Qafco Anual Report English Final 2010

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ANNUAL REPORT 2010

Board of Directors 3

Corporate Objectives 4

Qatar Fertiliser Company 5

QAFCO Downstream 5

Brief History 7

Chairman’s Message 9

Management Report 11

QAFCO Corporate Governance Report 15

Independent Auditors’ Report 17

Consolidated Statement of Financial Position 18

Consolidated Statement of Financial Income 19

Consolidated Income Statement 20

Consolidated Statement of Cash Flows 21

Consolidated Statement of Changes in Equity 22

Notes to the Consolidated Financial Statements 23

Contents

P.O. Box 50001, Mesaieed, Qatar Tel. (+974) 4422 8888, Fax (+974) 4477 0347 Email: [email protected] www.qafco.com

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His Highness Sheikh Hamad Al Thani

Emir of the State of Qatar

His Highness Sheikh Tamim Bin Hamad Al Thani

Heir Apparent

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Board of Directors

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H.E. Abdulaziz A. Al-Malki Chairman

Mr. Khalifa A. Al-Sowaidi Vice Chairman/CEO

Mr. Hamad Rashid Al-Nuaimi Member

Mr. Nasser J. Al-Kuwari Member

Mr. Saeed Mubarak Al-Kuwari Member

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Mr. Egil Hogna Member

Mr. Jorgen Ole Haslestad Member

Mr. Meshaal M. Al-Mahmoud

Member

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Corporate Objectives

Our MissionWe shall operate the plants Efficiently, Safely, and in an Environmentally Responsible manner to Produce and Supply Ammonia and Urea at the Quality required by our Customers and to carry out investments to Maximize Shareholders Returns.

Our VisionLargest Quality Ammonia and Urea Producer.

QAFCO’s Main Objectives are to• Achieve highest possible production at comparatively low cost.

• Operate the plants with maximum online factor.

• Design and operate the plants in a safe, secure and environmentally responsible manner.

• Meet customer’s expectations with regard to Quality and Timely Delivery.

WE ARE COMMITTED THROUGH OUR OCCUPATIONAL HEALTH & SAFETY, ENVIRONMENTAL AND QUALITY MANAGEMENT SYSTEMS TO:

• Lead QAFCO in ethical ways that increases the benefits to society by protecting our people, environment and community.

• Increase the competency of personnel and use of adequate technology to enhance Customers Satisfaction, environmental, safety, health and security performance.

• Prevent pollution and control operational and security risks in order to protect the environment, the safety and health of our employees, contractors, visitors, the neighbors and the community.

• Steward our products and services through each life cycle stages in order to protect people and the environment.

• Implement Occupational Health & Safety, Environmental, Quality and Responsible Care Integrated Management Systems as a prime line responsibility at all levels of our organization and continually improve their performance and effectiveness.

• Involve and consult with our employees on matters related to our Integrated Management Systems.

• Comply with all relevant Qatari Legislations, Regulations and Standards adopted by the Company.

• Communicate this Policy and systems performance measures to our employees, contractors and other stakeholders including public and make it available to them and other interested parties.

• Monitor, study and record the environmental impacts of our operations caused by discharges to the sea and emissions to air for possible reductions.

• Encourage re-use and recycling and manage our solid waste to reduce environmental impacts.

• Conduct regular reviews of relevant Occupational Health, Safety, Security, Environmental, Quality and Responsible Care activities for compliance with the adopted Standards.

• Open information, communication and share experiences with all parties affected by or interested in our activities on safe use, transportation and disposition of our products and to recognize, respect and respond to our community concerns about our products and operations.

• Work with Governments, Agencies and Associations at all levels in the development of effective and efficient health, safety, security and environmental laws and industry standards and support research.

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Qatar Fertiliser Company (Q.S.C.C.) (“the Company”) was incorporated on 29 September 1969 as a Qatari Shareholders Closed Company (“Q.S.C.C.”) in the State of Qatar. The Company

is engaged in the production and sale of Urea and Ammonia.

The shareholders and their shareholding interests in the Company are as follows:

Qatar Fertiliser Company

Name of the shareholder Country of incorporation Interests

Industries Qatar (IQ) Qatar 75%

Yara Netherland BV Netherland 25%

IQ is the immediate parent of the Company, which is a 70% owned subsidiary of Qatar Petroleum (QP). Thus QP is the ultimate parent of the Company.

QAFCO Downstream

Gulf Formaldehyde CompanyGulf Formaldehyde Company (S.A.Q) was incorporated on 3rd March 2003 as a Shareholder All Qatari Company in the State of Qatar. The company is engaged in the production and sale of Urea Formaldehyde Concentrate (“UFC”).

The Shareholder and their shareholding interests in the company are as follows:

Name of the shareholder Interests

Qatar Fertiliser Company Q.S.C.C. 70%

Qatar Industrial Manufacturing Company (S.A.Q) 15%

United Development Company P.S.C.

Amwal Investment Co.

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Qatar Melamine CompanyQatar Melamine Company was established following a Shareholders and Services agreement between Qatar Fertiliser Company and Qatar Holding to produce and sell melamine.

Name of the shareholder Interests

Qatar Fertiliser Company Q.S.C.C. 60%

Qatar Holding 40%

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Qatar Fertilizer Company A Brief History

Through scientific strategic plans and integration of the latest technologies, QAFCO has developed steadily, over the years, in terms of nameplate capacity, production quantities, quality and competitiveness of products and become one of the main producers and exporters of ammonia and urea in the world. QAFCO became the world’s largest single site producer of ammonia and urea.

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QAFCO’s inception in 1969 as a joint venture company to produce chemical fertilisers was the first and a significant step in Qatar’s industrial diversification program to utilize its abundant natural gas resources. Since then QAFCO has steered its way

successfully, responding adequately to the world market demand for fertiliser and living up to the expectations of its shareholders, IQ and Yara.

QAFCO inaugurated its first plant in 1973 with a design capacity of 900 tons of Ammonia and 1000 tons of urea daily. Presently QAFCO complex comprises four completely integrated trains; QAFCO-1 (1973), QAFCO-2 (1979), QAFCO-3 (1997) and QAFCO-4 (2004). Each train is made up of two units, one for production of ammonia and the other for urea.

Through scientific strategic plans and integration of the latest technologies, QAFCO has developed steadily, over the years, in terms of nameplate capacity, production quantities, quality and competitiveness of products and become one of the main producers and exporters of ammonia and urea in the world. QAFCO became the world’s largest single site producer of ammonia and urea. With the completion of QAFCO-V, QAFCO would further bolster its image as the world’s largest single site producer of ammonia and urea.

Milestones in history• 1973 - QAFCO-1

• 1979 - QAFCO-2

• 1997 - QAFCO-3

• 2003 - Gulf Formaldehyde Company

• 2004 - QAFCO-4.

• 2004 - Inauguration of QAFCO’s ammonia vessel LPG/C Al Marona.

• 2006 - Qatar Melamine Company established.

• 2008 - Foundation stone laid for QAFCO V.

• 2009 - Construction starts for QAFCO – 6 expansion project

• 2009 - QAFCO adopts new brand identity

• 2010 – Qatar Melamine Company inaugurated

QAFCO today is the world’s largest single site producer of urea with an export market extending to more than 35 countries across continents. QAFCO today is poised to become the largest producer and exporter of the Urea and Ammonia in the years to come.

Our products:• Ammonia

• Urea – prilled and granular

• Urea Formaldehyde

• Melamine

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Chairman’s Message

The year 2010 was a very good year for QAFCO. The year was the year of consolidation for QAFCO after the tremendous hard work and prudent strategic decisions had helped QAFCO weather the global economic slowdown of 2008 - 2009.

QAFCO’s focus has always been on its core skill that is producing quality ammonia and urea. And QAFCO did wonderfully well as it breached 3 million MT mark in urea production in the year under review. The ball was set rolling last year itself as QAFCO set its production record and bettered in the year under review. Yet another achievement of the year under review was that the

records were made without a single lost time accident for five million man-hours, yet another example of exemplary safety standards that we set for ourselves.

The year under review saw excellent profit figures of 2.1 billion Qatari riyals, it is the third highest in QAFCO’s history. The spurt in the cost of fertiliser also helped our cause of capitalising from a market that opened up opportunities after the aftermath of global recession. In 2010, QAFCO also expanded and consolidated its market presence as it further spread its marketing reach to the Southeast and East Asia. It also further secured its market in the American and African continents.

If the year 2009 posed a challenge to keep up with surmounting demands for fertiliser across the globe, the year 2010 was the year to build up on the success that all the hard work had given. QAFCO had met the challenge of 2009 and further consolidated on its standing as a reliable producer – this helped QAFCO in 2010 to further its market reach.

In the year under review, QAFCO sold 538,785 MT of Ammonia at an average competitive price of USD 339/MT, primarily to India, Jordan, and S. Africa. In the year gone by, QAFCO further consolidated its position in East Asia with South Korea and Indonesia accounting for 2 per cent each of the QAFCO exports. South Africa was the major importer from the African continent. As for Urea, QAFCO surpassed the 3 million mark when it

produced 3, 009, 951 Mt of urea. In the year under review, QAFCO sold 2,851,862 MT of urea at an average sales price of USD 295/t to Australia, Thailand, Bangladesh and the United States of America (USA).

Over the years, QAFCO has evolved responding to the market conditions to give maximum benefit to its shareholders. The year 2010 was yet another example of this, as QAFCO declared its arrival into melamine production. On the 12th of October 2010, His Highness Sheikh Hamad Bin Khalifa Al-Thani, the Emir, dedicated the Qatar Melamine Company to the nation.

Our expansion plans are well and truly in place. The QAFCO 5 project is into its final stages as preparations are on track for inauguration in the later part of 2011. QAFCO -6, on the other hand is on track for opening in the year 2012. With addition of these two plants to our existing plants, our production capacities will rise to 3.8 million MT of ammonia and 5.6 million MT of Urea.

With sustainability and environment becoming a prime focus of business discussions, it is the adaptability of companies towards these that will guide the path to future. At QAFCO, we are in the process of achieving “Responsible Care” certification. This is our commitment towards promoting sustainable development, with due care for future generations and bringing further benefits to people, environment and community. Our initiative into the realm of Product stewardship is yet another example wherein we center our environmental protection around the product itself.

