Dec (restated)

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1 FINANCIAL HIGHLIGHTS GRUPA LOTOS S.A. Dec PLN 000 EUR 000 Dec Dec Dec (restated) (restated) Sales revenue 27,289,314 18,124,675 6,591,463 4,526,190 Operating profit 603, , , ,410 Pre-tax profit 324, ,433 78, ,965 Net profit from continuing operations 307, ,954 74, ,111 Total comprehensive income (111,611) 464,954 (26,959) 116,111 Net cash provided by/(used in) operating activities 138, ,395 33,551 70,521 Net cash provided by/(used in) investing activities (29,986) (407,232) (7,243) (101,696) Net cash provided by/(used in) financing activities (113,629) 401,470 (27,446) 100,257 Total net cash flow 21, ,685 5,091 68,346 Basic earnings per share (PLN/EUR) Diluted earnings per share (PLN/EUR) PLN 000 EUR 000 As at Dec As at Dec (restated) As at Dec As at Dec (restated) Total assets 16,449,524 14,678,065 3,724,308 3,706,301 Equity 5,833,442 5,945,053 1,320,739 1,501,162 Items of the statement of financial position as at December 31th 2011, presented in Financial Highlights, were translated at the EUR mid-exchange rate quoted by the National Bank of Poland for December 31st 2011, i.e. EUR 1 = PLN Items of the statement of comprehensive income and the statement of cash flows for the period ended December 31st 2011, presented in the Financial Highlights table, were translated at the exchange rate of EUR 1 = PLN (the arithmetic mean of the mid-exchange rates quoted by the National Bank of Poland for the last day of each full month in the period January 1st December 31st 2011). Items of the statement of financial position as at December 31st 2010, presented in the Financial Highlights table, were translated using the EUR mid-exchange rate quoted by the National Bank of Poland for that date, i.e. EUR 1 = PLN Items of the statement of comprehensive income and the statement of cash flows for the year ended December 31st 2010, presented in Financial Highlights, were translated at the exchange rate of EUR 1 = PLN (the arithmetic mean of the mid-exchange rates quoted by the National Bank of Poland for the last day of each full month in the period January 1st December 31st 2010).

2 GRUPA LOTOS S.A. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31ST 2011 PREPARED IN ACCORDANCE WITH THE INTERNATIONAL FINANCIAL REPORTING STANDARDS ALONG WITH THE INDEPENDENT AUDITOR S OPINION

3 STATEMENT OF COMPREHENSIVE INCOME 4 STATEMENT OF FINANCIAL POSITION 5 STATEMENT OF CASH FLOWS 6 STATEMENT OF CHANGES IN EQUITY 7 NOTES TO THE FINANCIAL STATEMENTS 8 1. General information 8 2. Composition of the Management and Supervisory Boards 9 3. Approval of the financial statements 9 4. Information whether the Company is a parent or a major investor and whether it prepares consolidated financial statements Going concern Duration of the Company Balance-sheet date and the period covered by the financial statements Functional currency and reporting currency Basis of preparation of the financial statements New standards and interpretations Changes in accounting policies and correction of errors Key accounting policies Intangible assets Property, plant and equipment Tangible assets under construction Leases Shares in subsidiaries and associates Impairment losses on non-financial non-current assets Inventories Trade and other receivables Foreign currency transactions Cash and cash equivalents Accruals and deferrals Equity Provisions Retirement severance payments and length-of-service awards Assets for social purposes and liabilities of the Company s Social Benefits Fund Interest-bearing bank borrowings and other debt instruments Borrowing costs Government grants Carbon dioxide (CO 2) emission allowances Taxes Income tax Value-added tax, excise duty and fuel charge Financial assets Impairment of financial assets Derivative financial instruments Hedge accounting Trade and other payables Recognition of revenue Sales of products, goods for resale and services Interest Dividends Material values based on the Management Board's professional judgement and estimates Net earnings/(loss) per share Contingent liabilities and receivables Profit distribution for employee benefits and special accounts Assets held for sale Business segments Income and expenses Sales revenue Other operating income Finance income Costs by type Other operating expenses Finance expenses Depreciation and amortisation costs, impairment losses, and foreign exchange gains/losses on operating activities Costs of employee benefits Corporate income tax Tax expense 30 2

4 13.2 Corporate income tax calculated at effective tax rate and reconciliation of pre-tax profit to tax base Corporate income tax receivable and payable Deferred income tax Assets for social purposes and liabilities of the Company s Social Benefits Fund Earnings per share Dividends Property, plant and equipment and tangible assets under construction Intangible assets Non-current financial assets Inventories Trade and other receivables Prepayments and accrued income Current financial assets Employee benefits Retirement benefits and other post-employment benefits Termination benefits Cash and cash equivalents Cash structure in the statement of cash flows Assets held for sale Share capital Interest-bearing bank borrowings Provisions Change in provisions Trade and other payables, accruals and deferred income, other liabilities, and other financial liabilities Trade payables, accruals and deferred income, and other liabilities Other financial liabilities Finance lease liabilities Contingent liabilities and other guarantees and types of security Promissory notes, bank guarantees or other forms of security issued by financial institutions at the Company's request Contingent investment commitments Carbon dioxide (CO 2) emission allowances Material court, arbitration or administrative proceedings and other risks Related parties Related-party transactions Entity with significant influence over the Company Remuneration of the Management and the Supervisory Board members and information on loans and other similar benefits granted to members of the management and supervisory staff Remuneration paid or payable to other members of the key management staff Other transactions with Members of the Company s Management or Supervisory Boards, their spouses, siblings, ascendants, descendants or other close persons 34. Information on the agreement with and remuneration payable to the qualified auditor of 68 financial statements, and information on the appointment of the qualified auditor to audit the financial statements of Grupa LOTOS S.A Objectives and principles of financial risk management Financial instruments Fair value of financial instruments Items of income, expenses, gains and losses disclosed in the statement of comprehensive income by category of financial instrument Sensitivity analysis with respect to market risk related to fluctuations in FX rates, interest rates and prices of carbon dioxide (CO 2) emission allowances Sensitivity analysis with respect to market risk related to fluctuations in FX rates Sensitivity analysis with respect to market risk related to fluctuations in interest rates Sensitivity analysis with respect to market risk related to fluctuations in prices of carbon dioxide (CO 2) emission allowances Employment structure Other information Special rights of the State Treasury and how these rights are exercised in companies Implementation of the National Indicative Target (NCW) in accordance with the Act on Biocomponents and Liquid Biofuels Capital management Material events subsequent to the balance-sheet date Signatures of the Management Board members and the person responsible for keeping the accounting books of Grupa LOTOS S.A

5 STATEMENT OF COMPREHENSIVE INCOME for the year ended December 31st 2011 STATEMENT OF COMPREHENSIVE INCOME () Note Dec Dec (restated) Sales revenue ,289,314 18,124,675 Cost of sales 12.4 (25,893,214) (16,839,383) Gross profit 1,396,100 1,285,292 Selling costs 12.4 (540,269) (450,087) General and administrative expenses 12.4 (235,341) (216,586) Other operating income ,766 17,902 Other operating expenses 12.5 (21,858) (30,216) Operating profit 603, ,305 Finance income , ,057 Finance expenses 12.6 (526,388) (340,929) Pre-tax profit/(loss) 324, ,433 Corporate income tax 13.1 (16,675) (55,479) Net profit from continuing operations 307, ,954 ========= ========= Other comprehensive income Cash flow hedge accounting (517,631) - Income tax on other comprehensive income , Other comprehensive income (net) (419,281) Total comprehensive income (111,611) 464,954 ========= ========= Net profit from continuing operations per share (PLN) Weighted average number of shares ('000) , ,873 - basic diluted - - The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements. 4

6 STATEMENT OF FINANCIAL POSITION as at December 31st 2011 STATEMENT OF FINANCIAL POSITION () Note Dec Dec (restated) Jan (restated) ASSETS Non-current assets Property, plant and equipment 17 7,024,570 4,423,681 1,664,687 Tangible assets under construction 17 54,421 2,972,034 5,256,042 Intangible Assets 18 83,354 48,655 43,928 Non-current financial assets 19 1,208,537 1,045,271 1,066,339 Prepayments and accrued income 22 3,900 3,311 3, Total non-current assets 8,374,782 8,492,952 8,034, Current assets Inventories, including: 20 5,637,321 4,298,500 2,894,236 - mandatory reserves 20 4,425,263 2,976,818 2,192,785 Trade and other receivables 21 2,223,332 1,721,759 1,428,666 Current income tax receivable ,512-71,622 Prepayments and accrued income 22 28,306 22,503 15,355 Current financial assets 23 82, , ,883 Cash and cash equivalents 25 3,598 14,913 1, Total current assets 8,048,799 6,185,113 4,515, Assets held for sale 27 25, ========== ========== ========== Total assets 16,449,524 14,678,065 12,549,702 ========== ========== ========== EQUITY AND LIABILITIES Equity Share capital , , ,873 Statutory reserve funds 1,311,348 1,311,348 1,311,348 Cash flow hedging reserve (419,281) - - Retained earnings 4,811,502 4,503,832 4,038, Total equity 5,833,442 5,945,053 5,480, Non-current liabilities Interest-bearing borrowings 29 4,786,893 4,141,016 4,662,659 Long-term provisions 30 41,036 31,420 28,820 Deferred tax liabilities , ,869 61,929 Other financial liabilities ,364 80, , Total non-current liabilities 4,978,475 4,357,412 4,891, Current liabilities Trade payables, accruals and deferred income, and other liabilities ,817,503 2,623,515 1,612,978 Current income tax payable ,037 - Interest-bearing borrowings 29 1,682,149 1,539, ,998 Short-term provisions 30 8,521 6,672 7,712 Other financial liabilities , ,831 94, Total current liabilities 5,637,607 4,375,600 2,177, Total liabilities 10,616,082 8,733,012 7,069,603 ========== ========== ========== Total equity and liabilities 16,449,524 14,678,065 12,549,702 ========== ========== ========== The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements. 5

7 STATEMENT OF CASH FLOWS for the year ended December 31st 2011 STATEMENT OF CASH FLOWS () Note Dec Dec (restated) Cash flows from operating activities Net profit from continuing operations 307, ,954 Adjustments: Depreciation and amortisation , ,585 Foreign exchange (gains)/losses 319, ,706 Interest and dividends (142,065) (233,765) (Gain)/loss from investing activities 20,921 6,165 Current income tax ,675 55,479 Income tax paid (85,561) - (Increase) in receivables 26 (501,573) (293,097) (Increase) in inventories (1,338,821) (1,404,264) Increase in liabilities and accruals and deferred income 26 1,084,945 1,110,830 Increase in provisions 26 11,465 1,560 (Increase) in prepayments and accrued income 26 (6,757) (7,148) Settlement and valuation of financial instruments 109, ,390 Other adjustments 26 (32,623) Net cash provided by/(used in) operating activities 138, , Cash flows from investing activities Sale of non-current financial assets Sale of property, plant and equipment and intangible assets 715 6,248 Dividends received , ,936 Interest received 2, Repayment of loans advanced 71,877 1,100 Other cash inflows on financial assets - 6,606 Prepayments for tangible assets under construction 17 (3,315) (47,557) Loans advanced (972) (21,816) Purchase of non-current financial assets (144,677) (11,559) Purchase of property, plant and equipment and intangible assets 26 (149,998) (593,233) Other cash outflows on financial assets 26 (46,745) Net cash provided by/(used in) investing activities (29,986) (407,232) Cash flows from financing activities Increase in borrowings and other debt instruments 388, ,007 Repayment of borrowings and other debt instruments (308,483) (248,085) Interest paid (87,038) (61,004) Settlement of financial instruments 12.6 (106,730) (120,201) Decrease in finance lease liabilities 26 (67) (247) Net cash provided by/(used in) financing activities (113,629) 401, Effect of exchange rate fluctuations on cash held 25,788 (2,948) ========= ========= Change in net cash 26 21, ,685 ========= ========= Cash at beginning of the period 26 (187,066) (460,751) ========= ========= Cash at end of the period 26 (165,987) (187,066) ========= ========= - restricted cash 25 2,892 14,356 The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements. 6

8 STATEMENT OF CHANGES IN EQUITY for the year ended December 31st 2011 STATEMENT OF CHANGES IN EQUITY () Note Share capital Statutory reserve funds Cash flow hedging reserve Retained earnings Total equity Jan (restated) 129,873 1,311,348-4,038,878 5,480, Total comprehensive income Dec , ,954 ======== ========= ======== ========= ========= Dec ,873 1,311,348-4,503,832 5,945,053 ======== ========= ======== ========= ========= Jan ,873 1,311,348-4,503,832 5,945, Net profit from continuing operations for the year ended Dec , ,670 Other comprehensive income, net for the year ended Dec (419,281) - (419,281) ======== ========= ======== ========= ========= Dec ,873 1,311,348 (419,281) 4,811,502 5,833,442 ======== ========= ======== ========= ========= The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements. 7

9 NOTES TO THE FINANCIAL STATEMENTS 1. General information Grupa LOTOS S.A. ( the Company ) was established by virtue of a Notarial Deed dated September 18th On April 10th 2002, the Company was entered into the National Court Register maintained by the District Court of Gdańsk, XII Commercial Division of the National Court Register (currently the District Court for Gdańsk - Północ, VII Commercial Division of the National Court Register), under entry No. KRS The Company has been assigned Industry Identification Number (REGON) The Company s registered address is ul. Elbląska 135, Gdańsk, Poland. In 2003, by virtue of its decision of May 28th 2003, the District Court of Gdańsk, XII Commercial Division of the National Court Register, changed the Company s name from Rafineria Gdańska Spółka Akcyjna to Grupa LOTOS Spółka Akcyjna. In accordance with the Company s Articles of Association, the Company s core business comprises production and trading activities, as well as provision of services, including in particular: 1) extraction of crude petroleum and natural gas (PKD 06), 2) manufacture and processing of coke and refined petroleum products (PKD 19), 3) manufacture of industrial gases (PKD 20.11), 4) manufacture of other inorganic basic chemicals (PKD 20.13), 5) manufacture of other organic basic chemicals (PKD 20.14), 6) manufacture of plastics in primary forms (PKD 20.16), 7) generation and supply of electricity, gas, steam, hot water and air for air-conditioning installations (PKD 35), 8) water collection, treatment and supply (PKD 36), 9) construction of utility projects for fluids, electricity and telecommunications (PKD 42.2), 10) electrical, plumbing and other construction installation activities (PKD 43.2), 11) wholesale of fuels and related products (PKD 46.71), 12) wholesale of chemical products (PKD 46.75), 13) freight rail transport (PKD 49.2), 14) transport via pipelines (PKD 49.5), 15) cargo handling (PKD 52.24), 16) warehousing and storage (PKD 52.1), 17) technical testing and analysis (PKD 71.2), 18) other research and experimental development on natural sciences and engineering (PKD 72.19). The code of the Company s core business according to the Polish Classification of Activities (2007) is PKD 1920Z manufacture and processing of refined petroleum products. The Company operates in the segment of manufacturing and distribution of petroleum and chemical products. The Company holds the following licences related to its core business: - Licence for production of liquid fuels, issued by the President of the Polish Energy Regulatory Office on November 28th 1998 and extended until December 31st 2025 by virtue of the decision of the President of the Energy Regulatory Office of October 5th 2007, - Licence for trade in liquid fuels, issued by the President of the Polish Energy Regulatory Office on December 23rd 1998 and extended until December 31st 2025 by virtue of the decision of the President of the Energy Regulatory Office of October 5th 2007, - Licence for storage of liquid fuels valid until October 15th 2016, issued by the President of the Polish Energy Regulatory Office on October 10th 2006, - Licence for generation of electricity in co-generation units, issued by the President of the Polish Energy Regulatory Office on September 29th 2000 and extended until September 1st 2018 by virtue of the decision of the President of the Polish Energy Regulatory Office of July 16th 2009, - Licence for trade in electricity, issued by the President of the Polish Energy Regulatory Office on September 5th 2001 and extended until September 1st 2021 by virtue of decision of the President of the Polish Energy Regulatory Office of July 12th 2010, - Licence for transmission and distribution of electricity valid, issued by the President of the Polish Energy Regulatory Office on September 5th 2001 and extended until September 1st 2021 by virtue of decision of the President of the Polish Energy Regulatory Office of July 12th

10 2. Composition of the Management and Supervisory Boards In the period from January 1st 2011 until the date of approval of these financial statements, the composition of the Management Board of Grupa LOTOS S.A. was as follows: Paweł Olechnowicz President of the Management Board, Chief Executive Officer, Mariusz Machajewski Vice-President of the Management Board, Chief Financial Officer, Marek Sokołowski Vice-President of the Management Board, Chief Operation Officer, Maciej Szozda Vice-President of the Management Board, Chief Commercial Officer. As at January 1st 2011, the composition of Grupa LOTOS S.A.'s Supervisory Board of the seventh term of office was as follows: Wiesław Skwarko Chairman of the Supervisory Board, Leszek Starosta Deputy Chairman of the Supervisory Board, Oskar Pawłowski Secretary of the Supervisory Board, Małgorzata Hirszel Member of the Supervisory Board, Michał Rumiński Member of the Supervisory Board, Rafał Wardziński Member of the Supervisory Board, Ewa Sibrecht-Ośka Member of the Supervisory Board, Rafał Lorek Independent Member of the Supervisory Board. On June 27th 2011, the General Meeting of Grupa LOTOS S.A. appointed the Company's Supervisory Board for the eighth term of office. The following persons were appointed to the Supervisory Board: Małgorzata Hirszel, Ewa Sibrecht-Ośka, Leszek Starosta, Oskar Pawłowski, Michał Rumiński and Rafał Wardziński. The General Meeting appointed Mr Wiesław Skwarko as the Chairman of the Supervisory Board. In accordance with the Company's Articles of Association, Mr Wiesław Skwarko was appointed to the Supervisory Board by the State Treasury. On November 8th 2011, Mrs Ewa Sibrecht-Ośka submitted her resignation as Member of the Supervisory Board of Grupa LOTOS S.A. As at December 31st 2011, the composition of the Supervisory Board of Grupa LOTOS S.A. of the eighth term of office was as follows: Wiesław Skwarko Chairman of the Supervisory Board, Rafał Wardziński Deputy Chairman of the Supervisory Board, Oskar Pawłowski Secretary of the Supervisory Board, Małgorzata Hirszel Member of the Supervisory Board, Michał Rumiński Member of the Supervisory Board, Leszek Starosta Member of the Supervisory Board. On January 27th 2012 Mr Rafał Wardziński, Deputy Chairman of the Supervisory Board of Grupa LOTOS S.A., submitted his resignation as member of the Supervisory Board of Grupa LOTOS S.A. On February 29th 2012, the Extraordinary General Meeting of Grupa LOTOS S.A. resolved to change the composition of the Company's Supervisory Board and appointed Ms Agnieszka Trzaskalska and Mr Marcin Majeranowski as Members of the Supervisory Board, and removed from office Mr Leszek Starosta. As at the date of approval of these financial statements, the composition of the Supervisory Board of Grupa LOTOS S.A. of the eighth term of office was as follows: Wiesław Skwarko Chairman of the Supervisory Board, Marcin Majeranowski Deputy Chairman of the Supervisory Board, Oskar Pawłowski Secretary of the Supervisory Board, Małgorzata Hirszel Member of the Supervisory Board, Michał Rumiński Member of the Supervisory Board, Agnieszka Trzaskalska Member of the Supervisory Board, 3. Approval of the financial statements These financial statements were approved for publication by the Management Board on April 17th

11 4. Information whether the Company is a parent or a major investor and whether it prepares consolidated financial statements Grupa LOTOS S.A. is the Parent of the LOTOS Group and a major investor in subordinates and their related parties, controlled by the Company. Accordingly, Grupa LOTOS S.A. prepared consolidated financial statements of its Group, which include these entities financial data for the year ended December 31st 2011, and which were approved for publication by the Management Board on April 17th Going concern These financial statements were prepared on the assumption that the Company would continue its business activities in the foreseeable future. As at the date of approving these financial statements, the Company s Management Board has identified no facts or circumstances that might pose a threat to the Company continuing as a going concern in the 12 months following the balance-sheet date as a result of a planned or compulsory discontinuation or substantial limitation of its business activities. 6. Duration of the Company Duration of the Company is indefinite. 7. Balance-sheet date and the period covered by the financial statements These financial statements of Grupa LOTOS S.A. comprise the balance-sheet data as at December 31st 2011 and comparative data as at December 31st 2010 and January 1st The statement of comprehensive income, statement of cash flows and statement of changes in the Company s equity present the data for the period January 1st December 31st 2011 along with the comparative data for January 1st December 31st The financial information as at December 31st 2011 and December 31st 2010, and for the years then ended, contained in these financial statements, was audited. The financial information as at December 31st 2010 and for the year then ended was audited and an opinion on it was issued by the auditor on April 11th 2011 (this does not refer to selected restated financial information, as mentioned in Note 9.2). 8. Functional currency and reporting currency The functional and reporting currency of these financial statements is the Polish złoty (PLN). These financial statements are presented in the złoty (PLN), and all the figures are presented in thousands of złoty, unless indicated otherwise. 9. Basis of preparation of the financial statements These financial statements were prepared in accordance with the International Financial Reporting Standards ( IFRS ) and the IFRS endorsed by the European Union which were in effect as at December 31st The IFRS include the standards and interpretations approved by the International Accounting Standards Board ( the Board, IASB ) and the International Financial Reporting Interpretation Committee ( IFRIC ). As at the date of approval of these financial statements for publication, taking into account the ongoing process of implementation of the IFRS in the EU and the business activities conducted by the Company, as far as the accounting policies applied by the Company are concerned, there is no difference between the IFRS that have become effective and the IFRS endorsed by the EU. The following new standards, amendments to the existing standards and interpretations which have been adopted by the European Union are effective in periods beginning after January 1st 2011: 10

12 Amendments to IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction: Prepayments of a Minimum Funding Requirement (effective for periods beginning on or after January 1st 2011), Revised IAS 24 Related Party Disclosures (effective for annual periods beginning on or after January 1st 2011), Amendments introduced as part of the improvements to IFRSs published in May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34 and IFRIC 13) some changes are effective for annual periods beginning on July 1st 2010, some for annual periods beginning on January 1st 2011, Amendments to IFRS 7 Financial Instruments: Disclosures: Transfers of Financial Assets (effective for annual periods beginning on or after July 1st 2011). The Company has reviewed the new interpretations, standards and amendments to the existing standards. The new interpretations, standards and amendments to the existing standards which are in effect and have been adopted by the European Union, have no material impact on the accounting policies applied by the Company. 9.1 New standards and interpretations The following new standards, amendments to existing standards and interpretations have been issued by the International Accounting Standards Board or the International Financial Reporting Interpretation Committee, but have not been adopted by the European Union: IFRS 9 Financial Instruments: Classification and Measurement (effective for periods beginning on or after January 1st 2015), Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after January 1st 2012), Amendments to IFRS 1 First-Time Adoption of International Financial Reporting Standards: Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for periods beginning on or after July 1st 2011). IFRS 10 Consolidated Financial Statements (effective for periods beginning on or after January 1st 2013), IFRS 11 Joint Arrangements (effective for periods beginning on or after January 1st 2013), IFRS 12 Disclosure of Interests in Other Entities (effective for periods beginning on or after January 1st 2013), IFRS 13 Fair Value Measurement (effective for periods beginning on or after January 1st 2013), Amendment to IAS 19 Employee Benefits (effective for periods beginning on or after January 1st 2013), Amendment to IAS 1 Presentation of Financial Statements Presentation of Items of Other Comprehensive Income (effective for periods beginning on or after July 1st 2012), IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective for periods beginning on or after January 1st 2013). Amendments to IFRS 7 Financial Instruments: Disclosures: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1st 2013), Amendments to IAS 32 Financial Instruments: Presentation: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1st 2014), Amendments to IFRS 1 First-Time Adoption of International Financial Reporting Standards: Government Loans (effective for annual periods beginning on or after January 1st 2013). The Company has not decided to choose the option of early application of any of the above standards, interpretations, or amendments which have been published but have not yet become effective. By the date of approval of these financial statements, the first phase of IFRS 9 Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after January 1st 2015), had not been endorsed by the European Union. During the next phases, the International Accounting Standards Board will focus on hedge accounting and impairment. Implementation of the first phase of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets. The Company will analyse this effect along with the effect from the other phases of the project after their publication, in order to present a coherent picture. The Management Board does not expect the introduction of the new standards and interpretations specified above to have any material impact on the accounting policies applied by the Company. 11

13 9.2 Changes in accounting policies and correction of errors The accounting policies and calculation methods adopted by the Company in the preparation of these financial statements are the same as those used in the preparation of the financial statements for the year ended December 31st 2010 along with the comparative data, except to the extent that: - As of January 1st 2011, the Company changed its accounting policies as regards the exchange rates used to translate business transactions denominated in foreign currencies. As of January 1st 2011, such business transactions will be recognised as at the transaction date (i) using the exchange rate actually applied on that date due to the nature of the transaction in the case of sale or purchase of foreign currencies, and (ii) using the midexchange rate quoted for a given currency by the National Bank of Poland for a day preceding the transaction date in the case of payment of receivables or liabilities where there is no rationale for using the actual exchange rate, and in the case of other transactions. Application of the new accounting policies will not affect the Company s total net result, but will affect the values presented in the operating and financial parts of the statement of comprehensive income. Accordingly, in the statement of comprehensive income for the year ended December 31st 2010, cost of sales fell by PLN 298,039 thousand, finance income decreased by PLN 183,369 thousand, and finance expenses grew by 114,670 thousand. Furthermore, starting as of January 1st 2011, the Company introduced cash flow hedge accounting with respect to foreign-currency denominated borrowings used to finance the 10+ Programme, designated as hedges of future USD-denominated petroleum product sales transactions, as described in more detail in Note In the period January 1st December 31st 2011, foreign exchange loss recognised in the cash flow hedging reserve amounted to PLN 517,631 thousand, before the PLN 98,350 thousand adjustment for a tax effect. With effect as of January 1st 2011, the Company changed the rules for the presentation of measurement and settlement of financial instruments. The effect of measurement and settlement of financial instruments is presented on a net basis in finance income or expenses. This presentation change had no effect on the comparative data presented in these financial statements. As at December 31st 2010, in its statement of financial position the Company reclassified certain items which had earlier been presented as restricted cash and cash equivalents into interest-bearing current borrowings. These items included the PLN 8,665 thousand (January 1st 2010: PLN 9,928 thousand) deposits securing the repayment of interest and principal payments under facilities used to finance the 10+ Programme. Furthermore, in the cash flow statement, restricted cash as at December 31st 2010 and cash flows from operating activities for the year ended December 31st 2010, changed by PLN (8,665) thousand and PLN 1,263 thousand, respectively. For the current presentation policy, see Note 29. The Company has analysed the expected time of realisation of interest rate risk hedges (IRS) and has classified them as current or non-current assets and liabilities, based on the related cash flows. Previously, the Company classified interest rate risk hedges according to their expiry dates. The Company adjusted the comparative data. As at December 31st 2010, the value of current and non-current interest rate risk hedge (IRS) assets and liabilities amounted respectively to PLN 10,259 thousand, PLN 18,828 thousand, PLN 148,253 thousand and PLN 79,644 thousand. The Company reclassified a portion of general and administrative expenses (fire brigade services, perpetual usufruct charges, property insurance, licence fees) to selling costs and cost of sales. The Company adjusted the comparative data. In the year ended December 31st 2010, general and administrative expenses fell by PLN 34,285 thousand, selling costs rose by PLN 1,092 thousand, and cost of sales increased by PLN 33,193 thousand. 12

14 10. Key accounting policies These financial statements have been prepared in accordance with the historical cost principle, except with respect to financial derivatives, which are measured at fair value. The statement of cash flows is prepared using the indirect method. The key accounting policies applied by the Company are presented below Intangible assets Intangible assets are recognised if the Company is likely to obtain future economic benefits attributable directly to the assets. Intangible assets are initially recognised at cost, if they are acquired in separate transactions. Intangible assets acquired as part of a business combination are capitalised at their fair value on acquisition date. Intangible assets acquired as part of a business combination are capitalised at their fair value on acquisition date. Intangible assets are amortised using the straight-line method over their estimated useful lives, which are as follows; Patents, trademarks and licences Other 2 40 years 2 14 years The amortisation period and the amortisation method for an intangible asset are reviewed at the end of each financial year. Changes in the expected useful life or pattern of consumption of the future economic benefits embodied in the asset are reflected by changing the amortisation period or amortisation method, as appropriate, and are treated as changes in accounting estimates. Useful lives are also reviewed each year and, if required, they are adjusted with effect from the beginning of the following financial year. With the exception of capitalised expenditure on development, expenditure on intangible assets produced by the Company is not capitalised and is charged to expenses in the period in which it was incurred Property, plant and equipment Items of property, plant and equipment other than land are measured at cost less accumulated depreciation and impairment losses. Land is measured at cost less impairment losses. In the case of perpetual usufruct rights to land, cost is understood to mean the amount paid for the right to a third party. Perpetual usufruct rights to land obtained free of charge are capitalised in the accounting books. Initial value of a tangible asset comprises its cost, which includes all costs directly related to its acquisition and bringing it to working condition for its intended use. The cost also includes the cost of replacing component parts of plant and equipment, which is recognised when incurred, if relevant recognition criteria are fulfilled. Costs incurred on an asset which is already in service, such as costs of repairs, overhauls or operating fees, are expensed in the reporting period in which they were incurred. Upon acquisition, tangible assets are divided into components of material value to which separate useful economic lives can be assigned. Costs of major overhauls are also such components of tangible assets. 13

