 31 December 2007 and 2006, the Company had available unused short-term bank loans, i.e. overdrafts, of CZK 50,000 thousandand 50,000 thousand, respectively; all key requirements for their use had been met.

13. Receivables and Other Assets

31. 12.2007 2006

Trade receivables 157,477 153,384Tax receivables 4,263 4,255Other receivables 2,290 2,103Other assets 61,182 68,831Less: impairment loss (3,661) (3,661)Total receivables 221,551 224,912

Trade receivables include, in particular, receivables related to oil transportation and oil storage with a two-week maturity.

As at 31 December 2007 other assets include particularly accrued property insurance and external costs for rebilling which will be rebil-led in the course of 2008.

Ageing structure of receivables as at 31 December 2007 and 2006 is as follows:

Overdue, not reduced by provisionTotal Reduced Neither Less than 30-60 60-90 90-120 More than 120

by overdue 30 days days daysí days daysprovision nor reduced

2007 164,030 3,661 160,305 64 0 0 0 02006 159,742 3, 661 155,990 101 0 0 0 0

Bad debt provision In CZK thousands

At 1 January 2006 3,661Additions 0Disposals/settled receivables 0At 31 December 2006 3,661Additions 0Disposals/settled receivables 0At 31 December 2007 3,661

14. Inventories, net

31. 12.2007 2006

Material in stock 34,639 34,512Unfinished crude oil transport 4,589 13,425Less: impairment loss (10,868) (10,801)Inventory, net 28,360 37,136



61 The Company reduces the value of inventory whenever its realizable value falls below its acquisition costs. Valuation of long-term-heldfire devices reported within materials is reduced by provision set on the basis of their expiry terms. The realizable value of inventories writ-ten down to their realizable value as at 31 December 2007 and 2006 was CZK 23,222 thousand and CZK 32,397 thousand, respectively.

15. Shareholders’ Equity

31. 12.2007 2006

Nominal value of outstanding shares 8,430,921 8,430,921Treasury shares 0 0Share capital net of treasury shares 8,430,921 8,430,921

Shares issued and outstanding

As at 31 December 2007 and 2006, the Company had 1,071 issued shares with the following nominal value per share:

Category Nominal value in CZK Number of shares as at 31 December 2007 Number of shares as at 31 December 2006Registered 1,000,000,000 7 7Registered 100,000,000 13 13Registered 1,000,000 130 130Registered 1,000 921 921

All share categories have equal voting rights reflecting their nominal value. Right to dividend attached to individual share categories reflects a nominal value of individual share categories.

In 2007 and 2006, there were no movements in number of issued shares. The Company does not hold any own shares.

Pursuant to the Commercial Code the Company creates legal reserve fund from profit. In the first year in which profit is generated, a joint-stock company should allocate 20% of profit after tax (however, not more than 10% of share capital) to the legal reserve fund. Insubsequent years, the legal reserve fund is allocated 5% of profit after tax until the fund reaches 20% of share capital. These funds canonly be used to offset losses. As at 31 December 2007 and 2006, the legal reserve fund totalled CZK 155,250 thousand and CZK 142,950thousand, respectively.

Equity Management

The Company is not subject to external capital requirements.

The Company’s goals in terms of shareholder’s equity management are as follows:

a. To ensure that the Company continues as a going concern and thus ensure return of monies to shareholders b. To comply with all relevant legal requirements.

In future periods the Company’s Board of Directors will continue to assess and analyse the Company’s present and estimated results in-cluding planned and potential capital expenditures and to generate cash flows and adjust capital structure in order to reach these goals.No other specific goals have been set.

No changes in goals, procedures and processes occurred in 2007 and 2006.Capital structure used in capital management is as follows::

31. 12. 2007 31. 12. 2006

Capital 9,073,719 9,275,330Unrealised gains, net (cash flow hedge) 128,957 121,895Shareholders’ equity: 9,202,676 9,397,225



6216. Non-current Debt

The Company’s interest bearing loans and borrowings as at 31 December 2007 were as follows (including issued bonds):

2007Bank Original terms/conditions Total limit Amount in foreign currency Amount in CZK thousands

CompanyBank loans -Overdraft 1M PRIBOR – due within 1 year CZK 50,000 thousand 0 0

Bonds issued -Bonds issued Due 2011, interest 10.3 % 0 0 2,147,304

Total 0 2,147,304Less current portion 0 (147,304)

Net 0 2,000,000

Bonds issued at a total nominal value of CZK 2,000 million are publicly traded on the Prague Stock Exchange secondary market. Tradingvolumes of these bonds are minimal. An average reference market value was set at 118.08% as at 31 December 2007. The short-term po-rtion of the debt is aliquot interest expense for the period April 2007 through December 2007 which is due in April 2008.

