PKN ORLEN - Financial results for the 1ST quarter 2009

The financial results in the 1st quarter of 2009 were largely affected by external circumstances. The change in results in the 1st quarter 2009, compared to the 1st quarter 2008, was most strongly influenced by the 54% slump in Brent crude prices and the evident downturn in the petrochemical segment. Moreover, the results were negatively affected by inventory revaluation amounting to PLN 246 mn and exchange rate differences amounting to PLN 842 mn. As a result, the Capital Group reported an operating loss of PLN 320 mn and a PLN 1.1 bn net loss. The Company's revenue in the first three months of 2009 amounted to over PLN 14.7 bn. The Group generated over PLN 1.1 bn of operating cash flow.

Despite the negative environment, the refinery segment is visibly improving its results, with its PLN 177 mn operating profit (according to LIFO methodology), compared to PLN 13 mn loss generated in the 1st quarter 2008. Such result was due to increased sales volumes and relatively good macroeconomic conditions.
Despite the crisis, the retail segment remained on the way up. With the consequent restructuring policy, rebranding and effective marketing campaigns, PKN ORLEN expanded its share in the retail market at a 4% increase in retail sales volumes.  Retail operating profit went up by 24% to PLN 87 mn, compared to the corresponding period of the previous year. Because of low market prices, restoration of petrochemical stocks translated into a 20% increase in volumes (quarter to quarter).

Reacting to the economic slowdown, PKN ORLEN took a number of operating and strategic measures in all segments of its business. In the 1st quarter, the Company continued investment project optimisation, maintaining the projects whose objective is to ensure long-term improvement of PKN ORLEN's value. 11 new fuel stations were opened (including 7 own stations), whereas 33 other, unprofitable, stations were closed. We performed modernisation, rebranding and reconstruction at 12 fuel stations.
PKN ORLEN's priorities in 2009 are to ensure efficiency of its activities and generate positive cash flow. We plan to release capital employed by selling Polkomtel and Anwil.
The Company participates in a consultation process with the Ministry of Economy concerning allocation of mandatory reserves with a government agency. Currently, mandatory reserves encumber the Company balance sheet with PLN 4.5 bn. PKN ORLEN opts for such solutions which will help improve the country's energy security by strengthening State control over mandatory reserves and at the same time releasing companies from the obligation to finance mandatory reserves.

We will continue capital expenditure optimisation and measures to generate long-term improvement of the Company's value. We also plan to reduce operating expenses, mainly as a result of the restructuring programme and freezing pay rises in 2009.

In 2008, PKN ORLEN achieved the National Indicator Goal (NIG) at the required level of 3.45% of energy value. According to the assumed strategy, the Company took measures aimed at increasing the biocomponent content in fuel and popularising biofuel, such as adjusting all fuel terminals to blend diesel esters (over PLN 80 mn expenditure). Application of biocomponents resulted in an increase of over PLN 63 mn in costs in 2008. In 2009, the required level of renewable fuel content in Poland went up to 4.6% of energy value. Consequently the NIG-related expenses amounted to PLN 47 mn in the 1st quarter 2009 and are expected to grow over the next years. The costs of achieving the NIG, borne by companies, could be significantly reduced after quick enforcement of regulations relating to EU directives which would authorise the blending of up to 7% esters in diesel and 10% ethanol in petrol.