2.1 Planned merger with Polski Koncern Naftowy ORLEN S.A.

On July 14th 2020, the European Commission issued a conditional approval for the concentration involving acquisition of control of Grupa LOTOS S.A. by Polski Koncern Naftowy ORLEN S.A. (“PKN ORLEN”). The Commission’s decision was issued pursuant to the second paragraph of Article 8(2) of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) (OJ L No 24, p. 1). Therefore, PKN ORLEN is required to implement remedies set out in the decision to prevent adverse effects of the proposed concentration on competition in the relevant markets (the “Remedies”). The Remedies include structural and behavioural commitments relating to the structure and policies of the undertakings involved in the concentration: PKN ORLEN and Grupa LOTOS S.A.

In Current Report No. 21/2020 of July 14th 2020, Grupa LOTOS reported on the obligations undertaken towards the European Commission. The following commitments continue in effect until the divestment of assets to be disposed of in the implementation of the Remedies (“LOTOS Divestment Assets”) has been completed:

  • Undertaking to preserve the value and competitiveness of the LOTOS Divestment Assets in accordance with good market practice and to minimise as far as possible any risk of loss of competitive potential by the LOTOS Divestment Assets;
  • Undertaking to keep the LOTOS Divestment Assets separate from the business(es) that PKN ORLEN and Grupa LOTOS S.A. are retaining (hold separate obligations), which involves in particular ensuring that the management and staff involved in any business retained by Grupa LOTOS S.A. have no involvement in the business of the LOTOS Divestment Assets, and that the staff (including key personnel) of the LOTOS Divestment Assets identified in the undertakings have no involvement in any business retained by Grupa LOTOS S.A. and do not report to any individuals outside the LOTOS Divestment Assets. Immediately after the adoption of the Commission’s decision, Grupa LOTOS S.A. will appoint an individual or individuals as an independent hold separate manager (the “Hold Separate Manager”). The Hold Separate Manager will be a member of key personnel of the LOTOS Divestment Assets. The Hold Separate Manager will manage the LOTOS Divestment Assets independently and will report to an individual appointed by PKN ORLEN to monitor the implementation of the Remedies (the Monitoring Trustee). The above undertaking will not apply to the Gdańsk refinery;
  • Undertaking not to employ any key personnel of the LOTOS Divestment Assets within 12 months after the closing of divestment transactions giving effect to the Remedies;
  • Undertaking to cooperate with and assist the Monitoring Trustee to a reasonable extent, as required by the Monitoring

In the European Commission’s decision, the following business areas of Grupa LOTOS S.A. (“LOTOS Divestment Assets”) were identified:

  • Fuel production and wholesale,
  • Fuel logistics,
  • Retail activities,
  • Aviation fuel,
  • Bitumens

In Current Report No. 10/2021 issued on March 12th 2021, Grupa LOTOS S.A. announced that the Management Board gave a general consent to internal organisational measures aimed at optimising the Group’s structure and preparing it for implementation of the model whereby the remedies necessary to go ahead with the intended acquisition of control over Grupa LOTOS S.A. by PKN ORLEN are to be carried out.

On May 12th 2021, Grupa LOTOS S.A. announced in Current Report No. 16/2021 that it had entered into a cooperation agreement with PKN ORLEN, PGNiG S.A. (“PGNiG”) and the State Treasury (the “Parties”) concerning the recommended scenario for consolidation of PKN ORLEN, PGNiG and Grupa LOTOS S.A.

As at the date of the Agreement, the adopted scenario for acquisition by PKN ORLEN of control of Grupa LOTOS S.A. and PGNiG (the “Acquirees”) is to merge PKN ORLEN and the Acquirees pursuant to Art. 492.1.1 of the Commercial Companies Code, so that all assets of the Acquirees would be transferred to PKN ORLEN in exchange for shares that PKN ORLEN would issue to the shareholders of Grupa LOTOS S.A. and PGNiG as part of one or two separate merger processes.

The Agreement stipulates that, as a result of the merger or mergers, as the case may be, the shareholders of Grupa LOTOS S.A. and PGNiG will acquire new shares in the increased share capital of PKN ORLEN and become shareholders in PKN ORLEN as of the date of the merger or mergers, as the case may be.