The Company’s interest bearing loans and borrowings as at 31 December 2006 were as follows (including issued bonds):

2006Bank Original terms/conditions Total limit Amount in foreign currency Amount in CZK thousands

Company

Bank loans -Overdraft 1M PRIBOR – due within 1 year CZK 50,000 thousand 0 0

Bonds issued -Bonds issued Due 2011, interest 10.3 % 0 0 2,147,304

Total 0 2,147,304Less current portion 0 (147,304)

Net 0 2,000,000

Bonds issued at a total nominal value of CZK 2,000 million are publicly traded on the Prague Stock Exchange secondary market. Tradingvolumes of these bonds are minimal. An average reference market value was set at 127.65% as at 31 December 2006. The short-term po-rtion of the debt is aliquot interest expense for the period April 2006 through December 2006 which was due in April 2007.

The interest expense charged to income consists of the following:

2007 2006

Long-term bonds 206,000 206,000Total 206,000 206,000



63 17. Trade Payables, Deferred Income and Other Liabilities

Long-term trade payables, deferred income and other liabilities as at 31 December were as follows:

31. 12.2007 2006

Trade payables 49,617 27,922Payables to employees 5,121 3,426Deferred income – government subsidy 235,830 249,436Other Liabilities 523 0Trade Payables, Deferred Income and Other Liabilities, net 291,091 280,784

In 1993 through 1996, the Company received a grant of CZK 408million from the government budget for the purposes of a constructionof high-volume oil storage tanks. The tanks were completed and put to operation in 1996 and are being depreciated over 30 years. Thegovernment grant is being released to revenues (other operating expenses / revenues, see Note 4) over the expected useful life of therelated fixed assets.

Current trade payables, deferred income and other liabilities as at 31 December were as follows:

31. 12.2007 2006

Trade payables 236,709 165,456Advance payments received 36,231 71,319Wages and social insurance 17,366 17,197Payables related to other taxes 6,897 5,057Deferred income 26,654 34,969

Prepaid expenses 3,456 2,266Other payables 679 688Trade Payables, Deferred Income and Other Liabilities, net 327,992 296,952

The Company had no significant current trade payables overdue as at 31 December 2007 and 2006.



6418. Commitments and Contingencies

Except for the items mentioned below, the Company had no commitments, contingent liabilities and contingent assets (monetary andnon-monetary) which were not shown on the balance sheet as at 31 December 2007 and 2006.

In 2006, the Company made several contracts for currency forwards at a total nominal value of EUR 97,460 thousand hedging currency riskson future payments in the years 2006 through 2019. As at 31 December 2007, the fair value of these derivatives was CZK 159,824 thousand,of that a long-term portion was CZK 143,133 thousand and the short-term portion was CZK 16,691 thousand (see Notes 9 and 12).

Certain significant damage-prone buildings and constructions were insured against natural disasters as at 31 December 2007. Items bea-ring lower risk of damage, particularly pipelines, remained uninsured. The Company also insured third party crude oil inventories whichthe Company stores and for which it is responsible. In addition, the Company is insured against damage resulting from general respon-sibility and has also environmental damage insurance

19. Related Party Disclosures

MERO ČR, a.s. is owned by the Ministry of Finance of the Czech Republic, i.e. the Czech Republic as at 31 December 2007. From this per-spective any person in which the Czech government has an interest may be considered MERO’s related party.

The following schedule gives an overview of transactions with related parties, i.e. persons partly/wholly owned by the Czech governmentin 2007 and open receivable and payable items at 31 December 2007.

Related party Sales to Purchases from Amounts owed by Amounts owed byrelated parties related parties related parties related parties

Baufeld – ecological services 0 292 0 42ČEPRO, a.s. 61,979 31,279 56 2,702ČEZ Prodej, s.r.o. 0 12,352 0 410I & C Energo s.r.o. 0 414 0 0MERO Pipeline GmbH 440 598,331 47 84,824Správa státních hmotných rezerv (State Material Reserve Administration) 370,445 0 0 0Ústav jaderného výzkumu Řež a.s. 0 163 0 199Západočeská energetika, a.s. 0 0 0 489Total 432,864 642,831 103 88,666

Sales charged to the State Material Reserve Administration represent revenues from oil storage. Sales to ČEPRO, a.s. include particularlyrebilling of a share in costs incurred in joint capital expenditure event. Purchases from MERO Pipeline, GmbH include the purchase of tran-sportation though the German part of the IKL pipeline, purchases from ČEPRO, a.s., include, in particular, the purchase of what is knownas cathodic protection related to crude oil pipelines.

