1.         The LOTOS Group posted a net profit of PLN 484.7m for Q4 2017, that is 3.7% below the market consensus figure of PLN 504.3m. What were the main reasons for net profit coming in lower than expected in Q4 2017?

 The Company does not comment on consensus estimates.

The quarter-on-quarter decline in the LOTOS Group net profit for Q4 2017 was mainly attributable to a decrease in operating profit reported by the downstream segment due to lower product crack spreads and the lower average USD/PLN exchange rate for the quarter.

The decrease was also led by lower net finance income. As a result of fluctuations in foreign exchange rates, the upstream segment incurred foreign exchange losses on intragroup loans in Q4 2017.

2.         All key expansion projects currently underway at the LOTOS Group are likely to be delayed and go over budget. Considering changes in key parameters (completion dates, CAPEX), has the Company reviewed the dynamic profitability indicators for the projects, whose status as at December 31st 2016 (no updates were offered in the ‘financial statements/reports for 2017’) was as follows:

B8 Project – hydrocarbon production from a field in Poland’s Exclusive Economic Zone of the Baltic Sea

•           Expected production rate: 5 thousand boe/d

•           CAPEX: PLN 250m

B4/B6 Project – development of a natural gas field in the Baltic Sea

•           Expected production rate: 4.3 thousand boe/d

•           CAPEX: PLN 880m

Utgard Project – development of a new field in Norway through a tie-in to the facilities of the nearby Slepiner production area and launch of production in 2019

•           Expected production rate: 4 thousand boe/d

•           CAPEX: PLN 250m

EFRA Project − increasing oil conversion capacity

•           Total CAPEX: PLN 2.3bn

•           USD 2 margin increase per barrel

•           Additional 900 thousand tonnes of high-margin products per year (mainly diesel oil and aviation fuel)

Hydrogen Recovery Unit – designed to enable production of additional volumes of LPG and naphtha, reduction in CO2 emissions, and use of recovered hydrogen to enhance hydrodesulphurisation processes. The unit was to be placed in commercial operation in October 2016.

Following completion, the project was expected to output:

•           Ca. 100 thousand tonnes of LPG

•           9 thousand tonnes of hydrogen

•           25 thousand tonnes of naphtha

•           Total planned CAPEX: PLN 125m

The Company monitors the implementation of its investment projects on an ongoing basis and analyses their projected contribution to future cash flows. Optimisation and project management measures are taken to deliver the expected returns and minimise risks associated with execution and implementation of the key projects.

3.         Was the PLN 70m spent on marketing services in 2017 properly aligned with sales targets? If yes, was the LOTOS Group’s share in the Polish retail fuel market before and after the advertising campaign reviewed and compared?

The amount of PLN 70m referred to in the question covered all entertainment and advertising costs, i.e. marketing/sponsorship/events. The Company makes every effort to effectively allocate funds to achieve the intended image-building objectives and sales targets. Its share in the domestic fuel market is monitored on an ongoing basis, while its marketing activities are focused on a wider range of products than fuels (services/sponsorship/retail non-fuel sales).

4.         In 2017, a total of PLN 11.890m was incurred in legal expenses and management consultancy fees.

Does this figure include the operating costs of Grupa LOTOS S.A.’s Legal Department? If not, what are the Department’s annual operating costs?

The presented amount covers legal services, business consulting services, and audit engagements, and does not include the operating costs of Grupa LOTOS S.A.’s Legal Department, which are not disclosed by the Company.

5.         As the completion of the EFRA Project has been postponed, can you please provide a new deadline for an approximately 2 USD/bbl target increase in the refining margin?

In Current Report No. 21/2018 of July 13th 2018, the Company’s Management Board announced that talks were being held between LOTOS Asfalt Sp. z o.o. (“LOTOS Asfalt”, a subsidiary), the Company and KT - Kinetics Technology S.p.A. (“KT”, main contractor of the EFRA project) to set the deadline for the DCU (Delayed Coking Unit) to reach the RFSU (Ready for Start Up) status. The Company Management Board estimates that the target economic and financial effects of all the EFRA project facilities (as announced in Current Report No. 24/2015 and the Company’s subsequent public announcements) will not fully show in the Company’s consolidated results until the second quarter of 2019.

