Responses to the shareholder’s questions concerning the items of the agenda of ORLEN EGM to be held on 6 February 2024

ORLEN S.A. (“ORLEN”, “Company”) submits responses to the questions of the shareholder, the State Treasury asked pursuant  to Article 428 par. 6 of the Code of Commercial Companies and concerning items 6, 7 and 8 of the agenda of the Extraordinary General Meeting of ORLEN to be held on 6 February 2024, i.e.:

“6. Consideration of and voting on a resolution to approve the disposal of 100% of shares in Gas Storage Poland Sp. z o.o. of Dębogórze.

7. Consideration of and voting on a resolution to approve the disposal by the Company of properties situated in the Stara Biała Municipality and in Płock, together with their component parts, through their contribution in kind as payment for shares in the increased share capital of ORLEN Olefiny Spółka z ograniczoną odpowiedzialnością of Płock (KRS No. 0000906575) in connection with the continued construction of the Olefins III Complex by ORLEN Olefiny and the process of raising financing for the Project in the form of project finance.

8. Consideration of and voting on a resolution to approve the disposal of an organised part of the Company’s business to PGNiG Upstream Polska Spółka z ograniczoną odpowiedzialnością of Warsaw (Number in the National Court Register: KRS 0000919530), to be effected by contributing the organised part of business as a contribution in kind and subscribing, in exchange, for all new shares in the increased share capital of PGNiG Upstream Polska Spółka z ograniczoną odpowiedzialnością.”

 

Questions asked by the shareholder together with the Company’s responses are presented below.

 

Considering the information presented to the Shareholders in the justification for the resolution draft in item 6 of the agenda of Extraordinary General Meeting, please address the issues specified below and provide answers to the following questions:

1) what approach and valuation method were applied to assess the value of shares in Gas Storage Poland sp. z o.o. (hereinafter: GSP), including information on the use of any forced sale discount, and whether the agreed transaction pricing conditions (selling price) fall within the market value range of the shares, as determined in the valuation commissioned by ORLEN S.A.; 

RESPONSE: 

The valuation was carried out using the income approach, based on discounted cash flow (DCF). The discounted cash flow method was selected as adequate due to the maturity (documented historical ability to generate positive cash flow) of Gas Storage Poland Sp. z o.o. ("GSP") and GSP's subsidiary, i.e. CHEMKOP Sp. z o.o. ("Chemkop") and the availability of financial forecasts. A market approach using the comparable public companies method was used as a complementary approach.

The agreed price is within the range of the market value of the shares, as determined by the valuation prepared at the request of ORLEN and does not include a discount for forced sale.

 

2) are there storage installations and gas warehouses in the assets of the selling company;

RESPONSE: 

No, the assets of the divested company do not include storage facilities or gas storage facilities. GSP is only an operator of storage facilities, which remain the property of ORLEN. In accordance with the decision of the President of the Office of Competition and Consumer Protection No. DKK - 82/2022 of March 16, 2022, approving the concentration of ORLEN with Polskie Górnictwo Naftowe i Gazownictwo S.A. ("PGNiG"), one of the conditions is to ensure that on the date of disposal of control over GSP, an agreement entrusting GSP with the function of operator of the gas fuel storage system owned by the entity resulting from the concentration, will be in force, concluded for at least 10 years. The agreement will be the basis for GSP's operations in the long-term horizon.

 

3) is there a plan to contribute or dispose of other ORLEN assets to GSP prior to the disposal of GSP;

RESPONSE: 

No, no other ORLEN assets are planned to be contributed or disposed of to GSP prior to the disposal of GSP. This also applies to storage facilities and natural gas storage facilities, which, according to the answer to question no. 2, remain the property of ORLEN and will be made available to GSP on the terms specified in the agreement entrusting the responsibilities of the storage system operator.

 

4) will there be other components of ORLEN assets sold along with GSP shares, including critical infrastructure facilities;

RESPONSE: 

No, no other assets of ORLEN will be sold together with GSP shares. The subject of the transaction is only the sale of GSP together with its subsidiary Chemkop, which follows directly from the decision of the President of the Office of Competition and Consumer Protection No. DKK - 82/2022 of March 16, 2022.

 

5) is the transaction settlement planned exclusively in cash;

RESPONSE:

Yes, the settlement of transactions is planned to be in cash only.

 

6) for what reasons were the buyer and the selling price (or the method of its determination) not specified in the resolution?