The following schedule gives an overview of transactions with related parties, i.e. persons partly/wholly owned by the Czech governmentin 2006 and open receivable and payable items at 31 December 2006.

Related party Sales to Purchases from Amounts owed by Amounts owed byrelated parties related parties related parties related parties

ČEPRO, a.s. 85 33,077 44 63,018ČEZ Prodej, s.r.o. 0 12,800 260 54ČEZ Distribuce, a. s. 0 504 0 0ČEZ Distribuční služby, s.r.o. 0 4 0 2I & C Energo s.r.o. 0 226 0 0MERO Pipeline GmbH 90 613,405 80 60,055Správa státních hmotných rezerv (State Material Reserve Administration) 355,130 0 0 0Středočeská energetická a.s. 0 5 0 0Ústav jaderného výzkumu Řež a.s. 0 491 0 91Západočeská energetika, a.s. 0 0 0 977Severočeská energetika, a.s. 0 4 0 0Total 355,305 660,516 384 124,197



65 Sales charged to the State Material Reserve Administration represent revenues from oil storage. Purchases from MERO Pipeline, GmbHinclude the purchase of transportation though the German part of the IKL pipeline, purchases from ČEPRO, a.s., include, in particular, thepurchase of what is known as cathodic protection related to crude oil pipelines.

Remuneration of members of statutory and supervisory bodies and executive officers (inclusive of salaries and statutory insurance):

2007 2006

Board of Directors and management 21,792 21,730Supervisory Board 9,711 12,701Total 31,503 34,431

In 2007 and 2006, the members of statutory and supervisory bodies and executive officers were granted no loans, guarantees, advancesand other benefits and they do not hold any shares of the Company. Other benefits provided to members of statutory and supervisorybodies and executive officers consist of the use of company cars for private purposes, fuel for private purposes and contribution to themanagement capital insurance.

20. Financial Risk Analysis

Interest rate riskThe company is financed through its own capital and through bond issues. The bonds bear fixed interest rate (see Note 16). The cash flowsassociated with the Company’s debt financing therefore are not exposed to the risk of interest rate fluctuations.

Purchased financial investments - see Note 9 and 12, cash and cash equivalents – see Note 12, are particularly exposed to interest raterisk.

Liquidity RiskThe breakdown of contractual maturities of undiscounted financial liabilities including interest as at 31 December 2007 was a follows:

As at 31/12/2007 Upon Less than 3-12 1-5 More than Totaldiscretion 3 months months years 5 years

Interest bearing loans and bonds 0 0 206,000 2,618,000 0 2,824,000Liabilities from unpaid dividends 0 429,977 0 0 0 429,977Other liabilities 0 679 0 523 0 1,202Trade payables and advance payments received 13 218,642 54,285 18,493 31,124 322,557Payables to staff due to social and health insurance and other taxe 0 24,263 0 5,806 0 30,069Hedging derivatives 0 0 208,224 832,896 1,360,975 2,402,095Total 13 673,561 468,509 3,475,718 1,392,099 6,009,900

The breakdown of contractual maturities of undiscounted financial liabilities including interest as at 31 December 2006 was a follows:

As at 31/12/2006 Upon Less than 3-12 1-5 More than Totaldiscretion 3 months months years 5 years

Interest bearing loans and bonds 0 0 206,000 2,824,000 0 3,030,000Liabilities from unpaid dividends 0 429,977 0 0 0 429,977Other liabilities 0 688 0 0 0 688Trade payables and advance payments received 0 158,063 78,712 27,648 274 264,697Payables to staff due to social and health insurance and other taxe 0 22,254 0 3,426 0 25 680Hedging derivatives 0 0 208,224 832,896 1,569,199 2,610,319Total 0 610,982 492,936 3,687,970 1,569,473 6,361,361



66

Market Risk

Financial assets valued at fair value and foreign currency deno-minated financial assets and liabilities are particularly exposedto market risk.

The interest rate and exchange rate sensitivity analysis hasbeen prepared for change in interest rate by 0.1% and exchangerate by 1%.

