Integrated Annual Report of LOTOS Capital Group 2015

35.1 Material court, arbitration or administrative proceedings and other risks of the Parent or its subsidiaries

Material court proceedings to which the Parent is a party 

Proceedings brought by PETROECCO JV Sp. z o.o. seeking compensation for losses incurred as a result of monopolistic practices

In May 2001, PETROECCO JV Sp. z o.o. brought an action against the Company seeking the court’s decision awarding it PLN 6,975 thousand (plus statutory interest from May 1st 1999) as compensation for losses incurred as a result of the Company’s monopolistic practices favouring some customers by fulfilling their orders to a disproportionately larger 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 was also ordered to abandon the monopolistic practices pursuant to a decision of October 22nd 1997 issued by the Provincial Court of Warsaw – the Anti-Monopoly Court.

However, following the Company’s objection referring to the statute of limitation, this decision was overruled in 2003 and remanded for re-examination. The Company questioned whether any damage had been 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. As a result of further hearings, after evidence was taken based on an opinion of the expert witness of Instytut Nafty i Gazu (Oil and Gas Institute) of Kraków, which was favourable to Grupa LOTOS S.A., in 2013 the action filed by PETROECCO J. Sp. z o.o. was dismissed by the Court in its entirety. In January 2015, PETROECCO JV Sp. z o.o. filed a cassation appeal against the ruling of the court of second instance, again favourable to the Company. The Supreme Court refused to examine the cassation complaint filed by PETROECCO JV Sp. z o.o. As at the date of approval of these financial statements, the case is pending.

Assuming that there was little risk of an unfavourable outcome of the case, Grupa LOTOS S.A. did not recognise any provisions for potential liabilities related to the case.

Administrative and administrative court proceedings initiated upon a motion to declare invalid a decision expropriating certain property for the benefit of the State Treasury

The Company is a party to the proceedings against the State Treasury for declaring invalid the expropriation decision, based on which the Company acquired the perpetual usufruct right to land and ownership rights to buildings erected thereon. 

The proceedings cover real estate with a total area of 87,000 m², where a part of the tank farm of the Refinery’s wastewater treatment plant is erected. The proceedings were instigated on a motion filed by former owners of the real estate, which calls for declaring invalid the expropriation decision issued by the President of the City of Gdańsk on June 14th 1983 in its entirety or, failing that, declaring it invalid with respect to the amount of compensation paid. In September 2014, the Gdańsk Province Governor issued a decision refusing to declare invalid the expropriation decision the former owners appealed against. Currently, the case is being reviewed by the Minister of Infrastructure. As at the date of approval of these financial statements, the decision is not final. 

The Company believes the risk of an adverse conclusion of the proceedings to be low and without any material effect on these financial statements.

Tax settlements

In 2015, the Company’s VAT settlements for 2010–2011 were subject to two inspections carried out by tax inspection authorities.  On June 23rd 2015, the Company received reports on the inspection of its tax ledgers as part of the proceedings. The Company submitted reservations concerning the reports. On September 30th 2015, the Company received two decisions issued by the Director of the Tax Audit Office in Bydgoszcz, in which it assessed the VAT payable by the Company for the period from January to December 2010 and from January to December 2011, identifying VAT arrears of PLN 48.4m for 2010 and PLN 112.5m for 2011. In these decisions, the Director of the Tax Audit Office stated that certain transactions with two of the Company’s trade partners involved fraudulent tax practices, arguing that the Company failed to exercise due care in executing transactions with those trade partners and that it should at least have been aware that the transactions were connected to and resulted from a tax fraud committed at an earlier stage, which precluded the Company from making any VAT deductions.

Having reviewed the decisions, the Company dismissed the allegations of the Director of the Tax Audit Office as entirely groundless and on October 14th 2015 appealed them to the Director of the Tax Chamber in Gdańsk. Director or the Tax Chamber in Gdańsk upheld the decision of the Director of the Tax Audit Office in Bydgoszcz where it referred to the period January–December 2010. The Company lodged a complaint against the decision of the Director of the Tax Chamber in Gdańsk with the Provincial Administrative Court of Gdańsk.