15 Tangible assets (including their components), other than land, are depreciated with the straight-line method over their estimated useful lives, which are as follows: Buildings and structures Plant and equipment Vehicles Other tangible assets 1 80 years 1 25 years 1 15 years 1 10 years An item of property, plant and equipment may be removed from the statement of financial position if it is sold or if the company does not expect to realise any economic benefits from its further use. Any gains or losses on removal of an asset from the statement of financial position (calculated as the difference between net proceeds from its sale, if any, and the carrying amount of the asset) are disclosed in the statement of comprehensive income in the period of removal. The residual value, useful economic life and depreciation method are reviewed on an annual basis and adjusted if required with effect from the beginning of the next financial year. The costs of each overhaul are included in the carrying amount of property, plant and equipment, if relevant recognition criteria are fulfilled Tangible assets under construction Tangible assets under construction are measured at the amount of aggregate costs directly attributable to the acquisition or production of such assets, including finance expenses, less impairment losses, if any. Tangible assets under construction are not depreciated until completed and placed in service. Tangible assets under construction comprise tangible assets which are under construction or assembly and are recognised at cost. Finance expenses capitalised in tangible assets under construction include costs of servicing the debt incurred to finance the assets, in accordance with the policy described in Note Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership onto the lessee. All other types of leases are treated as operating leases. The Company as a lessor Finance leases are disclosed in the statement of financial position as receivables, at amounts equal to the net investment in the lease less the principal component of lease payments for the given reporting period calculated based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease. Finance income from interest on a finance lease is disclosed in the relevant reporting periods based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease. Income from operating leases is recognised in the statement of financial position on a straight-line basis over the lease term. The Company as a lessee Assets used under a finance lease are recognised as assets of the Company and at initial recognition are measured at fair value or, if lower, the present value of the minimum lease payments. The resultant obligation towards the lessor is presented in the statement of financial position under finance lease liabilities. Lease payments are broken down into the interest component and the principal component so as to produce a constant rate of interest on the remaining balance of the liability. Finance expense is charged to statement of comprehensive income. 14

16 Operating lease payments are recognised in the statement of comprehensive income on a straight-line basis over the lease term Shares in subsidiaries and associates Shares in subsidiaries and associates are disclosed at cost less impairment losses Impairment losses on non-financial non-current assets As at each balance-sheet date, the Company assesses whether there is any evidence of impairment of any of its assets. If the Company finds that there is such evidence, or if the Company is required to perform annual impairment tests, the Company estimates the recoverable value of the given asset. The recoverable value of an asset is equal to the higher of the fair value of the asset or cash generating unit, less the transaction costs, or its value in use. The recoverable value is determined for the individual assets, unless a given asset does not generate separate cash inflows largely independent from those generated by other assets or asset groups. If the carrying amount of an asset is higher than its recoverable value, the value of the asset is impaired and an impairment loss is recognised up to the established recoverable value. In assessing value in use, the projected cash flows are discounted to their present value using a pre-tax discount rate which reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses related to the assets used in the continued operations are disclosed under the cost categories corresponding to the function of the asset with respect to which impairment has been identified. As at each balance-sheet date, the Company assesses whether there is evidence that any impairment loss recognised in the previous periods with respect to a given asset is no longer necessary or should be reduced. If there is such evidence, the Company estimates the recoverable value of the given asset. The recognised impairment loss is reversed only when following the recognition of the last impairment loss there has been a change in the estimates used to determine the recoverable value of the asset. In such a case, the carrying amount of the asset is increased up to its recoverable value. The increased value may not exceed the carrying amount of the asset that would have been determined (net of accumulated amortisation/depreciation) if the impairment loss related to that asset had not been recognised in the previous years. Reversal of an asset impairment loss is immediately recognised as income in the statement of comprehensive income. Following reversal of an impairment loss, in the subsequent periods the amortisation/depreciation charge related to the given asset is adjusted so that over the remaining useful life of that asset its revised carrying amount, less its residual value, can be regularly written off Inventories Inventories are stated at the lower of cost and net realisable value. Costs incurred in order to bring each inventory item to its present location and conditions are accounted for in the following manner: materials and goods for resale acquisition cost calculated on weighted average basis, finished goods and work-in-progress the cost of direct materials and labour and an appropriate portion of indirect production costs, established on the basis of normal capacity, calculated on weighted average basis. Net realisable value is the selling price estimated as at the balance-sheet date net of VAT, excise duty and fuel charge, less any rebates, discounts and other similar items, and less the estimated costs to complete and costs to sell. Mandatory stocks are disclosed as non-current assets given their turnover in a short term Trade and other receivables Trade receivables, which typically become due and payable in 7 to 60 days, are recognised and carried at amounts initially invoiced, less impairment losses on doubtful receivables. Impairment losses on receivables are estimated when the collection of the full amount of receivables is no longer probable. Uncollectible receivables are written off through the statement of comprehensive income when recognised as unrecoverable accounts. If the effect of time value of money is significant, the value of receivables is determined by discounting the projected future cash flows to their present value using a pre-tax discount rate reflecting the current market 15

17 estimates of the time value of money. If the discount method is applied, an increase in receivables over time is recognised as finance income Foreign currency transactions Since January 1st 2011, transactions denominated in foreign currencies have been reported in the functional currency of the Company (Polish złoty) as at the transaction date, using the following exchange rates: 1) the exchange rate actually applied on that date due to the nature of the transaction in the case of sale or purchase of foreign currencies; 2) the mid-exchange rate quoted for a given currency by the National Bank of Poland for the day immediately preceding the transaction date in the case of payment of receivables or liabilities where there is no rationale for using the exchange rate referred to in item 1, and in the case of other transactions. The exchange rate applicable to purchase invoices is the mid-exchange rate quoted by the National Bank of Poland for the last business day immediately preceding the invoice date, and the exchange rate applicable to sales invoices is the mid-exchange rate quoted by the National Bank of Poland for the last business day immediately preceding the sales date. Any foreign exchange gains or losses are posted to the statement of comprehensive income, except for foreign exchange gains and losses which are treated as a part of borrowing costs and are capitalised in property, plant and equipment (foreign exchange gains and losses on interest and fees and commissions). Non-monetary items measured at their historical cost in a foreign currency are translated at the exchange rate effective as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated at the exchange rate effective as at the date of determining the fair value. The Company calculates realised and unrealised foreign exchange gains and losses separately and recognises the resulting total balance in the statement of comprehensive income under: operating income or expenses: in the case of foreign exchange gains and losses related to settlement of trade receivables and liabilities, finance income or expenses: in the case of borrowings, other debt instruments, investment commitments, and cash. Exchange differences arising on valuation, as at the balance-sheet date, of short-term investments (e.g. shares, other securities, loans advanced, cash and other monetary assets) and receivables and liabilities denominated in foreign currencies, are charged to finance income or expenses and operating income or expenses. Exchange rates applied for the purposes of balance-sheet valuation: Mid-exchange rate quoted by the NBP for: Dec Dec USD EUR Cash and cash equivalents Cash in hand and at banks, as well as and non-current deposits held to maturity are measured at face value. Cash and cash equivalents as disclosed in the statement of cash flows comprise cash in hand and cash at banks, overdraft facilities as well as those bank deposits maturing within three months which are not treated as investment activity Accruals and deferrals The Company recognises prepayments if they relate to future reporting periods. Accrued expenses are recognised at probable values of current-period liabilities. Employees of the Company are entitled to holidays in accordance with the rules set forth in the Polish Labour Code. The Company recognises the cost of employee holidays on an accrual basis using the liability method. 16

18 The amount of the provision for unused holidays is calculated on the basis of the difference between the balance of holidays actually used and the balance of holidays used established proportionately to the passage of time Equity Equity is recognised in the accounting books by categories, in accordance with the rules set forth in applicable laws and in the Articles of Association. The share capital of Grupa LOTOS S.A. is the share capital of the Company and is recognised at its par value, in the amount specified in the Company s Articles of Association and in the relevant entry in the National Court Register Provisions Provisions are recognised when the Company has an obligation (legal or following from commercial practice) resulting from past events, and when it is probable that the discharge of this obligation will cause an outflow of funds representing economic benefits, and the amount of the obligation may be reliably estimated. If the Company anticipates that the costs for which provisions have been made will be recovered, e.g. under an insurance agreement, the recovery of such funds is recognised as a separate item of assets, but only when such recovery is practically certain to occur. The cost related to a given provision is disclosed in the statement of comprehensive income net of any recoveries. If the effect of the time value of money is significant, the amount of provisions is determined by discounting projected future cash flows to their present value at gross discount rates reflecting the current market estimates of the time value of money and risks, if any, related to a given obligation. If the discount method is applied, an increase in provisions as a result of lapse of time is recognised as finance expenses. Provisions are charged against operating expenses, other operating expenses, or finance expenses, depending on what circumstances the future obligation relates to Retirement severance payments and length-of-service awards In accordance with the company remuneration systems applied by Grupa LOTOS S.A., the Company s employees are entitled to length-of-service awards and severance payments upon retirement due to old age or disability. Length-of-service awards are paid out after a specific period of employment. Old-age and disability retirement severance payments are one-off and paid upon retirement. Amounts of severance payments and length-of-service awards depend on the length of employment and the average remuneration. The Company recognises a provision for future liabilities under retirement severance payments and length-of-service awards in order to assign costs to the periods in which they are incurred. According to IAS 19 Employee Benefits, length-ofservice awards are classified as other long-term employee benefits, while retirement severance payments as defined post-employment benefit plans. The present value of the obligations as at each balance-sheet date is calculated by an independent actuary. The calculated value of the obligations is equal to the amount of discounted future payments, taking into account the employment turnover, and relate to the period ending at the given balance-sheet date. Information concerning demographics and employment turnover is sourced from historical data. Actuarial gains and losses are recognised in profit or loss. Furthermore, the Company creates a provision for the benefits to which employees and other eligible persons are entitled as part of the Company Social Benefits Fund Assets for social purposes and liabilities of the Company s Social Benefits Fund The Act on Company s Social Benefits Fund of March 4th 1994 (as amended), stipulates that an employer should set up a Social Benefits Fund if it employs over 20 full-time staff. In accordance with the statute and internal rules of procedure, the Company creates such fund and makes regular contributions to the fund, which are charged to costs. The purpose of the Social Benefits Fund is to subsidise social activities of the Company, finance loans to employees and other corporate social spending. The Company offsets the Social Benefits Fund s assets against its liabilities towards the Fund, as the Fund s assets are not fully controlled by the Company. The excess of the Fund's liabilities over the Fund's assets is disclosed under other receivables. The excess of the Fund's assets over the Fund's liabilities is disclosed under other payables. The Company recognises a provision for contributions to the Company's Social Benefits Fund made for the benefit of old-age and disability retirees covered by the Company's social aid programme (including current employees, who will become eligible for social aid in the future). The amount of the provision represents a sum of products of the expected undiscounted value of annual contribution in each successive year (taking into account 17

19 the expected growth of average remuneration in the national economy), the discounting factor for a given year and the likelihood that a given employee will remain with the Company until a given year. The amount of the provision is amortised over time against the length of service of a given employee at the Company Interest-bearing bank borrowings and other debt instruments All bank borrowings and other debt instruments are initially recognised at cost, equal to the fair value, less cost of obtaining the borrowing. Following initial recognition, interest-bearing borrowings and other debt instruments are measured at amortised cost, using the effective interest rate method. Amortised cost includes the cost of obtaining the borrowings as well as discounts or premiums obtained at settlement of the liability. Upon removal of the liability from the statement of financial position or recognition of value impairment, gains or losses are charged to the statement of comprehensive income Borrowing costs Borrowing costs are disclosed as the costs of the period in which they were incurred, except for the costs which relate directly to the acquisition, construction or production of an asset being completed, which are capitalised as a part of the cost of such an asset. To the extent that the funds are borrowed specifically for the purpose of acquiring the asset being completed, the amount of the borrowing costs which may be capitalised as part of such asset is determined as the difference between the actual borrowing costs incurred in connection with a given loan in a given period and the proceeds from temporary investments of the borrowed funds. To the extent that the funds are borrowed without a specific purpose and are later allocated for the acquisition of an asset being completed, the amount of the borrowing costs which may be capitalised is determined by applying the capitalisation rate to the capital expenditure on that asset. The accounting policies with respect to capitalisation of currency exchange differences are described in Note 10.9, Foreign currency transactions Government grants If there is reasonable certainty that the subsidy will be received and that all related conditions will be fulfilled, government grants are recognised at fair value. If a subsidy concerns a cost item, it is recognised as income in matching with the expenses it is to compensate for. If it concerns an asset, its fair value is recognised as deferred income, and then it is written off annually in equal parts through statement of comprehensive income over the estimated useful life of the asset Carbon dioxide (CO 2 ) emission allowances The Company recognises carbon dioxide (CO 2) emission allowances in its financial statements based on the net liability method the Company recognises only those liabilities that result from exceeding the limit of emission allowances granted, and the liability is recognised only after the Company actually exceeds the limit. The Company analyses the limits granted to it on an annual period basis. Income from the sale of unused emission allowances is credited against the statement of comprehensive income at the time of sale Taxes Income tax Mandatory decrease of profit/(increase of loss) comprises: current income tax (CIT) and deferred income tax. The current portion of the income tax is calculated based on the net profit/(loss) (taxable income) for a given financial year. The net profit (loss) established for tax purposes differs from the net profit (loss) established for financial reporting purposes to the extent of the income which is taxable and costs which are deductible in future years and the expenses and income items which will never be subject to deduction/taxation. The tax charges are calculated based on the tax rates effective for a given financial year. 18

20 For the purposes of financial reporting, the Company creates deferred tax liabilities using the balance-sheet liability method in relation to all temporary differences existing as at the balance-sheet date between the tax base of assets and liabilities and their carrying value as disclosed in the financial statements. Deferred tax liabilities are recognised for all taxable temporary differences: except to the extent that the deferred tax liabilities arise from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). in the case of taxable temporary differences associated with investments in subsidiaries or associates, and interests in joint ventures, unless the investor is able to control the timing of the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are disclosed in relation to all deductible temporary differences, unused tax credits, and unused tax losses brought forward in the amount of the probable taxable income which would enable these differences, assets and losses to be used: except to the extent that the deferred tax assets related to deductible temporary differences arise from the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). in the case of deductible temporary differences associated with investments in subsidiaries or associates and interests in joint ventures, the related deferred tax assets are recognised in the statement of financial position to the extent it is probable that in the foreseeable future the temporary differences will be reversed and taxable income will be generated which will enable the deductible temporary differences to be offset. The carrying amount of deferred tax assets is revised as at each balance-sheet date and is subject to appropriate reduction to the extent it is no longer probable that taxable income sufficient for a partial or full realisation of the deferred tax assets would be generated. Deferred tax assets and deferred tax liabilities are calculated using tax rates expected to be effective at the time of realisation of particular asset or release of particular provision, based on tax rates (and tax legislation) effective as at the balance-sheet date or tax rates (and tax legislation) certain to be effective as at the balancesheet date in the future. The effect of deferred tax on items posted directly to equity is recognised in equity through other comprehensive income. The Company offsets deferred tax assets against deferred tax liabilities only if it holds an enforceable legal right to offset current tax receivables against current tax payables, and the deferred income tax is related to the same taxpayer and the same tax authority Value-added tax, excise duty and fuel charge Revenue, expenses, assets and liabilities are recognised net of the VAT, excise duty and fuel charge: except where the value added tax paid on the purchase of assets or services is not recoverable from the tax authorities; in such a case it is recognised in the cost of the given asset or as part of the cost item, and except in the case of receivables and payables, which are recognised inclusive of the VAT, excise duty and fuel charge. The net amount of the VAT, excise duty and fuel charge which is recoverable from or payable to tax authorities is carried in the statement of financial position as part of receivables or liabilities Financial assets Financial assets are classified into the following categories: Financial assets held to maturity, Financial assets at fair value through profit or loss, Loans and receivables, Financial assets available for sale 19

21 Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities, which are quoted on an active market and which the Company has the positive intention and ability to hold to maturity, other than those: designated at fair value through profit or loss upon initial recognition, designated as available for sale, which qualify as loans and receivables. Financial assets held to maturity are measured at amortised cost using the effective interest method. Financial assets held to maturity are classified as non-current assets if they mature more than 12 months after the balance-sheet date. A financial asset at fair value through profit or loss is a financial asset that meets either of the following conditions: a) it is classified as held for trading. Financial assets are classified as held for trading if they: have been acquired principally for the purpose of being sold in the near future, are part of a portfolio of identified financial instruments that are managed together and for which there is probability of profit-taking in the near future, are derivatives (except for those which are part of hedge accounting or financial guarantee contracts), b) it has been assigned to this category on initial recognition (in accordance with IAS 39). Financial assets at fair value through profit or loss are measured at fair value, based on their market value on the balance-sheet date, without reflecting sales transaction costs. Any changes in the value of these instruments are recognised in the statement of comprehensive income as finance income or expenses. An entire contract can be designated as financial assets as at fair value through profit or loss if it contains one or more embedded derivatives. The above does not apply when an embedded derivative has no significant impact on the cash flows generated under the contract or when it is clear without an analysis or following a superficial analysis that if a similar hybrid instrument was first considered, separation of the embedded derivative would have been prohibited. Financial assets may be designated as financial assets as at fair value through profit or loss on initial recognition if the following criteria are met: (i) such designation eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch); or (ii) the assets are part of a group of financial assets that are managed and measured based on fair value, according to a well-documented risk management strategy; or (iii) the assets contain embedded derivatives which should be presented separately. Loans and receivables are financial assets with fixed or determinable payments not classified as derivatives and not traded on any active market. They are disclosed under current assets if they mature within 12 months from the balance-sheet date. Loans and receivables with maturities exceeding 12 months from the balance-sheet date are classified as non-current assets. Financial assets available for sale are financial assets that are not derivative instruments, and have been classified as available for sale or do not belong to any of the previous three categories. Financial assets available for sale are recognised at fair value increased by the transaction costs which may be directly attributed to an acquisition or issue of a financial asset. If quoted market prices from an active market are not available and the fair value cannot be reliably measured using alternative methods, available-for-sale financial assets are measured at cost less impairment. The positive or negative differences between the fair value of available-forsale financial assets (if they have a market price derived from an active regulated market or their fair value can be established in any other reliable manner) and their cost are recognised net of deferred tax in other comprehensive income. Impairment losses on available-for-sale financial assets are recognised in finance expenses. Any purchase or sale of financial assets is recognised at the transaction date. On initial recognition, financial assets are recognised at fair value including in the case of financial assets other than those at fair value through profit or loss transaction costs directly attributable to the purchase. Financial assets are derecognised when the Company loses control over contractual rights comprising particular financial instruments; this is usually the case when a financial instrument is sold or when all the cash flows related to a given instrument are transferred to a third party Impairment of financial assets As at each balance-sheet date the Company determines whether there is objective evidence of impairment of a financial asset or a group of financial assets. Assets carried at amortised cost If there is objective evidence that the value of loans and receivables measured at amortised cost has been impaired, the impairment loss is recognised in the amount equal to the difference between the carrying amount of a financial asset and the present value of estimated future cash flows (excluding future losses relating to irrecoverable receivables, which have not yet been incurred), discounted using the initial effective interest rate (i.e. the interest rate used at the time of initial recognition). The carrying amount of an asset is reduced directly or 20

22 by creating relevant provisions. The amount of loss is recognised in the statement of comprehensive income. First the Company determines whether there exists objective evidence of impairment with respect to each financial asset that is deemed material, and with respect to financial assets that are not deemed material individually. If the analysis shows that there exists no objective evidence of impairment of an individually tested asset, regardless of whether it is material or not, the Company includes the asset into the group of financial assets with similar credit risk profile and tests it for impairment together with the other assets from this group. Assets which are tested for impairment individually, and with respect to which an impairment loss has been recognised or a previously recognised loss is deemed to remain unchanged, are not taken into account when a group of assets are jointly tested for impairment. If an impairment loss decreases in the next period, and the decrease may be objectively associated with an event that occurred subsequent to the impairment loss recognition, the recognised impairment loss is reversed. The subsequent reversal of an impairment loss is recognised in the statement of comprehensive income to the extent that the carrying amount of the asset does not exceed its amortised cost as at the reversal date. Financial assets carried at cost If there exists objective evidence of impairment of a non-traded equity instrument which is not carried at fair value since such value cannot be reliably determined, the amount of impairment loss is established as the difference between the carrying value of the financial asset and the present value of estimated future cash flows discounted with the market rate applicable to similar financial assets prevailing at a given time. Financial assets available for sale If there exists objective evidence of impairment of a financial asset available for sale, the amount of the difference between the cost of that asset (less any principal payments and depreciation/amortisation charges) and its current fair value, reduced by any impairment losses previously recognised in the statement of comprehensive income, is derecognised from equity and charged to the statement of comprehensive income. Reversal of an impairment loss concerning equity instruments qualified as available for sale may not be recognised in the statement of comprehensive income. If the fair value of a debt instrument available for sale increases in the next period, and the increase may be objectively associated with an event that occurred subsequent to the impairment loss recognition in the statement of comprehensive income, the amount of the reversed impairment loss is recognised in the statement of comprehensive income Derivative financial instruments Derivatives used by the Company to hedge against currency risk include in particular FX forwards. In addition, the Company relies on full barrel swaps and commodity swaps to hedge its exposure to raw material and petroleum product prices, uses futures contracts to manage its exposure to prices of carbon dioxide (CO 2) emission allowances, and enters into interest rate swaps (IRSs) and forward rate agreements (FRAs) to hedge its interest rate exposure. Derivative financial instruments of this type are measured at fair value. The fair value of FX forwards is established by reference to the forward rates of contracts with similar maturities prevailing at a given time. The fair value of interest rate swaps is established by reference to the market value of similar instruments. Derivative instruments are recognised as assets if their value is positive and as liabilities if their value is negative. Gains or losses resulting from changes in the fair value of a derivative which does not qualify for hedge accounting are charged directly to the net profit or loss for the financial year. In the statement of financial position, financial instruments are presented as either current or non-current, depending on the expected time of realisation of assets and liabilities classified as held for trading Hedge accounting As of January 1st 2011, the Company introduced cash flow hedge accounting with respect to a USDdenominated borrowing designated as a hedge of future USD-denominated sales transactions. The objective of cash flow hedge accounting is to guarantee a specified Polish złoty value of its sales revenue generated in USD. The hedged items include a number of highly probable and planned USD-denominated refining product sales transactions, in particular the first portion of sales revenue (up to the amount of the designated instalment of the principal) in USD generated in a given calendar month, or if the amount of sales revenue in a given month is lower than the amount of the designated instalment of the principal the first portion of sales revenue generated in three successive months. If a subsequent portion of sales revenue is designated in a given calendar month, the hedged item is the first portion of sales revenue generated after the previously designated portion of sales revenue in USD in a given calendar month, or if the amount of sales revenue in a given month is lower than the amount of the designated instalment of the principal a subsequent portion of sales revenue generated in three successive months. A hedged item is linked to relevant hedging instruments based on an individual document designating the hedging relationship. 21

23 The selected hedging instruments cover an obligation to repay a USD-denominated borrowing, whose settlement dates fall on business days of specified calendar months, as provided in the principal repayment schedule. Changes in the fair value of financial derivatives selected to hedge cash flows, to the extent representing an effective hedge, are posted directly to revaluation reserve. Changes in the fair value of financial derivatives selected to hedge cash flow, to the extent not representing an effective hedge, are charged to other finance income or expenses in the reporting period. At the time when a hedge is undertaken, the Company formally designates and documents the hedging relationship, as well as its risk management objective and strategy for undertaking the hedge. The relevant documentation specifies the hedging instrument, the hedged item or transaction, the nature of the hedged risk, as well as how the Company will assess the hedging instrument s effectiveness in offsetting changes in the fair value of the hedged item or cash flows attributable to the hedged risk. The hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk. The hedge is assessed on an ongoing basis to determine whether it remains highly effective during all the reporting periods for which it was undertaken Trade and other payables Current trade payables are reported at nominal amounts payable. Financial liabilities at fair value through profit or loss include financial liabilities held for trading, and financial liabilities initially designated as financial liabilities at fair value through profit or loss. Financial liabilities are classified as held for trading if they were acquired for the purpose of being sold in the near future. Derivative financial instruments, including separated embedded instruments, are also classified as held for trading, unless they are considered as effective hedges. Financial liabilities may be designated as financial liabilities at fair value through profit or loss on initial recognition, if the following criteria are met: (i) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, (ii) the liabilities are part of a group of financial liabilities that are managed and measured based on fair value, according to a well-documented risk management strategy, or (iii) the financial liabilities contain embedded derivative instruments which should be presented separately. Financial liabilities at fair value through profit or loss are carried at fair value, reflecting their market value as at the balance-sheet date, excluding sale transaction costs. Changes in the fair value of such instruments are recognised in profit or loss as finance income or expenses. Financial liabilities, not classified as financial liabilities at fair value through profit or loss, are carried at amortised cost using the effective interest method. The Company removes a financial liability from the statement of financial position when it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. When a debt instrument between the same parties is replaced by another instrument whose terms are substantially different, the Company treats such replacement as if the former financial liability was extinguished and recognises a new liability. Similarly, material modifications in the terms of a contract concerning an existing financial liability are presented as extinguishment of the former and recognition of a new financial liability. Any differences in the respective carrying amounts arising in connection with the replacement are charged to profit or loss Other non-financial liabilities include in particular VAT, excise duty and fuel charge liabilities to the tax authorities and liabilities under received prepayments, which are to be settled by delivery of goods and tangible assets, or performance of services. Other non-financial liabilities are measured at nominal amounts payable Recognition of revenue Revenue is recognised in the amount of probable economic benefits to be derived by the Company in connection with a given transaction and when the amount of revenue may be reliably estimated Sales of products, goods for resale and services Sales revenue is disclosed at the fair value of payments received or due, and it represents the accounts receivable for the products, goods for resale and services provided in the ordinary course of business, less discounts, VAT and other sales-related taxes (excise duty, fuel charge). The sales of products and goods for resale are recognised at the moment of delivery, when material risk and benefits resulting from the ownership of the products and goods have been transferred to the purchaser. 22

24 10.28 Interest Interest income is recognised as the interest accrues (using the effective interest rate), unless the receipt of the interest is doubtful Dividends Dividend is recognised as finance income as of the date on which the appropriate governing body of the Company adopts a resolution concerning distribution of profit, unless the resolution specifies another dividend record date Material values based on the Management Board's professional judgement and estimates The preparation of financial statements in accordance with the International Financial Reporting Standards requires a number of assumptions, judgments and estimates which affect the value of items disclosed in the financial statements and in the notes thereto. Although the assumptions and estimates are based on the management s best knowledge of the current and future events and developments, the actual results might differ from the estimates. The estimates and underlying assumptions are reviewed on a continuous basis. Any change in an accounting estimate is recognised in the period in which it has been made if it refers exclusively to that period, or in the current period and future periods if it refers to both the current period and future periods. Material assumptions used by the Management Board in making the estimates are described in the relevant notes. While making assumptions, estimates and judgments, the Management Board relies on its experience and knowledge and may take into consideration opinions, analyses and recommendations issued by independent experts. Apart from the accounting estimates, the professional judgement of the management was of key importance in the application of the accounting policies in the cases described below. Measurement of provisions Provisions for employee benefits are estimated using actuarial methods. The assumptions adopted for the measurement of provisions are described in more detail in Note Depreciation/amortisation charges Depreciation/amortisation charges are determined based on the expected useful lives of property, plant and equipment and intangible assets. The Company reviews the useful lives of its assets annually, on the basis of current estimates. Fair value of financial instruments The fair value of financial instruments for which no active market exists is determined by means of appropriate valuation methods. In selecting appropriate methods and assumptions, the Company relies on professional judgment. The assumptions adopted for the measurement of fair value of financial instruments are described in Note 36. Deferred tax assets The Company recognises deferred tax assets if it is assumed that taxable profit will be generated in the future against which the asset can be utilised. If taxable profit deteriorates in the future, this assumption may prove invalid. The Company's Management Board reviews its estimates regarding the likelihood of recovering deferred tax assets taking into account the changes in the factors on which such estimates were based, new information and past experience. The assumptions adopted for the measurement of deferred tax assets are described in Note

