Unaudited interim condensed consolidated financial statements

1.     General information

 MOL Hungarian Oil and Gas Plc. was incorporated on 1 October 1991 on the transformation of its legal predecessor, the Országos Kőolaj- és Gázipari Tröszt (OKGT).

The registered office address of the Company is Október huszonharmadika u. 18., Budapest, Hungary.

MOL Plc. and its subsidiaries (hereinafter referred to as the Group or MOL Group) are involved in the exploration and production of crude oil, natural gas and other gas products, refining, transportation and storage of crude oil and wholesale and retail marketing of crude oil products, production and sale of olefins and polyolefins.

The shares of the Company are listed on the Budapest and the Warsaw Stock Exchange.  Depositary Receipts (DRs) are listed on the Luxembourg Stock Exchange and are quoted on the International Order Book in London and other over the counter markets in New York, Berlin and Munich.

2.     Basis of preparation

The interim condensed financial statements for the six months ended 30 June 2011 have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2010.

3.     Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 December 2010, except for the impact of the adoption of new Standards and Interpretations as of 1 January 2011 as follows:

IAS 24 Related Party Transactions (Amendment)

The amendment simplifies the disclosure requirements for entities that are controlled, jointly controlled or significantly influenced by a government and clarifies the definition of a related party. As a result, such a reporting entity is exempt from the general disclosure requirements in relation to transactions and balances with the government and government-related entities. The adoption of this amendment did not have any impact on the financial position or performance of the Group.

 IAS 32 Financial Instruments: Recognition Presentation (Amendment)

The amendment alters the definition of a financial liability in IAS 32 to enable rights issues and certain options or warrants to acquire a fixed number of an entity’s own equity instruments for a fixed price of any currency to be classified as equity instruments. The amendment had no effect on the financial position or performance of the Group.

IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment)

The amendment was issued to remove the unintended consequence in IFRIC 14 that in some cases entities are not permitted to recognize as an asset some voluntary prepayments for minimum funding contributions.The interpretation had no effect on the financial position or performance of the Group.

Improvements to IFRSs (issued May 2010)

In May 2010 the Board issued a collection of amendments to its standards, primarily with a view to

removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have significant impact on the financial position or performance of the Group.

 IFRS 1 First time adoption of International Financial Reporting Standards

The annual improvements to IFRS 1 include: a) accounting policy changes in the year of IFRS adoption - if a first-time adopter changes its accounting policies or the use of exemptions in IFRS 1 after it has published its interim financial report in accordance with IAS 34 but before its first IFRS financial statements, it should explain those changes; b) revaluation basis as deemed cost – clarifies that a first-time adopter is permitted to use event-driven fair value as deemed cost during the first IFRS period and c) use of deemed cost for operations subject to rate regulation for certain items of property, plant and equipment or intangibles.

IFRS 3 Business combinations

Amendment to IFRS 3 specifies that the option to measure non-controlling interests either at fair value or at proportionate share of the acquiree’s net identifiable assets applies only to non-controlling interests that are present ownership interests. All other components of non-controlling interests should be measured at their acquisition date fair value, unless another measurement basis is required by IFRSs. 

IFRS 3 specifies that requirements to measure awards of the acquirer that replace acquiree share-based payment transactions with regards to IFRS 2 applies also to such transactions of the acquiree that are not replaced. The amendment also clarifies that market-based measurement of replacement awards applies to all replacement awards regardless of whether the acquirer is obliged to replace the awards or does so voluntarily.

The last amendment to IFRS 3 clarifies that IAS 32, IAS 39 and IFRS 7 do not apply to contingent consideration from a business combination which occurred before the effective date of the revised standard IFRS 3 in 2008.

IFRS 7 Financial Instruments: Disclosures

The improvement to IFRS 7 clarifies disclosure requirements regarding credit risk and collateral held in order to enable users better to understand the nature and extent of risks arising from financial instruments.

IAS 1 Presentation of Financial Statements

The amendment to IAS 1 clarifies that the entity may elect to present the analysis of other comprehensive income by item either in the statement of changes in equity or in the notes to the financial statements.

IAS 27 Consolidated and Separate Financial Statements

The amendment to IAS 27 clarifies that amendments made to IAS 21, IAS 28, and IAS 31 as a result of IAS 27 revisions in 2008 should be applied prospectively with some exceptions.

IAS 34 Interim Financial Reporting

Amendments to IAS 34 clarify how significant events and transactions in interim periods should update the relevant information presented in the most recent annual financial report.

