A N N U A L R E P O R T

Transcription

1 A N N U A L R E P O R T

2 mission statement Aiming to become the regional leader, we ensure long-term value creation for our shareholders by offering our customers products and services of the highest quality. All our operations adhere to best practice principles of corporate governance and social responsibility, with a focus on care for our employees and the natural environment. Credo Whenever you need us

3 KEY FINANCIAL FIGURES FOR THE YEARS IFRS PLN m PLN m PLN m PLN m PLN m PLN m Income 18,602 17,038 16,902 24,412 30,680 41,188 EBITDA 2,335 1,706 1,891 2,503 4,037 6,728 EBIT 1, ,267 2,687 4,948 Net earnings ,538 4,638 Profit of minority shareholders Profit of the majority shareholder ,482 4,585 Assets 14,087 14,383 15,073 17,149 20,869 33,404 Equity 7,766 8,353 8,741 9,937 13,631 19,313 Net debt (1) 2,542 2,549 2,341 2, ,285 Net operating cash flows 1,073 2,112 1,292 1,707 3,637 3,664 Investments (2) 1,459 1, ,337 1,824 2,026 Headcount in the ORLEN Group (3) 13,342 17,582 17,818 15,133 14,296 20, PLN m PLN m PLN m PLN m PLN m PLN m EPS Operating cash flow per share Assets per share Equity per share Financial leverage (4) 32.7% 30.5% 26.8% 24.2% 3.5% 17.0% ROACE (5) 10.8% 4.2% 4.8% 7.9% 16.5% 21.8% NET EARNINGS IFRS, PLN m 5,000 4,500 4,638 4,000 3,762 3,500 3,000 2,500 2,000 2,330 2,538 1,500 1, * net earnings (LIFO) net earnings (weighted average) * Consolidation of the Unipetrol a.s. result is connected with a one-off effect of recording in 2005 estimated surplus of the fair value of acquired assets over their acquisition price of PLN million as other operating costs. 1) Net debt = short-term and long-term interest liabilities (cash + short-term securities). 2) Acquisition of tangible fixed assets and intangible fixed assets. 3) Including headcount of Unipetrol a.s. as at the end of 2005 on the level of ) Financial leverage = net debt/equity. 5) ROACE = EBIT after tax at the applicable rate/average (equity + net debt).