The year 2011 is expected to see a growth in nitrogen based fertilisers. The addition of more production plants in the Middle East and elsewhere in the coming years will be an interesting challenge in 2011. However, the facilities with easier and economical access to the natural resources will , obviously have the upper hand, what remains to be done is the effective consolidation of markets.

Today, QAFCO moves ahead and it is time for us to realign ourselves to the changing realities of business. Optimum utilisation of resources and diversification to expand product base is the need of the hour. QAFCO is responding to it by diversification and value addition to its product line.

We remain steadfast in our commitment towards helping to feed the world. With the mercurial rise in population predicted and the ever-depleting land resources, we as a fertiliser producer have a big role to play in the coming years.

In the coming years, I hope more such milestones are achieved and closer we come towards realising the vision of His Highness Sheikh Hamad Bin Khalifa Al-Thani, Emir of the State of Qatar and His Highness Sheikh Tamim Bin Hamad Bin Khalifa Al-Thani, the Heir Apparent. I am grateful to the guidance given by HE Abdulla Bin Hamad Al Attiyah, Deputy Prime Minister and HE Dr. Mohammad Saleh Al Sada, Minister of Energy and Industry and the QAFCO board. I express my gratitude towards industries Qatar, Yara International and QAFCO Management and staff who have helped QAFCO to the pedestal it is on today.

Abdulaziz A. Al-MalkiChairman

The year under review saw excellent profit figures of 2.1 billion Qatari riyals, it is the third highest in QAFCO’s history. The spurt in the cost of fertiliser also helped our cause of capitalising from a market that opened up opportunities after the aftermath of global recession.

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H.E. Abdulaziz A. Al-Malki Chairman

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Management ReportThe emerging economies lead the global economic recovery from the 2009 recess of economic contraction. The good work of the previous year helped QAFCO to capitalise on the opportunity that the emerging economies provided and the result was the third highest profits in QAFCO’s history.

In the year under review, QAFCO achieved a net profit of 2.1 Billion Qatari riyals. This is the third highest profit figure in QAFCO’s history. Considering the global meltdown after the exceptional year of 2008, and the challenge that the year 2009 posed, QAFCO, in 2010, took steps in the right direction to capitalise on the markets created by the depletion in the supply lines of the major consuming countries, thereby making the year yet another successful one. Globally, overall, there was a spike in the fertiliser prices in the year 2010 compared to 2009, which too, benefited QAFCO’s bottom line. Apart from this, QAFCO also announced its arrival into Melamine with the inauguration of Qatar Melamine Company by His Highness Sheikh Hamad Bin Khalifa Al-Thani, the Emir of the State of Qatar. QAFCO’s diversification into Melamine, Urea Formaldehyde, Aqueous Ammonia and initiatives into product value addition like Sulphur Coated urea are examples of optimum utilisation of resources and a process towards evolving unbound.

Ammonia Ammonia ProductionQAFCO operates four Ammonia plants with a combined production capacity of more than 2 million MT per annum in its only facility in Mesaieed, Qatar. In the year under review, QAFCO produced 2,269,512 MT of Ammonia, the highest volume ever in its production history, of which 1,679,531 MT was utilised in QAFCO for the production of Urea, Aqueous Ammonia and melamine, and the remaining exported. The previous highest production was in 2009, when QAFCO produced 2,202, 145 MT of Ammonia. QAFCO’s environment friendly processes along with optimum energy utilisation have augmented our standing in the international arena as a reliable producer. The history stands testimony to our role of meeting the demands of the fertiliser market as and when uncertainties have plagued, as in the year 2009 when recession bolted out many fertiliser plants, QAFCO stood firm and helped fill the lacuna created in the global demand and supply.

Ammonia sales: Consolidating in East Asia.In the year under review, QAFCO sold 538,785 MT of Ammonia at an average sales price of USD 339/MT as compared USD 243/MT in the year 2009. India, Jordan, S. Africa, continued to be the major importers of Ammonia from QAFCO. Of these, India re-established its primacy, as it bought 57 per cent of the total QAFCO ammonia export while Jordan’s 122, 494 mt of Ammonia saw it spreading its influence in the QAFCO Ammonia export pie. In the year under review, QAFCO consolidated its position in East Asia with South Korea and Indonesia accounting for 2 per cent of the QAFCO exports. South Africa on the other hand shipped the lion’s share of African ammonia imports with 76, 375 mt while Morocco followed with 11, 722 mt.

QAFCO expanding globallyQAFCO in its efforts to consolidate and expand its product reach signed many long-term marketing agreements. Notable among them being the one to supply 100,000 mt of ammonia to South Korea, which will further enhance QAFCO’s reach into East Asian markets. China’s export regulations too will further create markets for QAFCO to prosper further in East Asia. Other agreements included the supply of further 100,000 mt to India and 80,000 mt to S. Africa. QAFCO has been proactive in its efforts to expand globally. Today, QAFCO has been able to penetrate markets in the Latin American continent as well as East Asia.

In the coming years more production facilities, especially in North Africa and the Middle East are expected to come on stream and possibly blunting the sharp demand in the major consuming markets, however, a sound marketing strategy of consolidating the existing markets and establishing oneself in the new ones will go a long way into the future. QAFCO knows it. It has already taken those steps.

UreaUrea ProductionQAFCO operates four Urea plants in its vicinity in Mesaieed, Qatar, with a capacity of producing more than 3 million MT of urea annually. The ammonia produced in its ammonia plants is the feedstock for the production of urea. QAFCO produces two kinds of urea, the prilled and granular. QAFCO’s relatively older plants Urea-1and Urea 2 produce prilled urea while the later plants Urea 3 and Urea 4 produce urea granules.

In the year under review, QAFCO surpassed the 3 million mark when it produced 3, 009, 951 Mt of urea. Exemplary workmanship and team spirit guided towards this landmark. The previous production record was for the year 2009, which was 2,998,440 MT.

The 21st century is seeing a tremendous improvement in the living standards of the developing countries, as a corollary, this

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QAFCO Ammonia Exports 2010

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also brings into focus the need for increment in food production. With decreasing arable lands and increasing population, there is a need to improve the quality of soil to help increase the crop production per acre and here fertiliser producers will play a stellar role. QAFCO, with its continued focus on increasing production in the existing plants and its investments in the forthcoming trains of QAFCO 5 and 6, is prepared to take up the challenge.

Urea salesIn the year under review, QAFCO sold 2,851,862 MT of urea at an average sales price of USD 295/t. Australia, Thailand, Bangladesh and the United States of America (USA) took the major share of the QAFCO urea exports. Urea exports saw a spurt, predominantly in September, in response to the increased demand from industrial and agriculture sectors especially in Australia and USA. From Asia: Thailand, Bangladesh, South Korea, Philippines and Sri Lanka remained bullish for urea from QAFCO. The South American continent, meanwhile, increased its presence in the QAFCO urea exports with countries like, Brazil, Argentina shipping about five percent of the total QAFCO urea.

Urea Marketing highlightsExploring, expanding and consolidating markets in the farther reaches of the globe, QAFCO signed various agreements and MoUs. During 2010 Qafco signed long term agreement with Yara to supply 75, 000 mt of Urea to New Zealand; 200,000 mt to Philippines, and 400,000 mt to Thailand and 250,000 mt to South Africa.

Apart from these QAFCO also further entrenched its position in the East during 2010 by signing various agreements to export around two hundred thousand metric tonnes of urea in the coming year.

Our relationship with Bangladesh continued to prosper as QAFCO’s long term contract with Bangladesh delegate to supply urea was further extended to another year.

QAFCO Plant Maintenance The Maintenance Department main objective is to ensure that all production- and utilities plants are available for maximum production. The main KPI’s are maintenance cost pr. ton of product and unforeseen shutdown downtime (UFS, % of available production time). For 2010, the Maintenance cost for Ammonia dropped to 11.2 QR /Ton vs 12.48 QR/Ton in 2009. For Urea there was a slight increase to 7.67 QR/Ton vs 6.57 QR/Ton in 2009.

The Unforeseen Shutdown statistics for 2010 shows similar trends. Ammonia Plants had a record low UFS of 1.99 % of the total available time, vs 2.97 % for 2009. Urea Plants had UFS of 2.63% vs 1.29% for 2009. The increase is mainly contributed by technical issues related to Urea 1 Revamp.

Major shutdown 2010In March 2010, Qafco 4 was stopped for a major maintenance shutdown. Planned jobs were more than 16,000 with a total effort of 293,000 man-hours. The number of contractors reached 1600 at its peak. Urea 4 was back on stream after 22 days and Ammonia 4 after 26 days. Safety-wise the shutdown was conducted without any lost time accidents. It was recorded two minor personal injuries by contractors. Totally this is among the best results in Qafco shutdown history. Unscheduled shutdowns at QAFCO were limited to anticipated budget days.

Financial performanceQAFCO achieved a provisional net profit of QAR 2.1 Billions in the year under review. The sales income saw an increase due to the higher sales price achieved for ammonia and urea. The ammonia sales price saw an increase by 36 per cent and a 13 per cent

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QAFCO Urea exports in 2010

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increase in the volume sold. Meanwhile, urea saw a 4 per cent decrease in the sold quantity while registering a spike of 17 per cent in the sales price.

Human resourcesQAFCO believes that one of the ways to achieve the fundamental function of its overall business objectives is through proper Training & Development Plan of its workforce. Our training and development programs ensure that our people are up to date at international level of competitiveness in their respective fields of expertise.

Qatarization & DevelopmentQAFCO is committed to maximize the number of Qatari Nationals in its workforce. As part of the commitment towards achieving its goals of Qatarisation Plan, QAFCO recruited forty nine nationals as Trainee, QP TAFE Intake Trainee and as sponsorship students.

Our Human Resources focuses on the development of existing Qatari Nationals together with ongoing efforts to recruit fresh Qataris in various engineering, technical, vocational and administrative disciplines.

Given below are some of the programs that we follow with focus on Qatarization:

•TrainingPrograms(In-house,Local,Abroad)•Development(OJT,OJDP,Scholarship)•Summertraining•GraduationProjects•Recruitment•Networking(Schools,Universities,EducationalSectors)

In line with QAFCO’s commitment to develop its National workforce, the Human Resources Department through Training & Development Section has effectively followed up Qatari Nationals’ progression and movement to established/targeted positions in their respective area of specialization.

