Grupa LOTOS S.A. - Annual Report 2010

Economic performance

GRI	INDICATOR
EC 1	Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments

Grupa LOTOS	2006	2007	2008	2009	2010
	k PLN
Revenues, net	11,630,382	11,867,884	14,900,794	12,711,611	18,132,827
Operating costs	10,712,102	10,851,429	14,867,282	12,116,519	17,104,229
Employee compensation and other employee benefits	82,771	94,724	115,587	131,585	136,840
Payments to capital providers	3,093	65,680	61,497	127,114	126,842
Payments to governments	5,249,087	6,730,682	7,108,738	8.557,314	9,425,916
Community investments	1,876	1,121	651	793	1,240

On June 28th 2010, the General Shareholders Meeting of Grupa LOTOS passed a resolution on the distribution of net profit for 2009. Pursuant to the resolution, PLN 1,000 thousand was transferred to a special-purpose fund used by Grupa LOTOS to finance CSR projects.

LOTOS Group	2006	2007	2008	2009	2010
	k PLN
Revenues, net	12,834,708	13,143,463	16,309,960	14,344,851	19,695,002
Operating costs	10,978,033	11,368,625	15,314,995	12,775,790	17,562,048
Employee compensation and other employee benefits	359,998	388,418	422,506	462,948	497,043
Payments to capital providers	32,845	96,768	99,729	176,338	174,154
Payments to governments	5,968,567	7,194,536	7,519,904	8,951,791	9,804,980
Community investments	2,352	1,362	898	839	1,485

 

GRI	INDICATOR
EC 3	Coverage of the organisation’s defined benefit plan obligations

As Grupa LOTOS has obligations under the Collective Bargaining Agreement, it recognises provisions for severance pays and length-of-service awards.

Grupa LOTOS	2006	2007	2008	2009	2010
k PLN
Provisions for severance pays and length-of-service awards:
- long-term	15,150	19,072	27,612	28,820	31,420
- short-term	2,189	2,753	3,666	4,348	4,973
Total provisions	17,339	21,825	31,278	33,168	36,393
Contributions under insurance contract with investment fund covering Grupa LOTOS employees (Pillar 3 of the Polish pension system)	1,453	2,496	3,105	3,439	3,800
LOTOS Group
k PLN
Provisions for severance pays and length-of-service awards:
- long-term	54,232	60,295	82,587	87,961	95,370
- short-term	7,472	8,888	9,505	10,733	12,459
Total provisions	61,704	69,183	92,092	98,694	107,829
Contributions under insurance contract with investment fund covering LOTOS Group employees (Pillar 3 of the Polish pension system)	4,524	7,068	8,720	10,195	10,174

 

GRI	INDICATOR
EC 4	Significant financial assistance received from government

Grupa LOTOS	2006	2007	2008	2009	2010
k PLN
Subsidies received	3,416	2,808	-	5,908	-
Subsidies settled	-	-	-	-	-
Subsidies at end of year	16,560	19,368	19,368	25,276	25,276
LOTOS Group
k PLN
Subsidies received	3,486	4,322	19	5,908	791
Subsidies settled	634	601	663	744	1,122
Subsidies at end of year	20,819	24,540	23,896	40,343	40,012

LOTOS Asfalt conducts its operations within the Tarnobrzeg Special Economic Zone, EURO-PARK WISŁOSAN, under Permit No. 158/ARP S.A./2008 issued on January 23rd 2008. The permit is valid through November 15th 2017. In light of the applicable regulations, LOTOS Asfalt is exempt from corporate income tax over the period covered by the permit. The company assesses the taxable income in accordance with the Act on Corporate Income Tax of February 15th 1992. For the purposes of calculating the taxable income and tax exempt income, LOTOS Asfalt makes a distinction between costs and income associated with in-zone operations and out-of-zone operations. The tax exemption is applied under the Act on Special Economic Zones of October 20th 1994 and Permit No. 158/ARP S.A./2008 of January 23rd 2008. Also, owing to the fact that its investments are conducted within the Tarnobrzeg Special Economic Zone, LOTOS Asfalt is entitled to a tax exampetion which allows it to reduce the income tax due by an amount not exceeding 50% of total investment expenditures incurred within the Tarnobrzeg Special Economic Zone.

