Acting in accordance with Par. 3.2 of the Rules of Procedure for the Supervisory Board and Section 19 of “Good Practices in Public Companies” and having examined the financial statements of Grupa LOTOS S.A. and the LOTOS Group, the Directors’ Report on the operations of Grupa LOTOS S.A. and the LOTOS Group, as well as the qualified auditor’s opinions and report attached to the financial statements, the Supervisory Board of Grupa LOTOS S.A. presents the General Shareholders Meeting its opinion on the overall standing of the LOTOS Group. In 2005, the sales revenues of the LOTOS Group amounted to PLN 9,645.5m and were 29.5% higher than in 2004. This growth followed primarily from higher volumes of white fuel sales by the parent undertaking and higher selling prices. The consolidated operating profit in 2005 totalled PLN 1,069.9m and was PLN 457.7m (74.8%) higher than in 2004. The increase was chiefly a result of the PLN 266.6m goodwill recognised following an independent valuation of the assets, liabilities and contingent liabilities of the Southern Refineries and Petrobaltic, acquired by the Group on February 3rd 2005. The LOTOS Group’s net profit (attributable to the shareholders of the parent undertaking) for 2005 amounted to PLN 915.1m and was PLN 372.3m higher than in the previous year. This result should be seen as very good given the necessary 47-day repair shutdown at the Gdańsk refinery, as a result of which the Company was unable to fully take advantage of the particularly good market conditions prevailing in 2005. As regards the implementation strategic objectives, 2005 was also a year of intensive efforts aimed at implementing key development projects, in particular the Comprehensive Technical Upgrade Programme (PKRT), the PROSTA project, and the restructuring and development of the Southern Refineries. The activities under the PKRT project involved further work on the technological development plan, negotiation of agreements with market partners concerning various areas of the Programme, and contacts with selected financial institutions. The activities under the PROSTA project concentrated on the continued expansion of the network of own service stations and preparations to acquire the ESSO and Slovnaft networks. The Supervisory Board has found that the auditor’s opinion contains two qualifications: one concerns the size of provisions at the Czechowice Refinery, the other – Petrobaltic S.A.’s investment in the Naftos Gavyba Group. Neither of the matters which the qualifications concern pose a threat to the operations of the LOTOS Group. The Supervisory Board considers the following as positive developments in the Group’s operations: -successful execution of the IPO process – in a manner that increased the value of Group; -quick and efficient repair of production facilities and launch of additional production capacities, as well as increase in petroleum processing; -consistent integration of the Southern Refineries into the structures of the LOTOS Group and their restructuring; -flexible and ongoing adjustment of the Group’s structures to the needs resulting from the acquisition of the Southern Refineries and public listing of their shares; -strengthening of the Group’s market position through such means as effective acquisition of service station networks. The Supervisory Board believes that the financial standing of Grupa LOTOS S.A. and the LOTOS Group is sound and appropriate for continuing the restructuring processes and implementing investment programmes. However, the Supervisory Board is also of the opinion that the conditions and processes of the operations of the LOTOS Group should be improved. Given the complexity of its structure, the scale and diversity of operations, as well as the volatile conditions of its economic environment, the Group must act quickly to develop risk management organisation and develop an appropriate framework of institutional and functional competencies. The Company’s management structure and methods must be consistently adapted to the present and future needs of the Group based on a business process management model. The control and implementation of all investment processes, in particular the PKRT programme, must be strengthened. Bearing in mind the significance of crude oil supply from the perspective of the cost structure as well as the public interest, efforts aimed at diversifying the sources of crude oil supply and ensuring supply without intermediaries should be carried out more decisively. The Supervisory Board is of the opinion that the activities undertaken in 2005 – in particular the expansion of production capacity and the strengthening of market position – will bring the Company a series of measurable benefits, translating into further improvement of its financial performance and increase in shareholder value. Taking into account the Company’s growth prospects in the current year, the Supervisory Board views its standing as sound and financially stable.
Supervisory Board's Assessment of the Company's overall standing after 2005
Report no. 96/20052006-06-14