In 2010, a total of 12 Qatari Nationals were promoted to established positions and 12 Qatari Nationals were upgraded to developee after completing their respective On-Job-Training with an above par performance.

Scholarship ProgramsQAFCO identified High Fliers (Qatari employees) with excellent performance, hard work, commitment and helped design a career path. Along with that, in line with the development plan, national employees sent to pursue further studies. In the year under review, 44 students were supported by QAFCO towards furthering their education.

Safety at QAFCO QAFCO achieves 5 million man-hours free of lost time accidents

In the year 2010, QAFCO achieved 5 million man-hours free of lost time accidents. It is yet another example of safety being given utmost importance in QAFCO. Several contractor accidents were reduced considerably because of various awareness and training campaigns that were conducted on heat stress, shutdown safety

and housekeeping. Another prominent point for the year 2010 was “zero” lost time accidents during the QAFCO 4 major shutdown.

Behaviour Based Safety Pilot programme on Behaviour Based Safety (BBS) in QAFCO workshops was completed after six months of implementation. Apart from this an electronic reporting system is being implemented for reporting BBS observations in the Safety Information System. BBS films on STOP programme has been included in” Safety Information System” (QAFCO intranet) for better awareness.

Environment at QAFCO QAFCO continued to maintain its leadership position in Qatar and worldwide for its environmentally responsible operation of its plants. Proactive steps have ensured that ammonia emissions and urea dust emission were well controlled from QAFCO.

QAFCO achieves the consent to operate Qatar Melamine Company.The recently inaugurated Qatar Melamine Company received the consent to operate in the year 2010. The consent to operate was also achieved for Urea -1 after the revamp.

In the meantime, QAFCO released the Baseline Ecological Survey report which is based on the inferences drawn from the baseline ecological survey conducted at Al-Besheriya island. The survey conducted in March 2009, is part of QAFCO’s initiative to develop an Environmental Management Program for the island.

Quality at QAFCOCertifications for Qatar Melamine Company (QMC) Qatar Melamine Company is in the final stage of certification for Quality, Occupational Heath & Safety and Environmental Management Systems based on ISO 9001, OHSAS 18001 and ISO 14001 standards. The certification audit will be conducted in February 2011.

Product Stewardship CertificationProduct stewardship is a concept whereby environmental protection centers around the product itself, and everyone involved in the lifespan of the product is called upon to take up responsibility to reduce its environmental impact. Product Stewardship covers all stages of a product’s lifecycle initial concept, design, research and development, the sourcing of raw materials, manufacture, storage, distribution, applications, reasonably foreseeable uses, recycling and disposal. QAFCO

Behaviour Based Safety (BBS) is a proactive process for identifying at-risk behaviour and removing the barriers for safe behaviour. A study concluded that ninety six percent of incidents are due to unsafe act / behaviour of personnel.

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The Minister for Energy and Industry Affairs H E Dr. Mohammed Al Sada and the Minister of Environment H E Abdullah bin Aaboud Al Mi’dhadi being presented with the Baseline Ecological Survey Report at QAFCO stand at the QP Environment Fair by QAFCO’s Technical Services Manager Mr. Humoud Al Mannai

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is planning to achieve Product Stewardship certification from International Fertilizer Association (IFA) during 2011.

Significant eventsHis Highness Sheikh Hamad Bin Khalifa Al-Thani, the Emir inaugurates the Qatar Melamine Company. The inauguration of the Qatar Melamine Company (QMC) marks the debut of a new potentially beneficial industry in Qatar that will enable the country to avail itself of the comparative advantage it enjoys in terms of abundance of feedstock and competitive energy supplies. In its totality, this new industry represents a unique and genuine addition to Qatar’s cluster of economic activities. QMC is an initiative by Qatar Fertiliser Company (QAFCO) to further support the State of Qatar’s industrial diversification strategy.

The inauguration ceremony was attended by their Excellencies Ministers, Sheikhs, Qafco board Chairman, QP board members and ambassadors from countries that participated in implementing the melamine project. Among those present on the occasion were board members from QAFCO, Yara International, senior officials Snamprogetti, which executed the two projects, a number of distinguished personalities, and officials representing international, GCC and Qatari firms and companies.

Qatar Melamine Company’s capacity of 60,000 tons per year makes it the largest melamine facility in the Middle East, and the second largest in the world. Right now, Qatar Melamine Company is capable of supplying 5% of the entire world’s melamine demand. And by utilizing QAFCO’s excess urea supply, our costs have been controlled very efficiently, allowing Qatar Melamine Company to provide excellent return-on-investment for Qatar.

UpdatesQAFCO5:The QAFCO 5 train is well and truly on its way to scheduled startup as commissioning activities have already started. The plant will be inaugurated in 2011.

QAFCO 6:The construction activities are going on schedule and is expected to be completed in 2012.

Gulf Formaldehyde Company (GFC)Gulf Formaldehyde Company (GFC) was created in 2003 and began operations in 2004. GFC produces 82 tons per day of Urea Formaldehyde (UFC-85), a viscous liquid with 60 percent formaldehyde, 25 percent urea and 15 percent water. Eighty percent of the UFC-85 produced is consumed by QAFCO and is used as an anti-caking agent in the production of urea, a solid fertilizer, and one of QAFCO’s primary products. Production continues to increase and the plant is currently operating at 120 percent of its design capacity.

In the year under review, Gulf Formaldehyde Company produced 31, 706 MT, the highest ever in its production history. Of the total produced, 23,330 MT was used within QAFCO and the rest was exported to The Oman India Fertiliser Company (OMIFCO), Oman and FERTIL, United Arab Emirates.

Throughout 2010 QAFCO, which operates, maintains and administers the plant, ensured efficient, safe, and environmentally sound UFC-85 production.

QAFCO expands its Urea Formaldehyde Market.In the year under review, QAFCO renewed its contract with OMIFCO and also increasing its quantity exported to 15000 mt. Apart from, this, a 3 years contract has been signed with Fertil to supply 4,380 mt UFC85.

The year 2011 – strong increase in demand anticipated.The year 2011 augurs to be better than the year gone past, as strong demand for nitrogen based fertilizers is anticipated in the American continents and Oceania. The not so robust 2009 gave way to a better business in 2010 and the trend is expected to continue in the year 2011 as well. According to IFA estimates, world ammonia capacity is projected to grow by 3% in 2011, however, the supply and demand balances for nitrogen show a decreasing potential surplus. Meanwhile, trade in urea is expected to increase due to the potential demand in major consuming countries in the year 2011.

I hope that the fertiliser industry is nearing the end of a challenging period triggered by the global economic crisis that had been marked by delays in projects for new plants and a drop in demand. However, with the industry earmarked for expansion, particularly in countries that have gas surpluses, will definitely help stabilise the market.

I am grateful to QAFCO’s Board of Directors that has helped us on the path as envisioned by HH Sheikh Hamad Bin Khalifa Al-Thani, Emir of the State of Qatar and HH Sheikh Tamim Bin Hamad Bin Khalifa Al-Thani, the Heir Apparent. I express my gratefulness to HE Abdulla Bin Hamad Al Attiyah, Deputy Prime Minister and HE Dr. Mohammad Saleh Al Sada, Minister of Energy and Industry and the QAFCO board. I also express my sincere appreciation and gratitude to the Management and employees of QAFCO, with whom I look forward towards yet another year of progress.

Khalifa A Al Sowaidi

Vice-Chairman / CEO

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His Highness Sheikh Hamad Bin Khalifa Al-Thani, the Emir, dedicated the Qatar Melamine Company to the nation in mid October 2010.

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QAFCO Corporate Governance ReportQAFCO believes in having a strong corporate governance standard to focus on fairness, transparency, accountability and responsibility which are vital for our continued growth. A sound and efficient corporate governance process helps stimulate company’s performance and protects shareholder’s interest.

Qafco’s Board of Directors re-constituted the Board Audit Committee (BAC) in 2008 to provide better oversight in the following areas:

• company’s financial statements

• compliance with legal and regulatory requirements

• internal control framework and

• management of internal and external auditor’s activities.

The Board Audit Committee members are independent and do not participate in company’s executive management. The Board Audit

Committee has held 5 meetings in the year 2010 with following measures being implemented to strengthen the corporate governance environment in Qafco:

• Ethics and Whistleblowing Programs have been implemented to establish a mechanism for employees to report concerns about unethical behavior or violation of company’s code of conduct and ethics policies.

• Conflict of Interest declarations are obtained from all employees on an annual basis to ensure compliance with Code of Conduct and Ethics policies.

• The Board Audit Committee has initiated a “Report Rating” structure which comprises with the use of “traffic lights” that enables management to focus on the high risk issues first and implement corrective action within agreed target dates.

• The Board of Directors continues to place emphasis on the control environment to ensure early identification of risk and to ensure effective control.

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To the Shareholders ofQatar Fertiliser Company (Q.S.C.C)Report on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of Qatar Fertiliser Company (Q.S.C.C.) (the “Company”) and its subsidiary (together referred to as the “Group”), which comprise the consolidated statement of financial position as at 31 December 2010 and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2010 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Report on legal and other requirementsFurthermore, in our opinion, proper books of account have been kept by the Group, an inventory count has been conducted in accordance with established principles, and the consolidated financial statements comply with the Qatar Commercial Companies’ Law No. 5 of 2002 and the Company’s Articles of Association. We have obtained all the information and explanations we required for the purpose of our audit and, we are not aware of any violations of the above mentioned law or the Articles of Association having occurred during the year which might have had a material effect on the business of the Group or on its financial position.

Independent Auditors’ Report

A. Mekhael of Ernst & YoungAuditor’s Registration No. 59

Date: 9 February 20 II Doha.

Inde

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18

Consolidated statement of financial position

Abdulla Hussain SalattChairman of the Board

Khalifa Abdullah Al-SowaidiManaging Director

At 31 December 2010

The attached notes 1 to 28 form part of these consolidated financial statements.

