PKN ORLEN’s consolidated financial performance after four quarters of 2011

In 2011, PKN ORLEN recorded the following results:

• A growth in aggregate sales volumes to 35.5m tonnes;
• Sales revenues from all our markets exceeded PLN 100bn;
• LIFO-based operating profit for 2011 exceeded PLN 900m (y-o-y drop of PLN 800m);
• The petrochemical segment posted a 120% y-o-y increase in operating profit, up to PLN 1bn;
• Our debt level fell by another PLN 200 million (y-o-y), to PLN 7.6bn.
• Important non-recurring events in Q4 2011: PLN 2.3bn in profit from the sale of Polkomtel and PLN 2.3bn following from inventory revaluation.

The ORLEN Group generated LIFO-based profit of PLN 900m for 2011, down by PLN 810m year on year. The result was achieved despite the challenging and volatile macroeconomic conditions, such as the low refining margin, volatile URAL/Brent differential and unfavourable exchange rates of the złoty against foreign currencies. The rising prices of crude oil and petroleum products inflated fuel prices, eroding retail margins. The final operating result of PLN 3.25bn includes a record amount of PLN 2.3bn from inventory revaluation.

In 2011, PKN ORLEN's total sales volumes rose by 4%, to a record level of nearly 35.5m tonnes. In Q4 2011 alone, our fuel sales volume on the Polish market rose by 10%, which stands out as excellent performance compared with the whole market, whose growth in the quarter is estimated at merely 5%. On the back of the higher sales volumes and significant rise in oil prices, combined with the weakening of the złoty, the Group posted robust sales revenue for the entire 2011, which reached nearly PLN 107bn.

In the previous year, macroeconomic factors hurt the Group's financial performance. A 40% surge in oil prices, a drop in the model refining margin and the URAL/Brent differential by a total of USD 1.4/bbl, as well as a marked depreciation of the złoty both against the US dollar and the euro, compelled us to take steps aimed to boost sales volumes. The strategy was successful in driving up sales across all segments to a record level of PLN 35.5m tonnes, which helped us mitigate the adverse impact of macroeconomic factors. As a result, operating profit for 2011, before the inventory revaluation to reflect the rising oil prices, amounted to PLN 905m (compared with PLN 1.715bn in 2010). Concurrently, debt was reduced to PLN 7.6bn, financial leverage fell to a comfortable level of 29.6%, and the net debt/(EBITDA + dividend from Polkomtel) covenant dropped to 1.29.

“High oil prices and a weaker złoty affect our performance. This combination of factors dampens demand forcing us to settle for lower margins. I am glad that thanks to our consistent efforts to protect the market from excessive price rises, we managed to achieve record sales volumes across all segments, which improved PKN ORLEN's performance in 2011,” said Jacek Krawiec, PKN ORLEN’s CEO.

In 2011, retail sales went up by 5%. The growth was driven particularly by the Polish and German markets, where fuel sales rose by as much as 9%. The result offset the negative impact of lower retail margins.

Sales in the refining segment rose in 2011 by 3% year on year, although the volume of processed crude was down by 1%. The segment's LIFO-based operating result for 2011 was negative at PLN -22m. The main contributors to that result included the harsh macroeconomic climate, higher costs of meeting the National Indicative Target (as the excise duty relief was abolished), overhaul shutdowns at the ORLEN Group's largest refineries, and asset write downs at Paramo and ORLEN Lietuva.

The petrochemical segment reported sound performance thanks to the PX/PTA unit and sales of plastics. After the PX/PTA complex came on stream in June 2011 and sales of terephthalic acid were launched, while at the same time sales of plastics (PVC) increased, the overall sales volumes in the petrochemical segment rose by 7%. Combined with a higher model petrochemical margin, this allowed the Group to generate operating profit of PLN 1.07bn, up by 120% on 2010. The segment's result would have been even better but for the overhaul shutdowns, which were reflected in lower sales of certain petrochemicals, mainly polymers.

The Group owes its strong liquidity position to the continued implementation of measures aimed at reducing debt and capital employed. In 2011, debt was reduced to PLN 7.6bn, which resulted in a further lowering of financial leverage to 29.6% and of the net debt/(EBITDA + dividend from Polkomtel) covenant to 1.29. Also in 2011, credit facility agreements were signed for a total amount of nearly EUR 2.9bn to refinance the Group's debt, which means that PKN ORLEN has secured financing of its operations for the next five years. Capital employed was reduced by over 5.6bn relative to 2010. The effects of those measures were viewed positively by Fitch, which – despite the difficult environment – upheld the Company's rating at the BB+.

The sale of Polkomtel SA shares in November 2011 generated proceeds of PLN 3.7bn.

Development of the upstream and power generation segments lies at the core of our strategy to become a multi-utility group. In 2011, PKN ORLEN completed drilling of the first vertical wells in search for shale gas in Lubartów and Wierzbica. More vertical wells are planned to be drilled within both licence areas. If the results of the work performed so far are encouraging, there are plans for horizontal drilling and fracturing. Seismic surveys will be performed within the Hrubieszów licence in 2012. PKN ORLEN is also involved in the exploration for crude oil. Currently, analyses are under way with a view to identifying drilling locations in the Lublin Province and on the Latvian shelf, where the first borehole is to be spudded by the end of this year. In Polish Lowlands (Sieraków), work has been ongoing on an appraisal well.

In connection with the planned 450-500MWe gas-fired power plant project (in Włocławek), we have obtained the environmental decision and permit to build a power unit. The Group has also signed an agreement to connect the new power plant to the power grid and an agreement with GAZ-SYSTEM to construct a connection gas pipeline. The selection of an EPC contractor for the power plant project is planned for the first half of 2012 (price offers will be opened in mid-February to shortlist bidders for the next stage of the negotiations). The construction of the unit should start in 2012, while its commissioning is expected in late 2014 or early 2015. Investment expenditure on the project is estimated at PLN 1.5bn.

In 2011, the activities of PKN ORLEN were recognised by various Polish and international experts. The Group retained its position in the prestigious Respect Index and won the "Best Managed Company – The Most Compelling and Coherent Strategy in Poland" ranking of the Euromoney magazine. ORLEN was also the highest ranking Polish company in the Top 250 Global Energy Company list. The quality of the Company's communication with the capital market won the approval of the judging panels working as part of the WarsawScan 2011 and IR Magazine award rankings: PKN ORLEN was named the "Best Company in Terms of Quality of Information Policy and Corporate Governance" and awarded for the "Best Investor Relations by a Polish Company".

As part of our educational and CSR activities, inJanuary 2012 we launched a modern interactive website to teach chemistry to middle school students (Polish version at www.poczujchemie.pl, Czech version at www.zazijchemii.cz). In this way, we want to change the stereotypical perceptions of chemistry prevailing among youngsters and to popularise this branch of knowledge with the use of new media and innovative technologies.