The Organization and its Report

Transcription

1 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report The Organization and its Report We are an oil concern, one of the largest and most efficient companies in Central and Eastern Europe. We are engaged in the exploration for and production of crude oil from the Baltic Sea and the Norwegian Continental Shelf and onshore deposits in Lithuania and we operate the 3rd largest chain of service stations in Poland. In 2012, we recorded PLN 33.1bn in sales revenue. LOTOS-branded products are currently available in 75 countries worldwide. IN THIS CHAPTER The Organization Integrated Reporting Stakeholders Awards and distinctions 2

2 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / The Organization / Key data 2012 Key data 2012 Key data 2012 Grupa LOTOS - selected information FINANCIALS (*) Unit Year ended Dec Year ended Dec Change Revenue EUR 000 7,444,867 6,591,463 13% Operating profit EUR , ,745-9% Pre-tax profit EUR ,128 78, % Net profit EUR ,410 74, % Total comprehensive income EUR ,053 (26,959) - Net cash from operating activities EUR ,208 33, % Net cash from investing activities EUR ,373 (7,243) - Net cash from financing activities EUR 000 (179,186) (27,446) - Total net cash flow EUR 000 (50,605) (1,137) - Basic earnings per share EUR % Donations to social initiatives EUR % Environmental investments EUR 000 % As at Dec As at Dec Total assets EUR 000 3,916,667 3,724,308 5% Equity EUR 000 1,725,051 1,320,739 31% NON-FINANCIAL INFORMATION Unit Year ended Dec Year ended Dec Change (comparative data) 3

3 Workforce ** No, of employees 1,323 1, % Employee turnover % pp Lost Time Injury Frequency LTIF index (per 1 million hours worked) *** ,8% Total water consumption m 3,721,330 3,809,856-2% 3 CO emissions '000 tonnes/year 1,979 2,045-3% 2 The LOTOS Group - selected consolidated data FINANCIALS (****) Unit Year ended Dec Year ended Dec Change Revenue EUR 000 7,933,439 7,067,362 12% Operating profit EUR , ,185-72% Pre-tax profit EUR , ,180-35% Net profit EUR , ,837 41% Net profit attributable to owners of the Parent EUR , ,758 41% Net profit attributable to non-controlling interests EUR % Total comprehensive income EUR ,747 67, % Total comprehensive income attributable to owners of the Parent EUR ,744 66, % Total comprehensive income attributable to non-controlling interests EUR % Net cash from operating activities EUR , ,956 48% Net cash from investing activities EUR 000 (200,798) (204,571) - Net cash from financing activities EUR 000 (211,635) (8,594) - Total net cash flow EUR 000 (89,671) 4, % Basic earnings per share EUR % Donations to social initiatives EUR % Environmental investments EUR 000 % As at Dec As at Dec Total assets EUR 000 4,905,919 4,623,986 6% Equity attributable to owners of the parent EUR 000 2,215,560 1,761,781 26% Non-controlling interests EUR % Total equity EUR 000 2,216,731 1,761,996 26% 4

4 NON-FINANCIAL INFORMATION Unit Year ended Dec Year ended Dec Change (comparative data) Workforce ** No, of employees 4,748 5,004-5% Lost Time Injury Frequency LTIF index (per 1 million hours worked) *** Share in the fuel market % pp Crude oil production thousand tonnes % Natural gas production m Nm % 3 (*) Financials of Grupy LOTOS are presented in the Grupa LOTOS Financial Statements ( (**) Average annual employment. (***) LTIF number of accidents resulting in inability to work x106/number of working hours, calculated for the average annual workforce. (****) Financials of the LOTOS Group are presented in the Consolidated Financial Statements of the LOTOS Group ( The detailed review of the financial data is presented in the Directors' Report on the Operations of the LOTOS Group. ( 5

5 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / The Organization / Business profile Business profile This Integrated Annual Report provides an overview of the activities of the Group of Grupa LOTOS S.A. ( the LOTOS Group or the Group ), with a particular focus on the LOTOS Group s parent entity Grupa LOTOS S.A. ( Grupa LOTOS, the Company or concern ). Grupa LOTOS is one of Europe s largest and most efficient oil companies. In terms of revenue generated in 2011, it is second of the 500 largest companies in Poland and sixth among the 500 largest companies in Central and Eastern Europe.* Grupa LOTOS is involved in the production and processing of crude oil as well as wholesale and retail sale of petroleum products. Our range includes unleaded gasoline, diesel oil, diesel oil for heating purposes (light fuel oil), aviation fuel and heavy fuel oil. We specialise in the production and sale of lubricating oils and bitumens. On average, every third vehicle in Poland is driven by fuel produced at the Grupa LOTOS refinery. The strategy provides for the consolidation of the LOTOS Group s position as a strong, innovative and successfully developing entity, which plays a crucial role in ensuring Poland s energy security and operates in compliance with the principles of social responsibility and sustainable growth. Grupa LOTOS is a joint-stock company whose shares have been listed on the Warsaw Stock Exchange (WSE) since June According to our Articles of Association, we operate in Poland and abroad. Apart from Grupa LOTOS (the parent entity and operator of the refinery in Gdańsk), the LOTOS Group comprises 17 other companies operating under the LOTOS name. Two of them are based outside Poland - one in Lithuania, and the other one in Norway. The LOTOS Group employs over 5,000 staff. Territory covered by the LOTOS Group's operations Through LOTOS Petrobaltic S.A. and LOTOS Exploration and Production Norge AS, we are engaged in the exploration for and production of crude oil from the Baltic Sea and the Norwegian Continental Shelf. We also have access to onshore oil deposits in Lithuania through the subsidiary AB LOTOS Geonafta. We are focusing our efforts on dynamically growing the hydrocarbon exploration and production segment, which is our strategic priority in the 6