2010 2009

Notes QR QR

ASSETS Non-current assets

Property, plant and equipment 3 13,661,654,167 9,949,112,643

Project under development 4 1,015,203,230 990,968,858

Catalysts 5 46,012,156 41,557,884

14,722,869,553 10,981,639,385

Current assetsInventories 6 391,388,789 331,500,709

Accounts receivable and prepayments 7 778,321,901 564,898,452

Other financial asset 16 - 3,035,827

Bank balances and cash 8 497,003,830 1,907,800,697

1,666,714,520 2,807,235,685

TOTAL ASSETS 16,389,584,073 13,788,875,070

EQUITY AND LIABILITIES

Equity Share capital 9 1,000,000,000 1,000,000,000

Legal reserve 10 206,403,954 205,354,707

Cumulative changes in fair values (307,745,529) (128,196,557)

Retained earnings 9,372,252,014 8,255,631,605

Equity attributable to equity holders of the parent 10,270,910,439 9,332,789,755

Non-controlling interest 18,161,862 17,114,121

Total equity 10,289,072,301 9,349,903,876

Non-current liabilities Interest bearing loan 12 3,825,123,070 3,594,067,629

Other financial liabilities 16 307,745,529 129,977,389

Employees’ end of service benefits 13 69,550,362 69,789,957

4,202,418,961 3,793,834,975

Current liabilitiesInterest bearing loan 12 1,228,493,146 -

Accounts payable and accruals 14 561,046,072 575,574,309

Other financial liabilities 16 - 1,254,994

Income tax payable 15 108,553,593 68,306,916

1,898,092,811 645,136,219

Total liabilities 6,100,511,772 4,438,971,194

TOTAL EQUITY AND LIABILITIES 16,389,584,073 13,788,875,070

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19

Consolidated statement of financial income Year Ended 31 December 2010


2010 2009

Notes QR QR

Sales - net 20 3,880,038,408 3,306,600,136

Cost of sales 21 (1,438,507,686) (1,359,622,027)

GROSS PROFIT 2,441,530,722 1,946,978,109

Other income 22 116,237,189 196,964,008

Selling and distribution costs 23 (64,572,783) (55,118,244)

Administrative expenses 24 (372,377,731) (392,791,623)

PROFIT FOR THE YEAR 2,120,817,397 1,696,032,250

Attributable to:

Equity holders of the parent 2,117,669,656 1,692,742,786


2,120,817,397 1,696,032,250

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Consolidated statement of Comprehensive

Income Year Ended 31 December 2010


2010 2009

Note QR QR

Profit for the year 2,120,817,397 1,696,032,250

Other comprehensive (loss) income Net unrealised (loss) gain on cash flow hedges 16 (179,548,972) 318,213,012

Total comprehensive income for the year 1,941,268,425 2,014,245,262

Attributable to:

Equity holders of the parent 1,938,120,684 2,010,955,798


1,941,268,425 2,014,245,262

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21

Consolidated statement of Cash Flows Year Ended 31 December 2010


2010 2009

Notes QR QR

OPERATING ACTIVITIESProfit for the year 2,120,817,397 1,696,032,250

Adjustment for:

Depreciation of property, plant and equipment 3 318,451,595 292,846,761

Amortisation of catalysts 5 12,982,873 11,708,937

Provision for employees’ end of service benefits 13 15,845,083 16,125,455

Provision for obsolete and slow moving inventories 21 5,301,835 5,272,267

Profit on disposal of catalysts, property, plant and equipment 22 (2,478,983) (25,010)

Capital work-in-progress write-off 24 144,820 153,836

Provision for impairment of receivables 24 - 113,434

Interest income 22 (22,686,274) (164,551,763)

2,448,378,346 1,857,676,167

Working capital changes:

Accounts receivable and prepayments (173,176,772) (67,226,372)

Inventories (65,189,915) (29,679,868)

Accounts payable and accruals (14,528,237) (710,846,852)

Cash from operating activities 2,195,483,422 1,049,923,075

Interest paid (193,541,449) (191,032,196)

Employees’ end of service benefits paid 13 (13,764,930) (11,831,904)

Advance paid against end of service benefits (2,319,748) 994,066

Net cash from operating activities 1,985,857,295 848,053,041

INVESTING ACTIVITIESAdditions to property, plant and equipment (3,472,506,578) (4,624,290,062)

Movement in short term deposits maturing after 90 days 1,324,740,000 3,353,900,000

Contribution to project under development 4 (382,724,313) (129,926,223)

Additions to catalysts 5 (17,437,145) (28,178,995)

Interest income received 22 22,686,274 164,551,763

Proceeds from disposal of catalysts, property, plant and equipment 2,479,285 25,010

Net cash used in investing activities (2,522,762,477) (1,263,918,507)

FINANCING ACTIVITIESProceeds from interest bearing loan 1,456,000,000 1,820,000,000

Dividends paid to equity holders of the parent 11 (1,000,000,000) (1,150,000,000)

Finance arrangement changes paid 12 (3,051,685) (9,850,371)

Dividends paid to non-controlling interest (2,100,000) (1,500,000)

Net cash from financing activities 450,848,315 658,649,629

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (86,056,867) 242,784,163

Cash and cash equivalents at 1 January 583,060,697 340,276,534

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 8 497,003,830 583,060,697

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23

Notes to the consolidated financial statements At 31 December 2010

1 CORPORAT`E INFORMATIONQatar Fertiliser Company (Q.S.C.C.) (the “Company”) was incorporated on 29 September 1969 as a Qatari Shareholders Closed Company (“Q.S.C.C.”) in the State of Qatar. The Company is engaged in the production and sale of Urea and Ammonia. The Company’s registered office is at P.O. Box 50001, Mesaieed, State of Qatar.

The shareholders and their shareholding interests in the Company are as follows:

Name of the shareholder Country of incorporation Interests

Industries Qatar (IQ) Qatar 75%

Yara Netherland BV Netherland 25%

During the year, Fertiliser Holdings ASA transferred their 10% shareholding in the Company to Yara Netherland BV.

IQ is the immediate parent of the Company, which is a 70% owned subsidiary of Qatar Petroleum (QP). Thus, QP is the ultimate parent of the Company.

The consolidated financial statements of the Group for the year ended 31 December 2010 were authorised for issue in accordance with a resolution of the Board of Directors on 9 February 2011.

2 SIGNIFICANT ACCOUNTING POLICIESBasis of preparationThe consolidated financial statements of the Group have been prepared on a historical cost basis modified to include the measurement at fair value of derivative financial instruments. The financial statements are presented in Qatari Riyals.

Statement of complianceThe financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the applicable requirements of Qatar Commercial Companies’ Law No. 5 of 2002.

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Company and its subsidiary, Gulf Formaldehyde Company (S.A.Q.) (together referred to as the “Group”). The Company has 70% interest in Gulf Formaldehyde Company (S.A.Q.), a limited liability company registered under Commercial Registration No. 36137 in the State of Qatar and is engaged in the production and sale of Urea Formaldehyde Concentrate (“UFC”).

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full.

Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:

• Derecognisestheassets(includinggoodwill)andliabilitiesofthesubsidiary

• Derecognisesthecarryingamountofanynon-controllinginterest• Derecognisesthecumulativetranslationdifferences,recordedin

equity• Recognisesthefairvalueoftheconsiderationreceived• Recognisesthefairvalueofanyinvestmentretained• Recognisesanysurplusordeficitinprofitorloss• Reclassifiestheparent’sshareofcomponentspreviously

recognised in other comprehensive income to profit or loss or retained earnings, as appropriate.

Non-controlling interest represented the portion of profit or loss and net assets that were not held by the Group and were presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from the parent shareholders’ equity. Acquisition of non-controlling interest was accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired were recognised in goodwill.

Adoption of new and amended standards for the year The accounting policies used in the preparation of the consolidated financial statements are consistent with those used in the preparation of the financial statements for the year ended 31 December 2009, except for the adoption of new and amended standards as of 1 January 2010 as noted below:

• IFRS2Share-basedPayment:GroupCash-settledShare-basedPayment Transactions effective 1 January 2010

• IFRS3BusinessCombinations(Revised)andIAS27Consolidatedand Separate Financial Statements (Amended) effective 1 July 2009, including consequential amendments to IFRS 2, IFRS 5, IFRS 7, IAS 7, IAS 21, IAS 28, IAS 31 and IAS 39

• IAS39FinancialInstruments:RecognitionandMeasurement–Eligible Hedged Items effective 1 July 2009

• IFRIC17DistributionsofNon-cashAssetstoOwnerseffective1July 2009

• ImprovementstoIFRSs(May2008)• ImprovementstoIFRSs(April2009)

The adoption of the standards or interpretations is described below:

IFRS 2 Share-based Payment (Revised)The IASB issued an amendment to IFRS 2 that clarified the scope and the accounting for group cash-settled share-based payment transactions. The Group adopted this amendment as of 1 January 2010. It did not have an impact on the financial position or performance of the Group.

IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after becoming effective. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results.

IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) affect acquisitions or loss of control of subsidiaries and transactions with non-controlling interests after 1 January 2010.

The Group adopted this amendment as of 1 January 2010. It did not have an impact on the financial position or performance of the Group.

IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged ItemsThe amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the

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designation of inflation as a hedged risk or portion in particular situations. The Group has concluded that the amendment will have no impact on the financial position or performance of the Group.

IFRIC 17 Distribution of Non-cash Assets to OwnersThis interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation has no effect on either, the financial position nor performance of the Group.

Improvements to IFRSsIn May 2008 and April 2009, the IASB issued omnibus 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 some accounting policies but did not have any impact on the financial position or performance of the group.

Issued in May 2008• IFRS5Non-currentAssetsHeldforSaleandDiscontinued

Operations: clarifies that when a subsidiary is classified as held for sale, all its assets and liabilities are classified as held for sale, even when the entity remains a non-controlling interest after the sale transaction.

Issued in April 2009• IFRS5Non-currentAssetsHeldforSaleandDiscontinued

Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations.

• IFRS8OperatingSegments:clarifiesthatsegmentassetsandliabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker.

• IAS7StatementofCashFlows:Statesthatonlyexpenditurethatresults in recognising an asset can be classified as a cash flow from investing activities.

• IAS36ImpairmentofAssets:Theamendmentclarifiesthatthe largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes.

Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:

Issued in April 2009• IFRS2Share-basedPayment• IAS1PresentationofFinancialStatements• IAS17Leases• IAS34InterimFinancialReporting• IAS38IntangibleAssets• IAS39FinancialInstruments:RecognitionandMeasurement• IFRIC9ReassessmentofEmbeddedDerivatives• IFRIC16HedgeofaNetInvestmentinaForeignOperation

Standards, amendments and interpretations issued but not yet effectiveStandards issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective.

