Largest foreign acquisition in Poland’s history

On May 26^th, 2006 PKN ORLEN S.A. and Yukos International UK B.V., have signed a Share Sale and Purchase Agreement concerning the purchase by PKN ORLEN S.A. of 53.7% stakes in AB Mažeikių Nafta. At the same time a complete set of agreements was provided to the Lithuanian Government containing the agreement to purchase from the Lithuanian Government the package of 30.66% of Mažeikių shares that it owns.

After 10 months of effort, intensive negotiations, and talks held with both the Lithuanian Government and Yukos International UK BV, the acquisition of Mažeikių Nafta (MN) has become a fact. This largest foreign investment in Poland’s history leads towards the creation of the biggest concern in Central Europe measured by the amount of oil processed and revenues. The transaction is also a great success for Lithuania, because it finalizes a long and difficult privatization process. The Lithuanian Government’s decision allows MN to gain a credible and stable investor.

Acquiring the controlling stake of Mažeikių Nafta by PKN ORLEN is the consequence of signing a number of very important agreements between PKN ORLEN, Yukos International UK B.V. and the Lithuanian Government. The first step made by PKN ORLEN was to reach a Share Sales and Purchase agreement for 53.70% shares of Mažeikių Nafta with Yukos International UK BV for USD1,492 million. At the same time a complete set of agreements enabling the acquisition of 30.66% shares of Mažeikių Nafta for a total of USD 852 million has been signed and forwarded to the Lithuanian Government. The Government has already launched procedures that would allow it, with Parliament’s approval, to countersign the agreement.

According to the agreements, the Lithuanian Government will keep 10.00% of the shares of Mažeikių Nafta and will have a 5-year option to put those shares to PKN ORLEN, where the offered price for the projects is to decrease from USD 284 million to USD 278 million after 3 years.

Immediately after signing the agreement with Yukos, PKN ORLEN will submit the application to the European Commission seeking consent for the transactions. At the same time the Concern will seek the consent of the Government of Lithuania for the transaction with Yukos. The Agreement will be presented to the Government, which will have 30 days from delivery of the Agreement to exercise its right of first refusal. From the initial agreement it seems that the Government will not exercise this right. Once the closing conditions are satisfied, the simultaneous closing of both transactions is expected in the first quarter of 2007. The next step will be the calling by PKN ORLEN for a mandatory tender offer for 5.76% shares of Mažeikių Nafta, which is quoted on the Vilnius Stock Exchange.

The acquisition of Mažeikių Nafta is a key step towards the implemenation of PKN ORLEN’s strategy for 2005-2009, which is based on monitoring new markets for the availability of developments and interesting acquisition opportunities, focusing on markets with high grow potential, and also starting new and perspective activities that will lead to the finding and extraction of oil.

Thanks to this transaction ORLEN will become an undisputable leader in Central and Eastern Europe, whose operational activities will include, apart from the Polish, Czech and German markets also the Baltic States – Lithuania, Latvia, and Estonia, where Mažeikių Nafta satisfies the majority of the demand for petrol. This way the number of markets considered by PKN ORLEN as core markets will expand.

The experience of PKN ORLEN in carrying out the integration and modernization of refineries will allow for full utilization of the infrastructure and development potential of Mažeikių Nafta with a view to improving the Group’s value for shareholders.

The inclusion of Mažeikių Nafta into the PKN ORLEN Capital Group brings many opportunities –synergies will be possible in such areas as joint oil purchases, the optimization of margins and costs, as well as trade operations. It is planned to develop retail sales and petrochemical production.

Mažeikių Nafta is the only refinery in the Baltic States with wide–ranging export operations to Western Europe and the USA. It is a complex refinery with maximum throughput of 10 million tonnes per annum and a Nelson Complexity Index of 9.0. The company is also the owner and operator of pipeline systems for the transmission of oil and refinery products in Lithuania, as well as export-import oil terminal on the Baltic Sea (Butinge Sea Terminal). It also has a limited (27 outlet) retail sales network, which constitutes a basis for expansion of the retail segment.

The investment program adopted by ORLEN for Mažeikių Nafta requires outlays at the level of USD 720 to 950 million in the forthcoming 5 years. The program encompasses funding of approx. USD 228 million allocated to investment relayed to improvements in fuel quality and adjustment to requirements of environment protection law. Approx. USD 212 million will be allocated to the project to modernize the installations processing heavy crude oil. USD 55 million will be invested in the product pipeline to Kłajpeda, and an increase in the existing processing capacities up to 11 million ton annually will cost approx. USD 45 million. If the investment is economically feasible, PKN ORLEN will consider also the construction of a polypropylene production block for approx. USD 230 million. This program will ensure an improvement in fuel quality, conformity to environmental protection provisions, improvement in future refining activities, and significant growth in the financial results of Mažeikių Nafta.

The merger of the resources of both companies will allow the creation of the largest Fuel Concern in Central and Eastern European region by the key parameters used to determine the size of companies in the sector such as: volume of crude oil processing, number of fuel stations and size of incomes.

Details of the transaction

Details and structure of the purchase of Mažeikių Nafta were determined on the basis of the stock sale agreement of 26 May 2006. PKN ORLEN shall purchase from Yukos International UK B.V. 379,918,411 shares of the company, constituting 53.7% of all assets, for the aggregate amount of USD 1,492 million (1 share – USD 3.927). The sales price in not adjusted at the closing. Basing on the sales agreement signed by PKN ORLEN on 19 May 2006, the Group agreed to buy from the government of the Republic of Lithuania 216,915,941 shares of the company, constituting 30.66% of all the company’s shares for a total amount of USD 852 million (1 share - USD 3.927– the same as for the shares of Yukos International). Similarly to the case of transaction with Yukos, the sale price is fixed and is not adjusted at closing. The share sale agreement, including the put option agreement, agreement among shareholders and deed of termination and release of all parties’ obligations, were signed by PKN ORLEN on 19 May 2006 and deposited with the Government of Lithuania after approval from the Lithuanian Parliament for the conclusion of the transaction.

Implementation of the transaction on the basis of the share sale agreement with Yukos International is dependent on the meeting of several conditions. These include: obtaining approval of the European Commission; obtaining by PKN ORLEN certainty that the transaction conditions are not harmful for creditors of Yukos International; non-performance by the Lithuanian Government of the pre-emption right: obtaining the consent from the Government of the Republic of Lithuania for PKN ORLEN to take over Yukos’ right ensuing from privatization agreements of 1992 and 2002, and also the binding agreement of the shareholders, and conclusion of the agreement to sell 30.66% of the company shares between PKN ORLEN, and the Government of the Republic of Lithuania.

Also the transaction with the Government of the Republic of Lithuania will depend on meeting specified conditions. They include: being granted consent from the European Commission, closure of the transaction of purchase of 53.7% of Mažeikių Nafta share from Yukos, entering into a new agreement by shareholders as well as the deed of termination and release of all parties’ obligations concerning the privatization agreements of 1999 and 2002, as well as the binding shareholders’ agreement.

Additionally PKN ORLEN provided to the Government of the Republic of Lithuania an option, where the government of the Republic of Lithuania will have the right to sell to PKN ORLEN the remaining 10% of shares in Mažeikių Nafta within 5 years from the date of closing of the current transaction. The price for the option implementation is dependent on the date, when the Government of the Republic of Lithuania exercises its right to sell its 10% portfolio to PKN ORLEN. In the first three years the price of option implementation will be USD 4.0205 per share, in the next two years the price will go down to USD 3.27 per share.

The new agreement between shareholders and the Lithuanian Government assumes that if the Parliament consents to the transaction with PKN ORLEN, the shareholder agreement in force will be substituted by a new agreement wherein PKN ORLEN gains full operational control over MN. In line with provisions of the new agreement, the Lithuanian Government will have the right to appoint one member of the Supervisory Board and one member of the Management Board in Mažeikių Nafta. Moreover the Lithuania government will have the right to demand the repeal of decisions made by the governing bodies of MN, if those decisions might threaten the national security or energy security of Lithuania.

The Lithuanian Government will have the right to demand from PKN ORLEN the sale of all shares in Mažeikių Nafta in the following cases: if Możejki records a loss for 5 years in a row, components of the assets of Mažeikių Nafta with the value exceeding USD 200,000,000 will be taken over due to enforcement measures or in the case when the right to exercise over 50% of the voting rights at the general Assembly of PKN ORLEN will be gained by an entity, which in the reasonable opinion of the Government of the Republic of Lithuania constitutes a threat to national security of Lithuania.

Moreover the provisions of the new agreement state that the sale of shares in Mažeikių Nafta by PKN ORLEN or the Government of the Republic of Lithuania is covered by the pre-emption right of the other party.

PKN ORLEN will use its own funds, existing credit lines and new indebtedness to finance the transaction. The main sources of funding are: loans, subsequently refinanced from the issuance of bonds on the Polish and European markets, and a new bank loan.

Based on internal analyses and the opinions of external advisors, PKN ORLEN is aware of the increase in indebtedness related to the financing of the transaction, and it will make it the top policy priority in this respect to gradually lower indebtedness. The management is determined to gradually reduce indebtedness measures to the level of 1.5 x consolidated EBITDA with a view to maintaining the investment rating. To this end, PKN ORLEN announced a new dividend policy based on FCFE. The Group is also continuing with the sale of assets unrelated to its main line of business and the optimization of investment outlays.

Press Office
PKN ORLEN