Market presence

GRI	INDICATOR
EC 5	Range of ratios of standard entry level wage compared to local minimum wage at significant locations of operations

No.	Location	Minimum base pay in 2010 (PLN)	Ratio of minimum base pay to national minimum wage in 2010 of PLN 1,317 (%)
Grupa LOTOS
1.	Gdańsk	2,550	194
2.	Czechowice	2,755	209
3.	Jasło	2,600	197
4.	Kraków	4,284	325
5.	Piotrków Trybunalski	4,419	336
6.	Poznań	2,900	220
7.	Rypin	3,162	240
8.	Warszawa	3,490	265
LOTOS Asfalt
1.	Gdańsk	2,500	190
2.	Czechowice	2,464	187
3.	Jasło	1,500	114
LOTOS Kolej
1.	Gdańsk	2,600	197
2.	Czechowice	2,421	184
3.	Jasło	2,475	188
4.	Zduńska Wola	2,700	205
LOTOS Oil
1.	all locations	2,199	167
LOTOS Paliwa
1.	all locations	2,550	194
LOTOS Oil
1.	all locations	1,600	121

In 2010, the minimum national wage in Poland was PLN 1,317. 

GRI	INDICATOR
EC 6	Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operations

As one of the largest business enterprises in the Gdańsk region, Grupa LOTOS feels responsible for the local communities and their dynamic growth. In the course of doing business, the Company is guided by the principles of sustainable development and corporate social responsibility. This means that ethics, transparency and openness play an important role in its day-to-day activities.

According to in-house estimates, local suppliers account for 84% of all business partners in the Company’s key locations (Gdańsk, Warsaw and Kraków), and 50% of all contracts are signed with suppliers from the region of Pomerania. The chart below presents the percentage shares of liabilities to business partners having registered offices in the Company’s key locations.

No. of contracts with business partners having registered offices in Grupa LOTOS’ key business locations (2010)

Registered office	No. of contracts
Gdańsk and the region of Pomerania	385
Warsaw	197
Kraków	59
Other	125
Total	766

LOTOS Paliwa: The company purchases nearly 100% of its fuel stocks for resale from Grupa LOTOS. A major portion of the fuel is produced domestically at the Gdańsk refinery.

LOTOS Asfalt: In the process of choosing service and product suppliers, the company must follow a selection procedure which defines the rules to be applied and the course of action to be taken when purchasing products or services of any kind, with the key criteria being the quality and environmental impact of the product or service, compliance with health and safety regulations by the supplier, and the proposed terms of payment and warranty. The strategic supplier of feedstock to LOTOS Asfalt (Gdańsk, Jasło, Czechowice) is Grupa LOTOS. The share of local suppliers in the company’s supply structure is 5%, with Polish importers and international producers of raw materials and semi-finished products accounting for the balance.

LOTOS Kolej: The company’s procurement team seeks to optimise the purchasing process, including by selecting the best possible supplier, with one of the criteria being its location in the region. The largest item under costs of materials is the cost of spare parts for the rolling stock. A vast majority of spare part suppliers operate in the south of Poland, therefore only a portion of the supplies may be procured from local partners operating in the region of Pomerania.

LOTOS Parafiny: The company operates productions plants in the towns of Czechowice and Jasło, where local means from the south of Poland. Approximately 60% of transport services to or from Jasło and Czechowice are provided by local firms. As regards procurement of investment- or overhaul-related services, no special rules or restrictions apply as to the supplier’s location. In 2010, the local versus non-local supplier breakdown for the Jasło and Czechowice plants was 68%/32% and 85%/15%, respectively.

LOTOS Oil: The company tends to follow a supplier selection policy which enables it to secure at least two sources of supplies in each product category. If a monopoly is identified, the company monitors the market for any changes in the status quo on a regular basis. In line with the currently applied procurement policy, the company searches local markets for potential suppliers, and, if a reliable prospective partner is found, it is invited to participate in a tender procedure. In 2010, the procurement structure by value (net of services), accounting for all production units, the Distribution Centre, and business arrangements with Grupa LOTOS, was as follows: local suppliers represented 82% of total purchases, with the other 18% attributable to non-local suppliers. As regards the structure of service purchases by value, local providers accounted for 90% and non-local providers – for 10% of total purchases.

GRI	INDICATOR
EC 7	Procedures for local hiring and proportion of senior management hired from the local community at locations of significant operation

Grupa LOTOS hires members of senior management staff according to the job profile and skills required for the position. Only those candidates are selected who best satisfy the employment criteria. Managerial positions are often filled by persons selected in an internal recruitment process. At the Company’s key locations, 76.4% of senior management staff are persons from local communities.

LOTOS Asfalt: When creating a new job, or filling a managerial vacancy, priority is given to persons from the local labour market, provided that their skills and qualifications meet the relevant criteria. In 2010, local-community members represented, respectively, 82%, 100%, and 75% of the management staff employed in Gdańsk, Czechowice and Jasło.

LOTOS Kolej: When selecting senior managers, the company is guided by a pragmatic evaluation of the candidates, including their expertise and skills required for a given position. During a recruitment process, internal candidates, i.e. the Company’s or the LOTOS Group’s current employees, are considered first. All senior executives employed at the company come from the region of Pomerania.