6 years In line with the strategy, crude oil production is expected to reach 1.2 million tonnes per year by In 2012, crude output was 262,300 tonnes, up 15.1% year on year. During the period under report, we had no plans for discontinuation of the production activities, we did not decommission any of the production sites nor are any of them in the process of being decommissioned. In 2012, the LOTOS Group s net profit came in at nearly PLN 923m, a 42% increase on the previous year. In the same period, we recorded PLN 33.1bn in revenue, a 13% improvement on Our performance was driven by several factors, including a record-high crude oil throughput at the Gdańsk refinery of almost 9.7 million tonnes in 2012 (up 5.6% on 2011). The LOTOS Group s main market is Poland, but our foreign sales also grow regularly. In 2012, export volumes accounted for 31% of the LOTOS Group s total sales - we distribute our products to 75 countries worldwide. Exports of LOTOS brand products LOTOS operates a country-wide chain of over 400 branded service stations (the third largest in Poland). Through our chain, we offer products and services in the premium segment, to which motorway service stations belong, and under the new LOTOS Optima brand in the economy segment. This is also the fastest growing chain of service stations in Poland. In 2012, the number of economy service stations doubled to 101 sites. As at the end of 2012, the LOTOS Group s share in retail fuel sales in Poland was 8%, while its share in the domestic fuel market stood at 34%. 7

7 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / The Organization / Shareholder structure Shareholder structure The share capital of Grupa LOTOS comprises 129,873,362 ordinary shares, fully paid-up, with a par value of PLN 1 per share. Each share confers the right to one vote at the General Shareholders Meeting and carries the right to dividend. Structure of Grupa LOTOS share capital As at Dec 31st 2012 and Dec 31st 2011 Shareholders Number of Par value of shares % of share capital held shares/votes (PLN) State Treasury 69,076,392 69,076, Other shareholders 60,796,970 60,796, Total 129,873, ,873, At the end of 2011, the State Treasury held a total of 69,076,392 ordinary bearer shares in Grupa LOTOS, representing 53.19% of the share capital and the same proportion of votes at the Company s General Meeting. In the reporting period, no changes occurred in shareholder structure. Shareholder structure of Grupa LOTOS Grupa LOTOS shares by series State Treasury, 53% Series A shares, 61% Other Shareholders, 47% Series B shares, 27% Series C shares, 12% 8

8 Shares in Grupa LOTOS held by the Company s management and supervisory personnel As at December 31st 2012 Name Number of shares Par value of shares (PLN) Board, including: 9,636 9,636 Marek Sokołowski 8,636 8,636 Zbigniew Paszkowicz 1,000 1,000 Supervisory Board 0 0 Total 9,636 9,636 9

9 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / The Organization / Structure of the organization Structure of the organization As at December 31st 2012, the LOTOS Group comprised Grupa LOTOS (the parent entity), and 34 production and service companies, including: 14 direct subsidiaries of Grupa LOTOS, 20 indirect subsidiaries of Grupa LOTOS. Grupa LOTOS also holds shares in a jointly-controlled entity. Subsidiaries comprising the LOTOS Group Company name Registered office Business profile Method of consolidation Percentage of share capital held by Grupa LOTOS Dec Dec Parent Grupa LOTOS S.A. Gdańsk Production and processing of refined petroleum products (mainly fuels) and their wholesale Not applicable Not applicable Not applicable Direct subsidiaries LOTOS Paliwa Sp. z o.o. Gdańsk Wholesale and retail sale of fuels and light fuel oil, management of the LOTOS service station chain full % % LOTOS Gaz S.A. w likwidacji (in liquidation) Kraków Dormant full % % LOTOS Oil S.A. Gdańsk Production and sale of lubricating oils and lubricants, and sale of base oils full % % LOTOS Asfalt Sp. z o.o. Gdańsk Production and sale of bitumens full % % LOTOS Kolej Sp. z o.o. Gdańsk Rail transport full % % LOTOS Serwis Sp. z o.o. Gdańsk Maintenance of mechanical and electrical systems and controlling devices, overhaul and repair services full % % 10