25 Impairment of cash-generating units, individual items of property, plant and equipment, intangible assets As at each balance-sheet date, in accordance with IAS 36, the Management Board assesses whether there is any indication of impairment of cash-generating units and individual items of property, plant and equipment. Indications of impairment may be based on external sources and relate to market variables (including fluctuations in prices, FX rates, stock prices, interest rates and other variables related to current economic trends), as well as plans, actions and developments at the Company, such as decisions concerning change, discontinuation, limitation or development of its business, technological changes, efficiency and investment initiatives. If there is any indication of impairment, the Company is required to estimate the recoverable amounts of assets and cash-generating units. While determining the recoverable amount of the individual assets, the Company takes int o account such key variables as discount rates, growth rates and price ratios. For information on impairment of property, plant and equipment and intangible assets, see Note 17. Following the analysis of cash flows generated by individual cash-generating units and impairment tests of selected assets, which in the Management Board's opinion required such tests, the Company made necessary adjustments to the value of the assets for which there was material evidence of impairment Net earnings/(loss) per share Earnings/(loss) per share for each period are calculated by dividing the net profit/(loss) for a given period by the weighted average number of shares in this reporting period. If the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue, or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented is adjusted retrospectively. If such changes occur after the balance-sheet date but before the financial statements are authorised for issue, the earnings per share calculations for those and any prior period financial statements presented are based on the new number of shares. The Company does not present diluted earnings/(loss) per share, as there are no dilutive instruments outstanding Contingent liabilities and receivables A contingent liability is understood as a duty to discharge an obligation which is conditional upon the occurrence of certain circumstances. Contingent liabilities are not recognised in the statement of financial position, however information on contingent liabilities is disclosed, unless the likelihood of the outflow of funds embodying economic benefits is negligible. Contingent receivables are not recognised in the statement of financial position, however information on them is disclosed if the inflow of funds embodying economic benefits is likely to occur Profit distribution for employee benefits and special accounts According to the business practice followed in Poland, company shareholders have the right to allocate a part of profit for employee benefits by making contributions to the Company s social benefits fund and to other special accounts. In the financial statements prepared in accordance with the IFRS such distributions are charged to operating expenses of the period in which the profit distribution was approved by the General Meeting Assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is deemed to be met only if the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Classification of an asset as held for sale means that the management intends to complete the sale within one year from the change of its classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. 24

26 11. Business segments As the segments are identified at the Group level, the results of particular business segments for the year ended December 31st 2011 were presented in Note 11 to the consolidated financial statements for the year ended December 31st Grupa LOTOS S.A. is presented as a part of the downstream segment. Financial performance is assessed based on operating profit or loss at the Company level. 25

27 12. Income and expenses 12.1 Sales revenue Note Dec Dec Sales of products 35,771,073 25,870,639 Sales of services 104,424 88, Total sales of products 35,875,497 25,958,993 ============ ============ Sales of goods for resale 538, ,773 Sales of materials (1) 206,741 4, Total sales of goods for resale and materials 745, ,690 ============ ============ Effect of accounting for cash flow hedge accounting (90) - ============ ============ Total 36,620,738 26,344, including to related entities ,427,288 15,433, Elimination of excise duty and fuel charge (9,331,424) (8,220,008) ============ ============ Total 27,289,314 18,124,675 ============ ============ Note Dec Dec Domestic sales of products 30,742,525 22,991,656 Export sales of products 5,132,972 2,967, Total sales of products 35,875,497 25,958,993 ============= ============= Domestic sales of goods for resale and materials 544, ,662 Export sales of goods for resale and materials 201, Total sales of goods for resale and materials 745, ,690 ============= ============= Effect of accounting for cash flow hedge accounting (90) - ============= ============= Total 36,620,738 26,344, including to related entities ,427,288 15,433, Elimination of excise duty and fuel charge (9,331,424) (8,220,008) ============= ============= Total 27,289,314 18,124,675 ============= ============= (1) including sales of crude oil. 26

28 12.2 Other operating income Note Dec Dec Gain on disposal of non-financial non-current assets - 5,894 Reversal of impairment losses Receivables ,334 Subsidies Compensations/damages received 3,341 1,377 Other 988 8,297 (1) =========== =========== Total 4,766 17,902 =========== =========== (1) including PLN 5,999 thousand under reimbursement of payments resulting from adjustments to an excise duty tax return and fuel charges from previous years Finance income Note Dec Dec (restated) Dividend received 240, ,936 - from related entities , ,256 - from other entities Interest 6,856 3,121 ========== ========== Total 247, ,057 ========== ========== 12.4 Costs by type Note Dec Dec (restated) Depreciation and amortisation 26, , ,585 Raw materials and energy used 25,066,491 16,491,379 Contracted services 879, ,001 Taxes and charges 87,887 66,366 Salaries and wages 153, ,056 Social security and other benefits 34,924 36,084 Other costs by type 84,617 55,201 Goods for resale and materials sold 546, ,600 =========== =========== Total 27,229,253 18,006,272 =========== =========== Change in products and adjustments to cost of sales (560,429) (500,216) =========== =========== Total operating expenses: 26,668,824 17,506,056 =========== =========== Cost of sales 25,893,214 16,839,383 Selling costs 540, ,087 General and administrative expenses 235, ,586 27

29 12.5 Other operating expenses Note Dec Dec Loss on disposal of non-financial non-current assets Revaluation of assets: 13,272 19,162 - receivables ,932 - tangible assets under construction 17 13,245 14,230 Other provisions, including: 1,500 2,000 - special account 16, ,500 1,000 Fines and damages 124 2,270 Other 6,099 6,784 ========= ========= Total 21,858 30,216 ========= ========= 12.6 Finance expenses Dec Dec (restated) Interest 134, ,842 Foreign exchange losses 286, ,670 - on foreign-currency denominated credit facilities 356, ,444 - on foreign-currency denominated loans (6,818) (2,376) - realised foreign exchange differences on foreign-currency transactions in bank accounts (32,618) (57,775) - other foreign exchange differences (30,501) (3,623) Loss on disposal of investments Revaluation of financial assets: 109, ,863 - valuation of derivative financial instruments 2,995 73,189 - settlement of derivative financial instruments 106, ,201 - other 222 (5,527) (1) Bank fees 14,904 11,517 Other 1,777 1,123 Amounts capitalised as part of the cost of qualifying assets (21,515) (101,227) ========== ========== Total 526, ,929 ========== ========== (1) including revaluation of assets invested in subsidiary LOTOS Gaz S.A. w likwidacji (in liquidation). 28

30 12.7 Depreciation and amortisation costs, impairment losses, and foreign exchange gains/losses on operating activities Note Dec Dec Items recognised in cost of sales: 649, ,290 Depreciation of tangible assets and amortisation of intangible assets 331, ,277 Effect of revaluation of inventories (1) Net foreign exchange losses (gains) on trade settlements 317,827 (43,986) ========== ========== Items recognised in selling costs: 6,750 7,335 Depreciation of tangible assets and amortisation of intangible assets 6,750 7,335 ========== ========== Items recognised in general and administrative expenses: 29,688 26,754 Depreciation of tangible assets and amortisation of intangible assets 29,688 26,754 ========== ========== Items recognised in change in products and adjustments in cost of sales: 7,338 5,219 Depreciation of tangible assets and amortisation of intangible assets 7,338 5,219 ========== ========== 12.8 Costs of employee benefits Note Dec Dec Salaries and wages , ,056 Social security and other benefits ,924 36,084 ========== ========== Total, including: 188, ,140 ========== ========== Cost of current salaries and wages 138, ,658 Cost of social security contributions 19,571 22,847 Cost of retirement and other post-employment benefits 15,282 6,597 Costs of other employee benefits 15,116 13,038 ========== ========== Change in products and adjustments to cost of sales (1,628) (2,338) ========== ========== Total cost of employee benefits, including: 186, ,802 ========== ========== Items recognised in cost of sales 73,664 79,017 Items recognised in selling costs 11,692 9,024 Items recognised in general and administrative expenses 101,605 93,761 29

31 13. Corporate income tax 13.1 Tax expense The main components of the tax expense for the year ended December 31st 2011 and for the year ended December 31st 2010 are as follows: Dec Dec Corporate income tax 12 12,539 Deferred tax 16,663 42,940 ============ ============ Total tax charged to profit 16,675 55,479 ============ ============ Tax expense recognised in other net comprehensive income (98,350) - The current and deferred portion of income tax was calculated at the rate of 19% of the income tax base. The change in deferred tax assets and liabilities disclosed in the statement of comprehensive income for the year ended December 31st 2011 is primarily attributable to the fact that as of January 1st 2011 Grupa LOTOS S.A. has applied the accounting method to measure the foreign exchange differences for the purpose of corporate income tax settlements as well as settlements related to accelerated tax depreciation of new items of property, plant and equipment. The change in deferred tax assets and liabilities recognised in the statement of comprehensive income in the year ended December 31st 2010 is primarily attributable to the fact that as of January 1st 2010 Grupa LOTOS S.A. has applied the tax method to measure the foreign exchange differences for the purpose of corporate income tax settlements. In , the Company used the accounting method to measure the foreign exchange differences for the purpose of corporate income tax settlements Corporate income tax calculated at effective tax rate and reconciliation of pretax profit to tax base Dec Dec Pre-tax profit on continuing operations 324, ,433 ========= ========= Income tax at the rate of 19% 61,626 98,882 ========= ========= Tax effect of dividends received (45,691) (47,868) Tax effect of other permanent differences 728 4,465 Adjustments disclosed in current year related to tax for previous years 12 - ========= ========= Total 16,675 55,479 ========= ========= Corporate income tax calculated at effective tax rate 5.1% 10.7% 30

32 The difference between the tax amount disclosed in the statement of comprehensive income and the amount calculated by applying the tax rate to pre-tax profit results from the following items: Dec Dec Pre-tax profit on continuing operations 324, ,433 ========== ========== Income tax at the rate of 19% 61,626 98,882 Tax effect of revenue/income not classified as revenue/income under tax regulations (192,985) (172,989) Tax effect of expenses which are non-deductible under tax regulations 110, ,315 Tax effect of tax losses deducted in period - (62,255) Tax effect of tax losses incurred in period 153,419 - Other (132,650) (1) (12,414) ========== ========== Total - 12,539 Adjustments disclosed in current year related to tax for previous years 12 - ========== ========== Income tax disclosed in the statement of comprehensive income 12 12,539 ========== ========== (1) including PLN (125,278) thousand of excess of tax depreciation/amortisation over accounting depreciation/amortisation Corporate income tax receivable and payable Dec Dec Corporate income tax receivable 73,512 - (1) Expected tax refund 73,512 - Corporate income tax payable - 12,037 Income tax expected to be paid - 12,037 (1) In 2010, the amount of PLN 71,124 under corporate income tax receivable was offset against VAT payable. 31

33 13.4 Deferred income tax As at December 31st 2011, December 31st 2010 and January 1st 2010, the net deferred tax assets (liabilities) comprised the following items: Note Statement of financial position Statement of comprehensive income Dec Dec Jan Dec Dec Deferred tax assets Provision for employee benefits 13,627 14,571 9,436 (944) 5,135 Impairment losses on inventories (56) - Impairment losses on receivables 8,834 8,948 10,268 (114) (1,320) Impairment losses on property, plant and equipment 3,037 13,675 10,971 (10,638) 2,704 Negative valuation of derivatives 35,671 52,036 41,875 (16,365) 10,161 Exchange differences on revaluation of foreign-currency denominated items - 34,455 - (34,455) 34,455 Accrued tax loss carry-forward 153,419-62, ,419 (62,343) Cash flow hedge accounting , ,350 - Other 4,608 8,043 6,094 (3,435) 1,949 ========= ========= ========= =========== =========== Deferred tax assets 318, , , ,762 (9,259) ========= ========= ========= =========== =========== Deferred tax liabilities Difference between present tax and accounting value of property, plant and equipment and intangible assets 334, , , ,350 25,084 Positive valuation of derivatives 6,088 13,180 10,508 (7,092) 2,672 Other 994 6, (5,183) 5,925 ========= ========= ========= =========== =========== Deferred tax liabilities 341, , , ,075 33,681 ========= ========= ========= =========== =========== Deferred tax expense recognised under 81,687 (42,940) =========== ========== - profit from continuing operations 13.1 (16,663) (42,940) - other comprehensive income ,350 - Net deferred tax assets/liabilities, including: (23,182) (104,869) (61,929) Deferred tax assets continuing operations 318, , ,967 Deferred tax liabilities continuing operations (341,652) (237,577) (203,896) ========= ========= ========= =========== ========== Taxable temporary differences are expected to expire in Based on the current performance forecast, the Company's Management Board is of the opinion that the disclosed deferred tax assets are fully recoverable. 32

34 14. Assets for social purposes and liabilities of the Company s Social Benefits Fund The Company offsets the Social Benefits Fund s assets against its liabilities towards the Fund, as the Fund s assets are not fully controlled by the Company. The tables below set forth the Social Benefits Fund s assets and liabilities. Dec Dec Assets related to the Company s Social Benefits Fund Cash in separate bank account of the Company s Social Benefits Fund Receivables from employees under the Company s Social Benefits Fund 1,672 1,805 =========== =========== Total 2,657 2,654 =========== =========== Liabilities related to the Company s Social Benefits Fund Liabilities under the Company s Social Benefits Fund 2,657 2,654 =========== =========== Total 2,657 2,654 =========== =========== 15. Earnings per share Dec Dec Profit from continuing operations (A) 307, ,954 Weighted average number of shares (in thousands) (B) 129, ,873 =========== =========== Earnings per share (PLN) (A/B) =========== =========== Earnings per share for each period are calculated by dividing the profit from continuing operations for a given period by the weighted average number of shares in the period. The Company does not present diluted earnings per share, since it has no instruments with a dilutive effect. 16. Dividends On June 27th 2011, the General Meeting of Grupa LOTOS S.A. adopted a resolution on distribution of the Company s net profit for the year ended December 31st Pursuant to the resolution, the Company s net profit for the year ended December 31st 2010, totalling PLN 464,954 thousand, was excluded in whole from distribution to the Company Shareholders and allocated as follows: - PLN 463,454 thousand was transferred to the Company s statutory reserve funds, - PLN 1,500 thousand was transferred to the Special Account designated for financing corporate social responsibility (CSR) projects. In these financial statements, the Company presented profit after distribution under retained earnings. In addition, the allocation of profit to the Special Account was recognised as an expense in the year ended December 31st 2011 and presented under short-term provisions. As at the date of publication of these financial statements, the Company's Management Board has not yet adopted a resolution on distribution of the 2011 profit. 33

35 17. Property, plant and equipment and tangible assets under construction Dec Dec Land 177, ,071 Buildings and structures 2,654,055 1,873,751 Plant and equipment 4,080,143 2,267,997 Vehicles and other 112, ,862 ========== ========== Total property, plant and equipment 7,024,570 4,423,681 ========== ========== Tangible assets under construction 50,618 2,965,876 Prepayments for tangible assets under construction 3,803 6,158 ========== ========== Total tangible assets under construction 54,421 2,972,034 ========== ========== Total 7,078,991 7,395,715 As at December 31st 2011, financing costs capitalised in tangible assets under construction and prepayments for tangible assets under construction amounted to PLN 3,289 thousand (December 31st 2010: PLN 142,378 thousand). Changes to property, plant and equipment and prepayments for tangible assets under construction Land Buildings and structures Plant and equipment Vehicles and other tangible assets Tangible assets under construction Prepayme nts for tangible assets under constructi on Total Gross carrying amount Jan (restated) 178,398 1,274,037 1,042, ,339 5,163, ,699 7,954,158 Increase 7 1,015,681 1,880,233 72,771 (2,125,105) (144,541) 699,046 - purchase , ,474 47, ,550 - transfer from investments 7 1,015,681 1,880,233 64,252 (2,968,272) - (8,099) - settled prepayments ,098 (187,730) 4,368 - borrowing costs ,595 (4,368) 101,227 - other Decrease - (166) (8,482) (2,083) (132) - (10,863) - sale - (93) (31) (2,027) (25) - (2,176) - liquidation - (73) (8,451) (56) - - (8,580) - other (107) - (107) Gross carrying amount as at Dec ,405 2,289,552 2,914, ,027 3,037,852 6,158 8,642,341 Gross carrying amount as at Jan ,405 2,289,552 2,914, ,027 3,037,852 6,158 8,642,341 Increase - 905,100 2,000,412 64,940 (2,895,541) (2,355) 72,556 - purchase ,210 85,601 3,315 93,126 - transfer from investments - 905,100 2,000,407 60,730 (3,008,327) - (42,090) - settled prepayments ,670 (5,670) - - borrowing costs ,515-21,515 - other Decrease (214) (112) (8,805) (1,756) (69,243) - (80,130) - sale - (9) (3,481) (1,181) - - (4,671) - liquidation (214) (103) (5,324) (416) - - (6,057) - other (159) (69,243) (1) - (69,402) Gross carrying amount as at Dec ,191 3,194,540 4,905, ,211 73,068 3,803 8,634,767 34

36 Land Buildings and structures Plant and equipment Vehicles and other tangible assets Tangible assets under construction Prepayme nts for tangible assets under constructi on Total Accumulated amortisation as at Jan , ,962 81, ,683 Increase ,497 92,820 33, ,573 - amortisation ,497 92,820 33, ,573 Decrease - (99) (8,432) (2,075) - - (10,606) Accumulated amortisation as at Dec , , , ,174,650 Accumulated amortisation as at Jan , , , ,174,650 Increase , ,326 56, ,210 - amortisation , ,321 56, ,205 - other increases Decrease - (50) (7,865) (1,619) - - (9,534) Accumulated amortisation as at Dec , , , ,533,326 Impairment losses as at Jan ,746-57,746 Increase ,230-14,230 Decrease Impairment losses as at Dec ,976-71,976 Impairment losses as at Jan ,976-71,976 Increase ,713-19,713 Decrease (69,239) (1) - (69,239) Impairment losses as at Dec ,450-22,450 Net carrying amount Jan (restated) 178, , ,634 64,253 5,105, ,699 6,920,729 ====== ======= ======== ====== ======== ======= ======== Net carrying amount Dec ,071 1,873,751 2,267, ,862 2,965,876 6,158 7,395,715 ====== ======= ======== ====== ======== ======= ======== Net carrying amount Dec ,755 2,654,055 4,080, ,617 50,618 3,803 7,078,991 ====== ======= ======== ====== ======== ======= ======== 1 In the year ended December 31st 2011, by recognising an impairment loss of PLN 69,243 thousand, the Company reduced the value of tangible assets under construction to PLN 69,239 thousand, due to discontinued investments (design documentation). Capitalised costs of servicing the liabilities incurred to finance tangible assets under construction and prepayments for tangible assets under construction in the year ended December 31st 2011 amounted to PLN 21,515 thousand (December 31st 2010: PLN 101,227 thousand). As at December 31st 2011, the value of property, plant and equipment, serving as collateral for the Group s liabilities amounted to PLN 6,889,922 thousand (December 31st 2010: PLN 4,298,489 thousand). In the year ended December 31st 2011, the Company recognised an impairment loss of PLN 19,713 thousand related to the IGCC project of PLN 19,352 thousand (December 31st 2010: PLN 14,230 thousand), including licences with a value of PLN 6,468 thousand received free of charge. 35

37 The 10+ Programme (Comprehensive Technical Upgrade Programme) Implementation of the 10+ Programme was an element of the LOTOS Group s development strategy for the period The Programme was designed to increase the throughput capacity of the Gdańsk Refinery by approximately 75%, that is to 10.5m tonnes of crude oil per annum, with deeper conversion of hydrocarbon feedstock. As at December 31st 2010, the 10+ Programme reached a 100% completion status, meaning all the work connected with its engineering design, procurement and construction of all basic and auxiliary installations was completed as scheduled. In June 2011, the Company carried out a week-long test to evaluate the +10 Programme in terms of achieving the Programme's objectives related to the refining productivity and the volume and range of products. The Company was required to run the test pursuant to the agreement with banks providing debt financing for the Programme. The aim of the test was to prove that the upgraded refinery meets the requirements specified in the credit facility agreement. Bank Credit Agricole, acting as a representative of the bank syndicate, confirmed the positive outcome of the refinery s trial operation, and set July 25th 2011 as the date of successful completion of the +10 Programme. Following the completion of the 10+ Programme and fulfilment of the terms of the credit facility agreement, the bank margin on the facility was reduced pursuant to the provisions of the agreement. 18. Intangible assets Dec Dec Development expense - - Goodwill 1,862 1,862 Software 1,010 1,303 Patents, trademarks and licences 77,550 42,421 Other 2,932 3,069 ========= ========= Total 83,354 48,655 ========= ========= Changes in intangible assets Development expense Goodwill Software Patents, trademarks and licences Other Total Gross carrying amount as at Jan ,862 5,026 82,264 1,613 91,071 Increase ,960 2,996 10,956 - purchase ,857 2,857 - transfer from investments , ,099 Decrease Gross carrying amount as at Dec ,862 5,026 90,224 4, ,027 Gross carrying amount as at Jan ,862 5,026 90,224 4, ,027 Increase , ,182 - purchase transfer from investments , ,090 Decrease - - (4) - - (4) - sale liquidation - - (4) - - (4) Gross carrying amount as at Dec ,862 5, ,277 4, ,205 36

38 Development expense Goodwill Software Patents, trademarks and licences Other Total Accumulated depreciation as at Jan ,408 42,016 1,413 47,143 Increase , ,229 - amortisation , ,229 Decrease Accumulated depreciation as at Dec ,723 47,803 1,540 53,372 Accumulated depreciation as at Jan ,723 47,803 1,540 53,372 Increase , ,484 - amortisation , ,484 Decrease - - (5) - - (5) Accumulated depreciation as at Dec ,012 54,727 1,806 60,851 Impairment losses as at Jan Increase Decrease Impairment losses as at Dec Impairment losses as at Jan Increase Decrease Impairment losses as at Dec Net carrying amount as at Jan ,862 1,618 40, ,928 ======== ======== ======== ======= ===== ====== Net carrying amount as at Dec ,862 1,303 42,421 3,069 48,655 ======== ======== ======== ======= ===== ====== Net carrying amount as at Dec ,862 1,010 77,550 2,932 83,354 ======== ======== ======== ======= ===== ====== 37

39 19. Non-current financial assets Dec Dec (restated) Shares in subsidiaries 850, ,850 Additional contributions to equity 237, ,700 Receivables under shares (1) 53,980 - Shares in other entities 6,312 6,315 Deposits (2) 38,106 - Security deposits (margins) (3) 9, Positive valuation of derivative financial instruments: 12,098 19,408 - interest rate swap (IRS) 12,098 18,828 - futures (CO 2emissions) ========= ========= Total 1,208,537 1,045,271 ========= ========= (1) Receivables from acquisition of shares in LOTOS Petrobaltic S.A.; for more information, see Note 40. (1) Deposits of PLN 38,106 thousand have been earmarked for financing of an overhaul shutdown planned at Grupa LOTOS S.A. in 2013, as provided for in the credit agreements concluded to finance the 10+ Programme. (3) Security deposit (margin) of PLN 9,637 thousand (December 31st 2010: PLN 998 thousand) has been transferred to Grupa LOTOS S.A.'s account with Marex Financial, a brokerage firm, to enable execution of transactions on the ICE Futures Internet platform. As at December 31st 2011 and December 31st 2010, the Company s shares in the total vote at the general meetings of its subsidiaries were equal to its interests in the subsidiaries' share capitals. Name Registered office Business profile LOTOS Paliwa Sp. z o.o. Gdańsk Wholesale and retail sale of fuels and light fuel oil, management of the LOTOS service station network LOTOS Gaz S.A. w The company is not conducting (1) Kraków(1) likwidacji (in liquidation) operations Production and sale of lubricating oils LOTOS Oil S.A. Gdańsk and lubricants, and sale of base oils Ownership interest (%) Carrying amount of shares () Dec Dec Dec Dec % % 114, % % % % LOTOS Asfalt Sp. z o.o. Gdańsk Production and sale of bitumens % % LOTOS The company has not commenced Gdańsk Ekoenergia Sp. z o.o. operations % % LOTOS Kolej Sp. z o.o. Gdańsk Railway transport % % LOTOS Serwis Sp. z o.o. Gdańsk Maintenance of mechanical and electric operations and controlling devices, overhaul and repair services % % 4, LOTOS LAB Sp. z o.o. Gdańsk Laboratory analyses % % LOTOS Straż Sp. z o.o. Gdańsk Fire safety % % 3, LOTOS Ochrona Sp. z o.o. LOTOS Parafiny Sp. z o.o. Gdańsk Personal and property protection % % Jasło Production and sale of paraffin % % - (2) LOTOS Tank Sp. z o.o. Gdańsk Wholesale of petroleum products % % 7, LOTOS Czechowice S.A. Czechowice- (parent company of another Dziedzice group) LOTOS Jasło S.A. LOTOS Petrobaltic S.A. (parent of another group) Jasło Gdańsk Storage and distribution of fuels % (4) 97.55% (3) 26, Storage and distribution of fuels Renting and operating of own or leased real estate from March 24th 2011 Acquisition of crude oil and natural gas deposits and their exploitation % (4) 98.12% (3) 5, % (5) 99.32% 687,

40 Name LOTOS Park Technologiczny Sp. z o.o. AB LOTOS Geonafta (6) (parent of another group) LOTOS Biopaliwa Sp. z o.o. RCEkoenergia Sp. z o.o. LOTOS Exploration & Production Norge AS Registered office Jasło Gargždai, Lithuania Czechowice- Dziedzice Czechowice- Dziedzice Stavanger, Norway Business profile The company is not conducting operations Crude oil exploration and production, drilling services, and purchase and sale of crude oil Production of fatty acid methyl esters (FAME) Production and distribution of electricity, heat and gas Oil exploration and production at the Norwegian Continental Shelf, provision of services related to oil exploration and production Ownership interest (%) Carrying amount of shares () Dec Dec Dec Dec % % % 0.00% (6) % 0.005% (7) % 0.005% (7) % 0.00% (8) 0 0 Total shares 850, ,850 (1) On January 10th 2011, the General Meeting of LOTOS Gaz S.A. adopted a resolution to dissolve LOTOS Gaz S.A. by way of its liquidation. Furthermore, on January 3rd 2011 the Management Board of LOTOS Gaz S.A. filed a petition with the Commercial Division of the District Court of Płock requesting that LOTOS Gaz S.A. be declared bankrupt. According to the information received by the Company, the petition was effectively withdrawn, and the bankruptcy proceedings were discontinued on January 7th The company's new business address in Kraków was registered on July 8th Previously, the company was based in Mława. (2) As at December 31st 2011, the Company disclosed the carrying amount of the shares in LOTOS Parafiny Sp. z o.o. under assets held for sale (see Note 27). (3) By December 31st 2010, Grupa LOTOS S.A. acquired an additional 12.51% interest in LOTOS Czechowice S.A. and a 13.11% interest in LOTOS Jasło S.A. (4) Following relevant entries being made in the share registers of LOTOS Czechowice S.A. and LOTOS Jasło S.A. on April 7th and 8th 2011, respectively, Grupa LOTOS S.A. held 100% interests in each company. (5) By December 31st 2011, Grupa LOTOS S.A. acquired an additional 0.63% interest in LOTOS Petrobaltic S.A. On November 29th 2011, an increase in the share capital of LOTOS Petrobaltic S.A. was registered. The share capital was increased from PLN 92,400 thousand to PLN 96,600 thousand i.e. by PLN 4,200 thousand, through the issue of 420,000 Series B registered shares with a par value of PLN 10 per share in return for a cash contribution. Grupa LOTOS S.A. acquired in total 419,979 new Series B shares, in return for a cash contribution of PLN 80,968 thousand. As at December 31st 2011, Grupa LOTOS S.A. held a 99.95% interest in LOTOS Petrobaltic S.A. (6) On March 23rd 2011, LOTOS Petrobaltic S.A. and Grupa LOTOS S.A. executed an agreement whereby Grupa LOTOS S.A. purchased one share in AB Geonafta for LTL 3 thousand (PLN 3.5 thousand). On November 30th 2011, the name change from AB Geonafta to AB LOTOS Geonafta was registered. (7) On November 5th 2010, Grupa LOTOS S.A. acquired from LOTOS Czechowice S.A. one share in LOTOS Biopaliwa Sp. z o.o., representing 0.005% of the company s share capital, and one share in RCEkoenergiaSp. z o.o., representing 0.005% of the company s share capital. (8) On November 15th 2010, the share capital of LOTOS Exploration and Production Norge AS was increased by NOK 1, to NOK 430,000,001 (PLN 207,346,000, translated using the NOK mid-exchange rate quoted by the National Bank of Poland for November 15th 2010). One new share in the company, with a par value of NOK 1 (PLN , translated using the NOK mid-exchange rate quoted by the National Bank of Poland for November 15th 2010), representing % of the company's share capital, was acquired by Grupa LOTOS S.A. 39