In connection with these decisions, a VAT expense of PLN 160.9m (see Note 9.4) and a cost related to interest on the tax arrears of PLN 77.9m (see Note 9.6) were recognised in the statement of comprehensive income for 2015.

Court proceedings instigated by or against companies of the LOTOS Group

Proceedings involving a LOTOS Petrobaltic Group company

Agreement signed by LOTOS Exploration and Production Norge AS

LOTOS Exploration and Production Norge AS (“LOTOS E&P Norge AS”) was a party to proceedings held before an arbitration court in Norway in connection with claims filed by Single Buoy Moorings Inc. (“SBM”), the supplier of a MOPU (Mobile Offshore Production Unit) for the operation of the YME field, against Talisman Energy Norge AS, the operator of the YME field (“Talisman”, the “Operator”) and the other YME licence holders. The share of SBM’s claims attributable to LOTOS E&P Norge AS was 20%.

In March 2013, Talisman Energy Norge AS (“Talisman”, the then operator of the YME field) and Single Buoy Moorings Inc. (“SBM”, owner of the MOPU) announced that an agreement was reached to terminate all existing contracts and agreements executed by the parties in connection with the YME project and remove the defective MOPU from the YME field.  Under the agreement, SBM paid USD 470m to the consortium members, and Talisman Energy, on behalf of the licence holders, agreed to make the necessary preparations and remove the platform from the field. SBM agreed to be responsible for towing and scrapping the unit onshore. Following completion of certain works, the ownership of elements of the YME field in situ subsea infrastructure delivered by SBM will be transferred to the consortium members, who will be required to perform reclamation (and disassembly) activities related to the infrastructure. The parties will cover the costs of decommissioning work as set out in the agreement. The agreement was approved by all partners in the YME licence, including LOTOS E&P Norge AS. The agreement provided for the terms of termination of all pending arbitration proceedings (between SBM and Talisman and the other YME licence holders).

In accordance with the provisions of the agreement with SBM, USD 12.22m was paid to LOTOS E&P Norge AS’s bank account in March 2013. The payment represented a part of LOTOS E&P Norge AS’s 20% interest in the amount of USD 470m, paid by SBM to the consortium members. The balance of the Group’s share in the amount due to the consortium members under the agreement, that is USD 81.78m, was transferred to the escrow account of the YME project, to be gradually released to finance the removal of the MOPU and related infrastructure from the field, in accordance the agreement. In December 2013, Talisman and Excalibur Maritime Contractors (“EMC”) signed an agreement to remove the defective MOPU, and in February 2014 Talisman informed the Group of the execution of an agreement between EMC and Single Buoy Moorings Inc. (“SBM”) for the towing of the MOPU. In June 2014, the Group was notified that SBM and Veolia Environmental Services concluded an agreement on the scrapping of the platform.

The MOPU is planned to be removed from the YME field in mid-2016 (June/July).

As at December 31st 2015, available cash deposited in the escrow account, denominated in the presentation currency, was recognised in the amount of PLN 108,540 thousand under Other assets in the statement of financial position. The available provision for future costs of removal of the MOPU and disassembly of the related fixed assets was recognised in the amount of PLN 39,087 thousand under the current portion of Other liabilities and provisions. As the amount of the provision is the Management Board’s best estimate as at the reporting date, the assumptions may be subject to reasonable changes that may in the future cause the need to remeasure the provisions for future costs of decommissioning of the platform.

Proceedings involving LOTOS Petrobaltic S.A. 

In March 2013, LOTOS Petrobaltic S.A. received a payment notice for approximately GBP 6.5m from AGR Subsea Ltd. (“AGR”). The claim concerns AGR’s remuneration for the performance of a contract to unearth the legs of the Baltic Beta platform. LOTOS Petrobaltic S.A. questioned the amount demanded by AGR as remuneration for the services and has proposed to pay PLN 16m (the equivalent of GBP 3.2m, translated at the mid rate quoted by the National Bank of Poland for December 31st 2012) to AGR under the claim. The dispute concerns the nature of the contract, the reasons of its delayed and incomplete performance, as well as the grounds for LOTOS Petrobaltic S.A. to terminate the contract and demand reimbursement of costs incurred by LOTOS Petrobaltic S.A. to hire replacement contractors to complete the work. AGR Subsea Ltd. did not accept the settlement and brought the case to court. The dispute was referred to mediation by virtue of the court’s decision, which was accepted by LOTOS Petrobaltic S.A. The mediation started in April 2014 and was extended a number of times. By virtue of the Regional Court’s decision of February 2016, this case and the case instigated based on the suit filed by LOTOS Petrobaltic against AGR (see below) were joined to be examined together.