10 LOTOS Lab Sp. z o.o. Gdańsk Laboratory analyses full % % LOTOS Straż Sp. z o.o. Gdańsk Fire safety full % % LOTOS Ochrona Sp. z o.o. Gdańsk Personal and property protection full % % LOTOS Parafiny Sp. z o.o. Jasło Production and sale of paraffin full % (1) LOTOS Tank Sp. z o.o. Gdańsk Until October 16th trading in aviation fuel, since January 1st logistics services full % % LOTOS Czechowice S.A. Czechowice- Storage and distribution of full % % (parent of another group: LOTOS Dziedzice fuels Czechowice Group) LOTOS Jasło S.A. Jasło Storage and distribution of fuels Renting and operating of own or leased real estate full % % LOTOS Petrobaltic S.A. Gdańsk Acquisition of crude oil and (2) full 99.96% 99.95% (parent of another group: LOTOS natural gas deposits and their Petrobaltic Group) exploitation LOTOS Park Technologiczny Sp. z o.o. Jasło Dormant full % % Indirect subsidiaries RCEkoenergia Sp. z o.o. Czechowice- Production and distribution of full % % Dziedzice electricity, heat and gas LOTOS Biopaliwa Sp. z o.o. Czechowice- Production of fatty acid methyl full % % Dziedzice esters (FAME) Miliana Shipholding Company Nicosia, Storage and transport of crude (3) full 99.96% 99.95% Ltd. Cyprus oil, other sea transport related (parent of another group: Miliana services, and management of Shipholding Company Group) own financial assets Technical Ship Management Gdańsk On October 1st 2012, the (3.4) full 99.96% % Sp. z o.o. (4) company launched sea transport support activities involving advisory on the operation of ships, Miliana Shipmanagement Ltd. Nicosia, Provision of sea transport and (3) full 99.96% 99.95% Cyprus related services Miliana Shipping Group Ltd. (parent of another group: Miliana Shipping Group Group) Nicosia, Cyprus Management of own assets full 99.96% 99.95% (3) Bazalt Navigation Co. Ltd. Nicosia, Cyprus Ship chartering full 99.96% 99.95% (3) Granit Navigation Company Ltd. Nicosia, Cyprus Ship chartering 99.96% 99.95% (3) Kambr Navigation Nicosia, 11Ship chartering full 99.96% (3) 99.95%

11 Company Ltd. Cyprus St. Barbara Navigation Company Ltd. Nicosia, Cyprus Ship chartering full 99.96% 99.95% (3) Petro Icarus Company Ltd. Nicosia, Cyprus Ship chartering full 99.96% 99.95% (3) Petro Aphrodite Company Ltd. Nicosia, Cyprus Ship chartering full 99.96% 99.95% (3) LOTOS Exploration and Production Norge AS Stavanger, Norway Oil exploration and production on the Norwegian Continental Shelf, provision of services related to oil exploration and production (3) full 99.96% 99.95% Aphrodite Offshore Services N.V. Curaçao, Netherlands Antilles Dormant since October 17th 2011 (3) full 99.96% 99.95% Energobaltic Sp. z o.o. Władysławowo Production of electricity, heat, LPG and natural gas condensate (3) full 99.96% 99.95% AB LOTOS Geonafta (parent of another group: the AB LOTOS Geonafta Group) Gargždai, Lithuania Crude oil exploration and production, drilling services, and purchase and sale of crude oil (3) full 99.96% 99.95% UAB Genciu Nafta Gargždai, Lithuania Crude oil exploration and production (3) full 99.96% 99.95% UAB Manifoldas Gargždai, Lithuania Crude oil exploration and production (3.5) full 99.96% 49.98% Baltic Gas Sp. z o.o. Gdańsk The company has not commenced operations nonconsolidated (6) (3.6) 99.96% - Baltic Gas spółka z ograniczoną odpowiedzialnością i wspólnicy sp.k. Gdańsk The company has not commenced operations nonconsolidated (7) (3.7) 99.96% - Jointly-controlled companies UAB Minjos Nafta Gargždai. Lithuania Crude oil exploration and production proportional 49.98% 49.98% (3) (1) On January 10th 2012, 100% of shares in LOTOS Parafiny Sp. z o.o. were sold to a third party, Krokus Chem Sp. z o.o. As an additional element of the transaction, on November 29th 2011, the parties signed a seven year agreement for the supply of slack waxes by Grupa LOTOS S.A. to LOTOS Parafiny Sp. z o.o., for the period from January 1st 2012 to December 31st The estimated net value of the agreement is PLN 780m. The maximum net value of contractual penalties is estimated at PLN 98m. The agreement does not contain any provisions which would prevent the parties from seeking additional compensation beyond the contractual penalties. The other terms and conditions of the contract do not differ from the terms and conditions commonly applied in agreements of this kind. (2) In exercise of its pre-emptive rights, on December 15th 2011 Grupa LOTOS S.A. subscribed for the newly issued Series C shares of LOTOS Petrobaltic S.A. Grupa LOTOS S.A. subscribed for 279,996 shares in the increased share capital of LOTOS Petrobaltic S.A., with a total value of PLN 53,980,000. The increase in the share capital of LOTOS Petrobaltic S.A. was registered on February 2nd