4 2005 Calendar of Major Events January February March April May June July August September October November December Accepted corporate governance principles recommended by the Warsaw Stock Exchange. Joined the movement against financial corruption and embezzlement Partnership against Corruption. Co-financed the purchase of an autograph of Etude cis-moll op. 10 no. 4 of Frederick Chopin and presented it as a gift to the F. Chopin Memorial Museum in Warsaw. Ended the sales of the U-95 universal petrol. Presented shareholders of PKN ORLEN with the strategy for Building Corporate Value for the years Granting the Bulls and Bears statue by the Parkiet stock exchange magazine for top quality investor relations. Presenting the strategy for winning the regional sales leadership in the Retail Sales Development Plan in Poland for the years Launched the process of reorganizing regional structures. Obtained consent of the European Commission to purchase 63% of the Unipetrol a.s. holding. Won the first position in the ranking of the Parkiet stock exchange magazine and the Rzeczpospolita daily top 500 companies in Poland. Won for the fourth time the award of Trusted Brand, the largest European consumer opinion poll, in the petrol station category. PKN ORLEN becomes a holder of 63% shares in the Unipetrol a.s. holding, thus launching the construction of a strong regional fuel group with a big potential for value creation. The Supervisory Board of the Company approved the remuneration system for managerial staff of PKN ORLEN based on Management by Objectives (MBO). The team of Wisła Płock sponsored by PKN ORLEN won championships and the Polish Cup in handball. Took corporate control of Unipetrol a.s. in the General Meeting of the Czech Company. Accepted by the General Meeting of PKN ORLEN corporate governance principles presented by the Management Board (except for rule no. 20 referring to independent members of the Supervisory Board). Passed a decision by the General Meeting of PKN ORLEN on changing the employer structure of the Company. The General Meeting of PKN ORLEN passed a resolution on paying a dividend, at the highest amount in the history of the Company, of PLN 2.13 per share. Signed an agreement with trade unions ending a collective dispute on reorganizing the regional structures of the Company. A new regional structure was launched. Presented assumptions for improving cost and investment effectiveness of the ORLEN Group in the new cost containment programme called OPTIMA, aimed at 2 x PLN 600 million worth of savings. Obtained consent of the Czech SEC to call for shares of Unipetrol a.s., Paramo a.s. and Spolana a.s. Sponsored the production and screening of the film Battle for Warsaw on 61 st anniversary of Warsaw Uprising outbreak. Sponsored a celebration of 25 th anniversary of Solidarity held in Brussels. Marketed of the VERVA petrol and diesel oil of the latest generation, being an element of the premium brand of ORLEN, into the Polish market. The price of a PKN ORLEN share at the Warsaw Stock Exchange reached PLN 69.90, being the record price in the history of the Company. Presented business assumptions of investments in Unipetrol a.s. in the programme Partnership for Central Europe. Processed a jubilee 400-million ton of oil in the Production Plant in Płock. Launched the modernised complex of Wytwórnia Olefin II in the Production Plant in Płock. Granted the prestigious title of The Best Refinery 2005 in CEE to PKN ORLEN by The World Refining Association. As patrons of Polish culture and sponsor of XV Chopin Contest a scholarship for Rafał Blechacz, the best Polish pianist and the winner of the contest. Launched new systems for polyethylene and polypropylene production by Basell Orlen Polyolefins Sp. z o.o. in Płock. Management Board of PKN ORLEN aproved a new organisational structure of the Company based on the segment management concept. Inaugurated the Academy of Business, aimed at improving management competence of the managerial staff of the Company. Opened the first petrol stations in the BLISKA economy brand for customers expecting good quality of fuel for a competitive price. Accepted the restructuring plan for ORLEN Deutschland AG. Successful completion of the Comprenensive Cost Cutting Programme. Accepted the Code of Ethics of PKN ORLEN containing key values and rules of conduct for employees of the Company.

5 Annual Report 2005

6 You are invited to read our Annual Report. We will take you on a graphical tour of the topic of road safety. On the following pages of the report, we will tell you about ourselves about road users and about our conduct. We all want to feel safe. We buy good cars, pay attention to their performance, thoroughly examine their accessories. Let us not forget though that it is not only technology that determines safety. Safety is about our imagination, our ability to anticipate, our responsibility. No one and nothing will ever replace us, not even electronic systems, mechanical reinforcements or legal regulations. Safety is us.

7 C O N T E N T S page Supervisory Board of PKN ORLEN 4 Letter from the Chairman of the Supervisory Board 5 Letter from the President of the Management Board 6 Management Board of PKN ORLEN 12 Our strategy 16 ORLEN brand 26 We are changing our company 30 Relations with outside parties 42 Retail segment 58 Wholesale segment 66 Refining segment 72 Petrochemical segment 78 Logistics 84 Integration with Unipetrol 90 ORLEN Group 96 Auditor s opinion 116 Consolidated Financial Statements 118 Supplementary information 196 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y CONTE NASZE R E L AC J E Z OTOCZENIEM NT S 3

8 C O M P O S I T I O N O F T H E S U P E R V I S O R Y B O A R D O F P K N O R L E N S A * D a r i u s z D ą b s k i Chairman of the Supervisory Board A n d r z e j O l e c h o w s k i 4SUPE NASZE RVISORY R E BOAR L AC J E D Z OF OTOCZENIEM PK N OR LE N 4 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y Deputy Chairman of the Supervisory Board M a c i e j M a t a c z y ń s k i Member of the Supervisory Board, Secretary R a i m o n d o E g g i n k Member of the Supervisory Board Z b i g n i e w M a c i o s z e k Member of the Supervisory Board W o j c i e c h P a w l a k Member of the Supervisory Board * Composition of the Supervisory Board as of 26 th June 2006