RESPONSE:

Pursuant to § 7.7.15 of ORLEN's Articles of Association the competence of the General Meeting includes adoption of a resolution on approval of acquisition, purchase or disposal of shares or stocks of entities in the Company's Capital Group, which, based on generally applicable regulations, perform the function of a natural gas distribution system operator or natural gas storage system operator, with specification of the conditions and mode of disposal. Applying the provisions of the Articles of Association directly, the draft resolution specifies the conditions and mode of disposal. 

The lack of indication of the selling price results from the protection of ORLEN's interests in connection with the GSP divestment process. In addition, due to its relatively low value, the transaction has no material significance for ORLEN. The draft resolution indicates how the price will be determined by specifying that the GSP divestment will be carried out on price terms corresponding to market conditions based on valuations prepared by reputable auditing and consulting entities acting on behalf of both parties of the transaction. 

At the same time, the justification for the resolution indicates that Gas Transmission System Operator Gaz-System S.A. is a party of the transaction ("Gaz-System"), and that the President of the OCCP accepted Gaz-System as a potential buyer, meeting the requirements set for an Independent Investor in Decision No. DKK - 82/2022 dated March 16, 2022.

 

In the context of the decision of the President of the Office of Competition and Consumer Protection (OCCP) No. DKK – 82/2022 dated March 16, 2022, granting approval for the merger of the Company with Polskie Górnictwo Naftowe i Gazownictwo S.A. subject to the condition of ORLEN S.A. permanently divesting control over GSP within 12 months from the merger, and the subsequent decision of the same authority No. DKK – 265/2023 dated November 8, 2023, which extended the deadline for fulfilling the condition, please provide information regarding:

7) the reasons for the extension of the deadline for fulfilling the condition specified in the decision of the President of the Office of Competition and Consumer Protection, and information on the extended deadline;

RESPONSE: 

The change in the deadline results from the fact that the OCCP's taking into account the significant change in regulatory conditions resulting from article 37 of the Act on special protection of gas fuel consumers in 2023 in connection with the gas market situation of December 15, 2022 (Journal of Laws of 2022, item 2687) and the enacted new provision, i.e. article 9h(3) in the Act of April 10, 1997 - Energy Law (Journal of Laws of 2022, item 1385, 1723, 2127, 2243 and 2370), which introduces new responsibilities and a certification procedure for the storage system operator. This proceeding, conducted by the President of the Energy Regulatory Authority with the participation of the European Commission, introduced a new significant circumstance that did not exist at the time of the issuance of Decision No. DKK - 82/2022 dated March 16, 2022. Selling GSP without first obtaining the certificate referred to in Article 9h(3) of the Energy Law could harm the effectiveness of the condition imposed by the President of OCCP. At the same time, the President of the OCCP took into account additional circumstances pointed out by ORLEN, related to the high advancement of the GSP sale process.

The deadline for the obligation to implement the decision is extended to May 2, 2024. In accordance with decision No. DKK - 82/2022 of March 16, 2022, the period of the antitrust proceedings on the concentration between the independent investor and the GSP is not included in the deadline for implementing the condition.

 

8) the schedule for the implementation of further steps in the sale of GSP and information on whether the Company intends to use the maximum deadlines imposed by the President of OCCP.

RESPONSE:

It is ORLEN's intention that the conditions precedent will be fulfilled as of February 6, 2024, assuming the approval of ORLEN's EGM to divest GSP. The transaction is also conditioned by the approval of the concentration between Gaz-System and GSP, with this proceeding not counting towards the deadline set by the President of the OCCP. Accordingly, under the current project schedule, ORLEN does not anticipate the need to extend the deadline for the condition.

 

 

In reference to the justification of the resolution draft presented to the Shareholders in item 7 of the agenda of the Extraordinary General Meeting and the information published by the Company regarding the Olefins III project, especially in the current report No. 30/2023 dated June 29, 2023, please address the following issues, and provide information on:

1) the current status of the implementation of the Olefins III Complex construction project and the reasons for the ongoing increase in costs and extension of the project timeline, as well as risk factors associated with project implementation and anticipated methods of mitigation;

RESPONSE: 

Current status of the project 

Construction of Olefins III complex is a strategic investment of ORLEN designed to extend the value chain through the modern petrochemicals what at the same time will effectively translate into extension of refining assets life.

