PKN ORLEN’s consolidated financial performance in Q3 2011

PKN ORLEN’s performance was affected mainly by adverse macroeconomic developments, such as a 47% year-on-year rise in crude oil prices, a decrease of model petrochemical margin by 90 EUR/t year on year, and a decline of the model refining margin and the URAL/Brent differential by a total of 0.6 USD/bbl (15% y-o-y). The negative effect of macroeconomic factors, weaker trading environment, overhaul shutdowns and changes in legislation concerning biocomponents were offset by higher sales volumes across all segments. As a result, the Company’s operating profit in Q3 2011 remained relatively unchanged year on year, while the LIFO-based operating profit was PLN 216m. However, PKN ORLEN posted a net loss of PLN 249m for the period.

In Q3 2011, high fuel prices on European commodity exchanges further depressed demand for gasolines in all PKN Orlen markets, and in Poland the high prices also hurt demand for diesel fuel. Despite the clear demand slowdown, in Q3 2011 PKN ORLEN managed to achieve a 2% increase in the volume of retail fuel sales, with the retail segment posting operating profit of PLN 181m.

- Q3 2011 was yet another difficult period for the fuel industry. Our response to the adverse developments proved successful – we managed to achieve higher sales volumes across all segments, including the retail segment in Poland. In the face of the falling model margins, both petrochemical and refining, lower fuel consumption in all our markets and strong competition requiring greater flexibility in the retail strategy, such performance must be viewed as a considerable achievement. All the more so in the context of a 30% y-o-y increase in operating profit during the first nine months of 2011, which proves that we have properly prepared the Company for difficult times - commented Jacek Krawiec, PKN ORLEN’s CEO.

Higher sales and profit at the petrochemical segment
The ORLEN Group’s petrochemical segment posted PLN 367m in operating profit, up by PLN 225m (or 158%) year on year. This was attributable to a 12% year-on-year increase in sales volumes recorded by that segment, driven by stronger PVC sales and launch of sales of terephthalic acid (PTA) produced in a new facility commissioned in Włocawek as recently as five months ago.

- The petrochemical segment’s performance demonstrates that we have taken the right decision to continue with key investment projects as planned despite the challenging economic conditions. In the long run, such measures will guarantee the growth of the Company’s value - emphasized Mr. Krawiec.

Refining segment – challenging macroeconomic conditions
In Q3 2011, the ORLEN Group’s refining segment posted an operating profit of PLN 335m, down by 27.5% (or PLN 127m) year on year. The segment’s performance was adversely affected by the lower refining margin, legislative changes concerning taxation of fuel biocomponents that took effect in May 2011, overhaul shutdowns at the Gudron Hydrodesulphurisation Unit and the Hydrogen Plant in Płock, as well as depressed consumption that fuelled market competition.

Further debt reduction
The Company’s debt stood at PLN 9.3bn, down by PLN 0.6bn year on year. The financial gearing was reduced from 42.2% to 32.2%. The covenant ratio of net debt/EBITDA plus Polkomtel dividend provided for in the facility agreements remained at a safe level of 1.41.

- Our three-year efforts have delivered expected results: PKN ORLEN has a sound financial standing now. We intend to continue with debt reduction as well as steadily work to enhance our efficiency. Such a strategy will best prepare the Company for the hard times ahead. At the same time, we are glad that despite the deteriorating macroeconomic climate, we are able to continue investing in our key development projects - said Sławomir Jędrzejczyk, ORLEN’s CFO.

Stable situation of ORLEN Lietuva and Unipetrol
For the first nine months of 2011, ORLEN Lietuva recorded a LIFO-based operating profit of USD 5m. In Q3 2011 alone, the company incurred a LIFO-based operating loss of USD 6m. The loss is primarily attributable to the deteriorating macroeconomic conditions. However, year on year, the operating profit improved by USD 15m. The key factors which contributed to the improved performance were in particular enhanced efficiency (including a 16% increase in the share of inland sales), and the lower consumption of energy and other materials.

The challenging macroeconomic conditions and effects of the cyclic shutdown of the Litvinov plant significantly affected the Unipetrol Group’s performance, mainly in the refining and petrochemical segments. The adverse effect of global factors was partially offset by a reduction of fixed costs, allocation of unused CO2 emission allowances and non-recurring events. Whilst Unipetrol’s retail segment recorded a positive, but lower year on year performance; the company improved its margins on diesel oil and increased sales volume for high-margin Verva fuels. Overall, for the first nine months of 2011 Unipetrol reported a LIFO-based operating profit of CZK 50m.

Disinvestments
In Q3 2011, PKN ORLEN continued its efforts designed to release capital tied-up in non-core assets.

Towards the end of October 2011, the Office of Competition and Consumer Protection (UOKiK) approved the disposal of PKN’s 24.39% equity interest in Polkomtel to Spartan Capital Holdings. The final share purchase agreement is to be executed in November 2011. In the transaction, PKN ORLEN is to receive a pre-tax amount of PLN 3.7bn. Simultaneously with the above, PKN ORLEN was preparing the sale of Anwil. At the same time, the Company made preparations for the disposal of Anwil; ORLEN continued the buy-out of Anwil shares from minority shareholders in order to hold 100% of Anwil share capital. PKN ORLEN also conducted analyses of two potential disinvestment models: the sale of the entire company or sale of its two separate parts (fertiliser business and PVC business). The analyses were also designed to help select the optimum disposal model in the context of the prevailing market conditions.

New business segments
PKN ORLEN has continued its projects in the upstream and power segments. Currently, exploratory wells are being drilled as part of exploration for shale gas in the Lublin Province. The drilling results are to be known in mid-2012. PKN ORLEN is also involved in exploration for crude oil. Drilling of an exploratory well on the Latvian shelf is scheduled for H1 2012. A further two wells in the Polish Lowlands are also scheduled for drilling in 2012. Exploration for crude oil is also going to be conducted in the Lublin Province, where data is currently being analysed with a view to selecting well locations.

As part of its investing activity in the power segment, PKN ORLEN is at advanced stages of preparation for construction of a gas-fired power plant in Włocławek, with a capacity of up to 500 MWe. The Company has already obtained the building permit, and has opened a tender procedure for the selection of a contractor at the generating unit. The contract is to be awarded in early 2012, while the plant’s commissioning is scheduled for 2014.