41 Changes in the number of shares held by the Company in direct and indirect subsidiaries and other entities Shares in direct and other entities indirect subsidiaries Carrying amount as at Jan (restated) 769,889 6,317 Shares acquired: 11, acquisition of LOTOS Jasło S.A. shares 3, acquisition of LOTOS Czechowice S.A. shares 7, acquisition of one share in LOTOS Biopaliwa Sp. z o.o acquisition of one share in RCEkoenergia Sp. z o.o acquisition of LOTOS Exploration and Production Norge AS shares 0 - Shares sold: (626) - - sale of UAB LOTOS Baltija shares (626) - Revaluation 29 (2) ========= ========= Carrying amount as at Dec ,850 6,315 ========= ========= Carrying amount as at Jan ,850 6,315 Shares acquired: 90, acquisition of LOTOS Jasło S.A. shares acquisition of LOTOS Czechowice S.A. shares 1, acquisition of LOTOS Petrobaltic S.A. shares 88, acquisition of AB LOTOS Geonafta shares 3 - Shares sold: - (5) - sale of Energoaparatura S.A. shares - (5) Reclassification of LOTOS Parafiny Sp. z o.o. shares to assets held for sale (20,843) - Revaluation - 2 ========= ========= Carrying amount as at Dec ,704 6,312 ========= ========= Acquisition of LOTOS Jasło S.A. shares On February 4th 2010, Grupa LOTOS S.A. made an offer to purchase LOTOS Jasło S.A. shares. The offer was addressed only to the following persons: employees and former employees of LOTOS Jasło S.A. who acquired the shares free of charge under the Act on Commercialisation and Privatisation of State-Owned Enterprises, dated August 30th 1996, as well as their heirs and members of their immediate family who acquired the shares through donation directly from such persons. The offer was valid until March 22nd The purchase price offered for the shares was PLN 4.90 per share in the period from February 8th 2010 to March 8th 2010, and PLN 4.23 per share in the period from March 9th 2010 to March 22nd On May 20th 2010, Grupa LOTOS S.A. made another offer to purchase shares in LOTOS Jasło S.A. at a price of PLN 4.45 per share. The offer was addressed to all remaining shareholders and was valid until June 11th The share purchase process was completed at the end of With respect to the remaining shares held by other shareholders, on November 30th 2010 the General Meeting of LOTOS Jasło S.A. adopted a resolution regarding a minority squeeze-out. Following the transactions carried out as part of the squeeze-out and relevant entries having been made in the share register of LOTOS Jasło S.A., as of April 8th 2011 Grupa LOTOS S.A. has held a 100% interest in LOTOS Jasło S.A. 40

42 Acquisition of LOTOS Czechowice S.A. shares On February 4th 2010, Grupa LOTOS S.A. made an offer to purchase LOTOS Czechowice S.A. shares. The offer was addressed only to the following persons: employees and former employees of LOTOS Czechowice S.A. who acquired the shares free of charge under the Act on Commercialisation and Privatisation of State-Owned Enterprises, dated August 30th 1996, as well as their heirs and members of their immediate family who acquired the shares through donation directly from such persons. The offer was valid until March 22nd The purchase price offered for the shares was PLN 7.98 per share in the period from February 8th 2010 to March 8th 2010, and PLN 6.89 per share in the period from March 9th 2010 to March 22nd On May 20th 2010, Grupa LOTOS S.A. made another offer to purchase shares in LOTOS Czechowice S.A. at a price of PLN 7.25 per share. The offer was addressed to all remaining shareholders and was valid until June 11th The share purchase process was completed at the end of With respect to the remaining shares held by other shareholders, on December 1st 2010 the General Meeting of LOTOS Czechowice S.A. adopted a resolution regarding a minority squeeze-out. Following the transactions carried out as part of the squeeze-out and relevant entries having been made in the share register of LOTOS Czechowice S.A., as of April 7th 2011 Grupa LOTOS S.A. has held a 100% interest in LOTOS Czechowice S.A. Acquisition of Series A shares in LOTOS Petrobaltic S.A. and increase of the share capital of LOTOS Petrobaltic S.A. On December 17th 2010, Grupa LOTOS S.A. made an offer to purchase LOTOS Petrobaltic S.A. shares. The offer was addressed only to the following persons: employees and former employees of LOTOS Petrobaltic S.A. who acquired the shares free of charge under the Act on Commercialisation and Privatisation of State-Owned Enterprises, dated August 30th 1996, as well as their heirs and members of their immediate family who acquired the shares through donation directly from such persons. The offer was valid until January 30th The purchase price was PLN 126 per share. As at the date of approval of these financial statements, the share purchase process has not been completed. By December 31st 2011, Grupa LOTOS S.A. acquired 57,850 shares in LOTOS Petrobaltic S.A. with an aggregate value of PLN 7,422 thousand, representing 0.63% of the company's share capital. On November 29th 2011, the court registered the increase in the share capital of LOTOS Petrobaltic S.A. by PLN 4,200 thousand, i.e. from PLN 92,400 thousand to PLN 96,600 thousand, through the issue of 420,000 Series B registered shares with a par value of PLN 10 per share, paid for with cash. Grupa LOTOS S.A. acquired in total 419,979 new Series B shares, in return for a cash contribution of PLN 80,968 thousand. As a result of the executed transactions, consisting in the purchase of shares in LOTOS Petrobaltic S.A. from other shareholders and the increase in the share capital of LOTOS Petrobaltic S.A., as at December 31st 2011 Grupa LOTOS S.A. held a 99.95% stake in LOTOS Petrobaltic S.A., including 9,654,829 shares conferring the right to vote at the company's General Shareholders Meeting. Acquisition of shares in AB Geonafta by Grupa LOTOS S.A. On March 23rd 2011, LOTOS Petrobaltic S.A. and Grupa LOTOS S.A. executed an agreement whereby Grupa LOTOS S.A. purchased one share in AB Geonafta for LTL 3 thousand (PLN 3.5 thousand). Increase of the share capital of LOTOS Parafiny Sp. z o.o. On December 7th 2011, the share capital increase at LOTOS Parafiny Sp. z o.o. was registered. The share capital was increased from PLN 19,783 thousand to PLN 28,783 thousand, by way of creating 9,000 new shares, with a par value of PLN 1,000 thousand per share. The share capital increase was financed using own funds of LOTOS Parafiny Sp. z o.o. All new shares were acquired by Grupa LOTOS S.A. As at December 31st 2011, the Company disclosed the shares in LOTOS Parafiny Sp. z o.o. under assets held for sale (see Note 27). 41

43 Increase of the share capital of LOTOS Asfalt Sp. z o.o. On December 29th 2011, the share capital increase at LOTOS Asfalt Sp. z o.o. was registered. The share capital was increased from PLN 2,000 thousand to PLN 20,000 thousand, by way of raising the par value of the existing shares from PLN 500 per share to PLN 5,000 per share. The share capital increase was financed using own funds of LOTOS Asfalt Sp. z o.o. In , the ability of the subsidiaries of the LOTOS Group to transfer funds to the Parent in the form of dividends was limited. The agreement concluded on December 16th 2004 between subsidiary LOTOS Paliwa Sp. z o.o. and Bank Pekao S.A. and PKO BP S.A., which provides for financing of the reorganisation and development of the LOTOS service station network, including the purchase of organised parts of business from ExxonMobile Poland and Slovnaft Polska, imposes restrictions on the value of surplus cash generated by LOTOS Paliwa Sp. z o.o. in the financial year that may be allocated to dividend payment, and sets specific ratios which must be met. The credit facility agreement concluded on December 14th 2010 between Nordea Bank Polska and Nordea Bank Finland and AB LOTOS Baltija (currently AB LOTOS Geonafta) and LOTOS Petrobaltic S.A. as the guarantor, imposes restrictions on the value of surplus cash generated by LOTOS Petrobaltic S.A. in the financial year that may be allocated to dividend payment, and the terms of such restrictions provide that the company must meet specific financial ratios computed based on its financial statements. 20. Inventories Dec Dec Finished products 1,406,116 1,027,149 Semi-finished products and work in progress 606, ,756 Goods for resale 227, ,724 Materials 3,397,750 2,586,871 ========== ========== Net inventories 5,637,321 4,298,500 ========== ========== As at December 31st 2011, the value of inventories serving as collateral for the financial liabilities of Grupa LOTOS S.A. under the credit facility referred to in Note 29 to these financial statements, was PLN 5,054,327 thousand (December 31st 2010: PLN 3,896,635 thousand). As at December 31st 2011, the Company measured inventories at cost. As at December 31st 2011, the carrying amount of inventories measured at cost was PLN 5,637,321 thousand (December 31st 2010: PLN 4,298,500 thousand). Impairment losses on inventories Dec Dec Finished products - - Semi-finished products and work in progress - - Goods for resale - - Materials 4,864 5,159 ======== ======== Total impairment losses on inventories 4,864 5,159 ======== ======== 42

44 Changes in impairment losses on inventories Note Dec Dec At beginning of the period 5,159 5,160 Increase Release (1) Use (314) - ========= ========= At end of the period 4,864 5,159 ========= ========= Mandatory reserves of liquid fuels In , Grupa LOTOS S.A. complied with the mandatory reserves regulations effective as of April 7th 2007 and introduced by virtue of the Act on stocks of crude oil, petroleum products and natural gas, as well as on the rules to be followed in the event of threat to national fuel security or disruption on the petroleum market, dated February 16th 2007 (Dz.U. of 2007, No. 52, item 343, dated March 23rd 2007), as amended. The mandatory reserves include crude oil, petroleum products (liquid fuels) and LPG. The Act on stocks of crude oil, petroleum products and natural gas, as well as on the rules to be followed in the event of threat to national fuel security or disruption on the petroleum market, dated February 16th 2007 (Dz. U. of 2007, No. 52, item 343, dated March 23rd 2007), as amended, has defined the basis for calculation of the required amount of mandatory reserves as well as for identification of the entities subject to the requirement to increase mandatory reserves to 73 days in 2007 and to 76 days from 2008 onwards (does not apply to LPG). Detailed rules are set forth in the following regulations of the Minister of Economy, effective as of May 25th 2007: Regulation concerning the detailed list of commodities and petroleum products covered by the system of intervention stocks, dated April 24th 2007 (Dz. U. No. 81 item 546), as amended, Regulation concerning the detailed procedure for creation and maintenance of mandatory reserves of crude oil or fuels and determining their amount, dated April 24th 2007 (Dz. U. No. 81 item 547), as amended, Regulation concerning the register of producers and traders obliged to create and maintain mandatory reserves of crude oil or fuels, dated April 24th 2007 (Dz. U. No. 81 item 548), as amended, Regulation concerning the detailed procedure for reduction of the amount of mandatory reserves of crude oil or fuels, dated April 24th 2007 (Dz. U. No. 81 item 549), as amended. The gross value of mandatory reserves created on the basis of the above regulations is as follows: Dec Dec Mandatory reserves 4,425,263 2,976,818 =========== =========== 43

45 21. Trade and other receivables Note Dec Dec Trade receivables, including: 2,177,238 1,699,108 - from related entities ,730,282 1,222,999 Receivables from the state budget other than corporate income tax 9,006 (1) - Other receivables (2) 37,088 22,651 =========== =========== Net receivables 2,223,332 1,721,759 Impairment losses on receivables 86,480 85,986 =========== =========== Gross receivables 2,309,812 1,807,745 =========== =========== (1) Including prepaid customs liabilities of PLN 7,902 thousand related to a delivery made in (2) Including excise duty of PLN 33,194 thousand due to inter-warehouse transfers (December 31st 2010: PLN 20,465 thousand). As at December 31st 2011, trade receivables subject to assignment by way of security for the Company s liabilities under the credit facility referred to in Note 29 to these financial statements amounted to PLN 1,727,378 thousand (December 31st 2010: PLN 1,218,385 thousand). The payment term for trade receivables in the regular course of business is days. Impairment losses on receivables Note Dec Dec At beginning of the period 85,986 83,912 Increase (1) 1,147 4,973 Release 12.2 (4) (2,334) Use (649) (565) ============ ============ At end of the period 86,480 85,986 ============ ============ (1) Including PLN 27 thousand charged to other operating expenses (2010: PLN 4,932 thousand) and PLN 239 thousand (2010: PLN 881 thousand) reducing finance income under interest. The table below presents the age analysis of past due receivables not covered by recognised impairment losses, as at December 31st 2011 and December 31st For sensitivity analysis of trade and other receivables with respect to market risk related to fluctuations in exchange rates as at December 31st 2011 and December 31st 2010, see Note Dec Dec Up to 1 month 42, From 1 to 3 months From 3 to 6 months From 6 months to 1 year 1,267 3 ============ ============ Total 44,225 1,121 ============ ============ In 2011, Grupa LOTOS S.A.'s major customers whose shares in its total sales exceeded 10% were LOTOS Paliwa Sp. z o.o. (a wholly-own subsidiary of Grupa LOTOS S.A.) and Shell POLSKA Sp. z o.o., which accounted for 44.51% and 10.99% of the Company's total sales revenue, respectively. 44

46 In 2010, Grupa LOTOS S.A.'s major customer accounting for more than 10% of its total sales revenue was LOTOS Paliwa Sp. z o.o. (a wholly-owned subsidiary of Grupa LOTOS S.A.), with a 45.79% share in the Company's total sales revenue. In 2011 and 2010, the share of receivables from LOTOS Paliwa Sp. z o.o., Shell POLSKA Sp. z o.o., or any other customer, in Grupa LOTOS S.A.'s total assets did not exceed 10%. In the Company's opinion, with the exception of receivables from LOTOS Paliwa and Shell POLSKA Sp. z o.o., there is no significant concentration of credit risk related to trade receivables. As at the balance-sheet date, the Company s maximum exposure to credit risk is best represented by the carrying amounts of these instruments. 22. Prepayments and accrued income Dec Dec Property and other insurance 26,619 19,981 Commission fees on credit facilities, amortised over time 3,311 3,676 Other 2,276 2,157 ============= ============= Total 32,206 25,814 ============= ============= Non-current portion 3,900 3,311 Current portion 28,306 22, Current financial assets Dec Dec (restated) Positive valuation of derivative financial instruments: 37,202 49,961 - commodity swaps (commodities and petroleum - 1,472 products) - futures (CO 2emissions) 8, currency forward and spot contracts 17,258 37,540 - forward rate agreements (FRAs) interest rate swap (IRS) 11,640 10,259 Additional contributions to equity 4,281 9,380 Deposits (1) 40,497 5,932 Loans advanced to related entities ,165 (2) ========= ========= Total 82, ,438 ========= ========= (1) The item Deposits comprises: - deposits of PLN 7,874 thousand (December 31st 2010: PLN 5,932 thousand) constituting security for payment of interest on the inventory financing facility, - deposits of PLN 32,623 thousand serving as security for the repayment of interest on the facility contracted to finance the 10+ Programme. (2) Loans with a total principal amount of USD 20,000 thousand advanced to LOTOS Exploration and Production Norge AS, which were repaid on November 21st 2011; see Note 36 to these financial statements. As at December 31st 2011, the Company had no unsettled hedging contracts over which an assignment would be created as security for the credit facility referred to in Note 29 to these financial statements (December 31st 2010: PLN 1,326 thousand). 45

47 24. Employee benefits 24.1 Retirement benefits and other post-employment benefits In accordance with the relevant remuneration systems, the Company s employees are entitled to severance payments upon old-age or disability retirement. Length-of-service awards are paid out after a specific period of employment. Therefore, based on a valuation prepared by a professional actuary firm, the Company recognises provisions for the present value of its obligation to provide old-age and disability retirement severance payments and length-of-service awards. The table below provides information on the amount of the provision and a reconciliation of changes in the provision during the financial period. Note Dec Dec At beginning of the period ,393 33,168 Provision recognised ,893 (1) 7,355 Benefits paid 30.1 (3,475) (3,372) Provision released 30.1 (2,611) (758) ======== ======== At end of the period ,200 36,393 ======== ======== (1) change in the method of determination of the basis for calculation of employee benefits.(removal of base pay change factor). The table below presents the key assumptions adopted by the actuary as at the balance-sheet date to calculate the amount of the obligation. Dec Dec Discount rate (%) 5.7% 5.8% Expected inflation rate (%) 2.5% 2.5% Employee turnover ratio (%) 1.3%-5.7% 1.3%-5.8% Expected growth rate of salaries and wages (%) 2.8% 5% 1. The discount rate for future payments of employee benefits is 5.7% (i.e. it equals the return on the safest long-term securities traded on the Polish capital market as at the valuation date) (December 31st 2010: 5.8%), 2. The long-term annual growth rate of average remuneration in the national economy: 5%, i.e. the total of the real annual growth rate of remuneration of 2.5% and the long-term annual inflation rate of 2.5% (the National Bank of Poland's inflation target). 3. The long-term annual growth rate of remuneration is assumed at 2.8% in 2012 and 5% in the following years (December 31st 2010: the long-term annual growth rate of remuneration was assumed at 5%). 4. The employee attrition probability is based on the historical data on employee turnover at the Group and statistical data on employee attrition in the industry. The employee turnover ratios adopted by the actuary were determined separately for men and women and broken down into nine age categories in five-year intervals. 5. The mortality and life expectancy ratios are based on the Life Expectancy Tables of Poland for 2010, published by the Polish Central Statistics Office (GUS) and assume that the Company s employee population is representative of the average Polish population in terms of mortality (December 31st 2010: Life Expectancy Tables of Poland for 2009). 6. It is assumed that the Group employees will retire according to the standard system, i.e. men after reaching the age of 65, women after reaching the age of 60, except for those employees who, based on the information provided by the Group, meet the conditions for early retirement. 7. The data used in the assumptions does not cover cases related to organisational changes Termination benefits In 2011, termination benefits and compensation payable in respect of non-compete obligation totalled PLN 1,246 thousand (2010: PLN 269 thousand). 46

48 25. Cash and cash equivalents Dec Dec (restated) Cash at bank 3,577 14,895 Cash in hand =========== =========== Total 3,598 14,913 =========== =========== Cash at banks bears interest at variable rates linked to overnight bank deposit rates. Short-term deposits are placed for various maturities, ranging from one day to three months, depending on the Company s current demand for cash, and bear interest at respective interest rates. As at December 31st 2011, the amount of undrawn funds available to the Company under working capital facilities in respect of which all conditions precedent had been fulfilled (including the working capital facility provided by the Bank Syndicate (4); see Note 29) was PLN 1,213,149 thousand (PLN 511,578 thousand as at December 31st 2010). As at December 31st 2011, restricted cash was PLN 2,892 thousand (PLN 14,356 thousand as at December 31st 2010), and included mainly funds held in an account dedicated to servicing the payments related to the 10+ Programme projects. As at December 31st 2011, cash in bank accounts over which a registered pledge was created as security for liabilities under borrowings contracted by Grupa LOTOS S.A. amounted to PLN 772 thousand (December 31st 2010: PLN 446 thousand). 26. Cash structure in the statement of cash flows Note Dec Dec (restated) Cash at bank 25 3,577 14,895 Cash in hand Overdraft facilities 29 (169,585) (201,979) =========== =========== Total cash and cash equivalents (165,987) (187,066) =========== =========== Cash at bank bears interest at variable rates set on the basis of short-term interest rates prevailing on the interbank market. Short-term deposits are placed for various maturities, ranging from one day to one month, depending on the Company s current demand for cash, and bear interest at respective interest rates. In the statement of financial position, restricted cash is disclosed under Cash and cash equivalents. 47

49 Causes of differences between the items disclosed in the notes to the financial statements and the items of the statement of cash flows Receivables Dec Dec Balance-sheet change in net non-current and current receivables (575,085) (221,471) Change in income tax receivables 73,512 (502) Set-off of corporate income tax receivables against VAT liabilities - (71,120) Other - (4) Change in receivables as disclosed in the statement of cash flows (501,573) (293,097) Liabilities, accruals and deferred income Dec Dec (restated) Balance-sheet change in non-current and current liabilities, and accruals and deferred income 1,953,292 1,618,909 Change in non-current and current bank borrowings (788,481) (555,904) Adjustment for cash reserved for repayment of borrowings (168,346) 1,263 Change in income tax liabilities 12,037 (12,037) Change in investment commitments 59,303 27,906 Change in liabilities related to negative valuation of derivative financial instruments 17,073 (40,678) Change in finance lease liabilities Set-off of corporate income tax receivables against VAT liabilities - 71, Change in liabilities and accruals and deferred income as shown by the statement of cash flows 1,084,945 1,110,830 Provisions Dec Dec Balance-sheet change in provisions (70,222) 44,500 Change in deferred tax liabilities 81,687 (42,940) Change in provisions as shown by the statement of cash flows 11,465 1,560 Prepayments and accrued income Dec Dec Balance-sheet change in prepayments and accrued income (6,392) (6,783) Change in commission fees on revolving facilities, amortised over time (365) (365) Change in prepayments and accrued income as shown by the statement of cash flows (6,757) (7,148) 48

50 Cash Dec Dec (restated) Balance-sheet change in cash (11,315) 13,645 Change in interest-bearing overdraft facilities 32, , Change in cash as shown by the statement of cash flows 21, ,685 Causes of differences between the items disclosed in the notes to the financial statements and the items as shown by the statement of cash flows Depreciation and amortisation Dec Dec Depreciation/amortisation as disclosed in changes to property, plant and equipment and intangible assets 375, ,802 Depreciation directly related to expenditure on tangible assets under construction (59) (217) Depreciation/amortisation as disclosed in the statement of cash flows 375, ,585 Purchase of property, plant and equipment and intangible assets Dec Dec Purchase of property, plant and equipment and intangible assets as disclosed in changes to property, plant and equipment and intangible assets (89,903) (556,850) Change in investment commitments, including realised foreign exchange differences (59,063) (24,378) Other (1,032) (12,005) Purchase of property, plant and equipment and intangible assets as disclosed in the statement of cash flows (149,998) (593,233) Other items related to the statement of cash flows Other adjustments Dec Dec Cash reserved for repayment of interest, related to future reporting periods (32,623) Other adjustments (32,623) - Repayment of loans advanced Dec Dec Repayment of the loan advanced to LOTOS Gaz S.A. w likwidacji (in liquidation) - 1,100 Repayment of the loan advanced to LOTOS Exploration and Production Norge AS 71, Repayment of loans advanced 71,877 1,100 49

51 Purchase of non-current financial assets Dec Dec Acquisition of LOTOS Petrobaltic S.A. shares (144,677) - Acquisition of LOTOS Jasło S.A. shares - (3,981) Acquisition of LOTOS Czechowice S.A. shares - (7,578) Purchase of non-current financial assets (144,677) (11,559) Other cash outflows on financial assets Dec Dec Cash earmarked for financing of an overhaul shutdown planned at Grupa LOTOS S.A. in 2013, as provided for in the credit agreements executed to finance the 10+ Programme. (38,106) - Security deposit provided by Grupa LOTOS S.A. to Marex Financial, a brokerage firm, to enable execution of transactions on the ICE Futures Internet platform. (8,639) Other cash outflows on financial assets (46,745) Assets held for sale As at December 31st 2011, the Company disclosed PLN 25,943 thousand related to shares in LOTOS Parafiny Sp. z o.o. under assets held for sale. On January 10th 2012, 100% of shares in LOTOS Parafiny Sp. z o.o. were sold to a third party, namely Krokus Chem Sp. z o.o. (see Note 40). Assets held for sale represent amounts that the Company intends to gain within twelve months from the change of classification of such assets. 28. Share capital The structure of Grupa LOTOS S.A. s share capital as at December 31st 2011 was as follows: Number of shares Number of votes Par value of shares (PLN) Ownership interest (%) (1) State Treasury (2) 69,076,392 69,076,392 69,076, % Other shareholders 60,796,970 60,796,970 60,796, % Total 129,873, ,873, ,873, % (1) The percentage of share capital held equals the percentage share in the total vote. (2) In accordance with the shareholder's representation delivered to Grupa LOTOS S.A. on January 29th As at December 31st 2011, the share capital comprised 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 Meeting and carries the right to dividend. 50

52 The structure of Grupa LOTOS S.A. s share capital as at December 31st 2010 was as follows: Number of shares Number of votes Par value of shares (PLN) Ownership interest (%) (1) State Treasury (2) 69,076,392 69,076,392 69,076, % ING OFE (3) 6,524,479 6,524,479 6,524, % Other shareholders 54,272,491 54,272,491 54,272, % Total 129,873, ,873, ,873, % (1) Equals the percentage share in the total vote. (2) In accordance with the shareholder's representation delivered to Grupa LOTOS S.A. on January 29th By the date of publication of these financial statements, the Company has not received from the shareholder any other representation concerning any changes in the number of the Company shares held. (3) In accordance with the shareholder's representation delivered to Grupa LOTOS S.A. on November 23rd At the General Meeting of Grupa LOTOS S.A. which was held on June 28th 2010, ING Otwarty Fundusz Emerytalny registered 8,500,000 Company shares, representing 6.54% of Grupa LOTOS S.A.'s share capital. As at December 31st 2010, the share capital comprised 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 Meeting and carries the right to dividend. Acceptance of Grupa LOTOS S.A. Series C shares for registration with the Polish NDS and their admission and introduction to stock-exchange trading By virtue of Resolution No. 895/10 of the Management Board of the Polish National Depository for Securities (the Polish NDS), dated December 29th 2010, the Polish NDS decided to accept the deposit of 16,173,362 Series C ordinary bearer shares in Grupa LOTOS S.A. with a par value of PLN 1 per share, assigning them code No. PLLOTOS00025, provided that a decision is made by the market operator to introduce these shares to trading on the regulated market on which other Grupa LOTOS shares assigned code No. PLLOTOS00025 are traded. By virtue of Resolution No. 16/2011 of January 4th 2011, the Management Board of the Warsaw Stock Exchange decided to admit 16,173,362 Series C ordinary bearer shares in Grupa LOTOS S.A. with a par value of PLN 1 per share to stock-exchange trading on the main market. Pursuant to the above resolution, the WSE Management Board decided to introduce the Grupa LOTOS S.A. Series C shares referred to above to trading on the main market, by way of the ordinary procedure, as of January 10th In line with an announcement by the Operations Department of the Polish NDS, on January 10th 2011, 16,173,362 Grupa LOTOS shares were registered with the Polish NDS under code No. ISIN PLLOTOS Following the registration, the total number of shares registered under code No. ISIN PLLOTOS00025 was 129,804,251. Reduction of ING Otwarty Fundusz Emerytalny's share in total vote at the General Meeting of Grupa LOTOS S.A. On February 7th 2011, the Management Board of Grupa LOTOS S.A. received a notification to the effect that following a disposal of the Company shares, settled on February 2nd 2011, ING Otwarty Fundusz Emerytalny reduced its share in the total vote at the Company's General Meeting below 5%. Prior to the disposal, ING Otwarty Fundusz Emerytalny held 6,640,532 shares in Grupa LOTOS S.A., representing 5.11% of the Company's share capital and carrying the right to 6,640,532 votes, or 5.11% of the total vote, at the Company s General Meeting. As at February 7th 2011, 5,957,442 Grupa LOTOS shares were registered in the securities account of ING Otwarty Fundusz Emerytalny, representing 4.59% of the Company's share capital and conferring the right to 5,957,442 votes, or 4.59% of the total vote, at the Company's General Meeting. 51

53 As at the date of release of these financial statements, the shareholder structure of Grupa LOTOS S.A. was as follows: Number of shares Number of votes Par value of shares (PLN) Ownership interest (%) (1) State Treasury (2) 69,076,392 69,076,392 69,076, % Other shareholders 60,796,970 60,796,970 60,796, % Total 129,873, ,873, ,873, % (1) The percentage of share capital held equals the percentage share in the total vote. (2) In accordance with the shareholder's representation delivered to Grupa LOTOS S.A. on January 29th As at the date of release of these financial statements, the share capital comprised 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 Meeting and carries the right to dividend. 29. Interest-bearing bank borrowings Dec Dec (restated) Bank borrowings 6,469,042 5,680,561 =========== =========== Total 6,469,042 5,680,561 =========== =========== Non-current portion 4,786,893 4,141,016 Current portion 1,682,149 1,539,545 52

54 Loans by lender Dec Dec (restated) Non-current portion Bank syndicate (2)** 3,513,826 3,120,146 Bank syndicate (3)*** 1,273,067 1,020, Total non-current portion 4,786,893 4,141,016 Current portion Pekao S.A. 2,842 30,165 ING Bank Śląski S.A. 5 - Bank syndicate (1)* 1,369,959 1,187,413 Bank syndicate (2)** 225,715 91,439 Bank syndicate (3)*** 91,054 37,214 Bank syndicate (4)**** 169, ,979 Funds in bank deposits securing payment of interest and principal instalments***** (177,011) (8,665) Total current portion 1,682,149 1,539,545 ============= ============= Total 6,469,042 5,680,561 ============= ============= *Bank syndicate (1): Pekao S.A., PKO BP S.A., BRE Bank S.A., Nordea Bank Polska S.A.; on December 20th 2011, there was a change in the composition of the syndicate - see below. ** Bank syndicate (2): Banco Bilbao Vizcaya Argentaria S.A., Bank of Tokyo-Mitsubishi UFJ (Holland) N.V., Pekao S.A., BNP Paribas S.A., Caja de Ahorros y Monte de Piedad de Madrid, Credit Agricole CIB (formerly Calyon), DnB Nor Bank ASA, DnB Nord Polska S.A., ING Bank Śląski S.A., KBC Finance Ireland, Kredyt Bank S.A., Nordea Bank AB, PKO BP S.A., The Royal Bank of Scotland plc, Société Générale S.A., Bank Zachodni WBK S.A., Rabobank Polska S.A., Bank Gospodarki Żywnościowej S.A. and Sumitomo Mitsui Banking Corporation Europe Ltd. *** Bank syndicate (3): Banco Bilbao Vizcaya Argentaria S.A. and BNP Paribas S.A. **** Bank syndicate (4): Pekao S.A., PKO BP S.A., BNP Paribas S.A., ING Bank Śląski S.A., Nordea Bank Polska S.A., Rabobank Polska S.A. and Bank Gospodarki Żywnościowej S.A. ***** As at December 31st 2011 and December 31st 2010, the Company offset a financial asset (cash reserved for repayment of borrowings) against a financial liability under borrowings and in accordance with IAS 32 it disclosed the relevant net amount in the statement of financial position (the Company holds a valid legal title to set off the recognised amounts and intends to realise the asset and settle the liability simultaneously). The objective of this procedure is to reflect the expected future cash flows from settlement of two or more financial instruments. As at December 31st 2011, the average effective interest rate for the borrowings (including facilities denominated in USD and EUR) was approx. 2.22% (2.30% as at December 31st 2010). As at December 31st 2011, the Company had drawn under the term facility USD 1,510,630 thousand (in nominal terms) (the equivalent of PLN 5,162,427 thousand, translated at the mid-exchange rate for USD quoted by the National Bank of Poland for December 31st 2011). As at December 31st 2010, the Company had drawn under the term facility USD 1,464,596 thousand (in nominal terms) (the equivalent of PLN 4,341,209 thousand, translated at the mid-exchange rate for USD quoted by the National Bank of Poland for December 31st 2010). The working capital facility was made available to Grupa LOTOS S.A. in the form of overdraft facilities which are used by the Company on an as-needed basis. By the date of these financial statements, funds drawn under the facility were used by Grupa LOTOS S.A. according to its needs. Credit facility agreement for the refinancing and financing of inventories of Grupa LOTOS S.A. On August 23rd 2011, Grupa LOTOS S.A. and a syndicate of four banks, comprising: - Pekao S.A. of Warsaw, - PKO BP S.A. of Warsaw, - BRE Bank S.A. of Warsaw, - Rabobank Polska S.A. of Warsaw, 53