9 L E T T E R F R O M T H E C H A I R M A N O F T H E S U P E R V I S O R Y B O A R D O F P K N O R L E N The Supervisory Board exercises ongoing supervision over the Company s operations in all areas of its activity. Its particular competencies are defined by the Code of Commercial Companies and the Statute of PKN ORLEN. In the business area, one of the most significant events of 2005 was the publication of the strategy for The Creation of the Company s Value for the years It underlyingly focuses on the development of ORLEN Group in Poland, the Czech Republic and Germany, providing at the same time for the continuation of performance improving programmes and the implementation of investment projects in key business areas. The Company will continue to actively participate in mergers and takeovers, and to develop competencies in the upstream business. The Supervisory Board is happy to see a favourable change in the way PKN ORLEN is perceived by investors and customers, where such a change is a result of consistent actions serving to ensure compliance with the principles of corporate governance. The fact that in 2005 ORLEN was ranked among the group of the best companies respecting the principles of corporate governance in Poland is a confirmation of the effectiveness of measures undertaken by the Company with the Supervisory Board s approval. It is with great satisfaction and hope that I am witnessing commitment to the promotion of ethical behaviour in the Company. I believe that the introduction of the Code of Ethics as a signpost of honesty, reliability and good mutual relations will unite such a huge entity as PKN ORLEN. Yet, we are not going to rest on our laurels. In 2006, we will continue to implement the adopted development strategy, put into effect new carefully analysed market ideas, not forgetting to streamline all other activities having impact on the Company s bottom line. Striving to achieve the maximum profitability of our operations, we will ensure effective and stable operating conditions for the Group and tangible benefits for the shareholders. I would like to extend my words of gratitude to all Group employees for their great effort put into the Group s development, and to all of you for the trust you have placed and continue to place in the Company. Dariusz Dąbski Chairman of the Supervisory Board PKN ORLEN PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y LET NASZE TE R E L F AC ROM J E TH Z OTOCZENIEM E CH AIR M AN 5

10 L E T T E R F R O M T H E P R E S I D E N T O F T H E M A N A G E M E N T B O A R D O F P K N O R L E N The year 2005 was one of the most important years in the history of PKN ORLEN Capital Group. For over 14 months, we have been implementing a strategy for a two-fold increase in the Company s value by We wish to achieve this objective by fundamentelly changing the Company s corporate culture, modernising management methods, improving performance, and making new investments. Proceeding with its expansion plans, on 26 May 2006 PKN ORLEN signed a contract to acquire, from Yukos International UK B.V., a 53.7% stake in the share capital of AB Mažeikių Nafta, of Lithuania. Simultaneously, the Company initiated the process to purchase 30.66% of the MN shares owned by the Lithuanian government. This marks Poland s largest foreign investment ever, making ORLEN the undisputed leader in Central & Eastern Europe. The territory of the Company s core markets, i.e. Poland, Czech Republic and Germany, will now expand to include the Baltic states Lithuania, Latvia and Estonia where Mažeikių Nafta satisfies a major part of the fuel demand. 6LET NASZE TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDE NT 6 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y Until now, the Company s biggest foreign investment, and unprecedented in the history of the Polish economy, was the 2005 acquisition of control over the fuel & chemical holding Unipetrol a.s., the Czech Republic s third largest company in terms of revenue. Soon after taking over control, we took measures aimed at increasing the value of the Czech company. The Partnership Programme implemented in Autumn 2005 covered key business and function areas and envisaged support offered by both partners. 26 teams consisting of Czech and Polish experts developed nearly 200 initiatives. The targets planned for 2005 were met, while the first outcome of the Partnership Programme was EUR 28m in extra income and savings. PKN ORLEN s actions, as a strategic investor, were appreciated by the capital market. In the period from 24 May 2005, the day we took up shares in the Czech holding, until 31 May 2006, the value of the shares increased by 33.31%, from CZK to CZK

