Grupa LOTOS S.A. - Annual Report 2010

Dear Stakeholders,

The last months of 2010 saw the successful completion – on schedule and within budget – of the 10+ Programme – the largest refinery expansion project in Central and Eastern Europe.

Bringing that project, on a scale unmatched in Polish economy, to the finishing line was an achievement of strategic importance for the entire LOTOS Group, as it will entrench our market position for many years to come, while delivering value to our Stakeholders.

I have never doubted that the project would be anything but utter success, basing my conviction on its financing structure, which was well thought out and implemented. Thanks to our conservative approach, it proved resilient in the face of adverse market developments when the financial and economic crisis set in.

Following the expansion of the Gdańsk refinery, in 2010 we recorded a record-high oil throughput, in excess of 8 million tonnes. The upgrade has allowed us to intensify processing, resulting in a greater yield of high-margin products – especially diesel oil and aviation fuel. It should further be noted that the newly built units are capable of processing diverse types of crude oil, which has improved the refinery’s flexibility and our ability to capitalise on changing market trends.

Thanks to the increased throughput, our sales volumes grew, while imported fuel components were replaced by our own product streams from the new units. As a result, in 2010 Grupa LOTOS posted PLN 763.3m in operating profit, up by nearly 82% year on year. Operating performance was also boosted by favourable trends in the prices of petroleum products on global markets.

The LOTOS Group’s sales revenue also came to a record-high level of PLN 19.7bn, a 37.4% growth on a year earlier, chiefly on the back of higher sales volumes and soaring prices of crude oil and petroleum products on international markets. For instance, the average market price of Brent dtd in 2010 went up by 28.9% relative to 2009, while crack margins on diesel oil and gasoline rose over the same period by 24.8% and 13.8%, respectively.

The rapid growth of Grupa LOTOS’ business and the resulting level of capital expenditure, which in 2010 ran to more than PLN 1.2bn, affected the structure of the Company’s equity and liabilities. However, the fact that debt ratios stayed within assumed ranges and liquidity ratios remained safe confirms the soundness of our financing strategy, which has allowed us to implement key investment programmes without disruptions.

Going ahead, the Company will focus on deleveraging its business, using the increased cash flows generated by newly completed projects connected with the refinery’s expansion and production of crude oil.

It is worthy of note that – being an oil company – Grupa LOTOS operates in a sector with potential environmental impacts and plays an important role in Poland’s energy security. It is also one of the region’s largest employers. This demonstrates the complexity of our Stakeholder map and the resulting importance of a transparent and open disclosure policy, offering a broad basis for assessment of our credibility. I view it as an important factor behind the Company’s value creation.

The superior quality of the Company’s communication with the capital market was highlighted by the highest laurels in the Investor Relations category of the Listed Company of the Year ranking, prepared by the Pentor Research Institute for the Puls Biznesu daily.

The performance we delivered in 2010, as well as our sound financial position, provide solid foundations for the Company’s ambitious strategy for 2011–2015. I am fully convinced that the success of the 10+ Programme proves, and upholds the Stakeholder confidence, that we are able to accomplish the ambitious goals we set for ourselves and thus increase the Company’s value.
 

Yours faithfully,

Mariusz Machajewski
Vice-President of the Board
Chief Financial Officer
Grupa LOTOS S.A.