55 executed an amending agreement to extend by 12 months, i.e. until December 20th 2012, the credit facility agreement for the refinancing and financing of inventories of Grupa LOTOS S.A. of December 20th 2007, providing for a revolving credit facility of USD 400m (PLN 1,148,520 thousand, translated at the mid-exchange rates quoted by the National Bank of Poland for August 23rd 2011). The amending agreement executed pursuant to the credit facility agreement of December 20th 2007, which permitted extension of the credit facility term by an additional calendar year. Concurrently, as of December 20th 2011, Rabobank Polska S.A. ceased to be a party to the credit facility agreement. Pursuant to documents signed along with the amending agreement, as of that date its entire credit commitment was taken over by BRE Bank S.A. and Nordea Bank Polska S.A. of Gdynia. The other terms and conditions of the credit facility agreement of December 20th 2007 as well as its provisions concerning penalties do not differ from those commonly used in agreements of such type. Bank borrowings as at December 31st 2011, by currency and maturity EUR facilities USD facilities PLN facilities Total ,584,282 97,587 1,682, , , , , , , , ,145 after ,204,118-3,204,118 ========== ========== =========== ========== Total 280 6,371,175 97,587 6,469,042 ========== ========== =========== ========== The above table presents facilities by maturity. Bank borrowings as at December 31st 2010, by currency and maturity (restated) EUR facilities USD facilities PLN facilities Total ,322 1,415, ,493 1,539, , , , , , , , ,314 beyond ,986,580-2,986,580 ========== ========== =========== ========== Total 17,322 5,556, ,493 5,680,561 ========== ========== =========== ========== The above table presents facilities by maturity. In connection with the borrowings referred to under Bank Syndicate (1), Bank Syndicate (2), Bank Syndicate (3) and Bank Syndicate (4), as further described above, Grupa LOTOS S.A. is required to meet a covenant of maintaining the Tangible Consolidated Net Worth at least at the level specified in both facility agreements. In addition, in connection with the facility referred to under Bank Syndicate (1), the Company is also required to meet a financial covenant of maintaining the Loan to Pledged Inventory Value Ratio at a level not higher than specified in the facility agreement. As at December 31st 2011, and December 31st 2010, the covenants were complied with. 54

56 Bank borrowings as at December 31st 2011: Bank name; form of incorporation Registered office Facility amount as per agreement PLN Currency ('000) ('000) Outstanding amount (current portion) (1) PLN Currency ('000) ('000) Outstanding amount (non-current portion) (1) Maturity date Financial terms and conditions (interest rate, PLN Currency Non-current interest payment Current portion ('000) ('000) portion schedule, etc.) Pekao S.A. Warsaw 300,000-2, Overdraft facility (2) - 1M WIBOR + bank s margin ING Bank Śląski S.A. Warsaw 100, Overdraft facility (2) - 1M WIBOR + bank s margin Bank Syndicate (1) - - USD 400,000 1,369,959 USD 400, Dec Bank syndicate (2) - - USD 1,125, ,715 USD 65,853 3,513,826 USD 1,025,007 Oct Jan based on 3M or 6M LIBOR USD, depending on the interest period selected at a given time + bank s margin based on 1M, 3M or 6M LIBOR USD, depending on the interest period selected at a given time + bank s margin Bank syndicate (3) - - USD 425,000 91,054 USD 26,468 1,273,067 USD 369,638 Oct Jan fixed interest rate Bank syndicate (4) - USD 200,000 or equivalent Funds in bank deposits securing payment of interest and principal instalments Total (1) Measured at amortised cost, including arrangement fees. (2) Not treated as cash equivalents. 94, ,565 USD 21, EUR Overdraft facility - 3M WIBOR + bank s margin 3M LIBOR USD + bank s margin 3M EURIBOR + bank s margin Type of security power of attorney over bank account, voluntary submission to enforcement voluntary submission to enforcement registered pledge over inventories, registered pledge over bank accounts, assignment of rights under inventory insurance agreements, assignment of rights under inventory storage agreements, voluntary submission to enforcement mortgage, registered pledge over existing and future movables, registered pledge over bank accounts, assignment of rights under agreements for the implementation and management of the 10+ Programme, assignment of rights under insurance agreements relating to the Gdańsk refinery, assignment of licence and sale agreements with a value of over PLN 10,000 thousand per year, submission to enforcement ( ) USD (51.797) , ,584,282 USD 463,221 4,786,893 USD 1,394, EUR ,682,149-4,786,893 - The bank margins on the contracted borrowings and other debt instruments are in the range of 0.65pp. 1.35pp. 55

57 Bank borrowings as at December 31st 2010 (restated): Bank name; form of incorporation Registered office Facility amount as per agreement PLN Currency ('000) ('000) Outstanding amount (current portion) (1) PLN Currency ('000) ('000) Outstanding amount (non-current portion) (1) Maturity date Financial terms and conditions (interest rate, PLN Currency Non-current interest payment Current portion ('000) ('000) portion schedule, etc.) Pekao S.A. Warsaw 150,000-30, Overdraft facility (2) - 1M WIBOR + bank s margin Bank Syndicate (1) - - USD 400,000 1,187,413 USD 400, Dec Bank syndicate (2) - - USD 1,125,000 91,439 USD 30,775 3,120,146 USD 1,049,856 Oct Jan based on 3M or 6M LIBOR USD, depending on the interest period selected at a given time + bank s margin based on 1M, 3M or 6M LIBOR USD, depending on the interest period selected at a given time + bank s margin Bank syndicate (3) - - USD 425,000 37,214 USD 12,550 1,020,870 USD 344,228 Oct Jan fixed interest rate Bank syndicate (4) - USD 200,000 or equivalent Funds in bank deposits securing payment of interest and principal instalments 76, ,329 USD 36, ,322 EUR 4, Overdraft facility - 3M WIBOR + bank s margin 3M EURIBOR + bank s margin 3M LIBOR USD + bank s margin Type of security power of attorney over bank account, voluntary submission to enforcement registered pledge over inventories, registered pledge over bank accounts, assignment of rights under inventory insurance agreements, assignment of rights under inventory storage agreements, voluntary submission to enforcement mortgage, registered pledge over existing and future movables, registered pledge over bank accounts, assignment of rights under agreements for the implementation and management of the 10+ Programme, assignment of rights under insurance agreements relating to the Gdańsk refinery, assignment of licence, hedging and sale agreements with a value of over PLN 10,000 thousand per year, submission to enforcement (8,665) USD (2,923) , Total (1) Measured at amortised cost, including arrangement fees. 1,415,730 USD 477,502 4,141,016 USD 1,394,084 17,322 EUR 4, ,539,545-4,141,016 - (2) Not treated as cash equivalents. The bank margins on the contracted borrowings and other debt instruments fall within the range of 0.65pp. 1.80pp. 56

58 30. Provisions Dec Dec Long-term provisions Length-of-service awards and retirement severance payments 41,036 31,420 =========== =========== Total long-term provisions 41,036 31,420 =========== =========== Short-term provisions Length-of-service awards and retirement severance payments 7,164 4,973 Other provisions 1,357 1,699 =========== =========== Total short-term provisions 8,521 6,672 =========== =========== Total 49,557 38,092 =========== =========== For actuarial assumptions, see Note No Change in provisions Length-of-service awards and retirement severance payments and other employee benefits Other provisions Total Jan ,168 3,364 36,532 ========= ========= ========= Increase 7,355 2,000 9,355 Release (758) - (758) Use (3,372) (3,665) (7,037) ========= ========= ========= Dec ,393 1,699 38,092 ========= ========= ========= Jan ,393 1,699 38,092 ========= ========= ========= Increase 17,893 1,500 (1) 19,393 Release (2,611) - (2,611) Use (3,475) (1,842) (5,317) ========= ========= ========= Dec ,200 1,357 49,557 ========= ========= ========= (1) See Note

59 31. Trade and other payables, accruals and deferred income, other liabilities, and other financial liabilities 31.1 Trade payables, accruals and deferred income, and other liabilities Note Dec Dec Trade payables, 2,801,979 1,729,709 including: - to related parties ,228 74,001 Liabilities to the state budget other than corporate income tax 923, ,265 Special accounts Salaries and wages payable 2,491 2,749 Accruals and deferrals 21,915 38,421 Deferred income, including: 23,869 25,733 - grants (1) 23,580 25,275 - other Investment liabilities, including: 14,679 73,982 - to related parties ,556 2,672 Liabilities to insurers 28,989 21,644 Other liabilities 341 3,815 ========= ========= Total 3,817,503 2,623,515 ========= ========= (1) licences obtained free of charge. Trade payables do not bear interest and are, as a rule, settled on a day basis. Other liabilities do not bear interest, and their average payment period is one month. The amount resulting from the difference between input VAT and output VAT is paid to the relevant tax authorities on a monthly basis. Interest payable is usually settled on a monthly basis during a financial year. As at December 31st 2011 and December 31st 2010, Grupa LOTOS S.A. s excise duty liabilities disclosed under Liabilities to the state budget other than corporate income tax arise under Art. 8.1 of the Excise Duty Act of December 6th 2008 (Dz. U. of 2009, No. 3, item 11, as amended), which provides that excise duty is levied in connection with the following: 1) production of excise goods, 2) receipt of excise goods into a tax warehouse, 3) importation of excise goods, 4) intra-community acquisition of excise goods, other than intra-community acquisition of excise goods into a tax warehouse, 5) release from a tax warehouse of excise goods not owned by the authorised warehouse keeper otherwise than under a duty suspension arrangement, except for excise goods which are subject to an excise duty exemption due to their intended use, by an entity that obtained a relevant release authorisation from the competent head of customs office. Pursuant to Art. 8.3 of the Excise Duty Act of December 6th 2008, losses of excise goods are also subject to excise duty, in the Company s case up to the limit determined by the Head of the Customs Office of Gdańsk under Art of the Excise Duty Act. Grupa LOTOS S.A. s excise duty liabilities as at December 31st 2011 and December 31st 2010 arise also in connection with Art of the Excise Duty Act of December 6th 2008, which stipulates that in the case of excise goods covered by a duty suspension arrangement, the obligation to pay excise duty arises on their release from the duty suspension arrangement, unless the Excise Duty Act provides otherwise. Pursuant to the relevant authorisations issued by the Head of the Customs Office of Gdańsk, in connection with Art. 47 and Art. 48 of the Excise Duty Act of December 6th 2008, the Company operates the following tax warehouses: 1) in Gdańsk the refinery site, 2) in Czechowice-Dziedzice the site of the fuel terminal and the fuel blending plant (using biocomponents), 3) in Jasło the site of the fuel terminal and the fuel blending plant (using biocomponents), Business activity within the tax warehouses in the area of production, storage and distribution is conducted under a duty suspension arrangement. 58

60 Pursuant to the authorisation issued by the Head of the Customs Office of Gdańsk, in connection with Art. 62a of the Excise Duty Act of December 6th 2008, the Company operates as a registered consignor (within the meaning of the Excise Duty Act). The business activity of the Company as the registered consignor consists in dispatching imported excise goods from the place of importation under a duty suspension arrangement. On the basis of release authorisations issued by the Head of the Customs Office of Gdańsk in connection with Art. 54 of the Excise Duty Act, the Company may release its own excise goods stored in third party tax warehouses otherwise than under a duty suspension arrangement. For sensitivity analysis of trade and other liabilities with respect to market risk related to fluctuations in exchange rates as at December 31st 2011, and December 31st 2010, see Note For maturity analysis of other financial liabilities as at December 31st 2011 and December 31st 2010, see Note Other financial liabilities Note Dec Dec (restated) Negative valuation of derivative financial instruments: 256, ,871 - commodity swaps (commodities and petroleum products) - 3,517 - futures (CO 2emissions) 15, currency forward and spot contracts 69,057 41,654 - forward rate agreements (FRAs) interest rate swap (IRS) 172, ,897 Lease liabilities ========= ========= Total 256, ,938 ========= ========= Non-current liabilities 127,364 80,107 Current liabilities 129, ,831 As at December 31st 2011, there were no hedging contracts over which an assignment would be created as security for the credit facility referred to in Note 29 (December 31st 2010: PLN 120,822 thousand). For maturity analysis of other financial liabilities as at December 31st 2011 and December 31st 2010, see Note Finance lease liabilities Minimum lease payments Present value of minimum lease payments Dec Dec Dec Dec Up to 1 year From 1 to 5 years Over 5 years ======= ======= ======= ======= Total ======= ======= ======= ======= Less future financial charges - (2) - - ======= ======= ======= ======= Present value of minimum lease payments ======= ======= ======= ======= Non-current portion - - Current portion

61 32. Contingent liabilities and other guarantees and types of security 32.1 Promissory notes, bank guarantees or other forms of security issued by financial institutions at the Company's request Bank guarantees and other forms of security issued at the Company's request Dec () Beneficiary Security issued at the request of Grupa LOTOS S.A. Value of security in foreign currency Currency of security Value of security in PLN (1) Security expiry date Bank or other institution issuing the security Type of security / information on debtor Port Lotniczy Rzeszów Jasionka Sp. z o.o. 4,116 PLN 4,116 Dec (2) PKO BP S.A. Bank guarantee UOP CH SARL 700 USD 2,392 Jan (3) Deutsche Bank Bank guarantee Port Lotniczy Wrocław 5,547 PLN 5,547 Jan ING Bank Śląski S.A. Bank guarantee Other (each with a unit value of less than PLN 1,000 thousand) 2,210 PLN 2, Bank guarantees Other (each with a unit value of less than PLN 1,000 thousand) 134 EUR Bank guarantees Other (each with a unit value of less than PLN 1,000 thousand) 36 USD Bank guarantees Total 14,979 (1) Security in foreign currencies were translated at the mid-exchange rates quoted by the National Bank of Poland for December 31st (2) The original validity term (December 31st 2011) was extended until December 31st (3) Liability expired upon the lapse of its validity term. Dec () Beneficiary Security issued at the request of Grupa LOTOS S.A. Value of security in foreign currency Currency of security Value of security in PLN (1) Security expiry date Bank or other institution issuing the security Type of security / information on debtor VITOL S.A. 9,130 USD 27,062 Jan (2) Deutsche Bank Stand-by letter of credit Other (each with a unit value of less than PLN 1,000 thousand) 734 PLN Bank guarantees Other (each with a unit value of less than PLN 1,000 thousand) 169 EUR Bank guarantees Other (each with a unit value of less than PLN 1,000 thousand) 36 USD Bank guarantees Total 28,572 (1) Security in foreign currencies were translated at the mid-exchange rates quoted by the National Bank of Poland for December 31st (2) Security expired upon the lapse of its validity term.. 60

62 Promissory notes Dec () Beneficiary of promissory note Promissory note(s) amount in foreign currency Currency of promissory note(s) Promissory note(s) amount in PLN (1) Expiry date of promissory note(s) Type Promissory notes issued by Grupa LOTOS S.A. Head of the Customs Office in Gdańsk 240,000 PLN 240,000 Aug (2) Contingent liability in the form of lump sum security for a tax liability of PLN 800,000 thousand PKO BP S.A. 300,000 PLN 300,000 Nov (3) Security for a bank borrowing Total 540,000 (1) Security in foreign currencies were translated at the mid-exchange rates quoted by the National Bank of Poland for December 31st (2) The previous validity term of the security for excise duty was August 19th (3) On November 25th 2011, an annex to the credit facility agreement was executed under which the credit facility term end date was changed to November 25th 2016 and the credit facility amount was changed from PLN 200,000 thousand to PLN 300,000 thousand. Dec () Beneficiary of promissory note Promissory note(s) amount in foreign currency Currency of promissory note(s) Promissory note(s) amount in PLN (1) Expiry date of promissory note(s) Head of the Customs Office in Gdańsk 240,000 PLN 240,000 Aug Type Contingent liability in the form of lump sum security for a tax liability of PLN 800,000 thousand PKO BP S.A. 200,000 PLN 200,000 Aug (2) Security for a bank borrowing Total 440,000 (1) Security in foreign currencies were translated at the mid-exchange rates quoted by the National Bank of Poland for December 31st (2) On November 25th 2010, an annex to the credit facility agreement was executed under which the credit facility term end date. 61

63 32.2 Contingent investment commitments As at December 31st 2011, the Company did not have any commitments under material agreements related to expenditure on property, plant and equipment (the 10+ Programme) (as at December 31st 2010 its commitments amounted to PLN 29.8m) Carbon dioxide (CO 2 ) emission allowances As at December 31st 2011 and December 31st 2010, considering the limit of allowances allocated for , the Company reported an excess of the carbon dioxide (CO 2) emission allowances it had been allocated over its carbon dioxide (CO 2) emissions, therefore no provisions were recognised and disclosed in the financial statements. On July 1st 2008, the Council of Ministers adopted, by way of a regulation, the National Allocation Plan of Carbon Dioxide (CO 2) Emission Allowances for , issued under the EU carbon dioxide (CO 2) emission trading scheme to existing installations and installations undergoing modification (Dz. U. of November 14th 2008, No. 202, item 1248). In accordance with the current legislation, allowances under Phase II ( ) were allocated free of charge to all the installations covered by the emission trading scheme. In line with the Council of Ministers' regulation, for the Company was granted average annual allowance of 1,138 thousand tonnes of carbon dioxide (CO 2). Additionally, by virtue of the decision of the Marshal of the Gdańsk Province of January 18th 2011, per each of the years Grupa LOTOS S.A. was granted allowances for 143 thousand tonnes for the CHP plant and for 433 thousand tonnes for the refinery. On July 29th 2011, by virtue of the decision of the Marshal of the Gdańsk Province, Grupa LOTOS S.A. obtained additional carbon dioxide (CO 2) emission allowances for the installations newly placed in service (175 thousand tonnes for 2011 and 185 thousand tonnes for 2012). In total, taking into account the decision referred to above, Grupa LOTOS S.A. has been granted average annual carbon dioxide (CO 2) emission allowances of 1,889 thousand tonnes for 2011 and 1,889 thousand tonnes for Carbon dioxide (CO 2) emissions, calculated based on the production data for the installations covered by the emission trading scheme and verified in accordance with Art. 59 of the Act on Trading in Greenhouse Gas Emission Allowances of April 28th 2011, were 2,005 thousand tonnes for the year ended December 31st 2011 and 1,099 thousand tonnes for the year ended December 31st Material court, arbitration or administrative proceedings and other risks Material proceedings pending before public administration authorities in connection with the Company s business On March 21st 2005, the President of the Competition and Consumer Protection Office issued a decision whereby anti-trust proceedings were instigated ex officio to investigate the issue of a suspected agreement between Polski Koncern Naftowy ORLEN S.A. of Płock and Grupa LOTOS S.A. of Gdańsk, concerning a simultaneous discontinuation of the production and distribution of the U95 universal gasoline. In the opinion of the Company s Management Board, given that in fact the production and sale of the U95 universal gasoline were not discontinued, the allegations of the Competition and Consumer Protection Office are unfounded. In April 2005, the Management Board motioned for issuing a decision to the effect that Grupa LOTOS S.A. has not been found to use practices restricting competition. In July 2005, the Company appealed to the Anti-Monopoly Court against the Competition and Consumer Protection Office s decision limiting access to a part of the evidence gathered in the case. Independent of the appeal, in September 2005 the Company filed another request with the Court to issue a decision to the effect that Grupa LOTOS S.A. does not use monopolistic practices. In October 2005, the Company received another decision of the Competition and Consumer Protection Office concerning limitation of access to a part of the evidence, against which the Company appealed to the Anti-Monopoly Court. The Regional Court - Competition and Consumer Protection Court, dismissed the appeals. Grupa LOTOS S.A. appealed to the Warsaw Court of Appeals against the Regional Court s decisions, but those appeals were dismissed as well. Pursuant to a Decision of April 18th 2007, Grupa LOTOS S.A. s right of access to evidence in the anti-trust proceedings, namely to the materials obtained during inspections at PKN ORLEN S.A. s offices, was restricted on the basis of a petition submitted by PKN ORLEN S.A. The restriction concerned the report on inspection of the offices in Warsaw together with appendices to the report, and a part of appendices to the report on inspection of 62

64 the offices in Płock. Under the same Decision, PKN ORLEN S.A. s petition was rejected to the extent concerning restriction of Grupa LOTOS S.A. s right of access to the report on inspection of PKN ORLEN S.A. s offices in Płock. On April 26th 2007, Grupa LOTOS S.A. filed a complaint against the Decision restricting Grupa LOTOS S.A. s right of access to the evidence. On May 9th 2007, Grupa LOTOS S.A. received a notice from the Competition and Consumer Protection Office to provide information on changes to U-95 and Pb95 gasoline prices. The information was sent to the Office on the same day. On August 2nd 2007, Grupa LOTOS S.A. sent a notification to the Office to the effect that the production of the U95 gasoline had been discontinued. On December 31st 2007, the President of the Office imposed a fine of PLN 1,000 thousand on Grupa LOTOS S.A. Consequently, on January 17th 2008, an appeal against the decision was filed with the Regional Court of Warsaw. On September 23rd 2008, the Regional Court of Warsaw - Competition and Consumer Protection Court sent a response by the President of the Competition and Consumer Protection Office to the appeal submitted by Grupa LOTOS S.A. against the President s decision. In response to Grupa LOTOS S.A. s appeal, the President of the Competition and Consumer Protection Office stated that Grupa LOTOS S.A. s objections both with reference to substantive and procedural laws were unfounded and requested that the appeal be dismissed in its entirety and that the President be awarded the costs of legal representation. On April 27th 2010, the Court adjourned the rendering of judgment until May 6th On May 6th 2010, the Regional Court of Warsaw passed a decision dismissing the appeal against the decision of the Competition and Consumer Protection Office concerning anti-trust proceedings initiated ex officio as a result of the decision issued by the President of the Competition and Consumer Protection Office on March 21st 2005 concerning distribution of the U95 universal gasoline, and upheld the fines of PLN 1,000 thousand and PLN 4,000 thousand imposed by the Competition and Consumer Protection Office respectively on Grupa LOTOS S.A. and PKN ORLEN S.A. The court ruling dismissing the appeal against the President s decision was received on June 15th On June 28th 2010, Grupa LOTOS S.A. lodged an appeal against the court ruling. Subsequently, Grupa LOTOS S.A. and the Competition and Consumer Protection Office responded to the appeal by PKN ORLEN S.A., while PKN ORLEN S.A. and the Competition and Consumer Protection Office responded to the appeal by Grupa LOTOS S.A. On February 11th 2011, the Court issued a ruling dismissing the appeal lodged by Grupa LOTOS S.A. and PKN ORLEN S.A. On May 30th 2011, Grupa LOTOS S.A. filed a cassation complaint against the ruling, in which it appealed the ruling in its entirety, requesting its reversal. On the same day, a cassation complaint was submitted by PKN Orlen S.A. On June 17th 2011, a response to the cassation complaint filed by Grupa LOTOS S.A. was submitted, in which the President of the Competition and Consumer Protection Office requested that the complaint be dismissed and costs of proceedings be awarded to the Office. On December 2nd 2011, the Supreme Court refused to accept the cassation appeals for consideration. As at the date of approval of these financial statements, the case was finally closed. On March 10th 2011, using a previously recognised provision, the Company paid the liability of PLN 1,000 thousand, imposed by the court ruling of February 11th Proceedings brought by PETROECCO JV Sp. z o.o. seeking compensation for losses incurred as a result of monopolistic practices On May 18th 2001, PETROECCO JV Sp. z o.o. brought an action against the Company whereby it sought the courts decision awarding an amount of PLN 6,975 thousand, together with statutory interest from May 1st 1999, as compensation for damage incurred as a result of the Company s monopolistic practices, which involved selling BS base oils in a manner favouring some customers, whose orders were executed to a disproportionately higher extent than the orders of PETROECCO JV Sp. z o.o. The alleged use of the monopolistic practices by the Company was confirmed by a decision of the Anti-Monopoly Office of September 26th 1996, in which the Office ordered the Company to abandon such practices. The Company appealed against the decision. The Provincial Court of Warsaw the Anti-Monopoly Court, changed, by virtue of its decision of October 22nd 1997, only the wording of the decision and ordered the Company to abandon monopolistic practices. The cassation complaint against this decision filed by the Company was dismissed by the Supreme Court by virtue of its decision of June 2nd The Regional Court of Gdańsk, by virtue of its decision of December 21st 2002, dismissed the action for compensation, fully complying with the Company s objection referring to the statute of limitation. However, this decision was overruled on December 4th 2003 by the Gdańsk Court of Appeals, in case No. I ACa 824/03, and remanded for re-examination by the Regional Court of Gdańsk. The Court of Appeals found that the reference to the statute of limitation was not justified. According to the Court, it was only on June 2nd 1999 (the date of the Supreme Court s ruling) that PETROECCO JV Sp. z o.o. became aware that the damage it incurred resulted from monopolistic practices giving rise to the Company s liability in tort, and it is as of that date, in the Court s opinion, that the three-year period of limitation of compensation claims should be counted. 63

65 The case was pending before the Regional Court of Gdańsk (First Instance Court); court docket No. IX GC134/04. The Company has also defended itself by raising objections as to the merits of the case (it questions the fact that any damage was incurred by PETROECCO JV Sp. z o.o., the amount of the alleged damage, and the existence of the cause and effect relationship between the monopolistic practices and the damage). Following a hearing held in June 2005, the Regional Court of Gdańsk ordered an court expert in accountancy and economics to draw up an opinion concerning the extent of the damage which the plaintiff incurred as a result of Grupa LOTOS S.A. s activities. In the issued opinion, the court expert stated that based on the materials presented by PETROECCO JV Sp. z o.o. it was not possible to establish the amount of the losses or even state whether any losses were actually incurred. Besides, the expert pointed out that an opinion should be requested from an court expert in a field other than accountancy. The lack of evidence required to issue an opinion prevented the plaintiff from procuring the appointment of another expert witness. Another hearing was held on March 27th Announcement of the ruling was scheduled for April 10th 2007, and subsequently postponed until April 20th Pursuant to the ruling of April 20th 2007, the action was dismissed. On May 17th 2007, the Company filed an appeal against the court's decision regarding the cost of the proceedings. On June 4th 2007, PETROECCO JV Sp. z o.o. lodged an appeal against the ruling issued on April 20th On August 12th 2007, the Company submitted its response to the appeal. On December 20th 2007, the Court dismissed PETROECCO JV Sp. z o.o. s appeal against the Regional Court's decision. On March 19th 2008, an enforcement motion was filed with a Court Enforcement Officer against PETROECCO JV Sp. z o.o. On April 17th 2008, PETROECCO JV Sp. z o.o. lodged a cassation complaint against the ruling of December 20th The complaint was delivered to Grupa LOTOS S.A. on June 17th On June 30th 2008, Grupa LOTOS S.A. sent a response to the complaint. The case was referred to pre-trial proceedings scheduled for November 14th On January 14th 2009, the Supreme Court reversed the ruling appealed against and remanded the case for re-examination by the Court of Appeals in Gdańsk. On March 10th 2009, the case files were delivered to the Court of Appeals. On April 3rd 2009, the Court Enforcement Officer sent the decision on discontinuation of the enforcement proceedings. On May 14th 2009, the Court of Appeals referred the case to the Regional Court for re-examination. During a hearing held on November 3rd 2009, the Court obliged PETROECCO JV Sp. z o.o. to appoint an expert. On October 1st 2010, a hearing was held during which the expert was heard. On May 16th 2011, Grupa LOTOS S.A. sent its response to the summons to submit a representation concerning sustaining the motion for evidence from an expert's opinion and to pay a PLN 23 thousand advance towards the cost of the opinion. On May 18th 2011, a court paper was received from PETROECCO JV Sp. z o.o. which upheld the previous position on the above matter. On March 14th 2012, an opinion of the Oil and Gas Institute of Kraków was received, to which Grupa LOTOS S.A. replied on March 28th On March 22nd 2012, a court paper was received from PETROECCO JV Sp. z o.o. As at the date of approval of these financial statements, the case was pending. The Company s Management Board is of the opinion that the risk of an unfavourable ruling in a potential dispute is low, therefore no provisions for potential damages were recognised and disclosed in the financial statements. Proceedings brought by the Minister of State Treasury seeking invalidation of the share purchase agreement concerning shares in Naftoport Sp. z o.o. On November 3rd 2005, Grupa LOTOS S.A. was served a nullity suit submitted by the Minister of State Treasury, concerning the agreement of August 18th 1998 between Grupa LOTOS S.A. and Polska Żegluga Morska, a state-owned company, providing for the sale of two shares in Naftoport Sp. z o.o., valued at PLN 3,340 thousand. On April 21st 2006, the Regional Court of Gdańsk, IX Commercial Division, issued a ruling dismissing the suit in its entirety. On June 8th 2006, the Minister of State Treasury appealed against the ruling of April 21st 2006 which dismissed the Minister s nullity suit regarding the agreement of August 18th On June 30th 2006, the Company filed its response to the appeal. On December 28th 2006, the Court of Appeals passed a ruling reversing the challenged decision of April 21st 2006 and declaring the agreement on the sale of two shares in Naftoport Sp. z o.o. as invalid. On April 6th 2007, the Company filed a cassation complaint and a request to stay enforcement of the decision of the second instance. By virtue of the ruling of the Court of Appeals of Szczecin dated April 20th 2007, the request to stay enforcement of the decision of the second instance was dismissed. On August 10th 2007, the Supreme Court issued a decision to accept the cassation complaint for consideration. On November 21st 2007, the Supreme Court issued a decision to remand the case back to the Court of Appeals of Szczecin. The hearing was held on May 7th The court dismissed the claim in its entirety and decided that the costs of the proceedings in the amount of PLN 100 thousand would be returned to Grupa LOTOS S.A. On May 7th 2008, the court s decision became final. On August 20th 2008, the State Treasury lodged a cassation complaint. On December 11th 2008, the case files arrived at the Supreme Court, Civil Chamber Division II. In a closed session held on March 6th 2009, the court accepted the complaint for consideration. The date of the hearing was set for May 6th 2009; during the hearing, the Supreme Court remanded the case for re-examination by the Szczecin Court of Appeals. At the hearing held on September 30th 2009, the Court of Appeals dismissed the action and awarded reimbursement of the cost of court proceedings to Grupa LOTOS S.A. by the State Treasury. On January 11th 2010, the State Treasury lodged a cassation complaint against the ruling to the Court of Appeals. The complaint, along with the court s decision to accept the complaint for consideration, was served on the Company on June 6th On July 8th 2010, the Supreme Court overruled the Court of Appeals judgment and remanded the case for re-examination. On February 17th 2011, a hearing was held before the 64