IFRIC 13 Customer Loyalty Programmes

Amendment to IFRIC 13 specifies that fair value of award credits should consider the discount or incentives that customers who have not earned award credits would otherwise received as well as any expected forfeitures.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

4.     Seasonality of operations

Certain operations of the Group, mainly the retail activities and the Gas Midstream segment are exposed to seasonality (in case of retail, holiday peak results in higher margin revenues, whereby sales of the Gas Midstream segment are higher in the winter heating season). However, on Group level such seasonality is not considered to be significant.

5.     Operating segment information

Starting from 1 January 2011, the Group has revised its operational segments to reflect changes in organizational responsibilities as well as the approach of the Group’s chief operating decision making bodies with respect to resource allocation and performance analysis. As a consequence,

-       Petrochemical segment ceased to report separately and is included in Downstream

-       Heating operations have been reclassified to Downstream from former Gas and Power

-       INA’ gas wholesale trading subsidiary has been reclassified to Gas Midstream from Upstream

As a result of this resegmentation, the Group has the following three reporting segments: Upstream, Downstream, Gas Midstream. Comparative periods have been restated accordingly.

Additional information on segment performance, including certain non-IFRS measures is included in Appendices I - II.

6.    Impairment of fixed assets

Cash generating units of the Group (including those to which goodwill is allocated) are tested for impairment when circumstances indicate the carrying value may be impaired. Additionally, goodwill is also tested for impairment annually (as at 31 December) after the Group has completed its annual planning cycle. These require an estimation of the recoverable value of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The Group is currently in progress of updating its key assumptions for the future in the framework of its annual planning cycle. No changes in these key assumptions (subject to final approval from the management) has given rise so far to any indication for significant impairment of the Group’s cash generating units or the allocated goodwill.
Impairment expense of HUF 1.8 bn and HUF 0.5 bn were recorded with respect to the revision of field abandonment provision of maturing and suspended oil and gas producing fields in H1 2011 and H1 2010, respectively. Furthermore, impairment expense of HUF 2.8 bn and HUF 3.1 bn were recognised on Hungarian exploration fields in H1 2011 and 2010, respectively. In H1 2011 HUF 2.4 bn impairment expense was recognised on Crosco Group’s Lybian exploration equipment. A net impairment expense of HUF 0.6 bn were recorded with respect to low-performing filling stations and retail sites in H1 2010 only.

7.    Property, plant and equipment

During the six months ended 30 June 2011, the Group acquired assets with cost of HUF 85.3 bn, compared to HUF 136.4 bn in H1 2010. The cash outflow of the current period mainly reflects the CAPEX in the upstream (including the Syrian and North-Adriatic developments) and the downstream (Croatian refinery modernization) segments, while in the comparative period mainly reflects the CAPEX on expanding the Hungarian import pipeline capacity.
Assets with net book value of HUF 0.5 bn were disposed of by the Group during the same period resulting in a net gain of HUF 0.7 bn.

8.    Inventories

During the interim period the Group recorded an impairment of HUF 10.6 bn relating to different types of inventories. This expense is included in raw material cost and change in own produced inventory in the income statement.

9.    Provisions

Total amount of provisions was HUF 337.4 bn as of 30 June 2011, an increase from HUF 324.4 bn as of 2010 year-end, reflecting the combined effect of unwinding of the discounts for long-term environmental and field abandonment provisions and the revision of previous estimates on discount rates and the changes in FX (EUR and HRK) rates.

10.    Equity

Option agreements with ING Bank

On 4 January 2011 MOL exercised its American call option right arising from the share option agreement signed on 11 March 2010 with ING Bank N.V. (“ING”) regarding 5,220,000 MOL Series “A” Ordinary shares with cash-settlement method, in respect of all shares. The strike price was EUR 75.4 per share. Settlement took place on 7 January 2011.

Simultaneously, MOL and ING signed a share option agreement on 4 January 2011. As a result of the transactions, MOL received an American call option and ING received a European put option regarding 5,220,000 MOL Series “A” Ordinary shares owned by ING. The maturity for both options is one year. The strike price for both call and put options is EUR 78.6 per share.

Share sale and option agreement with UniCredit

MOL entered into a share sale and a share option agreement with UniCredit Bank A.G. („UniCredit”) on 8 February 2011. As a result of this transaction, UniCredit owns a total number of 2,914,692 MOL Series “A” Ordinary shares. Under the share option agreement MOL has an American call option and UniCredit a European put option in relation to such shares. Both options mature in one year, such maturity being subject to yearly extensions with one year, up to a maximum total tenor of three years. The strike price for both the call and the put options is EUR 85.8 per share which has been later amended to EUR 86.7. Due to the attached option structure, the transaction has been recorded as a non-current financial liability.

Transfer of treasury shares from MFB Invest

On June 29 2011 MFB Invest Zrt. transferred 1,273,271 MOL Series „A” Ordinary shares to MOL, according the share lending agreement between MOL and MFB Invest Zrt.