12 Grupa LOTOS S.A. also continued purchasing shares from non-controlling shareholders as part of the voluntary share purchase process, which was completed at the end of March From January 1st 2012 to the completion of the voluntary share purchase process, Grupa LOTOS S.A. acquired 26 shares in LOTOS Petrobaltic S.A. with an aggregate value of PLN 3,000, representing % of the company's share capital. With respect to the remaining shares held by non-controlling shareholders, excluding the shares held by the State Treasury, on May 8th 2012 the Extraordinary General Meeting of LOTOS Petrobaltic S.A. adopted a resolution on minority squeeze-out by the majority shareholder, that is Grupa LOTOS S.A. As part of the squeeze-out process, by December 31st 2012 Grupa LOTOS S.A. acquired 1,421 shares in LOTOS Petrobaltic S.A. with an aggregate value of PLN 179,000, representing % of the company's share capital, of which 218 shares with an aggregate value of PLN 28,000, representing % of the company's share capital, were recorded in the share register. Following the acquisition of shares in LOTOS Petrobaltic S.A. from non-controlling shareholders as part of the voluntary share purchase process and the minority squeeze-out, as well as the increase in the share capital of LOTOS Petrobaltic S.A., as at December 31st 2012 Grupa LOTOS S.A. held a 99.96% interest in the share capital of LOTOS Petrobaltic S.A., including 9,935,069 shares entered in the share register, and representing 99.95% of the share capital of LOTOS Petrobaltic S.A. (3) The shareholding changes described in item (2) above also resulted in changes in Grupa LOTOS S.A. s indirect interests in the share capitals of the subsidiaries and of the jointly-controlled company of LOTOS Petrobaltic S.A. (4) On July 31st 2012, Grupa LOTOS S.A. sold 100% of its interests in LOTOS Ekoenergia Sp. z o.o. to the Miliana Shipholding Company Ltd. A change in the company name from LOTOS Ekoenergia Sp. z o.o. to Technical Ship Management Sp. z o.o. was then registered on October 17th (5) On November 28th 2012, AB LOTOS Geonafta acquired a 50% interest in UAB Manifoldas. As a result of the transaction, AB LOTOS Geonafta now holds a 100% interest in UAB Manifoldas. (6) On November 12th 2012, LOTOS Petrobaltic S.A. and Kancelaria Prawna Domański i Wspólnicy sp.k. executed a share purchase agreement whereby LOTOS Petrobaltic S.A. acquired a 100% interest in Baltic Gas Sp. z o.o. Baltic Gas Sp. z o.o. was excluded from consolidation due to the fact that the data disclosed in its financial statements as at December 31st 2012 is immaterial to the performance of the obligation specified in IAS 27 Consolidated and Separate Financial Statements. (7) On November 12th 2012, LOTOS Petrobaltic S.A. purchased from Kancelaria Prawna Domański i Wspólnicy sp.k. all the rights and obligations in Baltic Gas Spółka z ograniczoną odpowiedzialnością i wspólnicy sp.k., making it the sole limited partner in the company. The general partner in Baltic Gas spółka z ograniczoną odpowiedzialnością i wspólnicy sp.k. is Baltic Gas Sp. z o.o., which was excluded from consolidation due to the fact that the data disclosed in its financial statements as at December 31st 2012 is immaterial to the performance of the obligation specified in IAS 27 Consolidated and Separate Financial Statements. Structure of the LOTOS Group As at December 31st

13 State Treasury 0.01%, employees 0.04% Limited partner General partner Grupa LOTOS holds 8.97% of the share capital of P.P.P.P. NAFTOPORT Sp. z o.o., a company of the PERN Przyjaźń Group of Płock Within the LOTOS Group, the role of Grupa LOTOS as the parent entity is to integrate the key management and support functions. To this end, Grupa LOTOS has implemented a segmental management model. A segment is understood as a separate area of business activities managed at the Group level by a designated member of the Board of Grupa LOTOS. This model enhances management efficiency, delivering Group-wide cost and revenue synergies. Segmental management provides for consistent implementation of strategy, coordinated planning and controlling, integrated operational management and maintenance of uniform corporate standards. In the operational activities of the LOTOS Group, the following two main reporting operational segments can be identified: Extraction operational segment comprising activities concerning exploration for and exploitation of crude oil and natural gas deposits; 14

14 Production and marketing operational segment comprising activities of companies concerned with production and processing of refined petroleum products as well as their retail and wholesale, and support, transport and servicing activities. For management purposes, the LOTOS Group is divided into the following business units based on the industry segments: Management segment falls within the remit of the President of the Board (i.e. the head of the management segment). The management segment s activities are focused on increasing the LOTOS Group value through overall management of its operations, including coordination of efforts to formulate corporate strategies, define development directions for individual business areas and coordinate the process support function. Exploration & production segment falls within the remit of the Vice-President of the Board in charge of Oil and Gas Exploration & Production (i.e. the head of the E&P segment). The scope of the E&P segment s activities includes formulation of development strategies for the LOTOS Group in the area of oil and gas exploration and production, as well as management and supervision of these activities. LOTOS Petrobaltic and its affiliates are part of the exploration & production segment. Operational segment falls within the remit of the Vice-President of the Board, Chief Operation Officer (i.e. the head of the operational segment). The operational segment s tasks include formulation of strategies to maintain and expand production facilities, as well as supervision and coordination of all matters related to the processing of crude oil, refinery production and technologies. Beyond that, the operational segment prepares policy objectives for refinery production, supervises production-related R&D work, coordinates technical and technological development projects, and ensures the requisite technical performance of the LOTOS Group s assets, safety processes and physical protection. LOTOS Ochrona, LOTOS Straż, LOTOS Serwis, LOTOS Lab, LOTOS Jasło and LOTOS Czechowice and its affiliates are all part of the operational segment. LOTOS Ochrona was transferred to the operational segment in October Previously, it had been allocated to the management segment; Marketing segment falls within the remit of the Vice-President of the Board, Chief Commercial Officer (i.e. the head of the marketing segment). The marketing segment s tasks include formulation of marketing strategies as well as effective management of sales, supplies and distribution of crude oil and petroleum products. It is also responsible for the development of trading and optimisation activities. LOTOS Paliwa, LOTOS Oil, LOTOS Asfalt, LOTOS Kolej and LOTOS Tank are all part of the marketing segment; Financial segment falls within the remit of the Vice-President of the Board, Chief Financial Officer (i.e. the head of the financial segment). The Financial segment s tasks involve monitoring of the implementation of LOTOS Group strategies and overall management of financial and accounting processes. This includes formulation of financial, legal and insurance strategies and monitoring of their implementation, management of budgeting and controlling, development and implementation of financial risk management strategies and overall management of assets and restructuring processes. LOTOS Park Technologiczny and LOTOS Gaz w likwidacji (in liquidation) and its affiliate are part of the financial segment. In 2012, there were significant changes to the Grupa LOTOS organizational structure, effected as a result of changes in the composition of the Company s Board. The changes were made to: Ensure implementation of the business strategy until 2015, Raise the standing, decision-making powers, responsibility and effectiveness of the segments, Enhance the management model, Minimise management costs, 15