66 Szczecin Court of Appeals, which, however, did not issue any ruling due to the complexity of the case. On July 13th 2011, the Supreme Court issued its decision concerning a legal issue presented by the Court of Appeals. On November 23rd 2011, the Court refused the Minister of State Treasury s appeal. As at the date of approval of these financial statements the case was pending. On March 6th 2012, the State Treasury s cassation complaint was received, to which Polska Żegluga Morska replied on March 20th As at the date of approval of these financial statements the case was pending. The Company s Management Board is of the opinion that the risk of an unfavourable ruling in a potential dispute is low, therefore no provisions for potential damages were recognised in the financial statements. Tax settlements Tax settlements and other regulated areas of activity (e.g. customs or foreign exchange control) are subject to inspection by competent administration authorities, which are authorised to impose high penalties and sanctions. As the legal regulations regarding these issues in Poland are relatively new, they are often ambiguous and inconsistent. Differences in the interpretation of tax legislation are frequent, both within governmental authorities and between those authorities and businesses, leading to uncertainty and conflicts. Consequently, the taxrelated risk in Poland is significantly higher than in countries where tax systems are better developed. Tax settlements may be subject to tax inspection for a period of five years from the end of the calendar year in which the tax payment was made. As a result of such inspections, additional tax liabilities may be assessed with respect to the tax settlements made by the Company. In the Company s opinion, as at December 31st 2011 it had adequate provisions for identified and measurable tax risks. 33. Related parties 33.1 Related-party transactions Transactions with related parties are executed on market terms. Areas of transactions with related parties Dec Dec Sales to related entities (incl. excise duty and fuel charge) 20,427,288 15,433,553 Purchases from related entities (incl. excise duty and fuel charge) 1,328,182 1,092,685 Sale of property, plant and equipment and intangible assets 10 9 Purchase of property, plant and equipment and intangible assets 21,027 39,964 Other operating income Other operating expenses, including 363 4,477 - impairment losses on receivables - 4,477 Finance income, including 243, ,716 - dividends 239, ,256 - interest 3,052 2,460 Finance expenses, including 223 (5,388) - revaluation of financial assets 222 (5,529) (1) (1) including PLN 6,429 thousand (shown with a minus sign under finance expenses) of reversal of an impairment loss on financial assets Dec Dec Net receivables from related entities 1,730,282 1,222,999 Payables to related entities 174,784 76,673 65

67 In the period from January 1st to December 31st 2011, loans advanced by the Company to related parties totalled PLN 972 thousand (2010: PLN 21,852 thousand, including USD 7,000 thousand). In the period from January 1st to December 31st 2011, related parties repaid PLN 71,877 thousand in principal and interest payments, the nominal value of the loans - USD 20,000 (2010: PLN 1,100 thousand), see Note 36. In the period from January 1st to December 31st 2011 and from January 1st to December 31st 2010, the Company did not issue any sureties for the benefit of related parties. As at December 31st 2011 and December 31st 2010, the Company carried no sureties issued for the benefit of its related parties. In the period from January 1st to December 31st 2011, the total value of security created by a related party for the benefit of the Company was USD 7,000 thousand (the equivalent of PLN 20,031 thousand, translated at the USD mid-exchange rate quoted by the National Bank of Poland for the transaction date). In addition, the Company holds the security referred to in Note 36 with respect to a PLN 2,000 thousand loan advanced to a related party. As at December 31st 2010, the total value of security created by a related party for the benefit of the Company was USD 20,000 thousand (the equivalent of PLN 59,282 thousand, translated at the USD mid-exchange rate quoted by the National Bank of Poland for December 31st 2010). In addition, the Company holds the security referred to in Note 36 with respect to a loan advanced to a related party, whose outstanding nominal value as at December 31st 2010 was PLN 900 thousand. In the period from January 1st to December 31st 2010, the Company received repayment of PLN 6,400 thousand it had earlier paid for shares in connection with a share capital increase at a subsidiary. As at December 31st 2011, trade receivables from related parties subject to assignment amounted to PLN 1,727,378 thousand (December 31st 2010: PLN 1,218,385 thousand) Entity with significant influence over the Company As at December 31st 2011 and December 31st 2010, the State Treasury held a 53.19% interest in Grupa LOTOS S.A. In the years ended December 31st 2011 and December 31st 2010, no transactions were concluded between Grupa LOTOS S.A. and the State Treasury Remuneration of the Management and the Supervisory Board members and information on loans and other similar benefits granted to members of the management and supervisory staff The remuneration paid or payable to the members of the Company s Management and Supervisory Boards was as follows: Remuneration of the Management Board in 2011 Short-term employee benefits (salaries and wages) Length-ofservice awards Share-based employee benefits Management Board subsidiaries (1) Total remuneration paid Paweł Olechnowicz ,187 Marek Sokołowski Mariusz Machajewski Maciej Szozda ========== ======= ======== ========== ========== Total 1, ,795 4,056 ========== ======= ======== ========== ========== (1) Short-term employee benefits remuneration paid to the members of the Management Board of Grupa LOTOS S.A. for serving on Supervisory Boards and Boards of Directors of direct and indirect subsidiaries. 66

68 Remuneration of the Supervisory Board in 2011 Term of office Total remuneration paid (1) Wiesław Skwarko Jan 1 Dec Leszek Starosta Jan 1 Dec Małgorzata Hirszel Jan 1 Dec Oskar Pawłowski Jan 1 Dec Michał Rumiński Jan 1 Dec Rafał Wardziński Jan 1 Dec Ewa Sibrecht-Ośka Jan 1 Nov Rafał Lorek Jan 1 Jun ========== Total 309 ========== (1) Short-term employee benefits (salaries and wages). The value of remuneration reflects changes in the composition of the Supervisory Board of Grupa LOTOS S.A. during the reporting period. Remuneration of the Management Board in 2010 Short-term employee benefits (salaries and wages) Length-ofservice awards Share-based employee benefits Management Board subsidiaries (1) Total remuneration paid Paweł Olechnowicz Marek Sokołowski Mariusz Machajewski Maciej Szozda ========== ========= ========== ========== ========== Total 1, ,597 ========== ========= ========== ========== ========== (1) Short-term employee benefits. Remuneration paid to the members of the Management Board of Grupa LOTOS S.A. for serving on the Supervisory Boards and Boards of Directors of direct and indirect subsidiaries. Remuneration of the Supervisory Board in 2010 Term of office Total remuneration paid (1) Wiesław Skwarko (2) Jan 1 Dec Leszek Starosta Jan 1 Dec Mariusz Obszyński Jan 1 Feb Radosław Barszcz Jan 1 Feb Małgorzata Hirszel Jan 1 Dec Jan Stefanowicz Jan 1 Feb Ireneusz Fąfara Jan 1 Mar Oskar Pawłowski Feb 11 Dec Michał Rumiński Feb 11 Dec Rafał Wardziński Feb 11 Dec Ewa Sibrecht Ośka Jun 28 Dec Rafał Lorek Jun 28 Dec ========== Total 261 ========== (1) Short-term employee benefits (salaries and wages). The value of remuneration reflects changes in the composition of the Supervisory Board of Grupa LOTOS S.A. during the reporting period. (2) On November 1st 2010, Mr Wiesław Skwarko withdrew his representation that he elects to forgo remuneration for serving on the Supervisory Board of Grupa LOTOS S.A. 67

69 As at December 31st 2011, the Company had a provision for length-of-service awards and retirement severance payments for the members of the Grupa LOTOS Management Board of PLN 350 thousand (December 31st 2010: PLN 260 thousand). Moreover, pursuant to the Act on Remunerating Persons Who Manage Certain Legal Entities, the Company also recognised a provision for maximum annual bonuses as defined by the act, to be paid to members of the Management Board of Grupa LOTOS S.A. for 2011, in the amount of PLN 249 thousand (2010: PLN 249 thousand of annual bonuses paid in 2011, disclosed in table Remuneration of the Management Board in 2011 under Short-term employee benefits (salaries and wages)). As at December 31st 2011 and December 31st 2010, and in the periods from January 1st to December 31st 2011 and from January 1st to December 31st 2010, the Company did not grant any loans or similar benefits to members of its management and supervisory staff Remuneration paid or payable to other members of the key management staff Dec Dec Short-term employee benefits (salaries and wages) 19,740 16,086 ========== ========== Total remuneration paid to key management staff (other than members of Management and Supervisory Boards of the Company) 19,740 ========== 16,086 ========== As at December 31st 2011, the Company had a provision for length-of-service awards and retirement severance payments for key management staff of PLN 5,031 thousand (2010: PLN 4,577 thousand). The Company also recognised a provision for annual bonuses expected to be paid to key management staff for 2011, of PLN 4,564 thousand (2010: PLN 4,375 thousand of annual bonuses paid in 2011, disclosed in the table above as at December 31st 2011 under Short-term employee benefits (salaries and wages)). As at December 31st 2011, loans and similar benefits granted by the Company to members of key management staff totalled PLN 21 thousand (December 31st 2010: PLN 39 thousand). In the periods January 1st December 31st 2011 and January 1 December 31st 2010, the Company did not grant any loans or similar benefits to members of key management staff Other transactions with Members of the Company s Management or Supervisory Boards, their spouses, siblings, ascendants, descendants or other close persons Transactions with members of the Company s Management or Supervisory Boards, their spouses, siblings, ascendants, descendants or other close persons In the years ended December 31st 2011 and December 31st 2010, the Company entered into no material agreements with members of the Management and Supervisory Boards (1), advanced no loans, made no advance payments, issued no guarantees and concluded no agreements to or with any such persons which would provide considerable benefits to Grupa LOTOS S.A. or its subsidiaries or associates. Based on representations submitted by members of the Company's Management and Supervisory Boards, in the years ended December 31st 2011 and December 31st 2010 Grupa LOTOS S.A. did not become aware of any transactions concluded with Grupa LOTOS S.A. or a company of the LOTOS Group by the spouses, relatives, or relatives by affinity in the direct line up to the second degree, of the members of Management and Supervisory Boards or persons related to them through guardianship or adoption or other persons with whom they have personal relationships. (1) Taking into account changes in the composition of the Supervisory Board (see Note 2). 68

70 Other transactions with parties related through members of the Management and Supervisory Boards Below are presented transactions concluded in 2011 (based on representations made by members of the Management and Supervisory Boards related-party transactions). Type of relationship () Sale Purchase Receivables Liabilities Supervisory staff 127-1, Management staff TOTAL 127-1, Below are presented transactions concluded in 2010 (based on representations made by members of the Management and Supervisory Boards concerning transactions with related parties). Type of relationship () Sale Purchase Receivables Liabilities Supervisory staff 1, Management staff TOTAL 1, Information on the agreement with and remuneration payable to the qualified auditor of financial statements, and information on the appointment of the qualified auditor to audit the financial statements of Grupa LOTOS S.A. Based on the resolution adopted by the Supervisory Board of Grupa LOTOS S.A. on December 17th 2009, Ernst &Young Audit Sp. z o.o., entered in the register of entities qualified to audit financial statements maintained by the National Board of Chartered Auditors under entry No. 130, was selected as the qualified auditor to audit the Company s financial statements for 2010, 2011 and On May 18th 2010, Grupa LOTOS S.A. and Ernst & Young Audit Sp. z o.o. of Warsaw concluded an agreement providing amongst other things for: - review of the separate and consolidated financial statements for the first six months of 2010, 2011 and 2012, - audit of the separate and consolidated financial statements in The total remuneration for the audit, review and verification procedures is set forth below Audit of the annual separate and consolidated financial statements of Grupa LOTOS S.A Attestation services 1, including: review of the semi-annual separate and consolidated financial statements of Grupa LOTOS S.A Other services (2) 4 10 Tax advisory services - - TOTAL (1) Fees for the audit, review and verification of the financial statements, as well as for other services provided by Ernst & Young Audit Sp. z o.o. under the agreement of May 18th 2010 regarding the review of the separate and consolidated financial statements for the first six months of 2010, 2011 and 2012 and for the audit of the separate and consolidated financial statements in (2) Training fees paid to the auditor. 69

71 35. Objectives and principles of financial risk management The Company is exposed to financial risks, including: market risk (risk related to prices of raw materials and petroleum products, risk related to prices of CO 2 allowances, currency risk, interest rate risk), liquidity risk, credit risk related to financial and trade transactions. The former Financial Risk Management Committee at Grupa LOTOS was replaced by the Price Risk and Trading Committee, which is responsible for: oversight and coordination of the price risk management process, monitoring and coordination of trading activities requiring cross-segment interaction. The powers of the Financial Risk Management Committee in the area of currency risk, interest rate risk and credit risk management have been vested directly in the Chief Financial Officer. In addition, a team for liquidity optimisation and coordination of financing has been set up to coordinate and supervise key efforts in the area of liquidity risk management, arrangement of financing, and debt management at the LOTOS Group. To ensure efficiency and operational security of risk management, Grupa LOTOS distinguished the following areas: financial transaction (front-office), risk analysis and control (middle-office) and documentation and settlement (back-office). Financial risk management seeks to achieve the following key objectives: increase the probability that budget and strategic objectives will be met, limit volatility of cash flows, ensure short-term financial liquidity, maximise the result on market risk management, given an assumed level of risk. In order to achieve these objectives, documents have been prepared at Grupa LOTOS S.A. and approved at appropriate decision-making levels of the Company. These documents specify the necessary framework for effective and secure functioning of the financial risk management process, including principally: methodology for quantifying exposures to particular risks, acceptable financial instruments, method of assessing financial risk management, limits within risk management, reporting method, credit limits. Grupa LOTOS S.A. monitors all managed market risks on an ongoing basis. Opening positions with respect to risks which do not arise as part of the Company s core activity is prohibited. Grupa LOTOS S.A. uses liquid derivatives which it is able to measure by applying common valuation models. The valuation of the underlying position and derivatives is performed based on market data provided by reliable sources. As of January 1st 2011, the Company introduced cash flow hedge accounting with respect to foreign-currency denominated facilities used to finance the 10+ Programme, designated as hedges of future USD-denominated petroleum product sales transactions. 70

72 Risk related to prices of raw materials and petroleum products The Company considers risk related to prices of raw materials and petroleum products, as well as currency risk, to be particularly important. The Company continues research and work on a new policy for managing the risk, which ties in closely with our plans to upscale trading operations. Concurrently, to enable implementation of specific price risk management processes, streamline management functions and improve security of operations in the broad price risk and trading area, the Company has launched the process of selecting a new Energy Trading and Risk Management system. As at December 31st 2011 and December 31st 2011, there were no open refining margin transactions. In 2010, the Company entered into commodity swaps in connection with sales of bitumen components at fixed prices, to ensure that the original risk profile remains unchanged. The swaps were settled in 2011, and as at December 31st 2011, there were no open commodity transactions. 71

73 Open commodity swaps as at December 31st 2010: Company Type of transaction Transaction execution date Beginning of the valuation period End of the valuation period Number of tonnes Price (USD/tonne) Fair value as at Dec (PLN 000) 1 Grupa LOTOS S.A. Commodity swap Mar Apr Apr , Grupa LOTOS S.A. Commodity swap Mar May May , Grupa LOTOS S.A. Commodity swap Mar Jun Jun , Grupa LOTOS S.A. Commodity swap Mar Jul Jul , Grupa LOTOS S.A. Commodity swap Mar Aug Aug , Grupa LOTOS S.A. Commodity swap Mar Sep Sep , Grupa LOTOS S.A. Commodity swap Mar Oct Oct , Grupa LOTOS S.A. Commodity swap Mar Apr Apr (592) 716 (109) Grupa LOTOS S.A. Commodity swap Mar May May (1,100) 716 (210) Grupa LOTOS S.A. Commodity swap Mar Jun Jun (874) 716 (175) Grupa LOTOS S.A. Commodity swap Mar Jul Jul (846) 716 (176) Grupa LOTOS S.A. Commodity swap Mar Aug Aug (1,100) 716 (240) Grupa LOTOS S.A. Commodity swap Mar Sep Sep (592) 716 (133) Grupa LOTOS S.A. Commodity swap Mar Oct Oct (226) 716 (52) Grupa LOTOS S.A. Commodity swap Mar Jun Jun , Grupa LOTOS S.A. Commodity swap Mar Jul Jul , Grupa LOTOS S.A. Commodity swap Mar Aug Aug , Grupa LOTOS S.A. Commodity swap Mar Sep Sep , Grupa LOTOS S.A. Commodity swap Mar Oct Oct , Grupa LOTOS S.A. Commodity swap Mar Nov Nov , Grupa LOTOS S.A. Commodity swap Mar Jun Jun (282) 715 (57) Grupa LOTOS S.A. Commodity swap Mar Jul Jul (282) 715 (60) Grupa LOTOS S.A. Commodity swap Mar Aug Aug (282) 715 (62) Grupa LOTOS S.A. Commodity swap Mar Sep Sep (282) 715 (64) Grupa LOTOS S.A. Commodity swap Mar Oct Oct (423) 715 (98) Grupa LOTOS S.A. Commodity swap Mar Nov Nov (564) 715 (132) Grupa LOTOS S.A. Commodity swap Apr Sep Sep , (500) Grupa LOTOS S.A. Commodity swap Apr Oct Oct , (474) Grupa LOTOS S.A. Commodity swap Apr Nov Nov , (449) Grupa LOTOS S.A. Commodity swap Apr Sep Sep (1,410)

74 Company Type of transaction Transaction execution date Beginning of the valuation period End of the valuation period Number of tonnes Price (USD/tonne) Fair value as at Dec (PLN 000) 1 Grupa LOTOS S.A. Commodity swap Apr Oct Oct (1,410) Grupa LOTOS S.A. Commodity swap Apr Nov Nov (1,410) Grupa LOTOS S.A. Commodity swap Dec Mar Mar , (62) Grupa LOTOS S.A. Commodity swap Dec Apr Apr , (91) Grupa LOTOS S.A. Commodity swap Dec May May , (88) Grupa LOTOS S.A. Commodity swap Dec Jun Jun , (71) Grupa LOTOS S.A. Commodity swap Dec Jul Jul , (58) Grupa LOTOS S.A. Commodity swap Dec Aug Aug , (54) Grupa LOTOS S.A. Commodity swap Dec Sep Sep , (40) Grupa LOTOS S.A. Commodity swap Dec Oct Oct , (25) Grupa LOTOS S.A. Commodity swap Dec Mar Mar (367) Grupa LOTOS S.A. Commodity swap Dec Apr Apr (621) Grupa LOTOS S.A. Commodity swap Dec May May (705) Grupa LOTOS S.A. Commodity swap Dec Jun Jun (705) Grupa LOTOS S.A. Commodity swap Dec Jul Jul (705) Grupa LOTOS S.A. Commodity swap Dec Aug Aug (846) 787 (8) Grupa LOTOS S.A. Commodity swap Dec Sep Sep (846) 787 (13) Grupa LOTOS S.A. Commodity swap Dec Oct Oct (846) 787 (16) 61,400 TOTAL, including (2,045) positive 1,472 negative (3,517) 1) Fair value of commodity swaps is established by reference to future cash flows from the executed transactions, calculated on the basis of the difference between the average market price and the transaction price. The fair value has been established on the basis of prices quoted on active markets, as provided by an external consultancy (Level 2 in the fair value hierarchy). 73

75 Risk related to prices of carbon (CO 2) allowances The risk related to prices of carbon dioxide (CO 2) allowances is managed in line with the assumptions set forth in The Strategy for Managing the Risk Related to Prices of carbon dioxide (CO 2) Allowances by Grupa LOTOS S.A. The period covered by the management is determined by the individual phases of the Kyoto protocol; currently, it is the period until the end of A position limit is defined based on the number of allowances granted for a given phase. The position in a given phase comprises the aggregate of positions for individual years within the phase. The maximum loss limit is defined based on the Company s equity. Depending on the market situation and allowances granted, the Company maintains an appropriate position in carbon allowances by entering into financial transactions. The basic risk map takes into account the allowances granted and the carbon dioxide (CO 2) emissions planned for a given phase, which can be reliably determined both with respect to the existing installations and the installations which are planned to be constructed. Underlying CO 2 allowances position as at December 31st 2011: EUA CER TOTAL Period (tonnes) (tonnes) (tonnes) Phase II ( ) (133,535) 17,873 (115,662) Underlying CO 2 allowances position as at December 31st 2010: EUA CER TOTAL Period (tonnes) (tonnes) (tonnes) Phase II ( ) (55,924) 49,863 (6,061) In 2011, the Company entered into EUA/CER swap transactions, as that was justified by the spread between these two types of emission allowances. Open CO 2 allowances transactions as at December 31st 2011: Company Type of transaction Transaction execution date Transaction settlement date No. of CO 2 allowances Price (EUR/tonne) Fair value as at Dec (PLN 000) 2 Grupa LOTOS S.A. CER Futures Jan Dec , (148) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (299) Grupa LOTOS S.A. CER Futures Jan Dec , (1,017) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (120) Grupa LOTOS S.A. CER Futures Jan Dec , (749) Grupa LOTOS S.A. CER Futures Jan Dec , (749) Grupa LOTOS S.A. CER Futures Jan Dec , (300) Grupa LOTOS S.A. CER Futures Jan Dec , (900) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (303) Grupa LOTOS S.A. CER Futures Jan Dec , (756) Grupa LOTOS S.A. CER Futures Jan Dec , (1,513) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (424) Grupa LOTOS S.A. CER Futures Jan Dec , (1,060) Grupa LOTOS S.A. CER Futures Jan Dec , (1,515) Grupa LOTOS S.A. CER Futures Jan Dec , (637) Grupa LOTOS S.A. CER Futures Jan Dec , (1,183) Grupa LOTOS S.A. CER Futures Jan Dec , (152) 74

76 Company Type of transaction Transaction execution date Transaction settlement date No. of CO 2 allowances Price (EUR/tonne) Fair value as at Dec (PLN 000) 2 Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (152) Grupa LOTOS S.A. CER Futures Jan Dec , (304) Grupa LOTOS S.A. CER Futures Jan Dec , (761) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (30) Grupa LOTOS S.A. CER Futures Jan Dec , (91) Grupa LOTOS S.A. CER Futures Jan Dec , (152) Grupa LOTOS S.A. CER Futures Jan Dec , (152) Grupa LOTOS S.A. CER Futures Jan Dec , (183) Grupa LOTOS S.A. CER Futures Jan Dec , (305) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (31) Grupa LOTOS S.A. CER Futures Jan Dec , (61) Grupa LOTOS S.A. CER Futures Jan Dec , (92) Grupa LOTOS S.A. CER Futures Jan Dec , (244) Grupa LOTOS S.A. CER Futures Jan Dec , (732) Grupa LOTOS S.A. EUA Futures Aug Dec (14,000) Grupa LOTOS S.A. EUA Futures Aug Dec (25,000) Grupa LOTOS S.A. EUA Futures Aug Dec (51,000) 12 1,142 Grupa LOTOS S.A. EUA Futures Aug Dec (50,000) 12 1,122 Grupa LOTOS S.A. EUA Futures Aug Dec (50,000) 12 1,016 Grupa LOTOS S.A. EUA Futures Aug Dec (6,000) Grupa LOTOS S.A. EUA Futures Aug Dec (44,000) Grupa LOTOS S.A. EUA Futures Aug Dec (5,000) Grupa LOTOS S.A. EUA Futures Aug Dec (14,000) Grupa LOTOS S.A. EUA Futures Aug Dec (50,000) 12 1,027 Grupa LOTOS S.A. EUA Futures Aug Dec (9,000) Grupa LOTOS S.A. EUA Futures Aug Dec (11,000) Grupa LOTOS S.A. EUA Futures Aug Dec (11,000) Grupa LOTOS S.A. EUA Futures Aug Dec (11,000) Grupa LOTOS S.A. EUA Futures Aug Dec (39,000) Grupa LOTOS S.A. EUA Futures Dec Dec (15,000) 7 (34) 110,000 TOTAL, including: (7,303) positive 8,304 negative (15,607) 75

77 Open CO 2 allowances transactions as at December 31st 2010: Company Type of transaction Transaction execution date Transaction settlement date No. of CO 2 allowances Price (EUR/tonne) Fair value as at Dec (PLN 000) 2 Grupa LOTOS S.A. CER Futures Nov Dec , (10) Grupa LOTOS S.A. CER Futures Dec Dec , (40) Grupa LOTOS S.A. CER Futures Dec Dec , (201) Grupa LOTOS S.A. CER Futures Dec Dec , (162) Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 15 3 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 15 3 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 15 3 Grupa LOTOS S.A. EUA Futures Dec Dec (8,000) Grupa LOTOS S.A. CER Futures May Dec , (19) Grupa LOTOS S.A. EUA Futures Dec Dec (11,000) Grupa LOTOS S.A. EUA Futures Dec Dec (24,000) Grupa LOTOS S.A. EUA Futures Dec Dec (30,000) Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 15 3 Grupa LOTOS S.A. EUA Futures Dec Dec (5,000) Grupa LOTOS S.A. EUA Futures Dec Dec (14,000) Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (35,000) Grupa LOTOS S.A. CER Futures Dec Dec , (1) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (15) Grupa LOTOS S.A. EUA Futures Dec Dec (10,000) Grupa LOTOS S.A. EUA Futures Dec Dec (10,000) Grupa LOTOS S.A. EUA Futures Dec Dec (10,000) Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 4 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 3 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 3 Grupa LOTOS S.A. EUA Futures Dec Dec (1,000) 16 3 Grupa LOTOS S.A. EUA Futures Dec Dec (10,000) Grupa LOTOS S.A. CER Futures Dec Dec , (3) Grupa LOTOS S.A. CER Futures Dec Dec , (3) Grupa LOTOS S.A. CER Futures Dec Dec , (3) Grupa LOTOS S.A. CER Futures Dec Dec , (1) Grupa LOTOS S.A. CER Futures Dec Dec , (1) Grupa LOTOS S.A. CER Futures Dec Dec , (1) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (0) Grupa LOTOS S.A. CER Futures Dec Dec , (3) Grupa LOTOS S.A. CER Futures Dec Dec , Grupa LOTOS S.A. CER Futures Dec Dec , Grupa LOTOS S.A. CER Futures Dec Dec ,

78 Company Type of transaction Transaction execution date Transaction settlement date No. of CO 2 allowances Price (EUR/tonne) Fair value as at Dec (PLN 000) 2 Grupa LOTOS S.A. CER Futures Dec Dec , Grupa LOTOS S.A. CER Futures Dec Dec , Grupa LOTOS S.A. CER Futures Dec Dec , Grupa LOTOS S.A. CER Futures Dec Dec , ,000 TOTAL, including: 152 positive 615 negative (463) 2) Fair value of futures contracts for carbon dioxide (CO2) allowances (EUA, CER) is established by reference to the difference between the market price, quoted by the Intercontinental Exchange (ICE) for the valuation date, and the transaction price (Level 1 in the fair value hierarchy). Total CO 2 allowances position as at December 31st 2011: EUA position (tonnes) CER position (tonnes) Period Underlying Transaction Total Underlying Transaction Total Phase II ( ) (133,535) (405,000) (538,535) 17, , ,837 Total CO 2 allowances position as at December 31st 2010: EUA position (tonnes) CER position (tonnes) Period Underlying Transaction Total Underlying Transaction Total Phase II ( ) (55,924) (182,000) (237,924) 49, , ,863 77

