35. Contingent liabilities and assets
Material court, arbitration or administrative proceedings and other risks of the Parent or its subsidiaries
Material court proceedings instigated against Grupa LOTOS S.A.
Proceedings brought by PETROECCO JV Sp. z o.o. seeking compensation for losses incurred as a result of monopolistic practices
On February 22nd 2013, the court dismissed in its entirety an action brought by PETROECCO JV Sp. z o.o. against the Company whereby it sought a court decision on the awarding of 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, which involved selling BS base oils in a manner favouring customers whose orders were filled to a disproportionately large extent than the orders of PETROECCO JV Sp. z o.o. On June 26th 2013, PETROECCO JV Sp. z o.o. appealed against the decision. As at the date of approval of these financial statements, the case was pending.
As the risk of an unfavourable outcome of the case was limited, Grupa LOTOS S.A. did not recognise any provisions for potential liabilities related to the case. By virtue of its ruling of February 22nd 2013, the court awarded PLN 57.6 thousand to Grupa LOTOS S.A. as reimbursement of the costs of proceedings.
Tax settlements and other regulated areas of activity (e.g. customs or foreign exchange control) are subject to inspection by competent authorities, which may impose high penalties and sanctions. As the legislation regulating such matters in Poland is relatively new, it is often ambiguous and inconsistent. Differing interpretations of tax legislation are common, both among governmental authorities and government and business, leading to uncertainty and conflicts. 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.
Court proceedings instigated by or against Group companies
WANDEKO vs. LOTOS Paliwa Sp. z o.o.
Court proceedings are pending against LOTOS Paliwa Sp. z o.o., instigated by Mr Andrzej Wójcik conducting business as WANDEKO. On October 28th 2009, the Regional Court of Gdańsk, 9th Commercial Division, issued a default judgment awarding PLN 1,921 thousand plus contractual interest from the company to the plaintiff. In 2009, LOTOS Paliwa Sp. z o.o. recognised a PLN 15,318 thousand provision for the court-awarded amount plus interest. The company appealed against the judgment by lodging an objection to the default judgment with the Regional Court of Gdańsk on November 10th 2009. By virtue of its decision of December 28th 2010, the Court of Appeals dismissed Mr Andrzej Wójcik’s complaint against the decision issued by the Regional Court of Gdańsk refusing to reverse the decision to lift the court order making the default judgment immediately enforceable, and awarded reimbursement of the cost of the proceedings to LOTOS Paliwa Sp. z o.o. In the reporting period ended December 31st 2013, following earlier decisions rendered in the case by the Regional Court in Gdańsk and the Court of Appeals in Gdańsk, the Court Enforcement Officer issued a decision reversing the earlier seizure of receivables from LOTOS Paliwa Sp. z o.o.’s bank account in the amount of PLN 18,320 thousand, which had been established to secure the plaintiff’s claims in 2009. Accordingly, the Group ceased to disclose that amount as Cash blocked in bank accounts under Current financial assets, as it had done in the 2012 financial statements (see Note 18).
The most recent hearing in the case was held on November 13th 2013. The court decided that the next hearing would take place after an expert opinion is obtained on the quality of work performed by WANDEKO for LOTOS Paliwa Sp. z o. o. As at the date of approval of these consolidated financial statements, the case was pending. As at December 31st 2013, LOTOS Paliwa Sp. z o.o. recognised a provision (see Note 30.1) for the court-awarded amount plus interest, as specified above.
Proceedings involving LOTOS Gaz S.A. w likwidacji (in liquidation)
On July 23rd 2009, the District Court for Kraków-Śródmieście in Kraków declared KRAK-GAZ Sp. z o.o.'s bankruptcy by liquidation of assets. The company’s estate is managed by a bankruptcy administrator. On September 24th 2009, LOTOS Gaz S.A. w likwidacji (in liquidation) lodged its claims in the proceedings. On March 13th 2012, the judge commissioner conducting the bankruptcy proceedings of KRAK-GAZ Sp. z o.o. issued a decision recognising the claims of LOTOS Gaz S.A. w likwidacji (in liquidation) for a total amount of PLN 23,695 thousand, including a principal of PLN 21,435 thousand, and acknowledged that claims of PLN 21,132 thousand were secured with mortgages. The decision is final. The bankruptcy administrator submitted a separate plan of distribution of the proceeds from sale of real property, but due to objections and contentions raised by the parties, the plan has not yet been approved by the judge commissioner. As at the date of approval of these consolidated financial statements, the bankruptcy proceedings were pending and did not affect the current consolidated financial statements.
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%.
On March 12th 2013, Talisman (the YME field operator) and SBM (the 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 MOPU from the YME field. Under the agreement, SBM paid USD 470m to the joint venture partners. On behalf of the licence holders, Talisman agreed to make the necessary preparations, remove the MOPU from the field and transport it to the handover point. 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 after the end of the production phase. 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. It includes an arrangement concerning 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 has been paid to LOTOS E&P Norge AS’s bank account by March 31st 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, and will be gradually released to finance works connected with the removal of the MOPU and infrastructure from the field, as defined in the agreement. As at December 31st 2013, the cash deposited in the escrow account, denominated in the presentation currency, was recognised in the statement of financial position as Cash blocked in bank accounts under Other non-current/current financial assets in the amounts of PLN 110,378 thousand / PLN 103,559 thousand, respectively (see Note 18). Also, the Group recognised a provision for future costs of the MOPU removal and disassembly of the installed assets under non-current and current portions of Other liabilities and provisions in non-current portion in amount of PLN 53,136 thousand and in current portion in the amount of PLN 143,183 thousand(see Note 30.1, Estimated costs of removal of the MOPU from the YME field).
On December 4th 2013, Talisman and Excalibur Maritime Contractors („EMC”) entered into an agreement to remove the Mobile Offshore Production Unit (MOPU) from the YME field. On February 5th 2014, Talisman notified LOTOS E&P Norge AS of the execution of an agreement between EMC and Single Buoy Moorings Inc. ("SBM") for the transport of the MOPU. The above-specified provisions comprise the liabilities under the agreement to remove the MOPU, which are attributable to LOTOS E&P Norge AS.
Proceedings involving LOTOS Petrobaltic S.A.
On March 11th 2013, LOTOS Petrobaltic S.A. received the final pre-court payment notice for approximately GBP 6.5m from AGR Subsea Ltd. (“AGR”). The claim concerns AGR’s remuneration for performance of an agreement to unearth the legs of the Baltic Beta platform. LOTOS Petrobaltic S.A. questioned the amount demanded by AGR as remuneration for the services. In the course of negotiations, LOTOS Petrobaltic S.A. 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 behind its delayed and incomplete performance, as well as whether LOTOS Petrobaltic S.A. had grounds to terminate the contract and demand reimbursement of costs incurred for replacement contractors hired by LOTOS Petrobaltic S.A. to complete the work. AGR Subsea Ltd. did not accept the settlement and brought the case to court. On November 4th 2013, the company received a claim brought by AGR for payment of GBP 6.5m. Moreover, on October 31st 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.
Given the complex nature of the dispute, it is difficult to assess the risk arising in relation to the court proceedings, as if the judgment is unfavourable to a given party, that party may have to incur additional expenses related to the proceedings, including costs of legal representation and costs of enforcement.
As at December 31st 2013, no liability towards AGR Subsea Ltd. was recognised by the Group in these consolidated financial statements.
- As at December 31st 2013, the Parent had a PLN 240,000 thousand blank promissory note deposited at the Customs Office in Gdańsk as lump-sum security for excise duty of PLN 800,000 thousand. The security is valid until August 19th 2014.
- 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 Exploration and Production Norge AS related to its exploration and production operations on the Norwegian Continental Shelf, was effective as at December 31st 2013 and December 31st 2012. In the guarantee, LOTOS Petrobaltic S.A. undertook to assume any financial liabilities which may arise in connection with the operations of LOTOS Exploration and Production Norge AS on the Norwegian Continental Shelf, consisting in the exploration for and extraction of natural resources from the sea bottom, including their storage and transport using means of transport other than ships.