In July 2021, the European Commission decided to extend the deadline for the implementation of remedies for PKN ORLEN’s acquisition of Grupa LOTOS S.A. until November 14th 2021.

On October 14th 2021, the Extraordinary General Meeting of Grupa LOTOS S.A. passed resolutions necessary to enable reorganisation of the LOTOS Group. The shareholders’ consents allow the Parent to prepare for the implementation of the remedies specified by the European Commission. As announced in Current Report No. 38/2021, the agenda for the Extraordinary General Meeting of Grupa LOTOS S.A. included:

  • Adoption of a resolution to give consent to the disposal of an organised part of Grupa LOTOS A. business to LOTOS Asfalt sp. z. o.o. by way of non-cash contribution in exchange for all new shares in the increased share capital of LOTOS Asfalt Sp. z o.o.
  • Adoption of a resolution to give consent to the acquisition by Grupa LOTOS S.A. of 19,999 shares in LOTOS Biopaliwa sp. z o.o., representing 99.95% of the share capital of LOTOS Biopaliwa Sp. z o.o.
  • Adoption of a resolution to give consent to the disposal by Grupa LOTOS A. of 100% of shares in LOTOS Biopaliwa sp. z o.o.
  • Adoption of a resolution to give consent to the disposal by Grupa LOTOS A. of 100% of shares in LOTOS Terminale S.A.
  • Adoption of a resolution to give consent to the disposal by Grupa LOTOS S.A. of 100% of shares in LOTOS Paliwa sp. z o.o. and companies which will acquire part of assets of LOTOS Paliwa sp. z o.o. as a result of demerger of LOTOS Paliwa sp. z o.o.
  • Adoption of a resolution to give consent to the disposal by Grupa LOTOS A. of 30% of shares in LOTOS Asfalt Sp. z o.o.
  • Adoption of a resolution to give consent to the disposal by Grupa LOTOS A. of 100% of shares in the company which will acquire part of LOTOS Asfalt Sp. z o.o.’s assets as a result of demerger of LOTOS Asfalt Sp. z o.o.

In order to prepare for the implementation of the remedies, on November 2nd 2021 the Extraordinary General Meeting of LOTOS Asfalt Sp. z.o.o. (“LOTOS Asfalt”) passed a resolution to increase the share capital of LOTOS Asfalt by issuing new shares, all of which were acquired by Grupa LOTOS as the sole shareholder of LOTOS Asfalt and paid for with a non-cash contribution in the form of an organised part of the Company’s business consisting of tangible and intangible assets related to the refining business, thus starting the integration of refining assets within LOTOS Asfalt.

In November 2021, the European Commission agreed to extend the deadline for the implementation of the remedies that PKN ORLEN is obliged to implement to prevent adverse effects of the planned concentration. The new deadline was set for January 14th 2022, with the extension justified by the need to finalise the negotiation process with partners participating in the discussions concerning sale of the LOTOS Divestment Assets covered by the remedies and to allow the partners to complete the necessary decision-making processes.

In Current Report No. 1/2022 of January 12th 2022, Grupa LOTOS S.A. announced that in order to implement the Remedies, the following conditional agreements were concluded, whose entry into force depends on:

  • the European Commission issuing a decision approving the buyers of divestment assets in the performance of the Remedies and the terms of the agreements concluded with them,
  • concentration between Grupa LOTOS A. and PKN ORLEN S.A. being completed,
  • the buyers (listed below) of the divestment assets to be sold as part of implementation of the Remedies obtain anti-trust and other administrative clearance for execution and performance those agreements;
  • other competent authorities’ approvals required by law for the disposal of rights to certain components of the divested assets are obtained

 

I a preliminary share purchase agreement for 30% of shares in LOTOS Asfalt z o.o. of Gdańsk (“LOTOS Asfalt”) (the “LOTOS Asfalt Preliminary Share Purchase Agreement”) between the Company and Aramco Overseas Company B.V. (“Aramco”), together with the following attachments:

a form of a joint venture agreement between PKN ORLEN, Grupa LOTOS, LOTOS Asfalt and Aramco, to be signed to fulfil the commitment to sell to an independent third party a 30% equity interest in the company to which the refinery located in Gdańsk was transferred as a contribution in kind, and to guarantee to that third party corporate governance rights under a contract;

b form of a processing agreement and an offtake agreement between Grupa LOTOS, LOTOS Asfalt and the Wholesale Company (as defined below), which will be concluded for the terms of the joint venture referred to in (a) above,

c form of a framework agreement for the maintenance of mandatory crude oil stocks between PKN ORLEN and the Wholesale Company (as defined below), to be concluded for a period of 10 years,

d form of a framework outsourcing agreement for rail logistics and transporting fuel between PKN ORLEN and the Wholesale Company (as defined below), to be concluded for the term of the processing agreement or the off-take agreement.