79 Currency risk Currency risk is managed in line with the assumptions stipulated in The Strategy of Currency Risk Management at Grupa LOTOS S.A. The exposure management horizon is connected with the introduction of a budget roll over into four quarters in advance as a permanent component of the planning activities at the Company. The four quarter period is treated as the basis for determining the exposure management horizon. The base map of currency positions takes into account principally the volumes and price formulae for purchases of raw materials and sales of products, investments, borrowings denominated in foreign currencies, as well as valuation of derivatives, and may be adjusted for a ratio reflecting the volatility in the prices of raw materials and petroleum products. The strategy provides for the calculation of the following limits: position limit (open currency transactions must not increase the Company s underlying position and must not exceed the volume of the underlying position); maximum loss and liquidity limits are expressed as a percentage of the Company s equity (the liquidity limit is calculated in order to reduce the risk of excessive accumulation of financial transactions over a limited period of time, the settlement of which could result in liquidity and operating problems); gross total and global currency position limits applicable for the entire management period as well as for sub-periods. For the purpose of the limits calculation, equity is remeasured on a quarterly basis. Moreover, when a loss on risk management exceeds a pre-defined threshold, limits are immediately revised in order to prevent any significant exceeding of the maximum loss limit set by the Management Board of Grupa LOTOS S.A. The strategy allows for the possibility of consolidated risk management at the Group level. USD is used in market price quotations for crude oil and petroleum products. For this reason it has been decided that USD is the most appropriate currency for contracting and repaying long-term facilities to finance the 10+ Programme, as such an approach contributes to reducing the structurally long position, and consequently to reducing the strategic currency risk. Pursuant to the agreement on financing of the 10+ Programme, Grupa LOTOS S.A. as of June 30th 2011 is no longer obliged to maintain a specified level of hedge ratio for the currency risk (EUR/USD and USD/PLN), which arose in connection with the fact that the currency in which the investment projects were financed was different from the currencies in which project execution contracts were denominated. Underlying currency position as at December 31st 2011: Period USD EUR ,678,817 (254,123,754) Underlying currency position as at December 31st 2010: Period USD EUR ,577,414 (266,115,943) Grupa LOTOS S.A. actively manages its currency position and changes it depending on the expected market developments. 78

80 Open currency transactions as at December 31st 2011: Company Type of transaction Transaction execution date Transaction settlement date Currency pair Amount in base currency Rate Amount in quote currency Fair value as at Dec (PLN 000) 3 Grupa LOTOS S.A. Currency forward May Feb EUR/USD 15,000, (20,953,500) (5,330) Grupa LOTOS S.A. Currency forward May Mar EUR/USD 10,000, (13,950,500) (3,473) Grupa LOTOS S.A. Currency forward May Jan EUR/USD 5,000, (7,008,000) (1,863) Grupa LOTOS S.A. Currency forward May Jan EUR/USD 10,000, (14,000,000) (3,671) Grupa LOTOS S.A. Currency forward Aug Mar USD/PLN (10,000,000) ,982,000 (5,381) Grupa LOTOS S.A. Currency forward Aug Mar USD/PLN (10,000,000) ,994,000 (5,366) Grupa LOTOS S.A. Currency forward Aug Feb USD/PLN (6,000,000) ,337,000 (3,236) Grupa LOTOS S.A. Currency forward Aug May EUR/USD 20,000, (28,878,600) (10,190) Grupa LOTOS S.A. Currency forward Aug Mar EUR/USD 11,000, (15,878,500) (5,636) Grupa LOTOS S.A. Currency forward Aug Apr EUR/USD 10,000, (14,412,000) (5,019) Grupa LOTOS S.A. Currency forward Aug Apr EUR/PLN 12,000, (50,559,600) 3,010 Grupa LOTOS S.A. Currency forward Sep Mar USD/PLN (10,000,000) ,350,000 (1,049) Grupa LOTOS S.A. Currency forward Dec Mar USD/PLN (20,000,000) ,332, Grupa LOTOS S.A. Currency forward Dec Oct USD/PLN (15,000,000) ,680,005 1,279 Grupa LOTOS S.A. Currency forward Dec Aug USD/PLN (15,000,000) ,538,000 1,291 Grupa LOTOS S.A. Currency forward Dec Oct USD/PLN (20,000,000) ,612,000 1,735 Grupa LOTOS S.A. Currency forward Dec Apr USD/PLN (20,000,000) ,734,000 1,705 Grupa LOTOS S.A. Currency forward Dec Oct USD/PLN (20,000,000) ,524,000 1,640 Grupa LOTOS S.A. Currency forward Dec May USD/PLN (20,000,000) ,810,000 1,615 Grupa LOTOS S.A. Currency forward Dec Oct USD/PLN (15,000,000) ,693,505 1,279 Grupa LOTOS S.A. Currency forward Dec Aug USD/PLN (15,000,000) ,535,000 1,291 Grupa LOTOS S.A. Currency forward Dec May USD/PLN (10,000,000) ,418, Grupa LOTOS S.A. Currency forward Dec Sep EUR/USD 20,000, (26,142,800) (673) Grupa LOTOS S.A. Currency forward Dec Nov EUR/USD 20,000, (26,185,000) (687) Grupa LOTOS S.A. Currency forward Dec Jun EUR/USD 20,000, (26,115,000) (743) Grupa LOTOS S.A. Currency forward Dec Aug EUR/USD 20,000, (26,133,000) (705) Grupa LOTOS S.A. Currency forward Dec Oct EUR/USD 20,000, (26,118,800) (542) Grupa LOTOS S.A. Currency forward Dec Jul EUR/PLN 20,000, (92,924,000) (2,936) Grupa LOTOS S.A. Currency forward Dec Jan USD/PLN 103,000, (362,127,400) (10,132) Grupa LOTOS S.A. Currency forward Dec Dec EUR/USD 10,000, (13,073,500) (248) Grupa LOTOS S.A. Currency forward Dec Jan EUR/PLN 8,000, (36,478,800) (1,138) 79

81 Company Type of transaction Transaction execution date Transaction settlement date Currency pair Amount in base currency Rate Amount in quote currency Fair value as at Dec (PLN 000) 3 Grupa LOTOS S.A. Currency forward Dec Feb EUR/USD 5,000, (6,515,125) (177) Grupa LOTOS S.A. Currency forward Dec Feb EUR/USD 5,000, (6,513,500) (172) Grupa LOTOS S.A. Currency forward Dec Apr USD/PLN (6,000,000) ,809, Grupa LOTOS S.A. Currency forward Dec Jan EUR/USD 10,100, (13,205,649) (514) Grupa LOTOS S.A. Currency forward Dec Jan EUR/USD (2,000,000) 1.3 2,582,800 (7) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN (10,500,000) ,770,350 (112) Grupa LOTOS S.A. Currency forward Dec Jan EUR/PLN (3,650,000) ,211, Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN (19,600,000) ,924,200 (57) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN (25,000,000) ,150, Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN (11,000,000) ,766, TOTAL, including: (51,799) Open currency transactions as at December 31st 2010: positive 17,258 negative (69,057) Company Type of transaction Transaction execution date Transaction settlement date Currency pair Amount in base currency Rate Amount in quote currency Fair value as at Dec (PLN 000) 3 Grupa LOTOS S.A. Currency forward May Feb EUR/USD 5,000, (6,396,500) 840 Grupa LOTOS S.A. Currency forward May Feb EUR/USD 10,000, (12,795,500) 1,671 Grupa LOTOS S.A. Currency forward May Mar EUR/USD 5,000, (6,398,500) 831 Grupa LOTOS S.A. Currency forward May Mar EUR/USD 10,000, (12,800,000) 1,652 Grupa LOTOS S.A. Currency forward May Mar USD/PLN (5,000,000) ,282,500 1,384 Grupa LOTOS S.A. Currency forward May Mar USD/PLN (15,000,000) ,759,000 4,060 Grupa LOTOS S.A. Currency forward May Jan USD/PLN 10,000, (33,293,000) (3,635) Grupa LOTOS S.A. Currency forward May Jan USD/PLN 6,000, (20,019,600) (2,223) Grupa LOTOS S.A. Currency forward May Jan USD/PLN 20,000, (61,930,000) (2,610) Grupa LOTOS S.A. Currency forward May Jan EUR/PLN 2,500, (10,118,250) (211) Grupa LOTOS S.A. Currency forward Aug May EUR/PLN 4,500, (18,204,750) (230) Grupa LOTOS S.A. Currency forward Aug May EUR/USD 2,500, (3,284,500) 160 Grupa LOTOS S.A. Currency forward Aug Jun EUR/PLN 10,000, (40,510,000) (482) Grupa LOTOS S.A. Currency forward Sep Jan EUR/PLN 9,000, (36,013,500) (357) 80

82 Company Type of transaction Transaction execution date Transaction settlement date Currency pair Amount in base currency Rate Amount in quote currency Fair value as at Dec (PLN 000) 3 Grupa LOTOS S.A. Currency forward Oct Apr EUR/USD 9,000, (12,330,000) (914) Grupa LOTOS S.A. Currency forward Nov Jan EUR/USD 15,000, (20,830,650) (2,338) Grupa LOTOS S.A. Currency forward Nov Mar EUR/USD 10,000, (13,866,000) (1,504) Grupa LOTOS S.A. Currency forward Nov Apr EUR/USD 15,000, (20,808,480) (2,291) Grupa LOTOS S.A. Currency forward Nov May EUR/USD 10,000, (13,855,000) (1,480) Grupa LOTOS S.A. Currency forward Nov Jul EUR/USD 15,000, (20,777,250) (2,221) Grupa LOTOS S.A. Currency forward Nov Sep EUR/USD 20,000, (27,647,000) (2,814) Grupa LOTOS S.A. Currency forward Dec Feb USD/PLN 31,000, (93,889,700) (1,745) Grupa LOTOS S.A. Currency forward Dec May USD/PLN (42,000,000) ,785,000 2,152 Grupa LOTOS S.A. Currency forward Dec Jun USD/PLN 42,000, (128,076,900) (2,156) Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 7,000, (21,466,200) (436) Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 10,000, (30,622,000) (580) Grupa LOTOS S.A. Currency forward Dec Sep USD/PLN (31,000,000) ,154,500 1,620 Grupa LOTOS S.A. Currency forward Dec Aug USD/PLN (38,000,000) ,557,400 2,160 Grupa LOTOS S.A. Currency forward Dec Aug USD/PLN (19,800,000) ,489, Grupa LOTOS S.A. Currency forward Dec Aug EUR/PLN 21,000, (85,915,200) (1,530) Grupa LOTOS S.A. Currency forward Dec Jan USD/PLN (34,100,000) ,916,340 2,803 Grupa LOTOS S.A. Currency forward Dec May USD/PLN (30,000,000) ,001,000 2,255 Grupa LOTOS S.A. Currency forward Dec Jun USD/PLN (30,000,000) ,215,500 2,324 Grupa LOTOS S.A. Currency forward Dec Jun EUR/PLN 8,000, (32,352,000) (335) Grupa LOTOS S.A. Currency forward Dec Jun USD/PLN (40,000,000) ,960,000 2,956 Grupa LOTOS S.A. Currency forward Dec Jul EUR/PLN 5,000, (20,256,000) (205) Grupa LOTOS S.A. Currency forward Dec Oct EUR/USD 10,000, (13,129,300) 634 Grupa LOTOS S.A. Currency forward Dec Oct EUR/USD 10,000, (13,147,500) 578 Grupa LOTOS S.A. Currency forward Dec Nov EUR/USD 20,000, (26,259,000) 1,254 Grupa LOTOS S.A. Currency forward Dec Dec USD/PLN 30,000, (93,460,500) (2,321) Grupa LOTOS S.A. Currency forward Dec Dec USD/PLN 30,000, (93,426,000) (2,281) Grupa LOTOS S.A. Currency forward Dec Dec EUR/PLN 20,000, (81,820,000) (749) Grupa LOTOS S.A. Currency forward Dec Jan USD/PLN (34,000,000) ,436,500 2,527 Grupa LOTOS S.A. Currency forward Dec Apr USD/PLN 20,000, (61,160,000) (1,514) Grupa LOTOS S.A. Currency forward Dec May USD/PLN (20,000,000) ,298,000 1,495 Grupa LOTOS S.A. Currency forward Dec Aug USD/PLN (15,000,000) ,260,000 1,114 Grupa LOTOS S.A. Currency forward Dec Nov USD/PLN 15,000, (46,605,000) (1,144) 81

83 Company Type of transaction Transaction execution date Transaction settlement date Currency pair Amount in base currency Rate Amount in quote currency Fair value as at Dec (PLN 000) 3 Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 7,000, (21,514,500) (490) Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 10,000, (30,734,000) (696) Grupa LOTOS S.A. Currency forward Dec Feb EUR/USD 4,000, (5,259,400) 250 Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 5,000, (15,368,000) (346) Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 8,000, (24,588,800) (552) Grupa LOTOS S.A. Currency forward Dec Jan EUR/USD 10,000, (13,166,000) 578 Grupa LOTOS S.A. Currency forward Dec Jan USD/PLN (10,000,000) ,223, Grupa LOTOS S.A. Currency forward Dec Jan EUR/USD 3,500, (4,630,815) 134 Grupa LOTOS S.A. Currency forward Dec Jan USD/PLN (1,000,000) 3.0 3,016, Grupa LOTOS S.A. Currency forward Dec Jul USD/PLN 13,000, (39,679,900) (622) Grupa LOTOS S.A. Currency forward Dec Dec USD/PLN (13,000,000) ,033, Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 3,000, (8,998,500) (106) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 10,000, (29,979,000) (339) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 4,000, (12,000,400) (144) Grupa LOTOS S.A. Currency spot Dec Jan EUR/PLN 1,000, (3,957,000) 3 Grupa LOTOS S.A. Currency spot Dec Jan EUR/PLN 2,000, (7,909,000) 12 Grupa LOTOS S.A. Currency spot Dec Jan EUR/PLN 1,000, (3,950,000) 10 Grupa LOTOS S.A. Currency spot Dec Jan EUR/PLN 600, (2,382,600) (6) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 10,000, (29,642,000) (1) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 5,000, (14,820,500) - Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 4,000, (11,901,200) (45) Grupa LOTOS S.A. Currency spot Dec Jan USD/PLN 5,000, (14,821,500) (1) TOTAL, including: (4,114) positive 37,540 negative (41,654) 3) Fair value of currency spots and forwards is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated on the basis of the fixing rate quotations of the National Bank of Poland and the interest rate curve implied in fx swaps (Level 2 in the fair value hierarchy). 82

84 Total currency position as at December 31st 2011: USD/PLN position EUR/PLN position Period Underlying Transaction Total Underlying Transaction Total ,678,817 (457,600,674) 11,078,143 (254,123,754) 245,450,000 (8,673,754) Total currency position as at December 31st 2010: USD/PLN position EUR/PLN position Okres Underlying Transaction Total Underlying Transaction Total ,577,414 (320,281,395) 2,296,019 (266,115,943) 268,600,000 2,484,057 83

85 Interest rate risk The base map of interest rate positions is related to the cash flows which depend on future interest rates; in particular it is based on the planned schedule of repayments under the facility for financing of inventories and implementation of the 10+ Programme and the associated interest calculated on the basis of a floating LIBOR USD rate. The structure of limits is based on the underlying s nominal value hedge ratio. In a long-term perspective, a partial risk mitigation effect was achieved through the choice of a fixed interest rate for the SACE sub-tranche under the term facility granted to finance the 10+ Programme described in Note 29. The obligation to maintain a specified hedge ratio for the interest rate risk connected with the LIBOR USD floating interest rate on the facility contracted to finance the 10+ Programme expired on June 30th 2011 as per the agreement on the financing of the 10+ Programme, Underlying interest rate position as at December 31st 2011 (USD 000): Period Underlying position 2012 (1,864,944) 2013 (1,373,687) 2014 (1,267,629) 2015 (1,143,396) 2016 (1,012,073) 2017 (876,641) 2018 (728,733) 2019 (562,495) 2020 (395,211) Underlying interest rate position as at December 31st 2010 (USD 000): Period Underlying position 2011 (1,913,471) 2012 (1,831,610) 2013 (1,373,687) 2014 (1,267,629) 2015 (1,143,396) 2016 (1,012,072) 2017 (876,641) 2018 (728,732) 2019 (562,495) 2020 (395,211) As at December 31st 2011, the Company holds open hedging transactions executed in 2008 and 2009 to partially mitigate the interest rate risk which is not covered by mandatory hedges. 84

86 Open interest rate transactions as at December 31st 2011: Company Type of transaction Transaction execution date Beginning of period End of period Notional amount (USD) Company pays Company receives Fair value as at Dec (PLN 000) 4 Grupa LOTOS S.A. Interest rate swap (IRS) Sep Oct Jan ,000, % 6M Libor (22,535) Grupa LOTOS S.A. Interest rate swap (IRS) Sep Jan Jan ,000, % 6M Libor (20,643) Grupa LOTOS S.A. Interest rate swap (IRS) Sep Jan Jan (100,000,000) 6M Libor 4.0% 23,738 Grupa LOTOS S.A. Interest rate swap (IRS) Oct Jan Jan ,000, % 6M Libor (20,437) Grupa LOTOS S.A. Interest rate swap (IRS) Oct Jul Jan ,000, % 6M Libor (18,262) Grupa LOTOS S.A. Interest rate swap (IRS) Mar Jul Jan ,000, % 6M Libor (40,338) Grupa LOTOS S.A. Interest rate swap (IRS) Apr Jul Jan ,000, % 6M Libor (22,009) Grupa LOTOS S.A. Interest rate swap (IRS) May Jul Jan ,000, % 6M Libor (27,910) TOTAL, including: (148,396) positive 23,738 negative (172,134) Open interest rate transactions as at December 31st 2010: Company Type of transaction Transaction execution date Beginning of period End of period Notional amount (USD) Company pays Company receives Fair value as at Dec (PLN 000) 4 Grupa LOTOS S.A. Interest rate swap (IRS) May Oct Jun ,000, % 6M LIBOR (6,650) Grupa LOTOS S.A. Interest rate swap (IRS) May Oct Jun ,000, % 6M LIBOR (6,908) Grupa LOTOS S.A. Interest rate swap (IRS) May Oct Jun ,000, % 6M LIBOR (14,220) Grupa LOTOS S.A. Interest rate swap (IRS) Jun Jul Jun ,000, % 6M LIBOR (19,599) Grupa LOTOS S.A. Interest rate swap (IRS) Jun Oct Jun ,000, % 6M LIBOR (30,735) Grupa LOTOS S.A. Interest rate swap (IRS) Jun Jan Jun ,000, % 6M LIBOR (16,943) Grupa LOTOS S.A. Interest rate swap (IRS) Jun Jul Jun ,000, % 6M LIBOR (25,768) Grupa LOTOS S.A. Interest rate swap (IRS) Sep Oct Jan ,000, % 6M LIBOR (27,521) Grupa LOTOS S.A. Interest rate swap (IRS) Sep Jan Jan ,000, % 6M LIBOR (25,060) Grupa LOTOS S.A. Interest rate swap (IRS) Sep Jan Jan (100,000,000) 6M LIBOR 4,0% 29,087 Grupa LOTOS S.A. Interest rate swap (IRS) Oct Jan Jan ,000, % 6M LIBOR (24,792) Grupa LOTOS S.A. Interest rate swap (IRS) Oct Jul Jan ,000, % 6M LIBOR (14,102) Grupa LOTOS S.A. Interest rate swap (IRS) Mar Jul Jan ,000, % 6M LIBOR (3,860) 85

87 Company Type of transaction Transaction execution date Beginning of period End of period Notional amount (USD) Company pays Company receives Fair value as at Dec (PLN 000) 4 Grupa LOTOS S.A. Interest rate swap (IRS) Apr Jul Jan ,000, % 6M LIBOR (3,444) Grupa LOTOS S.A. Interest rate swap (IRS) May Jul Jan ,000, % 6M LIBOR (8,295) SUMA (198,810) positive 29,087 negative (227,897) Company Grupa LOTOS S.A. Grupa LOTOS S.A. Type of transaction Transaction execution date Beginning of period End of period Notional amount (USD) Company pays Company receives Fair value as at Dec (PLN 000) 4 Forward rate agreement (FRA) Jan Jan Apr (100,000,000) 3M LIBOR % 655 Forward rate agreement (FRA) Apr Jan Apr ,000, % LIBOR 3M (340) TOTAL 315 positive 655 negative (340) 4) Fair value of IRSs/FRAs is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated using the zero-coupon interest rate curve based on 6M or 3M LIBOR, depending on the type of transaction (Level 2 in the fair value hierarchy). 86

88 Total interest rate position as at December 31st 2011: Period Underlying position (USD) Fixed interest rate borrowings (USD) Transaction position (USD) Total position (USD) Hedge ratio (USD) 2012 (1,864,943,750) 401,678, ,000,000 75,863,870 (887,401,755) 52% 2013 (1,373,687,500) 376,656, ,000,000 75,707,285 (721,323,965) 47% 2014 (1,267,628,750) 347,575, ,000,000 93,595,493 (626,457,632) 51% 2015 (1,143,396,250) 313,511, ,000,000 96,284,191 (533,600,184) 53% 2016 (1,012,072,500) 277,503, ,000, ,199,230 (432,369,520) 57% 2017 (876,641,250) 240,369, ,000, ,124,180 (334,147,695) 62% 2018 (728,732,500) 199,813, ,673,611 (415,245,139) 43% 2019 (562,495,000) 154,232, ,396,189 (292,866,311) 48% 2020 (395,211,250) 108,364, ,293,408 (175,553,467) 56% Total interest rate position as at December 31st 2010: Period Underlying position (USD) Fixed interest rate borrowings (USD) Transaction position (USD) Total position (USD) Hedge ratio (USD) 2011 (1,913,471,448) 415,619, ,000,000 27,709,808 (730,142,519) 62% 2012 (1,831,610,416) 401,678, ,000,000 68,602,578 (861,329,713) 53% 2013 (1,373,687,500) 376,656, ,000,000 72,506,923 (724,524,327) 47% 2014 (1,267,628,750) 347,575, ,000,000 89,910,022 (630,143,103) 50% 2015 (1,143,396,250) 313,511, ,000,000 92,393,815 (537,490,560) 53% Period Period 2016 (1,012,072,500) 277,503, ,000,000 94,878,009 (439,690,741) 57% 2017 (876,641,250) 240,369, ,000,000 94,354,545 (341,917,330) 61% 2018 (728,732,500) 199,813, ,292,185 (427,626,565) 41% 2019 (562,495,000) 154,232, ,468,228 (305,794,272) 46% 2020 (395,211,250) 108,364,375-74,265,210 (212,581,665) 46% To optimise the interest balance, the cash-pooling service for the LOTOS Group is used. The service consists in the application of favourable interest rates for debit and credit balances, which are subject to offsetting as at the end of each business day. Liquidity risk The liquidity risk management process in Grupa LOTOS S.A. consists in monitoring forecast cash flows and the portfolio of financial assets and liabilities, matching maturities of assets and liabilities, analysing working capital, optimising flows within the Group and close cooperation with business areas in order to safely and effectively allocate the liquidity. In the period covered by the budget, liquidity is monitored on an ongoing basis across the Group as part of the financial risk management. In the mid and long term, it is monitored as part of the planning process, which helps to develop a long-term financial strategy. In the area of financial risk, in addition to an active management of market risk, the Company applies the following liquidity management rules: no margins in derivatives trading on the OTC market, limited possibility of early termination of financial transactions, limits for low-liquidity spot financial instruments, credit limits for counterparties in financial and non-financial transactions, ensuring adequate quality and diversification of available financing sources, internal control processes and organisational efficiency facilitating prompt contingency response. Contractual maturities of financial liabilities as at December and December are presented below. 87

89 Maturity structure of financial liabilities as at December 31st 2011: Note Carrying amount Contractual cash flows Up to 6 months 6 12 months 1 2 years 2 5 years Over 5 years Secured bank borrowings (other than overdraft facilities) 29 6,296,610 6,556, ,920 1,568, ,927 1,306,763 3,256,577 Overdraft facilities , , , Finance lease liabilities Trade and other payables (net of public creditors) 2,848,479 2,848,479 2,848, ========= =========== =========== ========== ======== =========== ========== Total 9,317,521 9,577,693 3,143,831 1,568, ,927 1,306,763 3,256,577 ========== =========== =========== ========== ======== =========== ========== (restated) Maturity structure of financial liabilities as at December 31st 2010: Note Carrying amount Contractual cash flows Up to 6 months 6 12 months 1 2 years 2 5 years Over 5 years Secured bank borrowings (other than overdraft facilities) 29 5,478,582 5,580,121 53,271 1,295, , ,965 3,051,436 Overdraft facilities , , , Finance lease liabilities Trade and other payables (net of public creditors) 1,831,899 1,831,899 1,831, ========= =========== =========== ========== ======== =========== ========== Total 7,512,527 7,614,066 2,087,196 1,295, , ,965 3,051,436 ========== =========== =========== ========== ======== =========== ========== 88

90 Maturity structure of derivative financial instruments as at December 31st 2011: GRUPA LOTOS S.A. Note Carrying amount* Contractual cash flows Up to 6 months 6 12 months 1 2 years 2 5 years Over 5 years Commodity swap 23, Futures (CO 2emissions) 19, 23, 31.2 (7,303) (7,303) - (7,303) Currency forward and spot 23, 31.2 contracts (51,799) (51,799) (54,523) 2, Forward rate agreements 23, 31.2 (FRAs) Interest rate swap (IRS) 19, 23, 31.2 (148,396) (148,396) (40,014) 6,884 (51,537) (43,112) (20,617) ========= =========== =========== ========== ======= =========== ========== Total (207,498) (207,498) (94,537) 2,305 (51,537) (43,112) (20,617) ========== =========== =========== ========== ======= =========== ========== * Carrying amount (positive valuation of derivative financial instruments less negative valuation of derivative financial instruments) represents the fair value of derivative financial instruments. (restated) Maturity structure of derivative financial instruments as at December 31st 2010: Note Carrying amount* Contractual cash flows Up to 6 months 6 12 months 1 2 years 2 5 years Over 5 years Commodity swap 23, 31.2 (2,045) (2,045) (423) (1,622) Futures (CO 2emissions) 19, 23, Currency forward and spot 23, 31.2 contracts (4,114) (4,114) 4,044 (8,158) Forward rate agreements 23, 31.2 (FRAs) Interest rate swap (IRS) 19, 23, 31.2 (198,810) (198,810) (139,329) 1,335 (25,386) (39,215) 3,785 ========= =========== =========== ========== ======= =========== ========== Total (204,502) (204,502) (135,393) (8,410) (25,269) (39,215) 3,785 ========== =========== =========== ========== ======= =========== ========== * Carrying amount (positive valuation of derivative financial instruments less negative valuation of derivative financial instruments) represents the fair value of derivative financial instruments. 89

91 Credit risk GRUPA LOTOS S.A. Management of credit risk related to counterparties in financial transactions consists in the verification of creditworthiness of the current and potential counterparties and monitoring of credit exposure against the granted limits. The counterparties must have an appropriate credit rating, assigned by leading rating agencies, or hold guarantees from institutions meeting the minimum rating requirement. The Company enters into financial transactions with reputable firms with sound credit standing, and diversifies the group of institutions with which it cooperates. As at December 31st 2011, the concentration of credit risk with respect to a single counterparty in financial transactions did not exceed 0.02% of the Company's balance-sheet total. Given that sales are executed on a deferred-payment basis, the Company may be exposed to risk of nonpayment for products and services provided to its counterparties. As regards management of counterparty risk in non-financial transactions, all customers who request trading on credit terms are subject to credit assessment, whose results determine the level of possible credit limits. Credit risk is measured by the maximum exposure to risk of individual classes of financial assets. Carrying amounts of financial assets represent the maximum credit risk exposure. The maximum credit risk exposures as at the balance-sheet date: Note Dec Dec (restated) Shares: 6,312 6,315 - non-current 19 6,312 6,315 - current - - Deposits: 78,603 5,932 - non-current 19 38, current 23 40,497 5,932 Security deposits (margins) 19 9, Derivative financial instruments: 49,300 69,369 - non-current 19 12,098 19,408 - current 23 37,202 49,961 Loans and advances: ,165 - non-current current ,165 Trade and other receivables (net of receivables from the state budget) 2,214,326 1,721,759 Cash and cash equivalents 25 3,598 14,913 ========== ========== Total 2,362,526 1,881,451 ========== ========== In the Management Board s opinion, the risk related to non-performing financial assets is reflected by recognised impairment losses. For more information on impairment losses on financial assets, see note 12.3, 12.5 and For information on impairment losses on receivables, the age analysis of unimpaired past due receivables, as well as the analysis of concentration of credit risk related to trade receivables as at December 31st 2011 and December 31st 2010, see Note Financial instruments Description of financial instruments Financial assets and liabilities held for trading The Company discloses derivative transactions with positive fair values under financial assets held for trading. Derivative transactions with negative fair values are disclosed under financial liabilities held for trading. Financial assets and liabilities held for trading include the following types of derivatives: swaps, futures, forwards, options, interest-rate swaps, forward rate agreement. Fair value of commodity swaps is established by reference to future cash flows connected with the transactions, calculated on the basis of the difference between the average market price and the transaction price. The fair 90

