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

21 Improvement of ef ficienc y and investments as a par t of organic grow th During the first stage of the implementation of PKN ORLEN s strategy we focused on improving the efficiency and organic growth. This way, we have managed to carry out, as a priority, many undertakings from this area, including in particular: change in corporate culture, restructuring of ORLEN Group and implementation of segment management, restructuring and optimisation of the retail network, implementation of a new cost optimisation programme OPTIMA, successful integration of Unipetrol a.s., implementation of ORLEN Deutschland AG development plan, completion of investment projects with high rates of return in key areas of activity. In accordance with the best world standards, we have implemented a new management methodology based on segment management in ORLEN Group, which from 2007 will also cover Unipetrol Group. We have improved external and internal communications. A new performance-linked staff assessment and motivation system has been put in place. Striving to attain the set goals, we have prepared and implemented a retail sales development plan, closely following recent changes shaping the Polish fuel market. These changes brought about a clear-cut division of the market according to customer needs criteria. In consequence, this generated demand for two types of petrol stations: high standard stations and lower, economy standard stations. In order to strengthen competitiveness and operational efficiency of the retail network, we have implemented a strategy for two brands: a premium segment under ORLEN brand and economy segment under BLISKA brand. This allowed for alternative positioning of the customer offer. The premium segment represents a high standard of services, competitive and diversified product offerings and a wide range of non-fuel products. By assumption, the economy segment competes on prices with minimum outlays and costs allowing for optimisation of the retail margin. It is planned that by the end of 2009, the Company s chain of stations will have included approx stations operating under ORLEN brand and approx. 900 stations operating under BLISKA brand. As a result of the implementation of the 2005 investment plan, the retail network was expanded to include 40 new petrol stations, while 64 outlets were modernised. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OUR OTOCZENIEM STR ATEGY 17

22 In September 2005, responding to market needs, we PKN ORLEN and Unipetrol are involved in the work developed and launched the sale of new VERVA fuels of interdisciplinary teams virtually in all areas of offering superior quality. Over the first months follo- the Company s activity. The programme has identi- wing the launch, sales of VERVA fuels have exceeded fied PKN ORLEN s potential for generating synergy the planned targets by some 10%. which is estimated at over PLN 157m, of which about PLN 90m is already achievable in Further actions relating to the restructuring of the retail network will seek to implement strategic guide- As a result of streamlining and aligning Unipetrol s lines for the retail division, i.e.: operations with ORLEN Group companies, by 2008 Unipetrol s EBITDA will have increased by at least market share at the level of 30% (including 35% EUR 138m (based on macroeconomic indicators share in the fuel market), prevailing in 2004). annual volume of retail sales - 4.9bn litres per year, annual average sales of fuels to CODO (6) stations Following a thorough analysis of different options, 2.5m litres per year, we have made a choice and started to implement share of margin on non-fuel products in the total a restructuring plan for ORLEN Deutschland AG, retail margin 30%. a company managing the Company s German assets. As a part of measures aimed at improving the efficien- As a part of ORLEN Group restructuring, we are plan- cy, we are continuing to implement savings program- ning to continue to sell non-core assets, including mes. In 2005, the Comprehensive Operating Costs Polkomtel s shares. PKN ORLEN is going to sell the Reduction Programme (KPRKO) ended up in a success, shares in Polkomtel in accordance with the adopted brining in PLN 882m in savings, thus exceeding the strategy. In the wake of ownership changes, TDC Mo- programme s target by over 10%. Presently, we have bile International A/S has offered to sell a block of launched a new optimisation programme OPTIMA Polkomtel s shares to other shareholders. PKN ORLEN envisaging the reduction of operating costs and capi- has signed an agreement with the Polish shareholders 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 tal expenditure by further 2 x PLN 600m, respectively. The new programme is being implemented through measures such as centralised procurement, the production assets efficiency improvement programme, the lowering of retail network operating costs and the introduction of service centres for the entire ORLEN Group. In 2005, one of PKN ORLEN s priorities was integration with the Czech holding Unipetrol a.s. The implementation of the Partnership Programme developed as a part of the integration process generates extra providing, inter alia, for taking joint action with a view to selling all shares held in Polkomtel. synergy and benefits on the part of the Company. Under the programme, over 200 employees from 6) CODO Company Owned, Dealer Operated stations. 18