15 Improve segmental reporting, Enhance the communication process, Optimise areas related to financial and accounting support, CSR and sponsorship, IT management, financial risk management and asset management. Breakdown of the operational segments As at December 31st 2012 The corporate structure of Grupa LOTOS reflects its division of competences and the relationship between the various functions and tasks performed at the Company, and specifies the organizational and management hierarchy. As at the end of 2012, the corporate structure of Grupa LOTOS comprised the following units: 15 divisions, including 5 divisions reporting directly to the Chief Executive Officer, 35 offices, 19 departments, and 8 complexes. 16

16 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / Integrated Reporting Integrated Reporting The Annual Report of the LOTOS Group for 2012 is an integrated report covering the organization s operations in the financial year 2012, which coincides with the calendar year. The previous integrated annual report was published in April In , we published separate reports on the financial and non-financial aspects of our activity. In 2010, the Company s Board decided to integrate the reports for stakeholders presenting the organization s management approach and performance across all areas of its activity, i.e. economic, social and environmental. This publication is our fourth integrated report. The Grupa LOTOS Board s intent is to enable stakeholders to make a comprehensive, measurable and objective assessment of our overall involvement in sustainable development through an integrated and reader-friendly presentation of our financial statements and non-financial reports for a given year. We follow the best communication practices applicable to public companies: For financial reporting, we adhere to the International Financial Reporting Standards (IFRS) as endorsed by the European Union, published and in effect as at December 31st 2012, For non-financial reporting, we adhere to the Sustainability Reporting Framework and Guidelines of the Global Reporting Initiative (G3.1 GRI, with the Oil and Gas Sector Supplement) and the United Nations Global Compact s Principles. We are at Application Level A+* in the three-level GRI reporting system. * The individual Application Levels were assigned letters from C (the lowest), to C+ (where a + is given if a report has been verified by an independent assurance body), B, B+, A, through to A+. The reporting criteria used for each level measure the extent to which the Guidelines and the GRI Reporting Framework have been applied. For integrated reporting, there are currently no uniform, internationally recognised standards. In 2010, the Global Reporting Initiative and the Prince's Accounting for Sustainability Project established the International Integrated Reporting Committee (IIRC), whose aim is to establish an internationally recognised framework for integrated reporting. The IIRC believes that integrating financial analysis with analysis of the social, environmental and economic context of a company s operations is a valuable source of information, allowing its stakeholders to assess its long-term profitability research conducted together by the Black Sun agency and the IIRC revealed that integrated reporting allows better insight into how an organisation will generate future value. The integrated reporting model offers improved coherence in corporate communication with third parties and improved quality of the data collected. Those bound to benefit the most from the new reporting models include analysts and corporate reporting staff. As we wait for the new reporting standard to emerge, we consistently strive to improve the adopted model, using best available practice in financial and non-financial reporting. In our work on this Report we embraced the key principles of accuracy, materiality, completeness, comparability, balance and reliability. All data contained in this Report was collected in a reliable and responsible manner, and verified as being consistent with the facts. 17

17 The consolidated financial statements of the LOTOS Group included in this Report were audited by qualified auditors at Ernst & Young, pursuant to the provisions of Chapter 7 of the Polish Accountancy Act of September 29th 1994 (Dz.U. of 2009, No. 152, item 1223, as amended), and the Polish financial auditing standards issued by the National Council of Statutory Auditors (Krajowa Rada Biegłych Rewidentów). To ensure an appropriate level of transparency and credibility, in 2011 the Board of Grupa LOTOS decided that thirdparty assurance of non-financial data included in the Annual Report should be provided by an independent body. Limited assurance provided in 2013 by PwC complied with the International Standard on Assurance Engagements (3000 ISAE, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information). ISAE 3000 was issued by the International Federation of Accountants (IFAC). The standard is based on IFAC s Code of Conduct and the International Standard of Quality Control (ISQC-1), and is used to provide assurance with respect to CSR reports. The Standard defines the key principles and procedures for assurance engagements, including limited assurance engagements. The Board of Grupa LOTOS has resolved to publish annual implementation progress reports on the LOTOS Group's CSR strategy. The Annual Report for 2012 is our second report with independently verified CSR information, and we have made every effort to ensure the quality of the data collection process which is supported by the organization s management systems. Driven by environmental concerns, we are publishing this Report in electronic form only. This also serves the intention of providing readers with the most convenient range of solutions to making this publication a friendly tool, with which to perform their own analyses. Part of this are the functional solutions embedded in the electronic format, which are updated regularly based on, for example, stakeholder opinion polls or the appraisal of traffic to the webpage featuring the Report. Readers can display selected numerical data by periods, GRI indicators, operating segments, etc. Information included in the Report is integrated with the contents of the Company s website, which includes reports from previous years. Accessibility options such as Narration, a high-contrast mode and text zoom, have been added for people with disabilities, the elderly and the vision impaired. Environmental friendliness is ensured by an economical printout option, and there is also an option for readers to leave feedback. Previous reports are available from ( For contact details, refer to the Useful information ( section of this Report. 18