92 value has been established on the basis of prices quoted on active markets, as provided by an external consultancy (Level 2 in the fair value hierarchy). Fair value of futures contracts for carbon dioxide (CO 2) allowances (EUA, CER) is established by reference to the difference between the market price quoted by the Intercontinental Exchange (ICE) for the valuation date and the transaction price (Level 1 in the fair value hierarchy). Fair value of spots and currency forwards is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated on the basis of the fixing rate quotations of the National Bank of Poland and the interest rate curve implied in fx swaps (Level 2 in the fair value hierarchy). Fair value of FRAs is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated using the zero-coupon interest rate curve based on 6M or 3M LIBOR, depending on the type of transaction. This is considered Level 2 in the fair value hierarchy. Financial assets available for sale Non-current financial assets available for sale measured at fair value as at December 31st 2011 and December 31st 2010 include mainly shares and equity interests for which there is no active market. Loans advanced and receivables Loans advanced to Rafineria Nafty GLIMAR S.A. On September 23rd 2003 and April 8th 2004, Grupa LOTOS S.A. and Rafineria Nafty GLIMAR S.A. signed loan agreements for the financing of operating and investing activities, including the Glimar Hydrocomplex project, for a total amount of PLN 90m. By December 31st 2004, Grupa LOTOS S.A. had advanced PLN 48m to Rafineria Nafty GLIMAR S.A. under these agreements. Additionally, in connection with the Letter of Comfort executed by Grupa LOTOS S.A. on February 12th 2004 for the benefit of Bank Przemysłowo-Handlowy S.A., the Company undertook commitments relating to the co-financing of the Glimar Hydrocomplex project and maintaining appropriate financial standing of Rafineria Nafty GLIMAR S.A. In the opinion of the Company s Management Board, these commitments do not represent financial liabilities as at the balance-sheet date. As at December 31st 2011 and December 31st 2010, the assets under loans advanced were fully covered by an impairment charge. Loans advanced to LOTOS Exploration and Production Norge AS On April 30th 2009, Grupa LOTOS S.A. signed an agreement to grant a loan of USD 13,000 thousand (or PLN 42,717 thousand as translated at the USD exchange rate quoted by the National Bank of Poland for April 30th 2009) to LOTOS Exploration and Production Norge AS. The loan is intended for financing of the expenditure related to the YME Production Project. The original loan repayment date was July 31st 2009, but was extended, most recently until May 30th On November 21st 2011, LOTOS Exploration and Production Norge AS repaid the principal amount of the loan and interest. The loan bore interest at a floating annual interest rate based on 3M LIBOR plus margin. On October 22nd 2010, Grupa LOTOS S.A. signed an agreement to grant a loan of USD 7,000 thousand (or PLN 20,031 thousand as translated at the mid-exchange rate for USD quoted by the National Bank of Poland for October 22nd 2010) to LOTOS Exploration and Production Norge AS. The loan is intended for financing of further implementation of the YME Production Project. The original loan repayment date was September 30th 2011, but was extended until May 30th On November 21st 2011, LOTOS Exploration and Production Norge AS repaid the principal amount of the loan and interest. The loan bore interest at a floating annual interest rate based on 3M LIBOR plus margin. LOTOS Exploration and Production Norge AS created for the benefit of Grupa LOTOS S.A. security in the form of blank promissory notes with a protest waived clause and a promissory note declaration in order to secure the repayment of the loans (including principal, interest and default interest, if any, as well as any other liabilities that may arise in connection with the execution and performance of the loan agreements). Moreover, on February 22nd 2012, Grupa LOTOS S.A. signed an agreement to grant a loan of USD 10,000 thousand (or PLN 31,635 thousand as translated at the mid-exchange rate for USD quoted by the National Bank of Poland for February 22nd 2012) to LOTOS Exploration and Production Norge AS. The loan is mainly intended for the financing of the YME Production Project. The loan principal and interest are to be repaid by January 31st 91

93 2013. The loan bears interest at a floating annual interest rate based on 3M LIBOR plus margin. LOTOS Exploration and Production Norge AS established for the benefit of Grupa LOTOS S.A. security in the form of blank promissory notes with a protest waived clause and a promissory note declaration in order to secure the repayment of the loans (including principal, interest and default interest, if any, as well as any other liabilities that may arise in connection with the execution and performance of the loan agreements). Loan advanced to LOTOS Gaz S.A. w likwidacji (in liquidation) On June 29th 2010, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 2,000 thousand to LOTOS Gaz S.A. Under annexes to the agreement, the loan principal is to be repaid by November 30th In order to secure the repayment of the loan (including principal, interest and default interest, if any, as well as any other liabilities that may arise in connection with the execution and performance of the loan agreement), LOTOS Gaz S.A. will assign a future claim for payment of the price for the sale of assets of LOTOS Gaz S.A., subject to a condition precedent that LOTOS Gaz S.A. is not discharging its obligations towards Grupa LOTOS S.A. By December 31st 2011, LOTOS Gaz S.A. w likwidacji (in liquidation) repaid PLN 1,100 thousand under the loan. On March 8th 2011, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 247 thousand to LOTOS Gaz S.A. w likwidacji (in liquidation). Under an annex to the loan agreement, the original date for repayment of loan principal was changed to June 30th In order to secure the repayment of the loan (including principal, interest and default interest, if any, as well as any other liabilities that may arise in connection with the execution and performance of the loan agreement), LOTOS Gaz S.A. w likwidacji (in liquidation) will assign a future claim for payment of the price for the sale of assets of LOTOS Gaz S.A. w likwidacji (in liquidation). On March 29th 2011, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 352 thousand to LOTOS Gaz S.A. w likwidacji (in liquidation). Under an annex to the loan agreement, the original date for repayment of loan principal was changed to June 30th In order to secure the repayment of the loan (including principal, interest and default interest, if any, as well as any other liabilities that may arise in connection with the execution and performance of the loan agreement), LOTOS Gaz S.A. w likwidacji (in liquidation) will assign a future claim for payment of the price for the sale of assets of LOTOS Gaz S.A. w likwidacji (in liquidation). On May 26th 2011, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 123 thousand to LOTOS Gaz S.A. w likwidacji (in liquidation). The date for repayment of loan principal and interest was changed to November 30th To secure the repayment of the loan, LOTOS Gaz S.A. w likwidacji (in liquidation) created for the benefit of Grupa LOTOS S.A. security in the form of a blank promissory note with a protest waived clause and a promissory note declaration. On August 5th 2011, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 160 thousand to LOTOS Gaz S.A. w likwidacji (in liquidation). The loan principal and interest are to be repaid by June 30th To secure the repayment of the loan, LOTOS Gaz S.A. w likwidacji (in liquidation) established for the benefit of Grupa LOTOS S.A. security in the form of a blank promissory note with a protest waived clause and a promissory note declaration. On October 31st 2011, Grupa LOTOS S.A. signed an agreement to grant a loan of PLN 90 thousand to LOTOS Gaz S.A. w likwidacji (in liquidation). The loan principal and interest are to be repaid by September 30th To secure the repayment of the loan, LOTOS Gaz S.A. w likwidacji (in liquidation) established for the benefit of Grupa LOTOS S.A. security in the form of a blank promissory note with a protest waived clause and a promissory note declaration. 92

94 Financial liabilities at amortised cost Financial liabilities at amortised cost include loans, overdraft facilities and liabilities under finance lease. None of the following economic events or situations requiring disclosure occurred at the Company during the financial year ended December 31st 2011: The Company did not reclassify any financial assets (IFRS 7, paragraph 12); No collateral was established to the benefit of the Company on any class of assets, which would result in credit enhancements (IFRS 7, paragraph 15); The Company did not issue any instrument that contains both the liability and equity component (IFRS 7, paragraph 17); The Company met all contractual provisions (IFRS 7, paragraph 18); Interest income in connection with impaired financial assets was recognised by the Company as immaterial (IFRS 7, paragraph 20.d); The Company did not acquire any financial assets at a price different from their fair value (IFRS 7, paragraph 28); The Company did not obtain any assets by taking possession of collateral held as security (IFRS 7, paragraph 38). None of the following economic events or situations requiring disclosure occurred at the Company during the financial year ended December 31st 2010: The Company did not reclassify any financial assets (IFRS 7, paragraph 12); No collateral was established to the benefit of the Company on any class of assets, which would result in credit enhancements (IFRS 7, paragraph 15); The Company did not issue any instrument that contains both the liability and equity component (IFRS 7, paragraph 17); The Company met all contractual provisions (IFRS 7, paragraph 18); Interest income in connection with impaired financial assets was recognised by the Company as immaterial (IFRS 7, paragraph 20.d); The Company does not apply hedge accounting as the formal requirements are not met; accordingly, changes in fair value of derivative instruments are charged against profit or loss (IFRS 7, paragraph 22); The Company did not acquire any financial assets at a price different from their fair value (IFRS 7, paragraph 28); The Company did not obtain any assets by taking possession of collateral held as security (IFRS 7, paragraph 38). 93

95 as at Dec Fair value of financial instruments Note Financial assets at fair value through profit or loss held for trading Loans and receivables Financial assets available for sale Financial liabilities at fair value through profit or loss held for trading Financial liabilities at amortised cost Shares: - - 6, ,312 - non-current , ,312 - current Deposits: - 78, ,603 - non-current 19-38, ,106 - current 23-40, ,497 Security deposits (margins) 19-9, ,637 Loans and advances: non-current current Financial assets derivative financial instruments: 49, ,300 - non-current 19 12, ,098 - current 23 37, ,202 Trade and other receivables (net of receivables from the state budget) - 2,214, ,214,326 Cash and cash equivalents - 3, ,598 Trade and other payables (net of public creditors) (2,848,479) (2,848,479) Loans: (6,469,042) (6,469,042) - non-current (4,786,893) (4,786,893) - current (1,682,149) (1,682,149) Financial liabilities (256,798) - (256,798) Lease liabilities: non-current current Derivative financial instruments: (256,798) - (256,798) - non-current (127,364) - (127,364) - current (129,434) - (129,434) ======= ======== ======= ========= ========= ========= Total 49,300 2,306,914 6,312 (256,798) (9,317,521) (7,211,793) ======= ======== ======= ========= ========= ========= As at December 31st 2011, the Company did not carry any financial assets or liabilities measured at fair value through profit or loss whose components would be designated as measured at fair value through profit or loss on initial recognition (fair value option). As at December 31st 2011, the Company did not carry any financial assets held to maturity. As at December 31st 2011, the carrying amount of loans, receivables and financial liabilities measured at amortised cost did not significantly differ from their fair value (not applicable to loans and borrowings bearing interest at a fixed rate). 79% of contracted borrowings and other debt instruments bore interest at floating rates, with interest payable in a short term. The other borrowings and debt instruments (21%) bore interest at fixed rates. As at December 31st 2011, non-current financial assets available for sale measured at fair value include mainly shares and equity interests for which there is no active market. As at December 31st 2011, the Company held no financial assets whose terms would be renegotiated due to possible default or impairment. Total 94

96 Dec (restated) The methods and assumptions adopted for the measurement of fair value of financial instruments have been described in Notes 10 and 36. Note Financial assets at fair value through profit or loss held for trading Loans and receivables Financial assets available for sale Financial liabilities at fair value through profit or loss held for trading Financial liabilities at amortised cost Shares: - - 6, ,315 - non-current , ,315 - current Deposits: - 5, ,932 - non-current current 23-5, ,932 Security deposits (margins) Loans and advances: - 62, ,165 - non-current current 23-62, ,165 Financial assets derivative financial instruments: 69, ,369 - non-current 19 19, ,408 - current 23 49, ,961 Trade and other receivables (net of receivables from the state budget) - 1,721, ,721,759 Cash and cash equivalents - 14, ,913 Trade and other payables (net of public creditors) (1,831,899) (1,831,899) Loans: (5,680,561) (5,680,561) - non-current (4,141,016) (4,141,016) - current (1,539,545) (1,539,545) Financial liabilities (273,871) (67) (273,938) Lease liabilities: (67) (67) - non-current current (67) (67) Derivative financial instruments: (273,871) - (273,871) - non-current (80,107) - (80,107) - current (193,764) - (193,764) ======= ======== ======= ========= ========= ========= Total 69,369 1,805,767 6,315 (273,871) (7,512,527) (5,904,947) ======= ======== ======= ========= ========= ========= As at December 31st 2010, the Company did not carry any financial assets or liabilities measured at fair value through profit or loss whose components would be designated as measured at fair value through profit or loss on initial recognition (fair value option). As at December 31st 2010, the Company did not carry any financial assets held to maturity. As at December 31st 2010, the carrying amount of loans, receivables and financial liabilities measured at amortised cost did not significantly differ from their fair value (not applicable to loans and borrowings bearing interest at a fixed rate). 81% of contracted borrowings and other debt instruments bore interest at floating rates, with interest payable in a short term. The borrowings and debt instruments (19%) bore interest at fixed rates. As at December 31st 2010, non-current financial assets available for sale measured at fair value include mainly shares and equity interests for which there is no active market. As at December 31st 2010, the Company held no financial assets whose terms would be renegotiated due to possible default or impairment. Total 95

97 The methods and assumptions adopted for the measurement of fair value of financial instruments have been described in Notes 10 and Items of income, expenses, gains and losses disclosed in the statement of comprehensive income by category of financial instrument Dec Note Financial assets/ liabilities at fair value through profit or loss held for trading Loans and receivables Financial assets available for sale Financial liabilities at amortised cost Interest income/(expenses) - 6,856 - (114,532) (107,676) Foreign exchange gains/(losses) - 36,304 - (640,778) (604,474) Reversal/(recognition) of impairment losses - (245) - - (245) Gains/(losses) on realisation of derivative financial instruments 12.6 Total (106,730) (106,730) Gains/(losses) on fair value measurement of derivative 12.6 financial instruments (2,995) (2,995) Gains/(losses) on fair value measurement of hedging instruments (517,631) (517,631) Gains/(losses) on sale 12.6 Total - - (1) - (1) ======== ========= ======== ======== ========= (109,725) 42,915 (1) (1,272,941) (1,339,752) ========= ======== ======== ========= ========= 96

98 Dec (restated) Interest income/(expenses) Note Financial assets/ liabilities at fair value through profit or loss held for trading Loans and receivables Financial assets available for sale Financial liabilities at amortised cost Total - 3,121 - (34,399) (31,278) Foreign exchange gains/(losses) - 4,324 - (75,008) (70,684) Reversal/(recognition) of impairment losses - (3,498) (2) - (3,500) Gains/(losses) on realisation of derivative financial instruments 12.6 (120,201) (120,201) Gains/(losses) on fair value measurement of derivative 12.6 financial instruments (73,189) (73,189) Gains/(losses) on fair value measurement of hedging instruments Gains/(losses) on sale 12.6 Total ========= ========= ======== ======== ========= (193,390) 3,947 (2) (109,407) (298,852) ========= ========= ======== ======== ========= 36.3 Sensitivity analysis with respect to market risk related to fluctuations in FX rates, interest rates and prices of carbon dioxide (CO2) emission allowances Sensitivity analysis with respect to market risk related to fluctuations in FX rates Below is presented an analysis of the Company s sensitivity to currency risk as at December 31st 2011, along with the effects on the financial performance assuming a 4% increase or decrease in the USD/PLN and EUR/PLN currency exchange rates and constant levels of all other variables. Dec Note Carrying amount in foreign currency, translated into PLN as at the balancesheet date +4% change in exchange rate, effect on year s result -4% change in exchange rate, effect on year s result USD EUR USD EUR Trade and other receivables 134,381 5, (5,300) (75) Loans and advances Deposits 23 40,497 1,620 - (1,620) - Security deposits (margins) 19 9, (385) Financial assets derivative financial instruments ,300 (27,887) 1,805 27,887 (1,805) Cash and cash equivalents 3, (3) (136) Trade and other payables (2,447,878) (96,687) (1,228) 96,687 1,228 Loans 29 (6,371,455) (102,078) (1) (11) 102,078 (1) 11 Financial liabilities derivative financial instruments 31.2 (256,798) (40,272) 41,162 40,272 (41,162) ========== =========== ======== ======= ========= Total (8,838,852) (260,001) 42, ,001 (42,324) ========== =========== ======== ========= ========= (1) taking into account the effect of cash flow hedge accounting. Assuming a 4% increase or decrease in the USD/PLN exchange rate, the effect on other comprehensive income could potentially lead to a change of PLN (156,095) 156,095 thousand in the fair value of the facilities. 97

99 Below is presented an analysis of the Company s sensitivity to currency risk as at December 31st 2010, along with the effects on the financial performance assuming a 4% increase or decrease in the USD/PLN and EUR/PLN currency exchange rates and constant levels of all other variables. Dec (restated) Note Carrying amount in foreign currency, translated into PLN as at the balancesheet date +4% change in exchange rate, effect on year s result -4% change in exchange rate, effect on year s result USD EUR USD EUR Trade and other receivables 156,464 6, (6,150) (110) Non-bank borrowings 23 62,165 2,486 - (2,486) - Deposits 23 5, (237) - Security deposits (margins) (40) Financial assets derivative financial instruments ,369 (56,694) 14,855 56,694 (14,855) Cash and cash equivalents 14, (505) (62) Trade and other payables (1,561,973) (59,343) (3,137) 59,343 3,137 Loans 29 (5,574,068) (225,982) (692) 225, Financial liabilities derivative financial instruments 31.2 (273,871) 10,783 27,526 (10,783) (27,526) Total ========== =========== ======== ======= ========= (7,100,822) (321,858) 38, ,858 (38,764) ========== =========== ======== ========= ========= Sensitivity analysis with respect to market risk related to fluctuations in interest rates Below is presented an analysis of the Company s sensitivity to interest rate risk as at December 31st 2011, assuming a 0.2% increase or decrease in the interest rate. Dec Carrying Change Note amount +0.2% -0.2% Loans and advances (2) Deposits 19, 23 78, (157) Security deposits (margins) 19 9, (19) Cash and cash equivalents 25 3,598 7 (7) Financial assets derivative financial instruments (1) 19, 23 23,738 (696) 699 Loans 29 (6,469,042) (10,247) 10,247 Finance lease liabilities Financial liabilities derivative financial instruments (1) 31.2 (172,134) 11,027 (11,151) ========== ======= ======= Total (1) Including interest rate swap (IRS) (6,524,850) 269 (390) ========== ======= ======= As at December 31st 2011, the carrying amount of financial assets and liabilities (borrowings, deposits, security deposits (margins), cash and cash equivalents, derivative financial instruments, liabilities under loans and derivative financial instruments) which are sensitive to interest rate risk amounted to PLN (6,524,850) thousand net. A 0.2% change in interest rates could potentially lead to a change in the value of financial assets and liabilities as at December 31st 2011 of PLN 269 (PLN 390) thousand net. Below is presented an analysis of the Company s sensitivity to interest rate risk as at December 31st 2010, assuming a 0.2% increase or decrease in the interest rate. 98

100 Dec (restated) Note Carrying amount Change +0.2% -0.2% Loans and advances 23 62, (124) Deposits 23 5, (12) Security deposits (margins) (2) Cash and cash equivalents 25 14, (30) Financial assets derivative financial instruments (1) 19, 23 29,742 (1,358) 1,366 Loans 29 (5,680,561) (9,288) 9,288 Finance lease liabilities 31.3 (67) (0) 0 Financial liabilities derivative financial instruments (1) 31.2 (228,237) 13,690 (13,839) ========== ======= ======= Total (5,795,115) 3,212 (3,353) ========== ======= ======= (1) Including interest rate swap (IRS) and forward rate agreements (FRAs). As at December 31st 2010, the carrying amount of financial assets and liabilities (borrowings, deposits, security deposits (margins), cash and cash equivalents, derivative financial instruments, liabilities under loans, finance lease and derivative financial instruments) which are sensitive to interest rate risk amounted to PLN (5,795,115) thousand net. A change in interest rates up or down by 0.2% could potentially lead to a change in the value of financial assets and liabilities as at December 31st 2010 of PLN 3,212 (PLN 3,353) thousand net Sensitivity analysis with respect to market risk related to fluctuations in prices of carbon dioxide (CO 2 ) emission allowances As at December 31st 2011 and December 31st 2010, the Company held futures for the purchase of carbon dioxide (CO 2) emission allowances (EUA Emissions Unit Allowance), measured at fair value. Below is presented an analysis of the Company s sensitivity to risk related to fluctuations in prices of carbon dioxide (CO 2) emission allowances as at December 31st 2011 and December 31st 2010, assuming a 10% increase or decrease in the interest rate. Carrying amount Dec Dec Change Carrying Change +10% -10% amount +10% -10% Financial assets 8,304 (1,261) 1, (867) 867 Financial liabilities (15,607) 912 (912) (463) 691 (691) ========= ======= ======= ========= ======= ======= Total (7,303) (349) (176) 176 ========= ======= ======= ========= ======= ======= 99

101 37. Employment structure The average number of employees by employee groups was as follows: Dec Dec Blue-collar employees White-collar employees =========== =========== Total 1,309 1,303 =========== =========== 38. Other information 38.1 Special rights of the State Treasury and how these rights are exercised in companies The Act on Special Rights Vested in the Minister Competent for the State Treasury and How Those Rights Should Be Exercised at Certain Companies or Groups of Companies Operating in the Power, Crude Oil and Gaseous Fuels Sectors, dated March 18th 2010 (Dz. U. No. 65, item 404) ( the Act ), introduced the institution of a special officer responsible for the protection of critical infrastructure. Under the Act, the minister competent for the State Treasury has the right to raise and objection against a resolution adopted, or any other act in law performed, by the Company s Management Board to make a disposition with respect to any of the assets included in the single list of facilities, installations, equipment, and services comprising critical infrastructure, referred to in Art. 5b.7.1 of the Polish Crisis Management Act of April 26th 2007, if such disposition constitutes a real threat for the operation, continuity of operation and integrity of critical infrastructure. The minister competent for the State Treasury may also raise an objection with respect to any resolution by the Company s governing body providing for: - dissolution of the Company, - changes in the intended use or discontinuation of use of any of the Company s assets (1) changes in the intended use or discontinuation of use of any of the Company s assets included in the single list of facilities, installations, equipment, and services comprising critical infrastructure, referred to in Art. 5b.7.1 of the Polish Crisis Management Act of April 26th 2007, - change in the Company s business profile, - sale or lease of the Company s business or its organised part, or creation of any proprietary interest therein, - adoption of the budget, plan of investment activities, or a long-term strategic plan, - relocation of the Company s registered office abroad, if the implementation of any such resolution could constitute a real threat for the operation, continuity of operation and integrity of critical infrastructure. (1) such assets comprise: - in the power sector infrastructure used for the purpose of generation or transmission of electricity; - in the oil sector infrastructure used for the purpose of production, refining, processing, storage and transmission via pipelines of crude oil and petroleum products, as well as seaports used for handling crude oil and petroleum products; - in the gaseous fuels sector infrastructure used for the purpose of production, refining, processing, storage and transmission via gas pipelines of gaseous fuels, as well as LNG terminals. In accordance with the Act, the Company s Management Board, acting in consultation with the minister competent for the State Treasury and the Head of the Government Centre for Security, has the right to appoint and remove from office a special officer responsible for critical infrastructure protection at the Company. The special officer s duties include in particular providing the minister competent for the State Treasury with information on the execution by the Company s governing bodies of any of the acts in law referred to above, providing the Head of the Government Centre for Security with information on critical infrastructure whenever requested, and in cooperation with the Head of the Government Centre for Security providing and receiving to or from other entities information on any threats to the critical infrastructure. 100

102 The special officer responsible for protection of critical infrastructure is authorised to request from company governing bodies any documents or explanations regarding the issues referred to above, and, having analysed them, is required to submit the same to the minister competent for the State Treasury and the Head of the Government Centre for Security, along with the officer s written position, including grounds, regarding any issue at hand. On July 11th 2011, Grupa LOTOS S.A. received a notification to the effect that its assets have been included in the list of assets, facilities, installations, equipment, and services comprising critical infrastructure. On August 23rd 2011, the Management Board of Grupa LOTOS S.A. appointed a special officer responsible for protection of critical infrastructure Implementation of the National Indicative Target (NCW) in accordance with the Act on Biocomponents and Liquid Biofuels In Poland, the biocomponent-related matters are regulated under a number of legal acts prepared within the legal framewrok created by the European Union's directives, by way of the direct transposition thereof in the Polish law: - Act on Biocomponents and Liquid Biofuels dated August 25th 2006, Dz.U. of 2006, No. 169, item 1199; - Act on Monitoring and Control of Fuel Quality dated August 25th 2006, Dz.U. of 2006 No. 169, item 1200, as amended; - Act Amending the Act on Monitoring and Control of Fuel Quality and certain other acts dated May 27th 2011, Dz.U. No. 153, item 902; - Regulation of the Polish Council of Ministers concerning the National Indicative Targets for dated June 15th 2007, Dz.U. No Pursuant to the provisions of the Act on Biocomponents and Liquid Biofuels, Grupa LOTOS S.A. is obliged to implement the National Indicative Target through achieving the minimum required share of biocomponents and other renewable fuels in the total volume of sold, disposed of otherwise or used for its own needs liquid fuels and liquid biofuels, expressed in percent of energy content at individual levels in accordance with the binding regulation: % 4.6% 5.75% 6.2% 6.65% 7.10% Grupa LOTOS S.A. implements the National Indicative Targets with liquid fuels and liquid biofuels for which quality requirements are stipulated in the Act on Amending the Act on Monitoring and Control of Fuel Quality and certain other acts, that is for: - BB gasolines, known as E-95/E98 gasolines, containing up to 5% v/v of pure bioethanol or bioethanol in ETBE, - diesel oils known as B-7 oils, containing up to 7% v/v of FAME(Fatty Acid Methyl Esters), - B % higher fatty acid esters, which are intrinsic fuels. 39. Capital management The objective of Grupa LOTOS S.A. s financial policy is to maintain long-term liquidity, while using an appropriate level of financial leverage to support the achievement of the principal goal of maximising the return on equity for shareholders. This is achieved by striving to develop the desired capital structure. Grupa LOTOS S.A. monitors its financing structure using a debt to equity ratio calculated as net debt by equity. 101

103 Net debt is the sum of interest-bearing borrowings less cash and cash equivalents. Note Dec Dec (restated) Non-current interest-bearing borrowings 29 4,786,893 4,141,016 Current interest-bearing borrowings 29 1,682,149 1,539,545 Cash and cash equivalents 25 (3,598) (14,913) ========== ========== Net debt 6,465,444 5,665,648 ========== ========== Total equity 5,833,442 5,945,053 ========== ========== Net debt to equity The Group monitors its financing structure in order to achieve the goal set in Strategy for the LOTOS Group for the years , providing for a reduction of debt in order to achieve a debt to equity ratio of no more than 0.4 at the end of the Strategy term. 40. Material events subsequent to the balance-sheet date 1. On January 10th 2012, 100% of shares in LOTOS Parafiny Sp. z o.o. were sold to a third party, namely to Krokus Chem Sp. z o.o., in which Fundusz Nova Polonia Natexis LPII and the management staff of LOTOS Parafiny Sp. z o.o. hold interests. On November 30th 2011, Grupa LOTOS S.A. and Krokus Chem Sp. z o.o. signed a preliminary agreement to sell 100% of shares in LOTOS Parafiny Sp. z o.o. (see Note 27 to these financial statements). As an additional element of the transaction, on November 29th 2011 the parties executed a seven-year agreement on supply of slack waxes by Grupa LOTOS S.A. to LOTOS Parafiny Sp. z o.o. The agreement was concluded for a period from January 1st 2012 to December 31st 2018 and its estimated net value is PLN 780m. The maximum net value of contractual penalties is PLN 98m. The agreement does not contain any provisions which would prevent the parties from seeking additional compensation above the contractual penalties. The other terms and conditions of the contract do not differ from the terms and conditions commonly applied in agreements of such type. 2. On February 2nd 2012, the increase in the share capital of LOTOS Petrobaltic S.A. was registered. In exercise of its pre-emptive rights, on December 15th 2011 Grupa LOTOS S.A. subscribed for new Series C shares. In connection with the issue of 280,000 registered Series C shares with a value of PLN 10 per share, the share capital of LOTOS Petrobaltic S.A. was increased by PLN 2,800 thousand, i.e. from PLN 96,600 thousand to PLN 99,400 thousand. Grupa LOTOS S.A. was allocated 279,996 shares. Following registration of the share capital increase, Grupa LOTOS S.A. holds a 99.95% interest in LOTOS Petrobaltic S.A. 102

104 41. Signatures of the Management Board members and the person responsible for keeping the accounting books of Grupa LOTOS S.A. President of the Management Board, Chief Executive Officer Vice-President of the Management Board, Chief Financial Officer Paweł Olechnowicz Vice-President of the Management Board, Chief Operation Officer Mariusz Machajewski Vice-President of the Management Board, Chief Commercial Officer Marek Sokołowski Chief Accountant Maciej Szozda Tomasz Południewski 103