1          ACTIVITIES                                                                                                                                                                    

 Sahara Petrochemical Company (“the parent company”) is a Saudi Joint Stock Company registered under commercial registration number 1010199710 dated 19 Jumada'I 1425H (corresponding to 7 July 2004). The authorized, issued and fully paid share capital of the parent company before the capital increase was SR 1,875,000,000 divided into 187,500,000 shares of SR 10 each.

On 1 Ramadan 1430H (corresponding to 22 August 2009) the shareholders of the parent company agreed in their extraordinary general assembly meeting held in Riyadh to increase the share capital of Sahare Petrochemical Company (“the parent company”) by way of a rights issue amounting to SR 1,050,300,000 limited to the existing shareholders registered in the records of the parent company at the end of trading on the day of meeting corresponding to 22 August 2009. Number of shares issued in the rights offering was 105,030,000 shares in the price of SR 10 each and without any premium. The subscription price for the additional shares was set at SR 10, SR 12, SR 14 and SR 16. Thus, the share capital of the parent company became SR 2,925,300,000  divided into 292,530,000 shares of SR 10 each. The legal formalities in respect of the share capital increase are still in progress.

The principal activities of the parent company and its subsidiary (“the Group”) are to invest in industrial projects, specially in the petrochemical and chemical fields and to own and execute projects necessary to supply raw materials and utilities. The Group incurs costs on projects under development and subsequently establishes a separate company for each project that has its own commercial registration. Costs incurred by the Group will be transferred to separate companies when they are established.

Al Waha Petrochemical Company (“the subsidiary”), is a Saudi limited liability company registered under commercial registration number 2055007751, and is owned 75% by Sahara Petrochemical Company and 25% by Basell Arabia Investments, its contribution amounting to SR 1,161 million. The subsidiary company is still in the commissioning phase as at 31 December 2009.

The parent company also owns a 32.55% share in Tasnee and Sahara Olefins Company (the “Associate”), a closed Saudi Joint Stock Company,(with initial contribution of SR 781.2 million). This associated company owns 75% share of Saudi Ethylene and Polyethylene Company which has commenced its commercial production effective 1 June 2009.

During the year, the parent company has invested in Saudi Acrylic Acid Company, a Saudi limited liability company, with a direct share of 15% of the capital, where the direct contribution amounted to SR 82.5 million, and the parent company owns indirect share through Tasnee and Sahara Olefins Company (the “Associate”) referred to above, which has a stake in this company of 65%. The company has not started its commercial operations yet.

The parent company’s headquarters are located in Riyadh, where the branch and the industrial facilities are located at Jubail Industrial City, Kingdom of Saudi Arabia.

2          BASIS OF PREPARATION                                                                                                                                          

 The parent company and its subsidiary are consolidated from the date the parent company obtains control until such time as control ceases. The consolidated financial statements comprise the financial statements of Sahara Petrochemical Company and its subsidiary as explained in note 1. Acquisition of the subsidiary is accounted for using the purchase method of accounting. The financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. The attributable equity interests of third parties in the group are included under the minority interest caption in these consolidated financial statements. All intra‑group balances, transactions, income and expenses and profit and loss resulting from intra‑group transactions are eliminated in full. 

 3         SIGNIFICANT ACCOUNTING POLICIES                                                                                                                    

The consolidated financial statements have been prepared in accordance with accounting standards generally accepted in the Kingdom of Saudi Arabia.  The significant accounting policies adopted are as follows:

Accounting convention

The consolidated financial statements are prepared under the historical cost convention modified to include the measurement at fair value of interest rate swaps contracts.

Use of estimates                                                                                                                                                                            

The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year.

Cash and cash equivalents                                                                                                                                                         

For the purposes of the cash flow statement, cash and cash equivalents consists of bank balances, cash on hand, short term murabahat and investments that are readily convertible into known amounts of cash and have a maturity of three months or less when purchased.

Accounts receivable                                                                                                                                                                    

Accounts receivable are stated at original invoice amount less a 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 when there is no possibility of recovery.

Inventories                                                                                                                                                                                     

Raw material and spare parts are stated at the lower of cost and market value.

Investment in associates                                                                                                                                                             

Investment in associates are accounted for using the equity method.

Projects under development                                                                                                                                                      

Projects under development represents mainly legal, feasibility studies, and other related costs incurred by the group for the development of industrial projects and are accounted for at cost. Upon successful incorporation of the new companies, costs associated with the projects are transferred to the respective companies. When certain projects are considered to be not feasible, the related costs are written off immediately.

Construction work in progress                                                                                                                                                 

Construction work in progress are recognised at cost of materials and services needed to fabricate the plant and equipment plus salaries and other costs that can be specifically identified as necessary costs to have the plant and equipment ready for its intended use and other overheads allocated on a systematic basis, as well as capitalised borrowing costs. The cost of construction work in progress is reduced by the net proceeds from sale of products during the commissioning phase.

Borrowing costs                                                                                                                                                                           

Borrowing costs are recorded generally as period costs when incurred. Borrowing costs directly attributable to the construction of qualifying assets are capitalised. The capitalisation starts when the construction work is in progress and the expenses and borrowing costs are incurred. Capitalization of borrowing costs ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are completed. In case portion of the loan are deposited in Murabahat investment or deposits, the financial income earned is credited to the capitalised borrowing costs.