IAS 24 Related Party Disclosures (Amendment)The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate

inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. The Group does not expect any impact on its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard.

IAS 32 Financial Instruments: Presentation – Classification of Rights Issues (Amendment)The amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the Group after initial application.

IFRS 9 Financial Instruments: Classification and MeasurementIFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and derecognition. The completion of this project is expected in early 2011. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets. The Group will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

IFRIC 14 Prepayments of a minimum funding requirement (Amendment)The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the financial statements of the Group.

IFRIC 19 Extinguishing Financial Liabilities with Equity InstrumentsIFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the Group.

Improvements to IFRSs (issued in May 2010)The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either 1 July 2010 or 1 January 2011. The amendments listed below, are considered to have a reasonable possible impact on the Group:

• IFRS3BusinessCombinations• IFRS7FinancialInstruments:Disclosures• IAS1PresentationofFinancialStatements• IAS27ConsolidatedandSeparateFinancialStatements• IFRIC13CustomerLoyaltyProgrammes

The Group, however, expects no impact from the adoption of the amendments on its financial position or performance.

Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Capital work-in-progress is not depreciated.


25

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Depreciation is calculated on a straight line basis over the estimated useful lives of the assets as follows:

Buildings and foundations 13-20 yearsPlant, machinery and equipment 3-20 yearsVehicles and mobile equipment 3 years

Expenditure incurred over QR 200,000 on new or to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure over QR 200,000 is capitalised only when it increases future economic benefits of the related item of property, plant and equipment. All other expenditure is recognised in the consolidated statement of income as the expense is incurred.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount, being the higher of their fair value less costs to sell and value in use.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset is included in the consolidated statement of income in the year the asset is derecognised.

The asset’s residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year end.

Capital work-in-progress will be transferred to the respective class of property, plant and equipment when the asset is ready for its intended use.

Project under developmentProject under development is stated at cost less any accumulated impairment in value and will be transferred to property, plant and equipment when the asset is ready for its intended use by the management.

CatalystsCatalysts are initially recorded at cost. Subsequently, they are measured at cost less accumulated amortisation and any impairment in value. Catalysts are amortised over the estimated useful lives of 1 to 12 years. Catalysts not in use at the plant are kept under inventories and stated at the lower of cost and net realisable value.

InventoriesInventories are stated at the lower of cost and net realisable value. Costs are those expenses incurred in bringing each product to its present location and condition, as follows:

Packing materials, chemicals, supplies and spare parts - weighted average purchase cost

Finished goods - weighted average cost of direct materials, direct labor, other direct costs, plus attributable overheads based on normal level of capacity.

Net realisable value is based on estimated selling price less any further costs expected to be incurred on completion and disposal.

Impairment and uncollectibility of financial assetsAn assessment is made at each reporting date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the consolidated statement of income. Impairment is determined as follows:

(a) For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously

recognised in the consolidated statement of income;

(b) For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset;

(c) For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate.

Accounts receivableAccounts receivable are stated at original invoice amount less provision for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.

Cash and cash equivalentsCash and cash equivalents comprise cash on hand, bank balances and short term deposits with an original maturity of three months or less.

Interest bearing loanInterest bearing loan is recognised initially at fair value of the amounts borrowed, less directly attributable transaction costs. Subsequent to initial recognition, the loan is measured at amortised cost using the effective interest method, with any differences between the cost and final settlement values being recognised in the consolidated statement of income over the period of the borrowing. Installments due within one year at amortised cost are shown as a current liability. The costs of raising finance applicable to amounts already drawn down are amortised over the period of the loan using the effective yield method.

Gains or losses are recognised in the consolidated statement of income when the liabilities are derecognised.

Borrowing costsBorrowing costs directly attributable to the acquisition or construction or production of an asset that necessarily takes a substantial period of time for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Accounts payable and accrualsLiabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.

Derecognition of financial assets and liabilities a) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:

• Therightstoreceivecashflowsfromtheassethaveexpired;

• TheGrouphastransferreditsrightstoreceivecashflowsfromthe asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset.

In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured

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on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

b) Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated statement of income.

End of service benefitsThe Group provides end of service benefits to its employees in accordance with employment contracts and Qatari Labour Law. The entitlement to these benefits is based upon the employees’ final salary and length of service, subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment.

Under Law No. 24 of 2002 on Retirement and Pensions, the Group makes a contribution to a government fund for Qatari employees calculated as a percentage of the Qatari employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed as due.

ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and the costs to settle the obligation are both probable and able to be reliably measured.

Foreign currenciesTransactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to the consolidated statement of income.

Derivative financial instruments and hedgingDerivative financial instruments are contracts, the value of which are derived from one or more underlying financial instruments or indices, and include a call option to repurchase equity at a predetermined price.

The Group uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the consolidated statement of income.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is calculated by reference to the market valuation of the swap contracts.

For the purpose of hedge accounting, hedges are classified as:

• fairvaluehedgeswhenhedgingtheexposuretochangesin

the fair value of a recognised asset or liability or unrecognised firm commitment (except for foreign currency risk); or

• cashflowhedgeswhenhedgingexposuretovariabilityincash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting change in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the criteria for hedge accounting are accounted for as follows:

Fair value hedgesThe change in the fair value of a hedging derivative is recognised in the consolidated statement of income in finance cost. The change in the fair value of the hedged item attributable to the risk hedged is recorded as a part of the carrying value of the hedged item and is also recognised in the consolidated statement of income in finance cost.

Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised directly in equity.

The Group uses interest rate swap contracts to hedge its risk associated primarily with interest rate fluctuations relating to the interest charged on its interest bearing loans and borrowings. These are included in the consolidated statement of financial position at fair value and any resultant gain or loss on interest rate swaps contracts that qualify for hedge accounting is recognised in the consolidated statement of changes in equity and subsequently recognised in the consolidated statement of comprehensive income when the hedged transaction affects profit or loss.

For cash flow hedges which meet the strict criteria for hedge accounting, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cumulative changes in fair values, while any ineffective portion is recognised immediately in the consolidated statement of income in finance costs.

The Group uses forward currency contracts to hedge its risks associated with foreign exchange rate fluctuations. These are included in the consolidated statement of financial position at fair value and any subsequent resultant gain or loss on forward currency contracts is recognised as other comprehensive income in the cumulative changes in fair values. Amounts recognised as other comprehensive income are transferred to the consolidated statement of income when the hedged transaction affects profit or loss such as when a forecasted transaction occur or is expired.

Use of estimatesThe preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates.


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RevenueSale of goodsSale of goods is recognised when the risk and rewards of the product is transferred to the buyer, which is at the time of loading at the terminal in Mesaieed, State of Qatar and the amount can be measured reliably. Revenue from sale of goods is recorded net of direct costs such as freight and insurance.

Interest incomeInterest income is recognised as the interest accrues.

Operating leasesLeases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the

consolidated statement of income on a straight-line basis over the period of lease term.

Income Taxes Taxation is provided in accordance with the Qatar Income Tax Law.

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3 PROPERTY, PLANT AND EQUIPMENT

Buildings and Plant, machinery Vehicles and Capital work-in- foundations and equipment mobile equipment progress Total QR QR QR QR QRCost:

At 1 January 2010 1,197,538,324 4,787,672,563 12,261,156 8,143,174,622 14,140,646,665

Additions - - 1,474,185 4,029,664,055 4,031,138,240

Transfers 806,682 245,344,515 - (246,151,197) -

Disposals - (121,479,863) - - (121,479,863)

Write-off - - - (144,820) (144,820)

At 31 December 2010 1,198,345,006 4,911,537,215 13,735,341 11,926,542,660 18,050,160,222

Depreciation: At 1 January 2010 651,325,011 3,528,615,504 11,593,507 - 4,191,534,022

Charge for the year 45,801,081 271,840,208 810,306 - 318,451,595

Relating to disposals - (121,479,562) - - (121,479,562)

At 31 December 2010 697,126,092 3,678,976,150 12,403,813 - 4,388,506,055

Net carrying amount:

At 31 December 2010 501,218,914 1,232,561,065 1,331,528 11,926,542,660 13,661,654,167

Buildings and Plant, machinery Vehicles and Capital work-in-

foundations and equipment mobile equipment progress Total

QR QR QR QR QRCost:

At 1 January 2009 1,160,775,111 4,622,070,973 11,729,716 3,251,473,890 9,046,049,690

Additions - - 755,300 5,309,759,617 5,310,514,917

Transfers 36,763,213 381,141,836 - (417,905,049) -

Disposals - (215,540,246) (223,860) - (215,764,106)

Write-off - - - (153,836) (153,836)

At 31 December 2009 1,197,538,324 4,787,672,563 12,261,156 8,143,174,622 14,140,646,665

Depreciation:

At 1 January 2009 606,262,179 3,497,035,514 11,153,674 - 4,114,451,367

Charge for the year 45,062,832 247,120,236 663,693 - 292,846,761

Relating to disposals - (215,540,246) (223,860) - (215,764,106)

At 31 December 2009 651,325,011 3,528,615,504 11,593,507 - 4,191,534,022

Net carrying amount:

At 31 December 2009 546,213,313 1,259,057,059 667,649 8,143,174,622 9,949,112,643


Notes:

(i) Buildings and foundations, which include the industrial plant, office site and administrative facilities at Mesaieed are constructed on the land leased from Qatar Petroleum, except the staff housing complex, which is constructed on the land leased from the Industrial Development Technical Centre.

(ii) Capitalised borrowing costs of QR 384,573,645 (2009: QR 191,032,196) are included in the capital work-in-progress.

(iii) The depreciation charge has been allocated in the consolidated statement of income as follows:

2010 2009

QR QR

Cost of sales (Note 21) 290,431,124 265,940,660

Administrative expenses (Note 24) 28,020,471 26,906,101

318,451,595 292,846,761

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4 PROJECT UNDER DEVELOPMENT

2010 2009

QR QR

Advance for formation of a subsidiary 754,740,459 594,056,146

Advance for QAFCO - 5 104,482,001 396,912,712

Advance for QAFCO - 6 155,980,770 -

1,015,203,230 990,968,858

Advance for formation of a subsidiaryThe Group has signed an agreement with Qatar Intermediate Industries Holding Company Ltd. to establish a separate legal entity namely, “Qatar Melamine Company”. The subsidiary’s prime objective is to produce and sell Melamine through the ownership of a plant which is currently under construction. The balance as at 31 December represents the contribution by the Group towards the construction of their plant facilities. The Group will own 60% of the shares of Qatar Melamine Company, the commercial operation of which is expected to commence early in 2011.