If the CZK/EUR exchange rate as at 31 December 2007 decrea-sed (increased) by 1% with all the other variables remaining un-changed, the effect on profit after income tax would be by CZK34 thousand lower (higher) due to revaluation of monetaryitems denominated in foreign currency using the year-end ex-change rate. Other equity components would be higher (lower)by CZK 14,917 thousand due to increase (decrease) of fair valuesof hedging currency forwards recognised in equity.

If the CZK/EUR exchange rate as at 31 December 2006 decrea-sed (increased) by 1% with all the other variables remaining un-changed, the effect on profit after income tax would be by CZK194 thousand higher (lower) due to revaluation of monetaryitems denominated in foreign currency using the year-end ex-change rate. Other equity components would be higher (lower)by CZK 23,498 thousand due to increase (decrease) of fair va-lues of hedging currency forwards recognised in equity.

If the interest rates as at 31 December 2007 decreased (increa-sed) by 0.1% with all the other variables remaining unchangedthe effect on profit after income tax would be by CZK 12 thou-sand lower (higher) due to decrease (increase) in fair values offinancial assets recognised in the income statement. Otherequity components would be higher (lower) by CZK 747 thou-sand due to increase (decrease) of fair values of hedging cur-rency forwards recognised in equity.

If the interest rates as at 31 December 2006 decreased (increa-sed) by 0.1% with all the other variables remaining unchangedthe effect on profit after income tax would be by CZK 191 thou-sand higher (lower) due to increase (decrease) in fair values offinancial assets recognised in the income statement. Otherequity components would be higher (lower) by CZK 781 thou-sand due to increase (decrease) of fair values of hedging cur-rency forwards recognised in equity

Fair ValuesFair values of financial assets and liabilities are discussed in de-tail in the Notes disclosing these instruments, i.e. Notes 9, 12 and16. Carrying values of receivables and payables discussed in Notes6, 13 and 17 approximate their fair values due to their nature.

DerivativesThe Company management uses derivative and other financial in-struments to manage currency and interest rate exposures. TheCompany uses forwards (forward sales of foreign currencies) tomanage currency risks.

Open derivative instruments as at 31. 12. 2007 and 2006 are detailed in Note 9. Profit associated to these derivative instru-ments reclassified from capital accounts to the income statementwas CZK 18,504 thousand in 2007 and CZK 0 thousand in 2006, respectively, and was reported in the caption Other financial ex-penses/revenues. In 2007 and 2006 the Company recognized noamount in the income statement resulting from non-effective-ness of derivative instruments hedging cash flows.

21. Subsequent Events

There have been no material subsequent events after the balancesheet date that should be reflected in the accompanying finan-cial statements.


Page 66 / 67K / Report on Relations Between Related Parties

67 K / REPORT ON RELATIONS BETWEENRELATED PARTIES AT 31 DECEMBER2007 PURSUANT TO SECTION 66A(9)OF THE COMMERCIAL CODEPrepared by

MERO ČR, a. s.Veltruská 748278 01 Kralupy nad Vltavou

as the controlled party

Organisational structure

MERO ČR, a.s., based in Kralupy nad Vltavou, is one of 29 busi-ness companies controlled by the Ministry of Finance of the CzechRepublic in 2007.

MERO ČR, a.s. is the sole partner (100% share) in its subsidiaryMERO Pipeline GmbH, Vohburg an der Donau, Germany.

Related parties – organisation chart

The chart only includes companies with which MERO ČR, a.s.actively conducted business in 2007.

MF ČR

ČEPRO, a. s. ČEZ, a. s.

I & C Energo, a. s.

ČEZ Prodej, s.r.o.

Ústav jadernéhovýzkumu Řež, a. s.

Baufeld - ekologickéslužby, s.r.o.

MERO PipelineGmbH

MERO ČR, a. s.

Legal arrangements between related parties

MERO ČR, a.s. entered into the following contracts with related parties in 2007:



68

Supplies and counter-supplies are provided for usual prices and under usual commercial conditions.

Joint-stock company name

ČEPRO, a. s.

ČEZ Prodej, s. r. o.