1. In July 2023, pursuant to corporate decisions made on June, 29 2023 by the Management Board and the Supervisory Board of the Company, the following project agreements were signed:

• Amendment to the Agreement for the construction of the Olefins III complex in the EPCC (Engineering, Procurement, Construction, and Commissioning) formula with Hyundai Engineering Poland Limited Liability Company Técnicas Reunidas S.A. Spółka Jawna based in Płock, the contractor for the Olefins III complex within the ISBL scope (Inside Battery Limit).

• Contracts for the implementation of main units (OSBL, Outside Battery Limit) necessary for launching the Investment and preparing infrastructure for further stages of petrochemical development.

2. In December 2023 the construction works for ISBL scope exceeded half of their realization plan and for OSBL scope the works are at the early stage respectively to the contracted deadlines. 

3. Works related to the process of securing financing in the form of project finance are underway.

Reasons for increase in costs and extension of the schedule of Olefins III Complex construction project and risk factors

• The war in Ukraine and changes in legislation due to imposed sanctions.

The direct cause of the increase in CAPEX is the war in Ukraine and, as a consequence, the change in legislation due to imposed sanctions, along with the rising costs of project implementation resulting from these events. Due to the mentioned events, the assumptions relating to the costs and the schedule of the project approved in the realization decision for Olefins III in May 2021 was changed in June 2023..

• Inflation growth

During the referred period, the CPI (Consumer Price Index) inflation rate increased by ca. 29%.

• Supply chain disruptions and impact on the contracting process

It should be noted that to complete the work and initiate the process part of ISBL, it is necessary to construct and launch dedicated OSBL infrastructure to secure the essential media for the ISBL launch. At the outbreak of the war in Ukraine, in February 2022, ORLEN was, in line with the plan, in the process of contracting contractors for the auxiliary infrastructure facilities (OSBL). Due to the mentioned event, most Polish contractors were unable to continue participating in the procurement process, confirm their readiness to submit offers for the work due to the lack of material and resource availability, and the emergence of execution risks at that time.

In the new economic and political environment, the continuation of the project involved a significantly extended contracting process and extended delivery dates, which consequently postponed the planned commissioning date of the plant complex.

Anticipated ways of mitigating risk factors

• Regarding the aforementioned risks and enabling the continuation of the process, ORLEN has revised its procurement strategy and taken measures to optimize the scope of investments to reduce CAPEX and secure the possibility of finalizing the contracting process.

• The operations related to the project implementation are carried out in accordance with the highest standards, including the guidance and recommendations of reputable international technical and legal advisors.

It should be underlined that all identified project risks are analyzed and managed on an ongoing basis considering their impact on the schedule, budget, and parallel project streams. 

 

2) the way of use of assets divested by ORLEN S.A. in the process of obtaining financing for the Olefins III project;

RESPONSE: 

Contribution of assets by ORLEN to ORLEN Olefins Sp. z o.o. is a significant and necessary step in realization of the process of obtaining of financing for the Olefins III project in the “project finance” formula.

As part of the implementation of the project (except for the part that will ultimately be implemented at the level of ORLEN), work is currently underway to obtain external financing under the project finance formula. For this purpose, in 2021 ORLEN established ORLEN Olefins Sp. z o.o. ("SPV"), i.e. a special purpose vehicle (SPV), which formally and business-wise will be the entity implementing the project and, at the same time, the borrower, incurring debt to finance the implementation (construction) of the project. It should be noted that ORLEN holds all (100%) shares in the SPV, and therefore has full control over this company.

Consequently, a significant part of the assets and necessary for the implementation of the project must be contributed by ORLEN to the SPV. This applies to properties and assets belonging to and currently being acquired by ORLEN, in connection with the implementation of the project (including so-called fixed assets under construction, including future construction facilities, structures, buildings, machinery, equipment and transmission networks - which are currently at various stages of construction). 

The planned form of transfer of the aforementioned assets is their contribution by ORLEN - as an in-kind contribution - to the SPV, in exchange for new shares in that company to be acquired by ORLEN. As a result, the SPV will obtain legal title - i.e. the ability to use the above-mentioned assets for further implementation of the project, and will be able to establish, as standard required, a collateral for project financing in favor of financial institutions, such as mortgages (on the above-mentioned properties) and registered pledges (on movables and rights related to the project).

The referred properties have been allocated by ORLEN for the implementation of the project, as the plants and other facilities built in connection with the project will be located on them. Pursuant to Article 393 item 4 of the Commercial Companies Code and § 7 section 7 item 8 of the Articles of Association, approval of the General Meeting is required for the disposal of ORLEN’s properties valued over the certain amount. 