The movement in the advance for formation of a subsidiary is as follows:

2010 2009

QR QR

At 1 January 594,056,146 464,129,923

Additional fund contribution 160,684,313 129,926,223

At 31 December 754,740,459 594,056,146

Advance for QAFCO - 5 The Group has signed an agreement with Hyundai Construction & Engineering Co Ltd. and Snamprogetti S.P.A, (“Main Contractors”) to construct its plant expansion project namely, “QAFCO - 5”. In accordance with the terms of the agreement, the Group made a 10% advance payment to the Main Contractors and this amount will be recovered at the same percentage through progress billings. The project is expected to be completed in mid 2011.

The Group also entered into an agreement with a consortium of banks led by Hongkong and Shanghai Banking Corporation (“HSBC) as the facility agent on 2 December 2007, to obtain a term loan facility amounting to USD 1.6 billion (See Note 12).

The movement in the advance for QAFCO – 5 is as follows:

2010 2009

QR QR

At 1 January 396,912,712 888,460,891

Recovered during the year (292,430,711) (491,548,179)

At 31 December 104,482,001 396,912,712

Advance for QAFCO - 6 The Group has signed an agreement with Hyundai Construction & Engineering Co Ltd. and Snamprogetti S.P.A, (“Main Contractors”) to construct its plant expansion project namely, “QAFCO - 6”. In accordance with the terms of the agreement, the Group made a 10% advance payment to the Main Contractors and this amount will be recovered at the same percentage through progress billings. The project is expected to be completed in September 2012.

The movement in the advance for QAFCO - 6 is as follows:

2010 2009

QR QR

At 1 January - -

Paid during the year 222,040,000 -

Recovered during the year (66,059,230) -

At 31 December 155,980,770 -

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5 CATALYSTS

6 INVENTORIES

2010 2009

QR QR

Cost:

At 1 January 94,136,050 68,617,873

Additions 17,437,145 28,178,995

Disposals (31,233,160) (2,660,818)

At 31 December 80,340,035 94,136,050

Amortisation:

At 1 January 52,578,166 43,530,047

Charges for the year (Note 21) 12,982,873 11,708,937

Disposals (31,233,160) (2,660,818)

At 31 December 34,327,879 52,578,166

Net carrying amount at 31 December 46,012,156 41,557,884

2010 2009

QR QR

Spare parts 297,439,944 282,939,722

Finished goods 99,763,341 52,156,492

Chemicals and catalysts 19,411,528 18,931,254

Goods in transit 9,622,259 9,476,742

Packing materials, consumables and supplies 2,114,086 503,304

428,351,158 364,007,514

Less: Provision for obsolete and slow-moving inventories (36,962,369) (32,506,805)

391,388,789 331,500,709

Movements in the provision for obsolete and slow-moving inventories are as follows:

7 ACCOUNTS RECEIVABLE AND PREPAYMENTS

2010 2009

QR QR

At 1 January 32,506,805 28,769,941

Provided during the year (Note 21) 5,301,835 5,272,267

Amounts written off (846,271) (1,535,403)

At 31 December 36,962,369 32,506,805

2010 2009

QR QR

Trade accounts receivable 206,366,984 215,717,024

Amounts due from related parties (Note 19) 526,311,137 282,149,456

Prepayments and advances 44,758,539 48,941,873

Other receivables 885,241 18,203,533

778,321,901 565,011,886

Less: Provision for impairment of receivables (Note 24) - (113,434)

778,321,901 564,898,452

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As at 31 December 2010, trade accounts receivable at nominal value of QR Nil (2009: 113,434) were impaired and fully provided for. Movement in the provision for impairment of receivables is as follows:

Unimpaired receivables are expected, on the basis of experience, to be fully recoverable. It is not the practice of the Group to obtain collateral over receivables and the entire financial assets are, therefore, unsecured.

Bank balances and cash include call deposits of QR 300,000,000 (2009: QR 250,000,000) denominated in Qatari Riyals.

As at 31 December, the ageing of unimpaired financial assets is as follows:

2010 2009

QR QR

At 1 January 113,434 -

Provided during the year (Note 24) - 113,434

Recovered during the year (113,434) -

At 31 December - 113,434

Total QR

Neither past due nor impaired QR

Past due but not impaired

< 30 days QR

31 – 120 days QR

> 120 days QR

2010 733,563,362 732,219,284 719,264 45,231 579,583

2009 515,956,579 515,956,579 - - -

8 CASH AND CASH EQUIVALENTS

9 SHARE CAPITAL

11. DIVIDENDS PAID AND PROPOSED

2010 2009

QR QR

Bank balances and cash 497,003,830 1,907,800,697

Short term deposits maturing after 90 days - (1,324,740,000)

Cash and cash equivalents at 31 December 497,003,830 583,060,697

2010 2009

QR QR

Authorised, issued and fully paid:

10,000,000 ordinary shares of QR 100 each 1,000,000,000 1,000,000,000

10. LEGAL RESERVEAs required by the Company’s Articles of Association, 10% of the profit for the year should be transferred to legal reserve until the reserve totals 20% of the issued share capital. The Company resolved to discontinue such annual transfers since the reserve reached the required amount.

In the books of the subsidiary company, as required by Qatar Commercial Companies Law No. 5 of 2002 and the subsidiary

company’s Articles of Association, 10% of the profit for the year is required to be transferred to a legal reserve until the reserve equals 50% of the issued capital. The current year transfer represents only the subsidiary company’s share of transfers to the Group.

The reserve is not available for distribution except in the circumstances stipulated in the above law and the Company’s and subsidiary company’s Articles of Association.

2010 2009

QR QR

Declared and paid during the year:

Final dividends for 2009 QR 100 per share (2008: QR 115) 1,000,000,000 1,150,000,000

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The Board of Directors has proposed a final cash dividend of QR50 per share totaling QR 500,000,000 for 2010, which is subject to the approval of the shareholders at the Annual General Meeting.

The amortised arrangement fees were capitalised in the capital work-in-progress as borrowing costs (see Note 3).

The Group provides for end of service benefits for its employees. Movements in the provision are as follows:


12. INTEREST BEARING LOAN

13. EMPLOYEES’ END OF SERVICE BENEFITS

2010 2009

QR QR

Term loan 5,096,000,000 3,640,000,000

Less: Deferred financing arrangement costs (ii) (42,383,784) (45,932,371)

5,053,616,216 3,594,067,629

Presented in the statement of financial position as follows:

2010 2009

QR QR

Current portion 1,228,493,146 -

Non-current portion 3,825,123,070 3,594,067,629

5,053,616,216 3,594,067,629

Notes:

(i) The Group has entered into an agreement with a consortium of banks led by HSBC as the facility agent on 2 December 2007, to obtain a term loan facility amounting to USD 1.6 billion to finance the construction of QAFCO-5 project, which is currently under construction. The loan bears interest at LIBOR plus an applicable margin. The Group has entered into two interest rate swaps to hedge its risk associated with interest rate fluctuation as explained more in Note 16. The loan is repayable in semi-annual installments commencing after 4 years from the date of the loan agreement.

The Group has assigned to the security trustee, all monies which at

any time may be or become payable to the trustee, all its present and future rights, title and interest in, under various agreements pursuant thereto and the net proceeds of any claims, award and judgments which may at any time be receivable or received by the Group.

(ii) The finance costs associated with obtaining the above loan represent arrangement, underwriting, participation and agency fees paid (“arrangement fees”). Movements in the arrangement fees are as follows:

2010 2009

QR QR

At 1 January 45,932,371 39,726,481

Additions 3,051,685 9,850,371

Amortised during the year (6,600,272) (3,644,481)

At 31 December 42,383,784 45,932,371

2010 QR

2009 QR

At 1 January 117,700,498 113,406,947

Provision during the year 15,845,083 16,125,455

End of service benefits paid (13,764,930) (11,831,904)

119,780,651 117,700,498

Less: Advances against end of service benefits (50,230,289) (47,910,541)

At 31 December 69,550,362 69,789,957

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Reconciliation between income tax and the product of accounting profit multiplied by the effective tax rate for the year is as follows:

14. ACCOUNTS PAYABLE AND ACCRUALS

15. INCOME TAX PAYABLE

2010 QR

2009 QR

Trade accounts payables 196,061,753 211,455,601

Amounts due to related parties (Note 19) 284,038,429 262,513,703

Other payables and accruals 80,945,890 101,605,005

561,046,072 575,574,309

In accordance with the regulations of the Qatar Public Revenues and Taxes Department, the Company is subject to corporate income tax in the State of Qatar for the share of profit attributable to foreign shareholders excluding exempted profit of QAFCO Plant 4.

For the purpose of these consolidated financial statements, the income tax obligations of the Company have been included as amounts due from foreign shareholders given that such shareholders are fully liable for the tax payment.

Effective from the taxable year beginning 1 January 2010, Law No. 21 of 2009 introduced a new corporate income tax rate of 10% on companies. The new income tax law is not clear on the tax rate applicable to the share of profit attributable to the foreign shareholders of the Company whether 10% or 35%. The Company has applied the rate of 35% in calculating the income tax obligation for the year ended 31 December 2010 as a conservative measure.

2010 QR

2009 QR

Profit attributable to QAFCO Plants 1, 2 and 3 1,236,430,386 778,379,072

Profit attributable to QAFCO Plant 4 (Exempt from tax) 873,894,542 906,688,298

Profit from subsidiary (Exempt from tax) 10,492,469 10,964,880

Accounting profit 2,120,817,397 1,696,032,250

Accounting profit entitled for taxation 1,236,430,386 778,379,072

Expenses that are not deductible in determining taxable profit:

Provision for impairment of receivables - 66,522

Board of Directors remuneration 840,434 930,804

Provision for obsolete and slow moving inventories 3,976,376 3,954,200

4,816,810 4,951,526

Expense that is deductible in determining taxable profit:

Slow-moving inventories provision write-off (634,703) (1,151,552)

Taxable profit 1,240,612,493 782,179,046

Effective tax rate for the share of profit attributable to foreign shareholders 8.75% 8.73%

Income tax payable 108,553,593 68,306,916

QAFCO Plant 5 and QAFCO Plant 6 are under construction and there are no operational activities for the year ended 31 December 2010.