 Motor vehicles and equipment                                                                                                                                                 

Motor vehicles and equipment are stated at cost less accumulated depreciation and  any impairment in value. The cost of motor vehicles and equipment are depreciated on a straight line basis over the estimated useful lives of the assets.

The carrying values of motor vehicles and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exits and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount.

Leasehold improvements are amortised on a straight‑line basis over the shorter of the useful life of the improvement or the term of the lease. Expenditure for repair and maintenance are charged to income. Improvements that increase the value or materially extend the useful life of the related assets are capitalised.

Accounts payable and accruals                                                                                                                                                

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

Zakat                                                                                                                                                                                               

Zakat is provided for in accordance with Saudi Arabian fiscal regulations. The liability is charged to the consolidated statement of income. Additional amounts, if any, that may become due on finalisation of an assessment are accounted for at that time.

Employees' terminal benefits                                                                                                                                                   

Provision is made for amounts payable under the employments contract applicable to employees' accumulated periods of service at the cosolidation balance sheet date.

Statutory reserve                                                                                                                                                                         

As required by Saudi Arabian Regulations for Companies, the parent company must aside 10% of its consolidated net income until it has built up a reserve equal to one half of the capital. The reserve is not available for distribution.

Foreign currencies transactions                                                                                                                                              

Transactions in foreign currencies are recorded in Saudi Riyals at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the consolidation balance sheet date. All differences are taken to the consolidated statement of income.

Derivative financial instruments                                                                                                                                             

Derivative financial instruments are initially recorded at cost and are re‑measured to fair value at subsequent reporting dates. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in the consolidated statement of income as they arise.

A fair value hedge is a hedge of the exposure to changes in fair value of an asset or liability that is already recognized in the consolidated balance sheet. The gain or loss from the change in the fair value of the hedging instrument is recognized immediately in the consolidated statement of income. At the same time, the carrying amount of the hedged item is adjusted for the corresponding gain or loss since the inception of the hedge, which is also immediately recognized in the consolidated statement of income.

A cash flow hedge is a hedge of the exposure to variability in cash flows relating to a recognized asset or liability, an unrecognized firm commitment or a forecasted transaction. To the extent that the hedge is effective, the portion of the gain or loss on the hedging instrument is recognized initially directly in equity. Subsequently, the amount is included in the consolidated statement of income in the same period or periods during which the hedged item affects net profit or loss. For hedges of forecasted transactions, the gain or loss on the hedging instrument will adjust the recorded carrying amount of the acquired asset or liability.

Expenses                                                                                                                                                                                         

All the period expenses are classified as general and administration expenses. 

Lease contracts                                                                                                                                                                             

Leases are classified as capital leases whenever the terms of the lease transfer substantially all of the risks and rewords of ownership to the lessee. All other leases are classified as operating leases. All assets owned under capital lease agreements are recorded as an assets at the lower of the present value of the minimum lease payments or fair market value of the asset at the date of the commencement of the lease. The difference between the gross lease obligation and the lower of the present value of the minimum lease payments and the fair market value of the asset at the commencement of the lease are considered financial costs and charged to the consolidated statement of income during the lease term to achieve a consistent rate of allocation over the remaining lease obligation for each accounting period.

Rentals payable under operating leases are charged to the consolidated statement of income over the lease term on a straight‑line basis.

Earning (loss) per share                                                                                                                                                             

Basic earnings (loss) per share from net income (loss) is calculated by dividing the net results for the year by the weighted average of number of shares outstanding during the year.

Basic earnings (loss) per share from main operations are calculated by dividing income (loss) from main operations for the year by the weighted average of number of shares outstanding during the year.

Segmental Analysis                                                                                                                                                                     

A segment is a distinguishable component of the company that is engaged in providing products or services (a business segment) or in providing products or services within a particular economic environment (a geographic segment), which is subject to risks and rewards that are different from those of other segments. Segmental analysis is not disclosed until the group of companies commence the commercial operations.

Fair values                                                                                                                                                                                     

The fair value of commission‑bearing items is estimated based on discounted cash flows using commission rates for items with similar terms and risk characteristics.

Murabaha investments are kept with local commercial banks and are maintained in Saudi Riyals and US Dollars. These investments have original maturities of less than 3 months.

Spare parts inventories, are primarily related to plant and equipment, which are still under construction and accordingly expected to be utilised after the commencement of production in the plants of the group, which will be over more than one year.

The movement in the investments in associated companies are as follows:

The company has not accounted for its share in results of Saudi Acrylic Acid Company as the company was formed during the year and has not started commercial operations yet.

8          PROJECTS UNDER DEVELOPMENT                                                                                                                    

The cost of projects under development is mainly related to Chlor‑Alakali and EDC projects.

Construction work in progress mainly represents the costs incurred by the subsidiary for the construction of a Propane Dehydrogenation and Polypropylene Plants at Jubail Industrial City, Kingdom of Saudi Arabia. The cost of the project is currently estimated at approximately SR 4,300 million of which approximately 40 % is financed by equity and the remaining by debt finance from SIDF, Public Investment Fund (PIF) and commercial borrowings.