MERO PIPELINE GmbH

Valid from

1 August 2007

1 August 2007

1 August 2007

31 July 2007

1 January 2007

1 April 2007

18 June 2007

Contract number

19058

19059

19060

19061

60193468/1/07

60193468/2/07

In/0107/2007

Contract title

Purchase contract for land and structures

Purchase contract for unregistered real estate

Purchase contract

Purchase contract

Contract for electricity supply fromhigh voltage and very high voltage networks

Contract for electricity supply fromhigh voltage and very high voltage networks

Contract for a SCADA system, a stationautomation and communication system pertaining to the part of the IKL pipeline located in Germany

Contract subject

Transfer of title to real estate – product line H131 716 DN 250 - areas:Zdibohlavy, Chocenice u Břežan, Lošany

Transfer of title to real estate – section of product line H 131 716 DN250, land in: Zdibohlavy, Chocenice u Břežan, Lošany

Product line - Kolín bypass

Cooperation in establishing easements and settling costs connected therewith – product lineH131 716 DN 250 in connection withContracts Nos. 19058 a 19059

Electricity supply and assuring distribution of electricity and system services

Connection of offtake point No. 1885023 to CTR Nelahozeves at the ČEZ distribution network

SCADA system replacement on the IKL pipeline



69 Supplies and counter-supplies effected in 2007

SalesMERO ČR, a.s. sold and rebilled its services to the following related parties in 2007:

Related party Transaction (in CZK thousands)

MERO Pipeline GmbH Services 440ČEPRO, a.s. Services 61,979

Total 62,419

PurchaseMERO ČR, a.s., purchased products, fixed assets, goods and services from the following related parties in 2007:

Related party Transaction (in CZK thousands)

MERO Pipeline GmbH Oil transport and other services 598,331ČEPRO, a.s. Cathodic protection and services 31,279ČEZ Prodej, s.r.o. Power supply 12,352I & C Energo s.r.o. Services 414Ústav jaderného výzkumu Řež a.s. Materials analysis 163Baufeld – ekologické služby Services 292

Total 642,831

No other significant transactions were effected between related parties in 2007.

The controlling party, exercising the powers of the General Meeting, adopted the following measures during the elapsed period

21 June 2007• takes due note of the report of the Board of Directors on Company business activities and property for 2006, and

• approves

1. the ordinary financial statements at 31 December 2006

2. the distribution of net profit for 2006 as follows:

Net profit for the 2006 accounting period CZK 244,799,478.26Reserve fund allocation CZK 12,300,000.00Social fund allocation CZK 1,000,000.00Remuneration fund allocation CZK 5,436,000.00 Dividend CZK 226,063,478.26

and the distribution of retained earnings of MERO ČR, a.s. as follows:

Dividend CZK 279,7 9 1 ,781 .74

The dividend is payable at 15 January 2008.



70Closing representation of the MERO ČR, a.s. statutory body

We hereby declare that the Report on Related Parties drafted pur-suant to Section 66a(9) of the Commercial Code for the accountingperiod ended 31 December 2007 includes all:

- contracts between related parties,- supplies and counter-supplies provided to related parties,- other legal acts performed for the benefit of such parties,- all measures adopted or effected to the benefit or detriment of

these parties.

made or effected in this accounting period and known to us as atthe date of the signing hereof.

The Company management believe that any and all transactionswith related parties have been effected under standard businessconditions.

We hereby represent that MERO ČR, a.s. has incurred no financialor any other detriment arising from the aforementioned relations.

Ing. Jaroslav Pantůček Board of Directors Chairman

Ing. Vít TůmaBoard of Directors Vice-chairman



71


Page 72Imprint

72IMPRINT

MERO ČR, a.s.Annual Report for 2007

MERO ČR, a.s., Veltruská 748, 278 01 Kralupy nad Vltavou, Czech RepublicTel.: +420 315 701 100 Fax: +420 315 720 110 E-mail: [email protected] www.merocr.eu

Mero Pipeline GmbH, MERO-Weg 1, 850 88 Vohburg a.d. DonauTel.: +49 8457 926-234 Fax: +49 8457 926-220 E-mail: [email protected]

Design, conception and production: Heyduk, Musil & Strnad, s.r.o.Graphic design: Filip HeydukPhotography of the Board of Directors: Marek BartošPrint: T. A. Print

Mero ČR, a.s.Kralupy nad Vltavou

Annual Report 2007

MERO ČR, a. s. Veltruská 748, 278 01 Kralupy nad Vltavou, Czech Republicphone: +420 315 701 100 fax: +420 315 720 110 e-mail: [email protected] www.mero.cz www.merocr.eu

MERO Pipeline GmbHMERO-Weg 1, 850 88 Vohburg an der Donau, Germanyphone: +49 8457 926-234 fax: +49 8457 926-220e-mail: [email protected] www.mero-pipeline.de

Documents

ANNUAL REPORT 2007 - MEzinárodní · PDF fileANNUAL REPORT 2007. ANNUAL REPORT FOR 2007. Mero ČR, a.s. ... Jiří Suchomel – member Mgr. Martin Turnovský, MBA – member Ing