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16. OTHER FINANCIAL ASSETS AND LIABILITIES2010 2009

QR QR

Other financial asset

Derivative:

Forward foreign exchange contract collar – Current - 3,035,827

Other financial liabilities

Derivatives:

Interest rate swap 307,745,529 129,977,389

Forward foreign exchange contract collar - 1,254,994

307,745,529 131,232,383

Presented in the consolidated statement of financial position as follows:

Non-current portion 307,745,529 129,977,389

Current portion - 1,254,994

307,745,529 131,232,383

The maturity profile of the derivatives is as follows:

At 31 December 2010Positive fair

value QR “Mn”

Negative fair value QR “Mn”

Notional amount

QR “Mn”

3 – 12 months

QR “Mn”

1 – 5 years

QR “Mn”

More than 5 years

QR “Mn”

Interest rate swaps - 308 4,004 146 1,165 2,693

Forward foreign exchange contract with collar - - - - - -

Spot forward currency contract - - - - - -

- 308 4,004 146 1,165 2,693

Positive fair value

QR “Mn”

Negative fair value QR “Mn”

Notional amount

QR “Mn”

3 – 12 months

QR “Mn”1 – 5 years

QR “Mn”

More than 5 years

QR “Mn”

At 31 December 2009

Interest rate swaps - 129 4,004 - 1,019 2,985

Forward foreign exchange contract with collar 3 1 526 526 - -

Spot forward currency contract - - 365 365 - -

3 130 4,895 891 1,019 2,985

Interest rate swaps: The Group has two interest rate swap contracts replacing its floating interest rate bearing loans for fixed interest bearing loans, designated as hedges of expected future LIBOR interest rate payments during the period to 5 December 2017. The terms of the interest rate swap contracts have been negotiated to match the terms of the commitments of the term loan (Note 12). At 31 December 2010, the measurement of the fair values of the hedges resulted in a negative amount of QR 308 million (2009: QR 129 million) which has been recognized in the equity as changes in fair values and as derivative liabilities.

Forward foreign exchange contract with collar: Collar are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at fixed future date or any time during a specified period, a specified amount of a currency at a pre-determined price.

At 31 December 2010, the measurement of the fair values of the collar resulted in a positive amount of QR Nil (2009: QR 3 million) and negative amount of QR Nil (2009: QR 1 million) which has been recognized in the equity as changes in fair values and as derivative assets and liabilities.

Spot forward currency contract: The Group has signed a spot forward currency contract to sell USD Nil (2009: USD 100 million) and buy Qatari Riyals at the spot rate of QR 3.6475.

The fair values of above derivative financial instruments as of 31 December 2010 amounted to QR Nil (2009: QR 212,101) which has been included in the consolidated statement of income as the transaction do not qualify for hedge accounting and the resultant asset has been disclosed as other receivables.

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17. EXPENDITURE COMMITMENTS2010

QR

2009 QR

(a) Capital expenditure commitments:

Estimated capital expenditure contracted for at the reporting date but not provided for:

QAFCO - 5 expansion project (i) 2,091,930,954 5,227,424,519

QAFCO - 6 expansion project (ii) 1,590,430,598 2,256,800,000

Qatar Melamine project (iii) 79,469,110 306,155,333

Urea-1 Revamp project (iv) 6,330,881 24,612,897

Other contract commitments 250,309,989 188,759,803

4,018,471,532 8,003,752,552

(i) On 2 December 2007, the Group signed an agreement with Hyundai Construction & Engineering Co Ltd., and Snamprogetti S.P.A., for building a new Ammonia plant and Urea Formaldehyde Concentrate (UFC) Plant – UFC 85. The value of the contract including variation orders is USD 3,515,467,000.

(ii) On 9 October 2009, the Company signed an agreement with Hyundai Construction & Engineering Co Ltd., and Snamprogetti S.P.A., for building a new Urea plant. The value of the contract is USD 620,000,000.

(iii) The Group has signed an agreement with Qatar Intermediate Industries Holding Company Ltd., to establish a separate legal entity namely, “Qatar Melamine Company” for constructing plant facilities to produce Melamine. The value of the contract is USD 353,205,689. The Group will own 60% of the shares of the Qatar Melamine Company. The amount represents the Group’s share of the committed future capital expenditure on this project.

(iv) The Group has signed and agreement with Urea Casale S.A for building a new Urea - 1 Revamp project. The value of the contract including variation orders is USD 95,153,395.

2010 QR

2009 QR

(b) Operating lease commitments:

Future minimum lease payments:

Within one year 43,235,481 36,788,917

After one year but not more than five years 59,416,192 45,509,080

More than five years 184,520,881 100,329,169

Total operating lease expenditure contracted for at the reporting date 287,172,554 182,627,166

18. CONTINGENCIESContingent liabilitiesAt 31 December, the Group had the following contingent liabilities from which it anticipates that no material liabilities will arise:

2010 QR

2009 QR

Letters of credit 71,387,071 95,020,056

Bank guarantees 264,264 3,504,401

71,651,335 98,524,457

19. RELATED PARTY DISCLOSURES

Related parties represent major shareholders, directors and key management personnel of the Group, and entities controlled, jointly controlled or significantly influenced by such parties.

Industries Qatar (“IQ”) is the immediate parent entity of the Group and the ultimate parent entity of the Group is Qatar Petroleum (“QP”).

Related party transactions A significant portion of the Group’s transactions have been entered with the shareholders. The prices and terms of payment for these transactions are in accordance with specific agreements entered into,

with the shareholders as follows:

a) Urea Marketing Agreement dated 18 June 1994 entered with Yara International ASA (formally known as Hydro Asia Trade Pte Limited), dated 18 June 1994 to market prilled and granulated Urea produced by the Group in the regional markets of Europe, America, Africa and Asia, in return for a marketing commission. This initial agreement was replaced by the Urea Marketing and Off-take Agreement dated 5 September 2001 and shall remain in force until 31 December of the year from the tenth anniversary of the successful performance test of the QAFCO - 4 expansion project (i.e. 31 December 2016).

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b) Advisory and Technical Services Agreement entered with Yara International ASA to render technical services and provide qualified management and operating personnel to the Group in return for an agreed lump sum fee.

c) Gas Sale and Purchase Agreement dated 18 June 1994 entered with QP for a period of 25 years (renewable) to purchase feed gas at rates, which are lower than the prevailing international market rates, to use for the production of Urea and Ammonia.


Transactions with related parties included in the consolidated statement of income are as follows:

2010 QR

2009 QR

Shareholder:

Yara International A.S.A

- Sale of Urea and Ammonia 1,707,940,627 1,539,956,679

- Sales commission 51,239,201 45,890,730

- Technical service charges 3,500,000 3,500,000

- Purchase of inventories 39,323 43,403

Ultimate parent:

Qatar Petroleum

- Purchase of feed stock 892,523,373 853,142,611

- Purchase of Methanol 21,701,913 13,918,604

- Insurance 20,200,270 18,753,236

- Land lease and staff accommodation lease charges 13,977,951 13,416,083

- Training costs 11,640,012 6,428,402

- Other charges 2,435,787 663,053

Related party balances Balances with related parties included in the consolidated statement of financial position are as follows:

2010 2009

Accounts receivable QR

Accounts payable QR

Accounts receivable

QR

Accounts payable

QR

Yara International A.S.A 508,141,543 22,768,055 237,568,605 17,639,496

Qatar Petroleum 18,169,594 258,677,118 17,258,085 241,419,458

Qatar Fuel Additives Q.S.C.C. - 2,593,256 - 3,454,749

Fertiliser Holding A.S.A - - 27,322,766 -

526,311,137 284,038,429 282,149,456 262,513,703

Amounts due from and due to related parties are disclosed in Notes 7 and 14, respectively.

Compensation of key management personnel The remuneration of directors and other members of key management during the year are as follows:

2010 QR

2009

QR

Short-term benefits 12,534,484 11,884,683

Remuneration for Directors (Note 24) 1,396,664 1,516,927

Qatari employees’ pension fund contribution 398,363 379,349

14,329,511 13,780,959

20. SALES - NET2010

QR

2009

QR

Sales – gross 3,924,277,692 3,395,371,787

Freight and insurance (44,239,284) (88,771,651)

Sales – net 3,880,038,408 3,306,600,136

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21. COST OF SALES

22. OTHER INCOME

23. SELLING AND DISTRIBUTION COSTS

2010 QR

2009 QR

Raw materials consumed 926,109,875 877,433,399

Depreciation (Note 3) 290,431,124 265,940,660

Salaries, wages and related expenses 125,465,306 121,924,323

Spares and equipment consumed 38,698,319 41,953,336

External services 21,078,443 23,007,112

Insurance, rents and fees 16,862,017 10,861,389

Amortisation of catalysts (Note 5) 12,982,873 11,708,937

Provision for obsolete and slow moving inventories (Note 6) 5,301,835 5,272,267

Amortisation of shutdown costs 313,775 35,131

Others 1,264,119 1,485,473

1,438,507,686 1,359,622,027

2010 QR

2009 QR

Foreign currency exchange gain 52,015,193 -

Interest income 22,686,274 164,551,763

Reversal of excess provision 11,434,789 18,460,720

Sale of gas 10,966,324 3,389,786

Demurrages and dispatch 5,660,173 4,137,479

Profit on disposal of catalysts, property, plant and equipment 2,478,983 25,010

Club contribution 1,278,119 2,696,458

Rent income 1,169,061 1,459,698

Contribution from Norwegian Government for QAFCO Norwegian School 6,969 11,548

Miscellaneous income 8,541,304 2,231,546

116,237,189 196,964,008

2010 QR

2009 QR

Sales commission 59,232,191 51,780,599

Other sales expenses 5,340,592 3,337,645

64,572,783 55,118,244

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2010 QR

2009 QR

Salaries and related expenses 206,406,931 205,457,041

Insurance, rents and fees 43,510,016 45,311,427

External services 42,504,793 34,110,244

Depreciation (Note 3) 28,020,471 26,906,101

Spares and equipment consumed 27,790,645 29,360,461

Travel expenses 7,598,440 7,195,304

Public relations and gifts 5,482,885 11,928,377

Communication expenses 4,129,879 3,825,498

Remuneration for Directors (Note 19) 1,396,664 1,516,927

Capital work-in-progress write-off (Note 3) 144,820 153,836

Foreign currency exchange loss - 20,363,093

Provision for impairment of receivables (Note 7) - 113,434

Miscellaneous expenses 5,392,187 6,549,880

372,377,731 392,791,623

24. ADMINISTRATIVE EXPENSES

25. FAIR VALUE OF FINANCIAL INSTRUMENTS


Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the consolidated financial statements.