This conclusion follows from the current arrangements concerning the EFRA project, made between LOTOS Asfalt, the Company and KT, as well as from the Company’s own analysis. The Company also announces that as at June 30th 2018, the percentage of the EFRA project’s completion was 95.5% (December 31st 2017: 89.8%), with two of the three key project units, i.e. HGU (Hydrogen Generation Unit) and HVDU (Hydrowax Vacuum Distillation Unit), having reached the RFSU status. 

6.         Is the Company’s management considering the take-over of PKN Orlen S.A. by Grupa Lotos S.A. with a view to enhancing Poland’s energy security and mitigating the oil and gas transit risk? The transaction would involve an increase in the Company’s share capital through a private placement of new Series E ordinary bearer shares for the State Treasury, with pre-emptive rights waived. All Series E shares would be subscribed for by the State Treasury and fully paid for with in-kind contributions in the form of 117m shares in PKN Orlen S.A delivered to Grupa LOTOS S.A. by the State Treasury.

The Company is participating in a due diligence process conducted by PKN Orlen S.A. in connection with the letter of intent signed by PKN Orlen S.A. and the State Treasury for the acquisition of a controlling interest in Grupa LOTOS S.A. by PKN Orlen S.A. (for more details, see Current Report No. 26/2018 published by PKN Orlen S.A.)

7.         What progress has been made in the case concerning two tax inspections in respect of VAT for 2010–2011 conducted by tax audit authorities? In 2015, the Company received two decisions issued by the Director of the Tax Audit Office in Bydgoszcz, in which the Tax Audit Office identified tax arrears of PLN 48.4m for 2010 and PLN 112.5m for 2011.

The relevant rulings of the Provincial Administrative Court of Gdańsk have been appealed to the Supreme Administrative Court, with the case currently pending hearing,

which is expected to be scheduled for a date late in 2018 or early in 2019.

8.         Has the ownership restructuring of the upstream segment, aiming to build the segment around a dedicated holding company LOTOS Upstream, been effective in terms of:

•           improving the financial cost effectiveness of the Norwegian operations?

•           reducing debt of the upstream companies?

•           enhancing the ability to obtain external financing for new projects?

•           enhancing operational efficiency in the Baltic Sea?

•           improving risk management and increasing the effectiveness of consistent strategy implementation, capital allocation and owner’s supervision?

The ownership restructuring of the upstream segment, aiming to build the segment around a dedicated holding company LOTOS Upstream, has effectively contributed to reducing the upstream companies’ debt.

The restructuring has led to a marked improvement in the companies’ equity and liabilities structure and created new opportunities for them to raise funds externally to finance new projects, i.e.

• the financing structure of LOTOS E&P Norge AS has been significantly improved (positive equity achieved following the restructuring / intragroup financing / external financing);

• LOTOS Upstream Sp. z o.o.’s (LUPS) share capital was increased;

• LOTOS Petrobaltic S.A.’s (LPB) debt was significantly reduced, allowing the company to refinance its external debt.

   

   

  The corporate restructuring enabled LPB to effectively implement projects in the Baltic Sea, as reflected in the progress made by the company towards completion of the development of the B8 field, a key strategic project for Poland. The restructuring has laid the foundations for expanding the offshore well services business, which is expected to enhance the upstream segment’s operational efficiency in the long term.

  As part of the process, LUPS took over from LPB as the holding company of the Group’s upstream segment. As a result, management functions, i.e. strategy, finance, risk, and project management (LUPS), have been separated from operating functions (LPB), leading to more transparent and effective management processes.

   

Legal basis: Par. 19.1.12 of the Minister of Finance’s Regulation on current and periodic information to be published by issuers of securities and conditions for recognition as equivalent of information whose disclosure is required under the laws of a non-member state of March 29th 2018 (Dz.U. of 2018, item 757).