Dividends paid

During the interim period, no dividend was paid to the shareholders.

11. Borrowing and repayment of debt

Continuing the diversification of its funding portfolio, on 18 April 2011 MOL successfully executed the 2^nd HUF bond issuance under the MOL Bond Programme 2010-2011. The total nominal value of the issuance was HUF 11 bn, tenor of the bonds is 3 years.

On 10 June 2011 MOL signed a EUR 1 bn revolving credit facility agreement with the aim of enhancing the maturity profile of its funding portfolio. The tenor of the facility is 5 years which can be extended by further 1 plus 1 year.

The EUR 1 bn facility has refinanced the EUR 700 million revolving credit facility expiring 23 May 2012, and has partially refinanced the EUR 825 million revolving credit facility agreement expiring 25 July 2013. The EUR 700 million revolving credit facility has been cancelled as part of the transaction.

The main pillars of MOL Group’s long-term funds therefore are as follows: the EUR 1 billion, EUR 825 million and EUR 500 million multi-currency revolving loan facilities, the EUR 750 million Eurobond raised in 2005 and the EUR 750 million Eurobond raised in 2010 by MOL Plc. and USD 1 billion syndicated multi-currency revolving loan facility taken by INA.

The existing bank facilities ensure both sufficient level of liquidity and financial flexibility for the Group.

 
12.    Financial income/ expense 

Call option on MOL shares owned by CEZ

On 20 December 2007 CEZ and MOL signed an agreement to create a joint venture. To strengthen the strategic alliance, CEZ purchased 7,677,285 pieces of “A” series MOL shares (7% stake) at HUF 30,000 which was financially closed and settled on 23 January 2008. MOL also purchased an American call option for the shares with a strike price of HUF 20,000 per share which can be exercised within 3 years. The call option has been recorded as a derivative financial asset, measured at its fair value. During 2009 the terms of the call option has been renegotiated by the parties, extending it to 2014. The fair value of the option as of 30 June 2011 and 2010 was HUF 23.6 bn and HUF 14.0 bn, respectively, determined by applying the binomial valuation model. Spot market price (HUF 21,041 per share), implied volatility (40.3%) and an expected dividend yield of 1.22% have been used as input to the model as of 30 June 2011.

Fair valuation loss on derivative transactions, net includes the HUF 12.9 bn unrealised fair valuation loss on CEZ option as of June 30, 2011.

Perpetual exchangeable capital securities

The conversion option of the holders of Capital Securities issued by Magnolia Finance Limited has been recorded as Other non-current liability, the fair valuation of which is recognized in income statement. The fair value of the conversion option is determined on the basis of the fair value of the Capital Securities, using investment valuation methods (market values), and depends principally on the following factors:

- Quoted MOL share prices denominated in HUF

- HUF/EUR exchange rate

- Implied volatility of MOL share prices (calculated on EUR basis)

- Investor’s dividend expectations on MOL shares

- EUR-based interest rate

- Subordinated credit spread

The fair value of the conversion option as of 30 June 2011 and 2010 was HUF 20.0 bn and HUF 20.0 bn, respectively. The fair valuation impact of the option was HUF 5.0 bn gain in 2011 and HUF 0.3 bn loss in 2010, recorded as financial gain and expense.

13. Income tax

The main components of income tax expense in the interim consolidated income statement are:

14.    Components of other comprehensive income

15.    Earnings per share

As the fair valuation difference of the conversion option had an anti-dilutive effect in H1 2010, the diluted EPS was equal with the basic EPS.

16. Commitments and contingent liabilities

Capital contractual commitments of the Group were HUF 53.5 bn as of 30 June 2011, compared to HUF 64.0 bn at the end of 2010. INA contributed HUF 21.5 bn to the Group’s capital contractual commitments after spending HUF 19.4 bn in 2011 mainly on oil and gas field development in Syria, Egypt and Angola and the refinery modernisation projects in Croatia. Additional HUF 16.0 bn from the total commitment value reflects the modernization project of the thermal power plant in Bratislava.

Other contingencies and commitments (guarantees, operating lease liabilities and obligations resulting from litigation in which the Group acts as defendant) did not change significantly in H1 2011 compared to the amounts reported in the previous year. 

17. Related party transactions

The Group purchased and sold goods and services with related parties during the ordinary course of business in H1 2011 and 2010. All of these transactions were conducted under market prices and conditions.  The significantly higher balances in the comparative period reflect the one-off effect of selling a major natural gas inventory to MOL Energy Trade, an associated company from the commercial storage owned by MOL’s subsidiary, MMBF.

18. Events after the end of the reporting period

No significant events took place subsequent to the end of the reporting period.