Strategy of the LOTOS Group by 2012
Report no. 96/20052006-06-27

The Management Board of Grupa LOTOS S.A. hereby reports that on June 27 2006, the Company’s Supervisory Board approved the strategy for LOTOS Group until 2012. The strategy assumes that work on building the Company’s shareholder value through optimum utilisation of the Group’s capabilities in the three basic segments of activities will continue; this will enable execution of the projects and initiatives prepared in 2005 and 2006. The key components of the approved strategy include: 1.Crude oil production and supplies: Development of the Company towards: •Fully integrating and consolidating Petrobaltic, and maximising the company’s value; •Obtaining direct access to hydrocarbon reserves abroad through execution of financially viable projects with acceptable risks; •Enhancing the security of crude oil supplies to the Company through diversification of crude sources – maximum 60% of feedstock from a single source. 2.Refining: Execution of the PKRT project (comprehensive technical upgrade) assuming construction of: •Atmospheric and vacuum distillation unit, with a nameplate capacity of ca. 4.5m tonnes/year, to increase the throughput capacity to 10-10.5m tonnes/year; •SDA/ROSE deasphalting unit, MHC hydrocracking unit (production of fuel components, particularly for diesel fuel), and IGCC unit for the plant’s and the PKRT project needs. Particular units will be commissioned during the period until 2010. Execution of other construction and upgrade projects: •Construction of a new diesel hydrodesulphurisation unit, to enable production of diesel fuel with sulphur content below 10 ppm from 2009; •Increasing the production capacity of the existing hydrocracker; •Increasing the production capacity of the existing gasoline production units; •Construction of a new xylene fraction production unit. 3.Marketing Development of retail sales and achieving the target market share of 10% based on the following assumptions: •Increase in the number of service stations to 500; •Development of sales at the service stations through implementation and leveraging the loyalty and fleet programmes; •Marketing, throughout the service station network, of advanced quality fuels. Development of wholesale and achieving the target market share of 30% based on the following assumptions: •Higher sales to institutional customers and development of a market based on long-term sales contracts; •Higher total volume of fuel sales from 4m tonnes/year to 8m tonnes/year in 2012; launch of biofuel sales; •Higher share in the JET aviation fuel market and launch of direct deliveries to airports. In line with the strategy, Grupa LOTOS S.A. plans to increase the crude oil production from the Baltic seabed from 300 thousand tonnes/year to 1m tonnes/year in 2012 thus diversifying its crude sources. In 2011, the annual crude throughput should reach 10.5m tonnes/year, with higher conversion ratios. By 2012, the Company plans to significantly strengthen its position in the Baltic region, while in Poland its targets include a 10% share in the retail market and a 30% share in the wholesale market. The capital expenditure related to execution of the 2006-2012 strategy is planned to reach up to PLN 7.3bn. In line with the financial strategy, following completion of the key strategic initiatives, the Company’s debt-to-equity ratio should fall within the range of 0.3-0.4, while ROACE and EBIDTA should not fall below 12% and 9%, respectively. Under the approved strategy and based on the macroeconomic assumption,* in 2012 Grupa LOTOS S.A. is expected to record ROACE of 15.6% and EBITDA of 13.5%. The debt-to-equity ratio, which at the peak of the investment activity in 2009 is not to exceed 0.8, will fall to 0.11. The overriding principle of the dividend policy will be optimisation of the Group’s financing structure. During the time of execution of the key strategic programmes, dividend payments will not exceed 10% of net profit. Following completion of the programmes, the target dividend payout ratio will be 30%. * Key macroeconomic and pricing assumptions underlying the financial policy until 2012. 2009 2012 Brent dtd USD/bbl 57,2 56,0 Brent dtd - Ural DAF Adamowo USD/bbl 5,6 5,5 Premium Unl Carg. CIF NWE USD/Mg 534 530 ULSD 10 ppm Carg. CIF NWE USD/Mg 539 530 3,5 PCT Barges FOB Rotterdam USD/Mg 248 244 EUR/PLN 3,9 3,7 USD/PLN 3,2 3,0 Legal basis for the publication of this report: Art. 56.1.1 of the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies