PKN ORLEN - 2008 consolidated financial results
The effects of particularly adverse macroeconomic conditions last year and the results of required tests for impairment of fixed asset significantly affected the level of PKN ORLEN Capital Group financial results in 2008.
According to the International Accounting Standard 36 "Impairment of Assets", a company whose assets are in public trading is in certain circumstances required to test potential impairment of its assets.
The indications to perform tests were, among others: deteriorated macroeconomic situation caused by the global crisis, oil price drop and pressure on petrochemical and refinery margins, as well as decline in PKN ORLEN share prices on the Warsaw Stock Exchange below their book value.
As a result of tests carried out for the purposes of 2008 financial statements, net write-offs of fixed assets and intangible and legal assets burdened the remaining operating costs at PLN 2.4 bn, of which PLN 2.2 bn applied to Mažeikiu Nafta.
The reported 2008 consolidated operating result was negative, at PLN 1.6 bn. Taking into account net financial costs and taxes, net loss amounted to PLN 2.5 bn.
However, ORLEN Group maintained its stable financial position, which is proven by an over 80% increase in operating cash flow, amounting to PLN 3.6 bn at the end of 2008.
The Management Board believes that, although the foreign expansion plan in Baltic States seems reasonable, the Lithuanian refinery valuation scenario chosen upon submission of offers was relatively optimistic. Definitely, it was not reflected in the reality. When acquiring the Lithuanian assets, PKN ORLEN accepted huge financial burdens which hindered other investments and the possibilities of the company's strategic development. Moreover, the burdens negatively affected PKN ORLEN rating.
- The valuation assumed major capital expenditure, a part of which had to be allocated to restore the fire-stricken assets. Moreover, the hope was that synergy and improved efficiency would bring profits, but that depended on numerous factors, often external and beyond the company's control. Moreover, the risk of potential cut-off of pipeline supplies was not sufficiently considered. The accumulated EBITDA for the period of 2006-2008 initially estimated by advisors was three times higher than the actual value. The risks foreseen by the advisors came true, whereas the assumed potential profits proved too difficult to achieve - explains President of PKN ORLEN Management Board, Jacek Krawiec.
One of the methods to raise the company's effectiveness is to improve product sales logistics via Klaipeda and lower rail transport costs, which requires partnership approach of the Lithuanian Government.
- We count very much on this cooperation and we believe that the Lithuanian Government is interested in making Mažeikiu Nafta, the largest Lithuanian company, a profitable business and a driving motor of Lithuanian economy. We will consequently implement those plans, the more so that on 29 April we became the sole shareholder of AB Mažeikiu Nafta - says Jacek Krawiec.
Currently, ORLEN Group is implementing consecutive stages of a complex efficiency improvement programme through capital expenditure optimisation, fixed costs reduction and economising.
- Our goal is to implement the investment programme in its optimum variant, given the current economic situation, meanwhile reducing debt level. We have managed to reduce CAPEX and OPEX. We aim at over 1.5 bn cash savings in 2009. A major element of the programme is to improve Mažeikiu efficiency. To do this, we have to reduce raw material supply and product sales logistics costs - says Sławomir Jędrzejczyk, PKN ORLEN Financial Director.
Meanwhile, on 29 April 2009, exercising the put option dated 9 June 2006, PKN ORLEN acquired from the Government of the Republic of Lithuania its remaining shares in Mažeikiu Nafta, representing appr. 9.98% of the company's initial capital. As a result of the put, PKN ORLEN owns shares representing 100% of Mažeikiu Nafta initial capital. Consequently, the previous Mažeikiu Nafta Shareholders Agreement of 9 June 2006 has expired. This means, that the Lithuanian Government loses its right to appoint one member of Mažeikiu Nafta Supervisory Board and Management Board respectively. Moreover, the Government can no longer veto corporate decisions in the Lithuanian refinery. The total price of the shares bought under the put option was USD 284.5 mn.