The agreements referred to above will be executed on the date of execution of the final agreement for the sale of shares in LOTOS Asfalt.

The price under the LOTOS Asfalt Preliminary Share Purchase Agreement will be calculated based on the formula defined in the LOTOS Asfalt Preliminary Share Purchase Agreement, comprising a fixed component of ca. PLN 1.15 billion and a variable component whose amount will depend on the amount of LOTOS Asfalt’s debt and working capital on the day preceding the execution of the final agreement.

The LOTOS Asfalt Preliminary Share Purchase Agreement contains a material adverse change clause, giving Aramco the right to terminate the agreement if specific events, precisely defined therein, occur.

II preliminary agreement for the sale of 100% of shares in LOTOS SPV 1 z o.o. with its registered office in Gdańsk („the Wholesale Company”) between Grupa LOTOS and Aramco („Wholesale Company Preliminary Share Purchase Agreement”). Prior to the execution of the final agreement for the sale of shares in the Wholesale Company, an organised part of wholesale business currently operated by LOTOS Paliwa sp. z o.o. with its registered office in Gdańsk („LOTOS Paliwa”) („Wholesale Business”) will be transferred to the Wholesale Company.

The price under the Wholesale Company Preliminary Share Purchase Agreement will be calculated based on the formula defined in the Wholesale Company Preliminary Share Purchase Agreement, comprising a fixed component of ca. PLN 1 billion and a variable component whose amount will depend on the amount of Wholesale Company’s debt and working capital on the day preceding the execution of the final agreement.

The Wholesale Company Preliminary Share Purchase Agreement contains a material adverse change clause, giving Aramco the right to terminate the agreement if specific events, precisely defined therein, occur.

I a preliminary share purchase agreement for 100% of shares in LOTOS Biopaliwa z o.o. of Gdańsk (“LOTOS Biopaliwa”) between Grupa LOTOS and Rossi Biofuel Zrt. (“LOTOS Biopaliwa Preliminary Share Purchase Agreement”).

An additional document to the LOTOS Biopaliwa Preliminary Share Purchase Agreement is an agreement for sale of biocomponents between the Company and LOTOS Biopaliwa, to be concluded for a period of four years. The agreement will be executed on the date of execution of the final agreement for the sale of shares in LOTOS Biopaliwa.

 

I a preliminary share purchase agreement for 100% of shares in LOTOS Terminale S.A. of Czechowice-Dziedzice (“LOTOS Terminale”) between Grupa LOTOS and Unimot Investments spółka z ograniczoną odpowiedzialnością (“Unimot Investments”), together with a schedule in the form of the in-kind contribution agreement providing for the contribution of four fuel depots of PKN ORLEN located in Gdańsk, Szczecin, Gutkowo and Bolesławiec to LOTOS Terminale;

II a conditional fuel storage agreement between PKN ORLEN and Unimont Investments, enabling PKN ORLEN to use storage capacities in fuel depots located in Gdańsk, Szczecin, Gutkowo and Bolesławiec after disposal of LOTOS Terminale shares to Unimot Investments, concluded for a period of 10 years from its effective date;

III a conditional preliminary agreement on lease and reimbursement of outlays between the Parent and Unimot Investments and Unimot S.A., providing for the obligation of the Parent, Unimot Investments and Unimot S.A. to enter into a final agreement specifying the terms of delivery of a project to construct aviation fuel storage and transport infrastructure on the premises of the fuel depot being divested in Szczecin as part of implementation of the Commitments, to be owned and operated by LOTOS Terminale

The in-kind contribution agreement will be concluded between PKN ORLEN and LOTOS Terminale upon completion of the concentration of PKN ORLEN and Grupa LOTOS.

