Grupa LOTOS S.A. - Annual Report 2010

 

PLN '000	Dec 31 2010	Dec 31 2009
Carrying value of consolidation goodwill:
- LOTOS Partner Sp. z o.o.	1,862	1,862
- LOTOS Gaz S.A. (1)	10,009	10,009
- Energobaltic Sp. z o.o. (2)	1,126	1,126
Total	12,997	12,997
Carrying value of acquisition goodwill (3):
- purchase of ESSO service stations network	31,759	31,759
- purchase of Slovnaft Polska service stations network	1,932	1,932
Total	33,691	33,691
Total goodwill	46,688	46,688

⁽²⁾ Acquisition of Shares in Energobaltic Sp. z o.o. by LOTOS Petrobaltic S.A.

On October 29th 2009, the Extraordinary General Shareholders Meeting of Energobaltic Sp. z o.o. adopted a resolution to increase Energobaltic Sp. z o.o.'s share capital in accordance with the Arrangement with the Creditors of Energobaltic Sp. z o.o., which was approved by the Court. The key provisions of the Arrangement with the Creditors are as follows:

1. Bank Ochrony Środowiska S.A. will grant a grace period whereby the beginning of repayment of the principal amounts of all the loans will be postponed until June 30th 2014,
2. The loans granted by the shareholders (LOTOS Petrobaltic S.A. and Stablewood Power Ventures
   (Wladyslawowo) Ltd. will be converted into shares in Energobaltic Sp. z o.o.,
3. LOTOS Petrobaltic S.A. will submit declarations to the effect that:
   a) gas deliveries from the B8 field will commence on January 1st 2014,
   b) the agreement with Energobaltic Sp. z o.o. will be extended by 7 years, that is until 2025,
   c) the gas delivery price and the current pricing formula will remain unchanged for the period by which the agreement is to be extended,
4. LOTOS Petrobaltic S.A. will also agree to provide a security deposit of EUR 500 thousand (in the złoty) to secure the repayment of interest by Energobaltic Sp. z o.o. to Bank Ochrony Środowiska S.A., until June 30th 2014.

Energobaltic Sp. z o.o. Recovery Proceedings

On March 13th 2009, the Management Board of Energobaltic Sp. z o.o. filed a declaration of instituting recovery proceedings with the District Court for Gdańsk. On March 30th 2009, following examination of the case of Energobaltic Sp. z o.o.'s declaration, the District Court for Gdańsk, VI Commercial Division, appointed (under Art. 497.1 of the Act on Bankruptcy and Recovery of February 28th 2003) a court supervisor for Energobaltic Sp. z o.o. recovery proceedings. As part of the proceedings, an Arrangement was entered into by Energobaltic Sp. z o.o. and Bank Ochrony Środowiska S.A., LOTOS Petrobaltic S.A. and Stablewood Power Ventures (Wladyslawowo) Ltd. on June 29th 2009.

The Arrangement entered into by Energobaltic Sp. z o.o. and the creditors as part of the recovery proceedings instituted at the request of Energobaltic Sp. z o.o. was approved by the District Court in Gdańsk, VI Commercial Division, after a hearing held on September 1st 2009. The court's decision regarding approval of the Arrangement became final on September 9th 2009.

Total (A+B)he creation of the new shares, LOTOS Petrobaltic S.A. acquired 1,985 new shares, while Stablewood Power Ventures (Wladyslawowo) Ltd. acquired 1,769 shares; the par value of the shares acquired by both companies was PLN 8,100 per share. LOTOS Petrobaltic S.A.'s stake increased from 46.61% to 50.92%. Amendments to the Articles of Association of Energobaltic Sp. z o.o. were registered by the District Court of Gdańsk, VII Commercial Division of the National Court Register, on November 9th 2009.