18 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / Integrated Reporting / Scope and reach Scope and reach In determining the content of the non-financial sections of the Annual Report, we were guided by the GRI Reporting Framework. The information contained in the Report was selected based on the materiality criterion, which we define as being the potential to affect our enterprise's compliance with sustainable development principles, as well as our external stakeholders when looking for reliable, comparable and accurate information with which to inform their decisions. The non-financial information of this Report was prepared using the majority of core and additional indicators provided for in the GRI Guidelines, including economic, environmental and social performance. An important improvement on the previous report is our use, for the first time, of the newly established GRI Oil & Gas Sector Supplement. This adds additional indicators to the Report designed specifically for our industry. The Supplement itself was prepared using the G3.1 GRI Guidelines, which created the need to update the indicators reported in previous years based on G3 Guidelines. Although we had no obligation to do so, we wanted to include the Sector Supplement, so migration to the new revision of the Guidelines proved inevitable. The methods used to calculate the figures presented in this Report were the same as those used in preparation of the LOTOS Group s consolidated financial statements for These methods are in accordance with the IFRS effective as at December 31st For a vast majority of thematic areas, the facts and non-financial data presented in the Report pertain to Grupa LOTOS, the parent entity. However, all due care and consideration has been given on our part to account for the LOTOS Group s consolidated data where possible. Regarding areas of key importance to social and environmental responsibility, we have presented data on the largest commercial companies of the group and, as a natural addition to the Sector Supplement, on the LOTOS Petrobaltic Group. In each case, we make a clear distinction by specifically indicating the LOTOS Group entity currently being discussed in the Report. Whenever we refer to the largest commercial companies of the LOTOS Group (both in terms of revenue and head count), this applies to LOTOS Asfalt, LOTOS Kolej, LOTOS Oil and LOTOS Paliwa. This Report is our first attempt at a comprehensive presentation of results from the largest of the LOTOS Petrobaltic Group companies active in the exploration and production business. After the parent, LOTOS Petrobaltic (operating in Poland), these include LOTOS Geonafta in Lithuania and LOTOS Norge in Norway. The Report also considers another vital company of the group, Energobaltic, which is a CHP operator in Władysławowo. Since this is the first reporting period following the implementation of the Sector Supplement, it has not been possible to present all results of the companies covered by the Report in a uniform and consistent manner. However, given the challenges of sustainable development that lie ahead for the production business, we decided to present the collected data anyway. In subsequent reports, we will strive to improve the aggregation method for non-financial data on entities operating in the exploration and production segment. The current Report offers a larger pool of performance indicators reported by the above-mentioned commercial c ompanies. This results from continuous improvements in non-financial reporting, now more geared towards the broadest-possible presentation of the scale and nature of the impact of our operations, products and services on key stakeholders and the environment. 19

19 In the previous reporting period, no material changes or other circumstances occurred with respect to the LOTOS Group s entities which would affect the overall assessment of the organisation, either in terms of its individual activities or in comparison with its domestic peers. In January 2012, Grupa LOTOS sold 100% of the shares in LOTOS Parafiny, one of its marketing segment companies. Results from LOTOS Parafiny are no longer presented in this Annual Report. GRI indicators as reported by the LOTOS Group companies: LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, and the LOTOS Petrobaltic Group * (LOTOS Petrobaltic, LOTOS Geonafta, LOTOS Norge, Energobaltic) GRI aspects GRI indicators reported in Subsidiaries GRI indicators reported in Subsidiaries Products and services EN26 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic, LOTOS Geonafta, LOTOS Norge EN26 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny, LOTOS Petrobaltic (group) EN27 LOTOS Asfalt, LOTOS EN27 LOTOS Asfalt, LOTOS Oil, LOTOS Paliwa Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny Transport EN29 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic (group) EN29 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny, LOTOS Petrobaltic (group) Customer health and PR1 LOTOS Asfalt, LOTOS PR1 LOTOS Asfalt, LOTOS safety Kolej, LOTOS Oil, Kolej, LOTOS Oil, LOTOS Paliwa LOTOS Paliwa, LOTOS Parafiny Process safety OG13 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic - - Product and service PR3, PR5 LOTOS Asfalt, LOTOS PR3, PR5 LOTOS Asfalt, LOTOS labeling Kolej, LOTOS Oil, Kolej, LOTOS Oil, LOTOS Paliwa LOTOS Paliwa, LOTOS Parafiny Marketing PR6 LOTOS Oil, LOTOS PR6 LOTOS Oil, LOTOS communications Paliwa Paliwa, LOTOS Parafiny PR7 LOTOS Asfalt, LOTOS PR7 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, Kolej, LOTOS Oil, LOTOS Paliwa LOTOS Paliwa, LOTOS Parafiny Customer privacy PR8 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa 20 PR8 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny

20 Compliance PR2, PR4, PR9 LOTOS Asfalt, LOTOS Oil, LOTOS Paliwa, LOTOS Kolej PR2, PR4, PR9 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny Biodiversity EN11, EN12, EN13, EN14, OG4 LOTOS Asfalt, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic EN11 LOTOS Asfalt, LOTOS Oil, LOTOS Paliwa LOTOS Petrobaltic (group) EN12 LOTOS Asfalt, LOTOS Paliwa, LOTOS Petrobaltic (group) EN13 LOTOS Paliwa EN14 LOTOS Asfalt, LOTOS Oil, LOTOS Paliwa LOTOS Petrobaltic (group) Emissions, effluents, and waste EN16, EN17, EN18, EN19, EN20, EN21, EN22, EN23, OG5, OG7 LOTOS Petrobaltic (group) - - Indirect economic impacts EC9 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic, LOTOS Geonafta EC9 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa Local community OG11 LOTOS Petrobaltic (group) - - Reserves OG1 LOTOS Petrobaltic (group) - - Materials EN1 LOTOS Petrobaltic (group) - - Energy EN3, EN4 LOTOS Petrobaltic (group) - - Water EN8, EN9 LOTOS Petrobaltic (group) - - Market presence EC5, EC6, EC7 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic (group) EC5, EC6, EC7 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Parafiny Employment LA1, LA2, LA8, LA14 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic (group) LA1 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic Human rights HR1, HR

21 LOTOS Asfalt, LOTOS Kolej, LOTOS Oil, LOTOS Paliwa, LOTOS Petrobaltic (group) * Whenever results are reported for all companies, LOTOS Petrobaltic (group) is listed. However, when not all companies of this group report the given indicator, the names of individual entities reporting the indicator are listed. The Annual Report for 2012 accounts for a total of 84 GRI indicators, relative to 74 indicators in We decided to discontinue reporting of twelve indicators: HR5, HR6, HR7, HR9, HR10, HR11, EN2, OG2, OG3, OG9, OG12 core indicators, and the HR9 additional indicator, as the issues they cover were deemed immaterial to our organization. An index for looking up specific performance indicators and descriptive parts relating to specific issues discussed in this Report is included in the GRI Performance Indicators and Global Compact Principles ( in the Useful information section of this Report. 22

22 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / Integrated Reporting / Auditing and reviews Auditing and reviews 23

23 Independent auditors' opinion of Ernst & Young Audit Sp. z o.o. regarding the Financial statements of Grupa LOTOS for

24 25

25 Independent auditors' opinion of Ernst & Young Audit Sp. z o.o. regarding the Consolidated financial statements of the LOTOS Group for

26 27

27 Independent Assurance Report of PwC 28

28 29

29 30

30 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / Stakeholders Stakeholders We have defined three key stakeholder groups in the LOTOS Group's Corporate Social Responsibility Strategy for Each is taken into account in the decision-making processes having an actual or potential impact on their representatives. We endeavour to build positive relations with all these groups, although the extent and nature of our impact on them, as well as their expectations of us, tend to differ. We identified the individual stakeholder groups in the course of preparing our Corporate Social Responsibility Strategy in At that time, we invited their representatives to participate in the consultations on our strategic objectives in the area of corporate social responsibility. Further, in pursuit of our CSR Strategy, we also perform periodical assessment of individual social initiatives, e.g. surveys among the beneficiaries of our activities. KEY STAKEHOLDER GROUPS OF THE LOTOS GROUP INTERNAL ENVIRONMENT SOCIAL ENVIRONMENT MARKET ENVIRONMENT Employees Group companies Trade unions Employee Council Local communities NGOs Local government institutions Government administration Science and research institutes, and educational centres Employer organizations Media Natural environment Contractors and subcontractors Suppliers Customers Trade partners Competitors Industry organizations and international institutions Regulatory and monitoring organizations Capital market participants We employ various tools and means of communication to build our relationships with individual stakeholder groups in a responsible manner, in line with expectations. Our commitment to the improvement of communication practices is visible from our discussion of the issue in our Code of Ethics, in place since Effective communication, the aim of which is to facilitate understanding of assigned objectives and tasks, is key to strong employee performance. We make every effort to ensure that the rules governing the internal flow of information in the LOTOS Group are understandable and precise. In employee interactions, we value the willingness to cooperate and make concessions, exemplified by open and professional communication and active solicitation of feedback. We respond to proposed internal communications improvements and help build and enhance the interpersonal skills of our employees. We seek to maintain open and responsible communication with our external partners, without compromising their reputation or commitments. Source: The LOTOS Group s Code of Ethics 31

