PKN ORLEN’s Q2 2013 Consolidated Financial Results

In Q2 2013, PKN ORLEN recorded:

• LIFO-based EBITDA of over PLN 0.8bn,
• 3% to 9% increase in sales volumes across all business segments,
• further debt reduction, to PLN 5.2bn.

PKN ORLEN’s financial performance in Q2 2013 was mainly affected by adverse macroeconomic developments. The model refining and petrochemical margins, as well as the URAL/Brent differential declined year on year, while the Polish złoty depreciated against the U.S. dollar and the euro. In Poland, Germany and the Czech Republic, the GDP growth rates decelerated relative to the corresponding period of the previous year. All of PKN ORLEN’s geographical markets saw a decrease in the consumption of gasoline, while in Poland diesel oil consumption went down as well. Lower crude oil prices also had an adverse effect on the valuation of inventories, driving it down by approximately PLN 0.4bn. Q2 2013 then saw a one-off negative effect from the sale of mandatory stocks for PLN 0.1bn, which will, however, be offset with hedging transactions. In spite of the above developments, in Q2 2013 PKN ORLEN posted LIFO-based operating profit of more than PLN 0.8bn, owing mainly to the increase in sales volumes across all its operating segments and revenue on a par with the Q2 2012 figure.

The need for non-cash revaluation of inventories due to lower crude oil prices, as well as revaluation of credit facilities – due to depreciation of the Polish złoty – weighed down on the financial performance. As a result, PKN ORLEN reported an operating loss of PLN (-)137m and a net loss of PLN (-)229m.

“Despite the challenging macroeconomic environment, PKN ORLEN improved both sales and market shares. We have been consistently pursuing projects outlined in our strategy, aiming to enhance the ORLEN Group’s standing and competitiveness in the coming years,” said Jacek Krawiec, CEO and President of the PKN ORLEN Management Board.

The refining segment's LIFO-based EBITDA deteriorated by over PLN 800m, due to the souring macroeconomic climate as well as the one-off sale of a portion of mandatory stocks. These negative effects were only partly offset by a 5% increase in crude throughput, higher capacity utilisation, improved fuels yield and a 9% growth in sales volumes.

Improved fuel margins in Germany contributed PLN 28m to LIFO-based EBITDA, as a result of which Q2 saw it reach PLN 369m in the retail segment. That performance was also supported by a 9% uplift in sales in Germany and a 7% rise in sales on the Czech market, while in Poland sales volumes remained stable. Elsewhere, the Company expanded its shares in most of the markets in which it operates. The Polish network of ORLEN service stations was consistently expanded to include new outlets with catering services. However, the economic slowdown also depressed the non-fuel margin.

As petrochemical margins shrank, a 4% increase in the petrochemical segment's sales and higher capacity utilisation across the main units translated into LIFO-based EBITDA of PLN 531m. Sales volumes saw the strongest growth in polyolefin and PVC, but this was somewhat offset by a decline in fertiliser sales after a stoppage at the Spolana facilities in the wake of a flood which inundated parts of the Czech Republic in June.

“Our financial position remains very stable. In the second quarter, we posted robust operating inflows of PLN 4.3bn. We also managed to significantly reduce debt, and our financial leverage was retained on a very comfortable level. Our efforts have been recognised by the market, rating agencies and investors alike, as best evidenced by the huge success of two issues of ORLEN retail bonds launched in June,” said Sławomir Jędrzejczyk, CFO and Vice-President of the PKN ORLEN Management Board.

In line with the strategy established by PKN ORLEN towards the end of last year, the Company is pursuing projects in the area of exploration for both conventional and unconventional hydrocarbon reserves, as well as work aimed to develop its power generation business. Capital expenditure in the first half of the year reached PLN 838m. Work was continued on projects designed to ensure regulatory compliance and keep production assets fully operational. Forty percent of the total amount allocated to capex was spent on growth-oriented projects.

As part of the exploration work targeting unconventional gas plays, in the second quarter of 2013 the drilling of two vertical wells was completed within the Wierzbica and Lubartów licence areas, and an eighth, vertical well, was spudded within the Wierzbica block. Under the same licence, the first fracturing treatment of a horizontal well section was completed. In addition, PKN ORLEN is also engaged in conventional gas and oil exploration.

In April 2013, the cornerstone was laid for the construction of a 463 MWe CCGT unit in Włocławek. From 2017 onwards, the new unit will co-generate electricity and heat for the Anwil Group, PKN ORLEN, as well as third-party customers. In the second quarter, earthworks continued on the construction site and orders were placed for all key unit components. Concurrently, work was under way on a CCGT unit in Płock, with a rated capacity between 470 and 600 MWe. In June, the Company launched tender procedures for a project design required to obtain a building permit, and to select a contractor. According to the preliminary schedule, construction work is expected to span the years 2014-2017. The final decision to execute the project is due in 2014, once the economic feasibility study has been completed.

The issue of two series of retail bonds, carried out in the second quarter of 2013, was a huge success. Subscription for Series A bonds was launched on May 28th and covered PLN 200m of debt securities. In response to the enormous interest from investors (the entire issue was subscribed for in just two days), the Company decided to launch another issue for the same amount. The entire issue of Series B bonds was also sold before the scheduled closing date. PKN ORLEN expects the proceeds from the entire bond issue programme to reach approximately PLN 1bn. Both the Series A and Series B retail bond issues were viewed favourably by Fitch Ratings, as confirmed by the strong sovereign rating of BBB+ (pol) the agency assigned to the bonds. Investors are able to trade in the bonds on the Catalyst market of the Warsaw Stock Exchange.
PKN ORLEN has invariably enjoyed the confidence of independent financial and industry experts. In May this year, analysts from leading international banks, consulting firms and research institutes, taking part in the ninth edition of the 'Best Managed Companies in Central and Eastern Europe' ranking, published by the British financial magazine Euromoney, named PKN ORLEN the best managed company in Central and Eastern Europe in the oil/gas/chemicals/petrochemicals category. The Company was also ranked first in the fuel, power generation and hydrocarbon production category of the seventh edition of the prestigious ranking of Socially Responsible Companies, listing the largest Polish firms recognised for the outstanding quality of their CSR management policies. The Socially Responsible Companies ranking is prepared by the Dziennik Gazeta Prawna daily, with the expert support of the Responsible Business Forum, Kozminski University and PwC.