On October 28th 2009, LOTOS Petrobaltic S.A., Stablewood Power Ventures (Wladyslawowo) Ltd. and Stablewood Power Ventures Ltd. executed a preliminary agreement concerning for the acquisition of the remaining 49.08% stake in Energobaltic Sp. z o.o. by LOTOS Petrobaltic S.A. In performance of the preliminary agreement, on November 27th 2009 LOTOS Petrobaltic S.A. acquired from Stablewood Power Ventures (Wladyslawowo) Ltd. and from Stablewood Power Ventures Ltd. respectively 2,512 shares (representing 45.18% of the share capital) and 217 shares (3.90% of the share capital) in Energobaltic Sp. z o.o., as a result of which Petrobaltic S.A. came to hold 100% of the shares in Energobaltic Sp. z o.o. Amendments to the Articles of Association of Energobaltic Sp. z o.o. were registered by the District Court of Gdańsk, VII Commercial Division of the National Court Register, on January 25th 2010.

The above transaction was accounted for and presented in these consolidated financial statements as a business combination achieved in stages within the meaning of the revised IFRS 3 Business Combinations, based on the fair values of identifiable assets acquired and liabilities assumed.

Below are presented the fair values of identifiable assets acquired and liabilities assumed, as well as the accounting for the goodwill as at the acquisition date, that is November 27th 2009:

 

(PLN '000)	November 27th 2009
Consideration transferred (acquisition-date fair value) (A)	34,179
Acquisition-date fair value of the acquirer's previously held equity interest in the acquiree (B)	35,456
Total (A+B)	69,635
Equity interest in the acquiree	100.00%
Current assets, including:	8,164
Cash and cash equivalents	4,561
Non-current assets	130,620
Total assets	138,784
Provisions	10,303
Non-current liabilities	45,660
Current liabilities, and accruals and deferred income	14,312
Total liabilities and provisions	70,275
Net assets	68,509
Company's share in net assets	68,509
Excess of the share in net assets over acquisition cost (goodwill)	1,126

In a business combination achieved in stages, the acquirer remeasures its previously held equity interest in the acquiree at its acquisition-date fair value and recognises the resulting gain or loss, if any, in the statement of comprehensive income. The remeasurement of LOTOS Petrobaltic S.A.'s previously held equity interest in Energobaltic Sp. z o.o. at its acquisition-date fair value was posted to finance income in 2009 in the amount of PLN 12,525 thousand. Determination of the fair value of the consideration transferred had to take into account the valuation of the liabilities and receivables taken over by LOTOS Petrobaltic S.A. as part of the business combination, of PLN 321 thousand.

By December 31st 2010, LOTOS Petrobaltic S.A. had discharged its liabilities connected with the acquisition of shares, amounting to PLN 3,035 thousand (as at December 31st 2009: 3,035 thousand).

As at the balance-sheet date, that is December 31st 2010, LOTOS Petrobaltic S.A.'s liability under the acquisition of shares in Energobaltic Sp. z o.o. from Stablewood Power Ventures (Wladyslawowo) Ltd. amounted to PLN 31,669 thousand (as at December 31st 2009: PLN 30,011 thousand).

⁽³⁾ Goodwill Arising on Acquisition of an Organised Part of Business from ExxonMobil Poland and Slovnaft Polska

As at December 31st 2010 and December 31st 2009, the Group disclosed goodwill from the acquisition of an organised part of business from ExxonMobil Poland and Slovnaft Polska, with a net value of PLN 31,759 thousand and PLN 1,932 thousand, respectively.

The Group determines the recoverable amount of goodwill based on the value in use, using the discounted cash flow method. Future cash flows were calculated based on five-year cash-flow projections. The residual value for the discounted cash flows was calculated using the growing perpetuity formula. A fixed growth rate of 2.23% (2009: 2.76%) was used to extrapolate cash-flows projections beyond the five-year period. The extrapolation was based on a quantitative forecast of the fuel consumption growth rate in Poland in 2009–2015. To test goodwill for impairment, the Group assumed net weighted average cost of capital (WACC) of 8.61% (2009: 8.86%). Discounted cash flows calculated separately for each cash-generating unit were grossed up.

As at December 31st 2010 and December 31st 2009, the Group tested its assets for impairment. As at December 31st 2010 and December 31st 2009, no additional impairment loss on the goodwill was recognised (impairment tests of goodwill allocated to individual cash-generating units did not reveal the need to recognize any impairment losses).