The new plants built under the project, based on a lease agreement, will be fully provided by the SPV to ORLEN - for the purpose of their use and collection of benefits. ORLEN will pay to the SPV a remuneration, which will at the same time constitute a source of repayment of the debt incurred by the SPV to finance the project. Upon termination of the lease agreement, or in other situations provided for in the agreement, ORLEN will have the right to purchase the assets generated in the SPV under the project.

 

3) the key assumptions for further financing of the Olefins III investment.

RESPONSE: 

The financing for the main scope of the project is planned in the form of project finance through a special purpose vehicle, ORLEN Olefins Sp. z o.o. ("SPV"). It is planned that the SPV will secure external debt financing through bank loans covering a significant portion of the project's investment outlays. The remaining amount will be financed from ORLEN's funds, as the project sponsor. This includes the contribution of the sponsor's equity, incorporating the value of the investment outlays incurred to date for the creation of assets within the project, which will be subject to a contribution in kind to the SPV, as mentioned in the response to question 2 above. The proposed approval for the sale of the properties to the SPV is therefore one of the most crucial conditions for achieving financial closing for the project. Without this decision and the ability to finalize the contribution process by increasing the SPV's capital, the debt financing cannot be launched.

ORLEN has secured binding offers for participation in the aforementioned debt financing and is currently at the final stage of negotiating the terms and documents with several financial institutions, including Korean and Spanish export credit agencies (from the countries of origin of the main investment contractors). According to the current plan, the signing of the loan documentation should occur in the first quarter of 2024, and the financing closing for the project, enabling the activation of funds from the loans, will depend on the timing of meeting the suspensive conditions specified in the agreement.

The remaining part of the project, not subject to transfer to the SPV, will be implemented and financed directly by ORLEN. The entire project plants will ultimately be operated directly by ORLEN, as the plants owned by the SPV will be subject to leasing for the benefit of ORLEN.

 

 

Considering the information presented to the Shareholders in the justification for the resolution draft in item 8 of the agenda of the Extraordinary General Meeting and the strategic nature of the assets constituting the organized part of the enterprise (hereinafter: OPE) contributed to PGNiG Upstream Polska sp. z o.o., please address the following issues and provide information regarding:

1) the estimation of economic benefits related to transferring the upstream segment's activities to PGNiG Upstream Polska Sp. z o.o.;

RESPONSE: 

Transfer of the Organised Part of Business to PGNiG Upstream Polska Sp. z o.o. (“PGNiG Upstream Polska”) is part of a broader concept of reorganizing the upstream segment operations of ORLEN Group companies, aimed at maximizing the economic efficiency of using the assets acquired by ORLEN as a result of its merger with PGNiG S.A. and LOTOS Group S.A. (“Restructuring”).

The Restructuring is part of works related to the process of building a management model for an integrated energy multi-utility group and is part of a wide range of activities specified in the value creation program for the integration of the combined entities within the ORLEN Group. The plan is spread over the next few years, and its implementation is expected to lead to the creation of an efficient and effective organization with an orderly organizational and functional structure. The aim of the upstream Restructuring is to optimize upstream operations and utilize domestic hydrocarbon resources in the most rational and efficient manner possible - taking advantage of synergies resulting from centralization of operations of upstream entities within the ORLEN Group (acquired resources of PGNiG S.A. including Exalo Drilling S.A., ORLEN Upstream Sp. z o.o., LOTOS Petrobaltic S.A. and LOTOS Upstream Sp. z o.o.). in one dedicated entity.

The Restructuring assumes increasing the efficiency of the use of upstream assets and competency resources in the ORLEN Group, and the primary goal of the changes is modernize and optimize operational processes, which will increase the value of the upstream business from the shareholders' perspective.

The achievement of the indicated economic goals of the Restructuring will be enabled by the planned activities related to:

1) the creation of an effective unified decision-making and corporate stream (expected savings both in the area of financial outlays, as well as in the burden on human resources and decision-making time); 

2) providing access to geological information within one entity (expected cost savings and improvements in the efficiency of entities' exploration and extraction processes);

3) increasing the occupancy of existing infrastructure; PGNiG Upstream Poland will have a consolidated portfolio of assets and a much larger resource of upstream, hydrocarbon processing and transmission infrastructure, which will allow to realize savings resulting from the economies of scale of its operations;

4) effective cooperation of experts previously working in different entities;   

5) creation of a strong service and technical competence centre of the upstream area, which will provide the following services: maintenance services for drilling mining, engineering and construction services, drilling services, geological services, geophysical services, construction services, research, processing and interpretation of seismic and drilling data (the centre will support both Polish and foreign operations: in Norway, Canada, UAE - leading to improved use of entities' technical resources and additional cost savings).