31 Selected tools and methods for building relations with stakeholders in 2012 MAIN STAKEHOLDER CATEGORIES RELATIONS MANAGEMENT FORMS MATERIAL CHANGES RELATIVE TO 2011 Employees In-person meetings, intranet platform, intranet kiosks, mobile service, corporate newsletter, training, opinion polls. We have extended the intranet service to mobile devices and launched an English version to ensure that employees in Norway and Lithuania have access to current information. We have also made efforts to develop the public consultations system across the LOTOS Group. Local communities Social programmes and initiatives, internet service, opinion polls, consultations with members of local communities. We improved our online communications by creating relevant corporate profiles on Facebook and YouTube. On our website, we created a section devoted to sustainable growth. NGOs In-person meetings, social programmes, internet service, annual report, opinion polls. We joined the Development Initiation Forum an innovative platform for cooperation between the three sectors in the Pomerania region. We also held a CSR workshop in conjunction with a specialised NGO. Capital market participants Current and periodic reports, annual reports, in-person meetings, conferences, conference calls, internet service, Analyst s Day and Investor s Day events. We extended the statement of compliance with corporate governance standards in the annual report, and the Corporate Governance section under the Investor Relations tab of our website, to include issues of business ethics and activities initiated under the Ethical Conduct Programme. Public authorities Annual report, lobbying, in-person meetings, conferences. We have actively participated in consultation and law-making processes for energy sector regulations in Poland and the EU. Customers Call service, internet service, information provided through products, direct contact, social campaigns as part of the loyalty programme, satisfaction surveys. We have adopted a uniform model for our customer satisfaction surveys and have standardized the complaints procedure. We have also developed a project for the implementation of a customer relationship management system enabling determination of synthetic customer service indices. 32

32 Grupa LOTOS S.A. - Integrated Annual Report 2012 LOTOS Integrated Annual Report 2012 / The Organization and its Report / Stakeholders / Stakeholders involvement Stakeholders involvement Discussions with stakeholders of issues relating to the social and environmental impact of our business are valuable opportunities for learning how to improve our performance. We also engage in extensive communications and public consultations in order to improve our corporate practices. In 2011, a number of diverse stakeholder engagement methods were used in an in-depth manner and on a large scale during the public consultations in course of the work on the updated LOTOS Group s Corporate Social Rersponsibility Strategy. The process itself as well as the conclusions to be drawn from it were presented in detail in the 2011 Integrated Annual Report ( In 2012, we created an opportunity to meet with stakeholders using a variety of means at our disposal. These included: Public consultations, Knowledge-sharing workshops, Conferences promoting good practices, Multi-directional communication, Opinion polling. Public consultations with employees One of the key objectives of the LOTOS Group s CSR strategy is the improvement of management processes by ensuring ethical conduct and transparency of business processes. Achievement of this goal is dependent on the implementation of a significant project - our comprehensive Ethical Conduct Programme. In mid-2012, the Company s Board resolved to appoint a special team to formulate assumptions and develop the process and organization-related solutions necessary for successful implementation of the Ethical Conduct Programme. The need to improve ethical standards at the LOTOS Group was confirmed by our employees, not only in the course of the work on the CSR Strategy, but also in an opinion poll on ethical issues conducted in the spring of Over 170 respondents indicated a risk of corruption and conflict of interests, the maintenance of professional secrecy and the 33

33 transparency of business partner selection processes as issues which needed to be addressed in the Code of Ethics. Equal employment, advancement, and career development opportunities were identified as being equally important. As the Code of Ethics is one of the most important elements of the Ethical Conduct Programme, in 2012 we began work on formulating its contents. The programme is a means of implementing and monitoring ethical standards at the company, facilitating proper conduct and supporting the moral behaviour of employees. Ethical Conduct Programmes typically comprises a number of solutions and functions, such as a Code of Ethics, tools for reporting breaches of the Code, an Ethics Officer, and education on ethics-related issues. A set of standards and principles of conduct applicable across the organization, based on adopted core values and issues identified by employees as needing regulation. As the foundation of the Ethical Conduct Programme, the Code of Ethics provides a kind of moral compass guiding employee s actions and motivations in their everyday work. The LOTOS Group s Code of Ethics is addressed to all employees, regardless of their place within the organization, job title or type of work performed. Therefore, we decided to ensure the possibility of participating in the public consultations of the draft document to every one of our over five thousand employees, in Poland, Lithuania and Norway. Needless to say, these were the most extensive consultations on a document in the company. Staff meetings were preferred as the means of sharing the contents of the draft Code, and we spent three weeks at the end of 2012 arranging the meetings. Over 400 members of the management were responsible for carrying out the consultations. At the staff meetings, we: Explained the importance of the Code of Ethics and its role as the key component of the Ethical Conduct Programme, Presented the drafting methodology for the document, Shared the contents of the Code of Ethics, Elicited comments, questions and amendment proposals from the employees, Clarified any doubts raised by the employees. During the consultations, employees raised over 300 questions and comments, and made proposals for amendments to some of the provisions. The main page of the Ethical Conduct Programme subservice was visited more than 2,300 times in its first three weeks. The letter posted on our intranet from the President of the Grupa LOTOS Board, encouraging active participation in the discussion on the document, received over 1,500 hits. 1,500 copies of a special publication accompanying the consultations were handed out. Such active, two-way communication ensured that all our employees had a strong influence on the final version of the Code of Ethics. Once the consultation period had ended and the submitted comments taken into account, in December 2012 the Board of Grupa LOTOS finally adopted the LOTOS Group s Code of Ethics. The document became effective in January 2013 and is publicly available on the our website ( Link to the Code of Ethics ( ( 34