11 Our experience in completing refinery integration and modernisation projects will help us make full use of the restructuring possibilities and development potential of the acquired Lithuanian assets with a view to increasing the Company s value for the shareholders. In early 2005, PKN ORLEN adopted for implementation the strategy for The Creation of the Company s Value for the years Its assumptions were based on three pillars: continuation of performance enhancing measures, strengthening of core operations in home markets and active searching for new development possibilities in new markets, including mergers and acquisitions. Under the first pillar, which played a major part at an early stage of the strategy implementation, particular emphasis was put on measures relating to the restructuring of the retail network. The Company launched a new chain of economy stations BLISKA, and also launched a new fuel brand VERVA to be sold through ORLEN premium network. We have thoroughly reorganised regional retail sale structures by implementing a sales management programme, centralising and improving the support function, as well as streamlining employment. Thanks to decisive actions we have managed to prevent a further drop in the market share at the level of 27%. At the same time, sales of non-fuel products grew by 1.4% versus the year before, as did the number of participants in the Flota loyalty scheme by 20%. In Q4 2005, we also presented the assumptions of the strategy for ORLEN Deutschland AG for the years , based on in-depth restructuring and concurrent development of the network. We opted for the concept ensuring the fulfilment of strict economic criteria and the achievement of the adopted financial targets (ROACE of 18.4%) over the next four years. Although we approved this strategy variant for implementation, we have not ruled out the possibility of selling German assets on favourable terms. We have completed a number of key investment projects relating to petrochemical operations, including the modernisation of the Olefins Plant II and the construction of the polyethylene and polypropylene plant at Basell Orlen Polyolefins, a company from our Capital Group. Our Production Plant processed m tonnes of crude oil 3.1% more than in It is worth noting that in October we processed the 400 millionth tonne of crude oil, symbolising the 42 years of accomplishments of the refinery in Płock and the output of a sizeable segment of the Polish petroleum industry. Last year, we carried out the first independent professional assessment of the Production Plant in Płock within the context of the Salomon Study. The aim of this assessment was to benchmark the refinery s operations against competitors. PKN ORLEN was ranked among world s best, the so-called first quartile, both in comparison with all Study participants and when benchmarked against competitors from Western Europe in the following areas: return on investment, net margin, repair index. As regards operating expenses, we were ranked in the second quartile. In other areas (utilisation of the refinery s capacity, mechanical availability, personnel index, energy index), in comparison with all Study participants and Western Europe, the Company was classified into the fourth quartile. This signalled the need to initiate actions aimed at improving performance in these areas. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y LET NASZE TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDE NT 7