Construction related costs at 31 December 2009 comprise construction costs under various agreements and directly attributable costs to bring the asset to the location and working condition necessary for it to be capable of operating in a manner intended by the management. Directly attributable costs include employee benefits, site preparation costs, installation costs, licensing fees, professional fees and borrowing costs.

Finance costs capitalized by the subsidiary during the year amounted to SR 101 million (2008: SR 88.44 million).

The subsidiary’s plant facilities are constructed on a plot of land allocated by the Royal Commission of Jubail and Yanbu to the parent company and sub‑leased to the subsidiary. The lease term is for 30 years commenced in 2006 and is renewable by mutual agreement of the parties.

10        MOTOR VEHICLES AND EQUIPMENT                                                                                                                

 The estimated useful lives of the assets for the calculation of depreciation are as follows:

The following are major related party transactions during the year:

‑ Sahara Petrochemical Company ("the Company") has rented its admin building in Jubail city from an affiliate. Total charges to the group in this regard amounted to SR 1.4 million (2008: Nil).

‑ Total purchases of raw material from one of the affiliates during the year amounted to SR 52 million (2008: Nil).

‑ The company has sold part of its testing products during the year to one of the related parties, which amounted to SR 117.3 million (2008: Nil)

Prices and terms of these transactions are approved by the management of the group.

Amounts due from affiliates are disclosed in Note 5 to the consolidated financial statements.

13        SHORT TERM LOANS                                                                                                                                                 

These represents the short term financing facilities received from two banks and are utilized to bridge finance the project costs incurred by the subsidiary until the disbursement of remaining loan facility from Saudi Industrial Development Fund (notes 15) and until the right issue to increase the share capital (note 1).

The facilities were carrying financial cost at commercial rates.

As the parent company has received the remaining facility from the Saudi Industrial Development Fund, and has also increased its share capital through right issue shares, the parent company has paid the short term loans in full during the year.

14        ADVANCES AGAINST ISLAMIC FACILITIES                                                                                                    

 During 2006, the subsidiary signed an IFA for US$ 276.6 million (SR 1,037.3 million) through which the commercial banks will participate in the procurement of the Project assets on the basis of co‑ownership. On the completion of the Project, the co‑owned assets will be leased to the subsidiary at an annual rental calculated at LIBOR plus 1.95%. Under a separate Purchase Undertaking Agreement, the subsidiary will purchase the above assets from the banks over a period of 11 years starting six months after the completion of the Project. As of 31 December 2009, the subsidiary has drawn down US$ 246 million (2008: US$ 160 million) from the total available facility. One installment of SR 15.6 million due in 2010 is shown as current liability in the consolidated balance sheet.

The Subsidiary has entered into an interest rate swap contract with commercial banks to manage the exposure to volatility in interest rates for a notional amount ranging from US$ 16.71 million (SR 62.68 million) to US$ 503.79 million (SR 1,889.71 million) with no upfront premium. The option fixed rate is 5.105% per annum and is exercisable effective June 29, 2007 on a half yearly basis, up to December 31, 2016.

Saudi Industrial Development Fund loan
On 18 June 2007, the subsidiary signed a term loan agreement of SR 400 million with SIDF. The loan is secured through mortgage of assets, assignment of insurance proceeds, technology rights and corporate guarantee of the partners to the extent of their ownership in the subsidiary. The loan is payable over 13 semi‑annual installments starting from 15 Sha’aban, 1432H corresponding (July 17, 2011). The loan agreement includes covenants to maintain financial ratios during the loan period. At 31 December 2009, the Subsidiary has drawn down SR 400 million (2008 ‑ SR 320 million).

Public Investment Fund loan
On 31 October 2007, the Subsidiary signed a term loan agreement of US$ 250 million (SR 937.9 million) with PIF. This loan carries interest at London Inter Bank Offered Rate (“LIBOR”) plus 0.5% and is repayable in twenty semi annual equal installments starting from May 2011. The loan is secured by mortgage over the assets of the subsidiary through an interparty deed with the commercial banks under Islamic Facilities Agreement (“IFA”). At 31 December 2009, the subsidiary has drawn down US$ 250 million (2008 ‑ US$ 170 million) from the total available facility.

16        ZAKAT                                                                                                                                                                                

 Charge for the year

The zakat charge consists of:

Movements in provision:

The movement in the zakat provision  was as follows:

Status of assessments

Zakat assessments have been agreed with the Department of Zakat and Income Tax (DZIT) for the parent company and its subsidiary for all years up to 2004. The zakat assessment of the parent company for the year 2005 has been raised with additional zakat liability of SR 4.69 million. The parent company has appealed against the DZIT assessment in front of the preliminary appeal committe.

The zakat assessments for the parent company and the zakat and tax assessments for the subsidiary for the years from 2006 up to 2008, have not been raised yet.

17        MINORITY INTEREST                                                                                                                                                

 Minority interest represents Basel Arabia Investments share of 25% in Al Waha Petrochemical Company.