Carrying amount Fair value

2010 QR

2009 QR

2010 QR

2009 QR

Financial assets

Trade and other receivables 733,563,362 515,956,579 733,563,362 515,956,579

Other financial asset:

Forward foreign currency collar - 3,247,928 - 3,247,928

Bank balances and cash 497,003,830 1,907,800,697 497,003,830 1,907,800,697

Total 1,230,567,192 2,427,005,204 1,230,567,192 2,427,005,204

Financial liabilities

Interest bearing loans

Floating rate borrowings 5,096,000,000 3,640,000,000 5,096,000,000 3,640,000,000

Trade and other payables 480,100,182 473,969,304 480,100,182 473,969,304

Other financial liabilities:

Interest rate swaps 307,745,529 129,977,389 307,745,529 129,977,389

Forward foreign currency collar - 1,254,994 - 1,254,994

Total 5,883,845,711 4,245,201,687 5,883,845,711 4,245,201,687

The fair value of financial assets and liabilities is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The following methods and assumptions were used to estimate the fair values:

• Bankbalancesandcash,tradeandotherreceivablesandtradeandother payables approximate their carrying amounts largely due to the short-term maturities of these instruments.

• Interestbearingloanisestimatedbasedondiscountedcashflowsusing interest rate for items with similar terms and characteristic.

• TheGroupentersintoderivativefinancialinstruments,principallywith financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate swaps and foreign

exchange forward contracts (collar). The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves.

At 31 December, the marked to market value of derivative asset position is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationship and other financial instruments recognised at fair value.

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26. FINANCIAL RISK MANAGEMENT

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1 : quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2 : other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly Level 3 : techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

At 31 December, the Group held the following financial instruments measured at fair value:

31 December 2010 QR

Level 1 QR

Level 2 QR

Level 3 QR

Assets measured at fair value

Forward foreign currency collar - - - -

Spot forward currency contract - - - -

Liabilities measured at fair value

Interest rate swaps 307,745,529 - 307,745,529 -

Forward foreign currency collar - - - -

31 December 2009 QR

Level 1 QR

Level 2 QR

Level 3 QR

Assets measured at fair value

Forward foreign currency collar 3,247,928 - 3,247,928 -

Spot forward currency contract 212,101 - 212,101 -

Liabilities measured at fair value

Interest rate swaps 129,977,389 - 129,977,389 -

Forward foreign currency collar 1,254,994 - 1,254,994 -

During the reporting period ending 31 December 2010 and 2009, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.

Objectives and policiesThe Group’s principal financial liabilities comprise interest bearing loan, trade accounts payable and amounts due to related parties. The main purpose of these financial liabilities is to raise finance for the Group’s operations. The Group has various financial assets such as trade accounts receivable, amounts due from related parties and bank balances, which arise directly from its operations.

The main risks arising from the Group’s financial instruments are cash flow interest rate risk, credit risk, liquidity risk and foreign currency

risk. The Board of Directors review and agree on policies for managing each of these risks which are summarised below.

Interest rate riskInterest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates.

The Group is minimally exposed to interest rate risk on its interest bearing assets and liabilities (term loan and short term deposits).

At reporting date, the interest rate profile of the Group’s interest bearing financial instruments is as follows:

2010 QR

2009 QR

Fixed interest rate instruments:

Short term bank deposits - 1,324,740,000

Effective interest rate 12.42%

Floating interest rate instruments:

Call deposits 300,000,000 250,000,000

Interest bearing loan (5,096,000,000) (3,640,000,000)

(4,796,000,000) (3,390,000,000)

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s financial assets and liabilities with floating interest rates and fixed interest instruments. To manage the risk of changes in floating interest rate on its interest bearing loan, the Group has entered into interest rate swaps as explained in Note 16. Under the swap agreements, the Group will pay an agreed fixed interest rate and receive a floating interest rate.

The following table demonstrates the sensitivity of the consolidated statement of income (due to call deposits), property, plant and equipment (due to borrowing costs capitalised) and equity (due to interest rate swaps) to reasonably possible changes in interest rates by 25 basis points, with all other variables held constant. The sensitivity of the consolidated statement of income, property, plant and equipment and equity is the effect of the assumed changes in

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interest rates for one year, based on the floating rate financial assets and financial liabilities held at 31 December. The effect of decreases in

interest rates is expected to be equal and opposite to the effect of the increases shown.

Profit +25b.p.

QR

Property, plant and equipment

+25b.p. QR

Equity +25 b. p.

QR

At 31 December 2010

Variable rate instruments

Call deposits 750,000 - -

Interest bearing loan - 12,740,000 -

Interest rate swaps - - (10,010,000)

750,000 12,740,000 (10,010,000)

Profit +25b.p.

QR

Property, plant and equipment

+25b.p. QR

Equity +25 b. p.

QR

At 31 December 2009

Variable rate instruments

Call deposits 625,000 - -

Interest bearing loan - 9,100,000 -

Interest rate swaps - - (10,010,000)

625,000 9,100,000 (10,010,000)

Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group’s exposure to credit risk is as indicated by the carrying amount of its assets which consist primarily of account receivables, bank balances and derivatives.

The Group seeks to limit its credit risk with respect to banks by only dealing with reputable banks. With respect to customers, the marketing department has established a credit policy under which each new customer is analysed individually for creditworthiness

before Group’s standard payment and delivery terms and conditions are offered and monitoring outstanding receivables. The Group is engaged in production and sales of Urea and Ammonia. The five largest customers of the Group account for 82 % of outstanding receivable at 31 December 2010 (2009: 78%).

With respect to credit risk arising from the financial assets of the Group, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments as follows:

2010 QR 2009 QR

Bank balances 497,003,830 1,907,800,697

Amounts due from related parties 526,311,137 282,149,456

Trade accounts receivable 206,366,984 215,603,590

Other financial assets 885,241 21,239,360

1,230,567,192 2,426,793,103

Liquidity riskLiquidity risk is the risk that the Group will not be able to meet financial obligations as they fall due. The Group’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group limits its liquidity risk by maintaining adequate funds in the

banks and ensuring bank facilities are available. The Group’s terms of sales require amounts to be paid within 30 days of the date of invoice. Trade payables are normally settled within 45 – 60 days of the date of purchase.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December based on contractual undiscounted payments.

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Year ended 31 December 2010 Less than 3 months

QR

3 to 12 months

QR

1 to 5 years

QR

> 5 years

QR

Total

QR

Trade accounts payable 196,061,753 - - - 196,061,753

Amounts due to related parties 284,038,429 - - - 284,038,429

Derivative financial liabilities (net basis) - 80,622,549 (69,321,979) (26,558,835) (15,258,265)

Interest bearing loan 48,703,306 1,383,629,839 1,851,116,635 2,969,920,043 6,253,369,823

Total 528,803,488 1,464,252,388 1,781,794,656 2,943,361,208 6,718,211,740

Year ended 31 December 2009 Less than 3 months

QR

3 to 12

months QR

1 to 5 years

QR

> 5 years

QR

Total

QR

Trade accounts payable 211,455,601 - - - 211,455,601

Amounts due to related parties 262,513,703 - - - 262,513,703

Derivative financial liabilities (net basis) - 133,859,548 42,584,912 (57,841,177) 118,603,283

Interest bearing loan 36,646,896 109,940,687 1,203,918,163 3,290,435,493 4,640,941,239

Total 510,616,200 243,800,235 1,246,503,075 3,232,594,316 5,233,513,826

Currency riskCurrency risk is the risk that the fair value or the future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates.

As the Qatari Riyal is pegged to the US Dollars, the balances in US Dollars are not considered to represent significant currency risk.

The table below indicates the Group’s foreign currency exposure at

31 December, as a result of its monetary assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the Qatari Riyal currency rate against the GBP and Euro, with all other variables held constant, on the consolidated statement of income (due to the fair value of currency sensitive monetary assets and liabilities). The effect of decrease in currency rates is expected to be equal and opposite to the effect of the increase shown.

Changes in currency rate to the Qatari Riyal

Effect on profit QR

2010

GBP +5% (122,324)

Euro +5% (437,923)

2009

GBP +5% (82,398)

Euro +5% (780,704)

Capital managementThe Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balances.

The Group makes adjustments to its capital structure, in light of changes in economic and business conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment

to shareholders, or issue new shares. During 2009, the Group has obtained a loan facility to finance the QAFCO 5 Plant.

Capital includes share capital, legal reserve, and retained earnings and is measured at QR 10,578,655,968 at 31 December 2010 (2009: QR 9,460,986,312).

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27. KEY SOURCES OF ESTIMATION UNCERTAINTY

28. COMPARATIVE FIGURES

a) Impairment of accounts receivable An estimate of the collectible amount of trade accounts receivable is made when collection of the full amount is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and a provision applied according to the length of time past due, based on historical recovery rates.

b) Impairment of inventories Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. For individually significant amounts this

estimation is performed on an individual basis. Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and a provision is applied according to the inventory type and the degree of ageing or obsolescence, based on historical realisable value.

c) Useful lives of property, plant and equipment The Group’s management determines the estimated useful lives of property, plant and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset, physical wear and tear, technical or commercial obsolescence.


The net of certain expenses and income which were previously included under “Cost of sales” and “Other income” amounting to QR 190,148,265 and QR 17,412,735, respectively, have been reclassified to “Administrative expenses” of QR 172,735,480 for the year ended 31 December 2009.

However, these reclassifications did not have any effect on the profit and total equity of the prior period. These changes have been made to improve the quality of information presented.

Qafco Anual Report English Final 2010

Documents

minimum funding

scientific

environmentally

annual periods

separate financial

yara netherland

floating interest

interest rate