12 Last year, we started to implement new projects which will ensure continued development and further growth of the Company s effectiveness. These include the cost optymisation programme OPTIMA, subsequent stages of the retail network development and ventures relating to the streamlining of our Capital Group s operations, including the implementation of segment management. The most important restructuring projects include a plan for the consolidation of southern assets covering Rafineria Jedlicze SA, ORLEN Oil Sp. z o.o., Rafineria Trzebinia SA and Paramo a.s. The aim of those measures is to optimise the production of oil and lubricants by those companies. Beginning in 2005, we implemented a uniform consistent and transparent remuneration and incentive system for Members of Management Boards and managerial staff based on the MBO system (Management by Objectives). Following the example of the best corporations, we have had Shareholders Value Added (SVA) parameter calculated for the entire Capital Group, the most important element of the manager assessment system. It helps to assess the performance of managerial staff as a team and motivates one to look at decisions and projects from the point of view of the entire corporation. Within the context of the implementation of the second pillar of the strategy, over the following years we are planning to increase considerably capital expenditure, which on average will amount to PLN 3.4bn per year until The Company s ROACE will increase above 18.5% relative to reference macroeconomic conditions prevailing in The expenditure will be targeted at ventures with high rates of return and will be spent on projects, inter alia, in the petrochemical segment on the construction of the Paraxylene and Terephthalic Acid Plants and on increasing the capacity of the Olefin Plant in Chemopetrol. In the refining segment, investment spending will cover the following projects: Diesel Hydrodesulphurisation (HON VII), the Ostrów Wlk Wrocław product pipeline and hydrocracker intensification in Unipetrol. Other projects include the construction, modernisation and rebranding of petrol stations in Poland and activities relating to the implementation of the restructuring plan for ORLEN Deutschland AG. 8LET NASZE TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDE NT 8 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y One of the most important elements of the updated strategy, making up its third pillar, is the launch of upstream operations, a move which is to prospectively ensure own material resources for the Company. By implementing these plans and extending the existing PKN ORLEN value chain to include the exploration and production sector (upstream), it will be possible to achieve a considerable increase in the Company s value and to strengthen its competitive edge. In 2005, even after making deductions for a one-time effect of recording the surplus of the share of the fair value of Unipetrol s consolidated net assets over their purchase price (surplus occurred as a result of purchasing shares in Unipetrol), we still achieved record financial results. Inclusive of the surplus originating as a result of purchasing shares in Unipetrol, PKN ORLEN Capital Group generated consolidated net profit in the amount of PLN 4,638m. Excluding the effect of the surplus produced by purchasing shares in Unipetrol, the net profit amounted to PLN 2,744m, which is 8% more than in 2004.

13 The growth of turnover by nearly 35% was a result of the consolidation of Unipetrol s results from June 2005 onwards, higher sales and favourable market conditions for refining and petrochemical products. The operating costs reduction programme envisaged for the years ended up in a success, bringing in the total of PLN 882m in operating savings. We thus exceeded the set targets by 10%. Fixed costs in the Company (excluding Unipetrol) fell by nearly 4% versus 2004, while payroll costs fell by nearly 8% (given lower employment level). The statement of the last year s results shows that in 2005 PKN ORLEN recorded a 66.7% growth in effectiveness measured by EBITDA in comparison with 2004, while after deductions have been made for the effect of market conditions to make them comparable to those prevailing in 2004 and for fair value, EBITDA grew by 22.6%. Thereby, the Company exceeded its commitment made to investors at the beginning of 2005, when it declared a growth of at least 14% under conditions comparable to those prevailing in The Company reported equally good performance at the level of ROACE, which in 2005 amounted to 21.8%, and under conditions comparable to those prevailing in 2004 and net of fair value to 14%. Having taken account of the effects brought so far by the implemented programmes and new initiatives undertaken in 2005, we have updated the assumptions of the Company s strategy for the years We increased our financial targets, expecting EBITDA calculated under stable macroeconomic conditions of 2004 to achieve the level of PLN 10bn in The Company s ROACE will increase above 18.5% under stable macroeconomic conditions prevailing in Updating our strategy, we also outlined the assumptions for changing the dividend disbursement policy. The change will make it possible to maintain an optimal equity structure based on the Company s investment undertakings and possibilities, taking account of acquisitions. The basic measure to use for calculating dividend is to be Free Cash Flow to Equity (FCFE). Our objective will be to pay out dividend at the level of at least 50% of FCFE. By fulfilling declared targets and undertakings in a consistent and effective manner and making ambitious assumptions for the future, PKN ORLEN has now become the strongest Polish brand and one of the most desirable employers, which, alongside financial performance, is a proof of the extent and speed of introduced changes. This is evidenced, among other things, by the fact that in 2005 PKN ORLEN was ranked among top companies most strictly observing the principles of corporate governance recommended by the Warsaw Stock Exchange. In the ranking prepared on the initiative of the Polish Corporate Governance Forum, the Company received the A - grade. We also received a special award in the annual prestigious ranking published by Gazeta Parkiet daily. The organisers recognised the top quality of investor relations presenting the Company with a special award Bulls and Bears PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y LET NASZE TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDE NT 9