LOTOS Oil: The company has adopted a global recruitment policy: the same procedures apply at each of its branches. The policy provides for no special treatment of candidates from the local labour market. However, all senior management staff members (directors, deputy directors, plant managers, heads of office) employed at the company’s key business locations (the Gdańsk Branch, the Czechowice Branch, the Jasło Branch and the Distribution Office in Piotrków Trybunalski) are locals. Similarly, 100% of staff employed at the offices established across the country as part of the management function diversification process are members of local communities.

LOTOS Parafiny: The company selects well-qualified candidates for senior executive positions in line with relevant procedures. During a recruitment process, applications from the existing employees of the LOTOS Group are considered first. Ninety-one percent of senior management staff employed at the company’s key locations represent local communities.

LOTOS Paliwa: The company does not follow the global policy of favouring local community members in the recruitment of managerial personnel. Due to the nature of the Company’s operations, management staff members across Poland are hired on an as needed basis.

Indirect economic impacts

GRI	INDICATOR
EC 8	Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind, or pro bono engagement

Detailed information on Grupa LOTOS activities in this area are available on the Company’s website [ link ].

GRI	INDICATOR
EC 9	Understanding and describing significant indirect economic impacts, including the extent of impacts – cooperation with suppliers at significant location of operation

Grupa LOTOS seeks to align its decision-making process with the corporate social responsibility strategy by giving due consideration to the potential impact of its decisions on local communities and the development of the Gdańsk region as a whole. Half of the contracts for the supply of goods or services are signed with local suppliers. Around 35% of all contracts are recurring or long-term arrangements entered into with small and medium-sized enterprises operating on local markets. This fact alone demonstrates our commitment to the local market and its economic prosperity.

By contracting locally, the Company indirectly contributes to improved financial standing of local populations. For many small and medium-sized businesses in the region, Grupa LOTOS is a source of additional capital, which fuels their operations and helps increase employment rates in the SME sector. This, in turn, supports improvement in the living standards, stimulates consumer spending, including on luxury goods and services, and encourages investment in education and intellectual resources, which the Company considers pillars of the economy. Intellectual assets offer measurable benefits: hired by Grupa LOTOS, the competent and well-educated members of the Gdańsk region community build the Company’s potential and innovation at the local, national and international levels.

LOTOS Asfalt: The company is a wholesaler of bitumens, heavy fuel oil, bunker fuel and waterproofing materials. These are produced and sold under business-to-business (B2B) arrangements. Accordingly, by establishing business links with its partners, the company has an indirect impact on their growth prospects and economic standing. Moreover, the company contributes to maintaining or increasing employment rates and stimulates economic activity on its local markets. Since 2009, LOTOS Asfalt’s indirect economic impact on the Jasło region, suffering from an economic slowdown, took the form of investments in a new manufacturing business, the Waterproofing Materials Production Plant. The large-scale project located in the Tarnów Special Economic Zone in the south-east of Poland helped improve the local labour market, affected by unemployment concerns. Launched in 2009, the plant, after becoming fully operational, created 104 new jobs (data as at the end of 2010). As at the end of 2009 the headcount was 69 persons. Thanks to relevant training, employees of the newly launched modern production facility were offered an opportunity to gain hands-on experience and skills in operating technologically advanced manufacturing equipment and to learn how to function in organisational, logistics and distribution systems based on contemporary IT tools.

LOTOS Kolej: Although no monitoring takes place in this area, certain aspects of the company’s activities may be classified as having an indirect economic impact. One such aspect is the company’s consistent efforts to upgrade the operated rolling stock. Purchases of new road locomotives strengthen the company’s competitive edge and position it among leading carriers that invest in new technologies. In late 2009, the company signed a contract for the sale of ST 43 Diesel locomotives (the last engine of this type left the company’s premises in 2010). In September 2009, LOTOS Kolej signed a contract for the delivery of the highly advanced TRAXX F140 DE diesel locomotives with Bombardier Transportation GmbH and an operating lease of 14 TRAXX F140 MS electric locomotives with Railpool GmbH. As a result, the company owns the most modern railroad plant and equipment in Poland, adding to the technological advancement of the local market.

LOTOS Oil: In distributing its products, the company supports employment at its business partners operating locally and nationally. Entering into cooperation agreements at home and abroad, LOTOS Oil obtains access to new technologies. The company undertakes efforts to upgrade its processes, enhance the quality of its products and services, and provide employees with opportunities to improve their professional qualifications through training. These efforts make the company the most sought after employer in the country, which offers prospects for improvement and development and attracts specialists with extensive experience.

LOTOS Parafiny: The company’s indirect economic impact on local communities is reflected in its efforts to create new jobs across the supply chain and improve professional qualifications and skills on the local labour markets, which is linked with recruiting more suppliers.