I a preliminary agreement for the sale of shares in LOTOS Paliwa between Grupa LOTOS and MOL Hungarian Oil and Gas Public Limited Company („MOL”) (“LOTOS Paliwa Preliminary Share Purchase Agreement”), covering a total of 417 petrol stations of the LOTOS retail network in Poland; prior to the execution of the final agreement for the sale of shares in LOTOS Paliwa, a Wholesale Business will be spun-off from the company.

An additional document to the LOTOS Paliwa Preliminary Share Purchase Agreement is a conditional agreement for the sale of fuels to the MOL Group between PKN ORLEN and MOL, to be concluded for a period of up to eight years.

The price under the LOTOS Paliwa Preliminary Share Purchase Agreement will be calculated based on the formula defined in the LOTOS Paliwa Preliminary Share Purchase Agreement, comprising a fixed component of ca. PLN 610 million and a variable component whose amount will depend on the amount of LOTOS Paliwa’s debt and working capital on the last day of the month preceding the month in which the final agreement is executed.

The LOTOS Paliwa Preliminary Share Purchase Agreement contains a material adverse change clause, pursuant to which the occurrence of specific events, precisely defined therein, will trigger a reduction in the price of LOTOS Paliwa shares based on an agreed formula.

I a preliminary agreement for sale of all shares in LOTOS-Air BP Polska z o.o. of Gdańsk (“LOTOS-Air BP”) held by Grupa LOTOS between Grupa LOTOS and Aramco;

II a conditional agreement for sale of aviation fuel to LOTOS-Air BP between PKN ORLEN and LOTOS-Air BP, concluded for up to 15 years from its effective date;

III a conditional agreement for storage of LOTOS-Air BP’s aviation fuel at the Olszanica depot between PKN ORLEN and LOTOS-Air BP, concluded for up to 15 years from its effective date;

IV a conditional agreement for the provision of operating support services in case of an event of force majeure between PKN ORLEN, ORLEN Aviation sp. z o.o. with its registered office in Warsaw and LOTOS-Air BP, concluded for up to 15 years from its effective date.

I a preliminary share purchase agreement for 100% of shares in LOTOS Terminale, which, prior to the execution of the final share sale agreement, will acquire 100% of shares in LOTOS SPV 2 sp. z o.o. (the “Bitumen Company”), between the Company and Unimot Investments. Prior to that, the Bitumen Business will be spun off and transferred to the Bitumen Company.

II a conditional agreement for sale of bitumens between Grupa LOTOS, PKN ORLEN and Unimot Investments, to be concluded for a period of 10 years from its effective date, with an option to extend for another two years, on terms previously agreed between the parties.

 

Profesional judgement

The Management Board of the Parent has analysed the requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations taking into account the progress of the implementation of particular Remedies provided for in the decision. As of December 31st 2021, the LOTOS Divestment Assets were not available for immediate sale as of that date. The process of preparing the individual LOTOS Divestment Assets for sale includes a number of significant, non-customary, activities in 2022 such as a number of reorganization activities within the Group, obtaining appropriate external approvals from relevant regulatory authorities and the European Commission, and obtaining internal corporate approvals, including from the Parent’s General Meeting and the general meeting of PKN ORLEN S.A. By January 14th 2022, the Management Board of PKN ORLEN S.A. notified the European Commission of conditional agreements for sale of the LOTOS Divestment Assets. Both as at December 31st 2021 and as at the date of authorisation of these financial statements for issue, the European Commission’s decision and the approval of corporate bodies were not certain and it may be necessary to make significant changes to the divestment plan, which means that the criteria of high probability defined in IFRS 5 are not met.

Therefore, based on the judgement of the Management Board of the Parent, as at December 31st 2021 the criteria defined in IFRS 5 for available-for- sale non-current assets (or disposal group) were not met by the LOTOS Divestment Assets specified in the European Commission’s decision of July 14th 2020

Estimates

As preliminary sale agreements related to the implementation of the remedies were signed, it was necessary to analyse indications of potential impairment for the cash-generating units (CGUs) covered by the remedies. As a result of this analysis, indications of impairment were identified for the refining and wholesale CGU and the logistics CGU. These CGUs were tested for impairment, and the significant underlying assumptions are described in Note 10.1.1.1.1.

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