The synergy effects in the areas discussed and the resulting savings will also allow efficient development work and modernization of upstream processes in the merged entities. The above circumstances provide the economic basis (reason) for the ongoing Restructuring process, the first stage of which is the contribution of the organized part of the enterprise to PGNiG Upstream Poland.

 

2) the way of transferring of concessions for the exploration, appraisal, and extraction of hydrocarbons from deposits currently owned by ORLEN S.A.;

RESPONSE:

Concessions for the exploration, appraisal and production of hydrocarbons from the fields, relating to the Organized Part of Business will be transferred by ORLEN to PGNiG Upstream Polska as part of the Organized Part of Business, on the basis of contribution agreement, after prior consent (no objection) from the licensing authority, i.e. the Minister for Climate and Environment. The procedure for notifying the concession authority of the intention to transfer the concessions and obtaining the regulator's approval is conducted on the basis of Article 36a of the Act as of June 9, 2011 - Geological and Mining Law.

 

3) the reasons for deciding to divide the Reorganization into two stages (i.e., transferring warehouses in Bonikowo and Daszewo in the first stage and warehouses in Kosakowo, Mogilno, Wierzchowice, Husów, Brzeźnica, Swarzów, and Strachocin in the second stage);

RESPONSE:

The first stage of the Restructuring assumes the transfer by ORLEN to PGNiG Upstream Polska of the set of tangible and intangible assets described in the draft resolution, including the nitrogen rich natural gas storage facilities located in Bonikowo and Daszewo. The above-mentioned storage facilities are an integral part of the nitrogen rich natural gas system for balancing of its production. These storage facilities are primarily an element of the gas production system. Therefore, their functions are integrally related to the tangible and intangible assets to be transferred by ORLEN to PGNiG Upstream Polska under the Organized Part of Business.

The second stage of the Restructuring assumes the transfer by ORLEN to PGNiG Upstream Polska, in particular, the storage facilities located in Kosakowo, Mogilno, Wierzchowice, Husowo, Brzeźnica, Swarzów and Strachocina. These storage facilities are part of the natural gas storage system. The above-mentioned storage facilities are subject to the obligation to obtain a certificate of independence by the storage system operator, introduced by the amendment to the Act as of April 10, 1997 - Energy Law, which took place in December 2022. The procedure for obtaining the certificate by the storage system operator is in progress. Transfer of natural gas storage facilities to PGNiG Upstream Polska before the certification process is completed would require re-carrying of a significant part of the activities and could result in the materialization of unacceptable risk factors regarding the stability of the storage operations. One of the bodies involved in the certification process is the European Commission. The date of completion of the certification process cannot be clearly determined.

Considering that carrying out the first stage of the Restructuring is beneficial to ORLEN, and the implementation of this stage of the Restructuring is not dependent on the completion of the certification process indicated above, it was decided to transfer these organized parts of the enterprise in two stages. As part of the first stage, the following will be transferred to PGNiG Upstream Polska: storage facilities that are part of the gas production system, and as part of the second stage - storage facilities that are part of the natural gas storage system. The second stage of the Restructuring will be implemented after the certification process is completed.

 

4) the approach to the valuation and the valuation method of the divested OPE;

RESPONSE: 

The valuation of the Organized Part of Business was carried out using the discounted cash flow (DCF) method under the income approach and, additionally, the market approach (multiples of comparable companies). The valuation included an estimate of fair market value, as defined by International Valuation Standards (IVS).

 

5) the planned timeframe for contributing the contribution to PGNiG Upstream Polska sp. z o.o. 

RESPONSE: 

The planned date for the contribution in kind of the Organized Part of Business to PGNiG Upstream Poland is July 1, 2024 (planned date of concluding the contribution agreement).

 

Additionally, please provide information on whether critical infrastructure objects are part of the divested OPE.

RESPONSE: 

Information on critical infrastructure facilities may be made available only in the manner and on the terms provided for in the relevant regulations, including the Act as of March 18, 2010 on the special powers of the minister responsible for state assets and their exercise in certain capital companies or capital groups operating in the electricity, oil and gas fuels sectors.

 

 

See also: regulatory announcement no 47/2023 and no 48/2023 as of 12 December 2023, and 1/2024 as of 11 January 2024.