14 In 2005, the Production Plant in Płock received the title of The Best Refinery 2005 in Central and Eastern Europe awarded by the international community in recognition of the Company s strategy, infrastructure, technological innovativeness and development plans. It is a distinction and honour for us. Even more so because such an acclaimed title was awarded by representatives of our industry during the eighth edition of the Central European Conference of the Refining and Petrochemical Sector. Our active involvement in the life of the local community, including regular support for the Sports Club Wisła Płock, the Płock Industrial and Technological Park, or through ORLEN Dar Serca Foundation to charities reaching out to the poor is a manifestation of our responsibility for the environment in which we operate. We have also established the Grant Fund for Płock Foundation, whose main objective is to support NGOs from Płock. For years, PKN ORLEN has played a role of a sponsor of cultural events and a patron of artists. In 2005, we awarded a scholarship to Rafał Blechacz, the best Polish pianist, the winner of the 15th Frederic Chopin International Piano Competition. The year 2005 was a happy time for us not only because of financial achievements. As a starting point for all managerial activities launched in Autumn 2004, we embraced depoliticization and internal restoration of our Company. Consistent changes in human resources management, the Capital Group, external and internal communications, and, first of all, embarking on a process seeking to change the corporate culture by, inter alia, implementing a simple and transparent Code of Ethics, all these developments are a notable example of combining business aims with ethical and social objectives. Being ranked among the leading Polish companies entails responsibility. PKN ORLEN must be associated not only with good financial performance, but also with high ethical standards. For this reason, one of the priority projects seeks to change the corporate culture and implement Key Corporate Values. In order to meet the set business objectives, last year we started to work on building such relations in the Company that would restore the Company s NASZE LET TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y credibility in relation to its own employees and at the same time would enhance their involvement and creativity. Last year, we focused on preparing basic documents. Following in-depth analyses, work on internal regulations and unwritten standards applicable in the Company and after numerous internal and external consultations, we have completed work on the Code of Ethics. At the same time, we worked on Key Corporate Values. Professionalism, honesty, persistence in pursuing objectives, co-operation, responsibility and entrepreneurship, all these are attitudes we promote. They mark not only a new corporate culture model, but also a direction of the Company s development. It is also a declaration of what we want to be and what we are striving for. 10

15 The Code of Ethics and Key Corporate Values initiated a change of employee attitudes and behaviours at all levels of the organisational structure. The general provisions of the Code constituted a point of reference for the work on PKN ORLEN s Best Practices documents, which are our declaration made to customers and to all partners of measures we will undertake to achieve the highest standards of provided services and the highest quality of manufactured products. Responsibility for ensuring compliance with the provisions of the Code of Ethics lies with the Ethics Compliance Officer. Launched in 2005, the grass-roots process seeking to elect the Officer ended in April this year with the pledge to the flag of PKN ORLEN. The election of the Ethics Compliance Officer enjoyed great popularity among the entire corporate community. Nearly 2,500 employees took part in the vote, i.e. 48% of PKN ORLEN s workforce. The main task of the Officer and the Ethics Team supporting him or her is to shape proper relations in the Company, encourage and support measures aimed at changing the corporate culture. We are trying to make the values and principles laid down in the Code of Ethics viable in order to ensure that our employees follow them and thus build a positive image of our Company. Our strategy is clear: we are striving to become a better and better company. To this end, we are constantly changing, searching for the best social and technological solutions. Ladies and Gentlemen, Summing up, I wish to thank all Employees of PKN ORLEN Capital Group for their day-to-day effort in building the value of our Company. I also wish to extend my words of thanks to the Supervisory Board for their intensive work, substantive support and trust, allowing the Management Board to carry out the Company s mission. I count on further support of Shareholders, the Supervisory Board and Employees, as well as continued kindness and loyalty of our Customers. With complements Igor Chalupec President of the Management Board PKN ORLEN PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE LET TE R R E L F AC ROM J E Z TH OTOCZENIEM E PR ESIDENT 11