In October 2013, LOTOS Petrobaltic S.A. filed a claim against AGR to the Regional Court of Gdańsk for payment of GBP 5.6m to cover the costs of hiring the replacement contractors. In March 2014, the Regional Court of Gdańsk, 9th Commercial Division, in writ-of-payment proceedings, issued an order of payment. AGR filed a complaint against the order. In April 2015, the court referred the case to mediation, to which LOTOS Petrobaltic S.A. did not agree. As at the date of issue of these consolidated financial statements, talks are in progress to settle the dispute amicably. By virtue of the Regional Court’s decision of February 2016, the case will be examined jointly with the case brought to court by AGR against LOTOS Petrobaltic (see above).

As at December 31st 2015 and 2014, no liability towards AGR was recognised by the Group in these consolidated financial statements. 

Given the complex nature of the dispute, it is difficult to assess the risk arising in relation to the court proceedings, because if the judgement is unfavourable to one of the parties, that party may have to incur additional expenses related to the proceedings, including costs of legal representation and costs of enforcement.

Proceedings involving other companies of the LOTOS Group

WANDEKO vs. LOTOS Paliwa Sp. z o.o.

LOTOS Paliwa Sp. z o.o. was a party to court proceedings instigated by Mr Andrzej Wójcik conducting business as WANDEKO. On July 28th 2015, the Court issued a judgment dismissing Mr Wójcik’s action in its entirety. As at the issue date of these consolidated financial statements, the judgment was not final. As at December 31st 2015, LOTOS Paliwa Sp. z o.o. recognised a PLN 15,318 thousand provision related to that case (see Note 30.1). 

Proceedings involving LOTOS Gaz S.A. w likwidacji (in liquidation)

In 2009, LOTOS Gaz S.A. filed its claims in the bankruptcy liquidation proceedings against KRAK − GAZ sp. z o.o. In March 2012, the bankruptcy court issued a decision recognising the claims of LOTOS Gaz S.A. w likwidacji (in liquidation) totalling PLN 23,695 thousand, and acknowledged that claims of PLN 21,132 thousand were secured with mortgages. In accordance with an approved separate plan for the distribution of funds obtained through the bankruptcy proceedings of KRAK − GAZ Sp. z o.o., LOTOS Gaz S.A. w likwidacji (in liquidation) recovered a portion of its claims, in the amount of PLN 4,567 thousand. As at the date of approval of these consolidated financial statements, the bankruptcy proceedings are pending.

 35.2 Other contingent liabilities

• On July 17th 2015, the Company deposited two promissory notes issued by the Company for up to PLN 40,000 thousand and PLN 200,000 thousand, respectively, with the Head of the Customs Office in Gdańsk. The promissory notes were deposited as lump-sum security for future liabilities related to excise duty in the amount of PLN 800,000 thousand, valid until August 19th 2017. The promissory note for PLN 240,000 thousand deposited as security for excise duty and valid until August 19th 2015 was returned to the Company on September 30th 2015.
• An unconditional and irrevocable guarantee issued by LOTOS Petrobaltic S.A. for the benefit of the government of Norway on June 17th 2008, concerning the activities of LOTOS E&P Norge AS related to its exploration and production operations on the Norwegian Continental Shelf, was effective as at December 31st 2015 and December 31st 2014. In the guarantee, LOTOS Petrobaltic S.A. undertook to assume any financial liabilities which may arise in connection with the operations of LOTOS E&P Norge AS on the Norwegian Continental Shelf, consisting in exploration for and extraction of the natural resources from the sea bottom, including their storage and transport using means of transport other than ships.

Contingent liabilities also include future investment commitments presented in Notes 13.3 and 15.3.