16 M ANAGEMENT NASZE R E BOARD L AC J E Z OF OTOCZENIEM PKN ORLE N PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y C O M P O S I T I O N O F T H E M A N A G E M E N T B O A R D O F P K N O R L E N S A f r o m t h e l e f t : P a w e ł S z y m a ń s k i Member of the Management Board Chief Financial Officer J a n M a c i e j e w i c z Vice-President of the Management Board Head of Cost Management C e z a r y S m o r s z c z e w s k i Vice-President of the Management Board Head of Capital Investment 12

17 I g o r C h a l u p e c President of the Management Board Chief Executive Officer C e z a r y F i l i p o w i c z Vice-President of the Management Board Head of Upstream & Crude Procurement W o j c i e c h H e y d e l K r z y s z t o f S z w e d o w s k i Vice-President of the Management Board Member of the Management Board Head of Sales Head of Organisation & Capital Group PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y M ANAGEMENT NASZE R E BOARD L AC J E Z OF OTOCZENIEM PKN ORLE N 13

18 Road works

19 Our strategy

20 NASZE R E L AC J E Z OUR OTOCZENIEM STR ATEGY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y O U R S T R A T E G Y Update of the Strategy for The Creation of the Company s Value for the year s At the beginning of 2005, we approved for implementation The Strategy for the Creation of the Company s Value for the years , which was updated in January The strategy is based on three pillars: continuation of performance enhancing measures, strengthening of core operations in home markets and active searching for new development possibilities in new markets, including mergers and acquisitions. The updated strategy provides for achieving increased financial targets in The more ambitious targets are the result of taking account of such factors as the effects of Unipetrol s consolidation, a change in the method of consolidation of Basell Orlen Polyolefins Sp. z o.o., additional restructuring reserves, effects of the sales development plan and the implementation of the upstream programme, as well as the plan for restructuring ORLEN Deutschland AG and the OPTIMA savings programme. The changes also resulted from the inclusion in the capital expenditure plan of initiatives such as: the diesel hydrodesulphurisation plant HON VII together with hydrogen plant, the butadiene 1) FCFE Free Cash Flow to Equity. This will be calculated by adjusting net profit and depreciation for capital expenditure, change in the value of net working capital and change in the level of loans. PKN ORLEN will seek to pay out dividend at the level of at least 50% FCFE, while maintaining the optimum capital structure and taking account of plans and investment possibilities in the area of mergers and acquisitions. 2) Additional important financial and operational information: Relative to macroeconomic conditions prevailing in All financial data pertain to ORLEN Group according to IFRS Based on macroeconomic assumptions for 2009: Brent crude oil price 29.6 USD/bbl, Brent-Ural spread 2.95 USD/bbl, Rotterdam refining margin 4.46 USD/bbl, PLN/EUR 4.10, PLN/USD 3.38 Based on macroeconomic assumptions for 2004: Brent crude oil price 38.3 USD/bbl, Brent-Ural spread 4.1 USD/bbl, Rotterdam refining margin 5.6 USD/bbl, PLN/EUR 4.52, PLN/USD 3.65 Deprecation (annual average ) PLN 2.0bn; for PKN ORLEN (parent company) CAPEX and depreciation (annual average ) respectively at the level of PLN 2.1bn and PLN 1.1bn, does not include potential capital expenditure incurred in the M&A process 3) EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization 4) CAPEX Capital Expenditures 5) ROACE Returns on Average Capital Employed production plant, the paraxylene (PX) plant and the terephthalic acid (PTA) plant. Together with the update of the strategy, the Management Board of PKN ORLEN presented a draft policy for disbursement of dividend, which is to amount to the minimum of 50% of free cash flow to equity (FCFE) (1). Financial targets to be achieved in 2009 (2) according to the updated strategy: EBITDA (3) CAPEX (4) annual average PLN 10bn PLN 3.4bn ROACE (5) 18.5% Financial leverage 30% 40% Dividend policy based on FCFE (1) 16