23 Strengthening of core operations in home markets Searching for new development possibilities in new areas and markets Performance enhancing measures undertaken in 2005 were accompanied by development projects. After modernisation, we opened Olefins Plant II, thus doubling ethylene and propylene production capacity. In Basell Orlen Polyolefins, a new polyolefins production plant was opened, having the total production capacity of over 700,000 tonnes per year. We have modernised the Aromatics Extraction plant, which allowed for the optimisation of aromatic fraction management. Another project in the pipeline in this field is the construction of the paraxylene and terephthalic acid plants. At present, the construction of the FCC Naphtha Desulphurisation plant is underway. In 2005, we also started work on the modernisation of HON VI plant. Financial estimates put capital expenditure until 2009 at PLN 13,6 bln. In the Czech market, our priority is to put the assets portfolio in order and sort out all disputes arising from agreements entered into by the previous Management Board. We will also seek greater influence in the key Unipetrol Group company - Česka Rafinerska. We are considering purchasing additional logistic assets in order to strengthen our position in the Czech market. In the Polish market, we will focus on the continuation of investments in the retail sales segment in order to streamline the network and increase sales per station. In the Czech market, we are going to take advantage of the production opportunity to increase the scale of operations in the retail segment. The Company s updated strategy envisages that over the following years, more emphasis will be put on non-organic development. We are going to actively participate in mergers and acquisitions, although the number of potential targets is limited due to progressing consolidation in the industry. The Company will turn its attention to the markets of Central, Eastern and Southern Europe. We will implement investment projects and make acquisitions forming the basis for the growth of value, only if strict investment assessment criteria are fulfilled. Equit y investments In 2005, within the context of the implementation of the strategy for the development of operations in new markets with a considerable growth potential, we continued to look for new attractive investment targets in the field of refining assets. The Company was actively involved in the process of privatisation of the Turkish refining company TÜPRAŞ (Türkiye Petrol Rafinerileri AS). Having thoroughly PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OUR OTOCZENIEM STR ATEGY 19

24 analysed the company s situation and the transaction terms during the final auction stage of the bid, the Company decided not to raise its binding price bid, finding the higher price bracket to be unattractive from the point of view of the expected return on investment and the creation of value for shareholders. operates a pipeline system to transport petroleum and refinery products in Lithuania and an export & import cargo handling terminal on the Baltic Sea (the Butinga Sea Terminal). It also owns a small network of 27 retail stations, which forms the basis for expanding the retail segment. In September 2005, PKN ORLEN was invited by Yukos International UK B.V. to participate in a bid to buy a block of 53.7% shares in the Lithuanian refinery AB Mažeikių Nafta. After long months of efforts, intensive negotiations and talks held concurrently with the two largest shareholders, i.e. the Lithuanian government and Yukos, on 26 May 2006 PKN ORLEN and Yukos International UK B.V. finalised the bidding by signing a contract to sell a 53.7% stake in the share capital of AB Mažeikių Nafta to the Polish Company. At the same time, the Management Board of PKN ORLEN signed and delivered to the Lithuanian government a complete set of documents containing an agreement for the purchase of 30.66% of shares the block owned by the Lithuanian government. The value of the ORLEN - Yukos contract reached USD 1,492m, while the transaction with the Lithuanian government is worth USD 852m. The inclusion of Mažeikių Nafta in ORLEN Group offers great opportunities, e.g. possible synergies in such areas as joint oil purchases, margin and cost optimisation, and sales activities. Development of retail sales and petrochemical production is also planned. The investment programme adopted by ORLEN for Mažeikių Nafta requires expenditures of USD m within the next 5 years. Under the programme approx. USD 228m will be earmarked for investments to improve the fuel quality and make adjustments to the environment protection regulations. Approx. USD 212 m will be spent on modernisation of installations to process heavy crude oil fractions, USD 55m will be invested in the Klaipeda product pipeline, while approx. USD 45m will be expended for increasing the throughput capacity of the existing installations up to 11 million tonnes per year. PKN ORLEN will also 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 PKN ORLEN will finalise the deal with its own funds as well as with the existing and newly-secured credit lines. The key new sources of funds will include: a loan to be subsequently refinanced with the funds obtained through an issue of bonds in the Polish and European markets, and a new bank credit. Mažeikių Nafta is the only refinery in the Baltic States to rely on extensive exports to Western Europe and the USA. Its annual throughput capacity stands at 10 million tonnes of oil. The company also owns and PLN m EBITDA 2009 (as of Febuary 2005) 0.6 OPTIMA EBITDA 2009 (1) 1.5 Other initiatives, additional investments and efficiency improvement of companies in the Group 10.0 EBITDA 2009 (as of January 2006) 1) Assuming comparable environment as 2004 average: Brentprice 38.3$/b, Brent-Ural differential 4.1$/b, refining margin 5.6 $/b, PLN/EUR 4.52; PLN/USD

25 Crude oil exploration and produc tion (Upstream) A follow-up to the Company s updated strategy is a plan for expanding upstream business in order to secure own material resources in the long-term, achieve a growth of the Company s value and strengthen its competitive edge. The primary reason for entering the crude oil exploration and production sector is the possibility of generating sizable income from the investment and ensuring economically viable supplies from different geographic locations in the long term. By diversifying supplies, PKN ORLEN becomes an inherent part of Poland s energy security policy. The programme for developing upstream operations provides for a gradual establishment of organisational structures in this area. The first stage of the programme envisages building competencies on the basis of isolated transactions involving the purchase of assets, in parconsider construction of a polypropylene production block for approx. USD 230m providing that this investment is economically feasible. Thanks to the said programme, Mažeikių Nafta will raise its fuel quality, ensure the fuel compliance with ecological standards, increase the plant s operating efficiency and largely improve its economic performance. Combining the resources and potential of the two partners, i.e. PKN ORLEN Capital Group and AB Mažeikių Nafta, will allow to build the largest fuel concern in Central & Eastern Europe in terms of the key parameters that determine a company s position in the sector, such as: the volume of crude oil processing, number of fuel stations and level of revenue. In 2006, we are planning to look for other investment opportunities in the crude oil processing sector. Also envisaged are the first initiatives relating to the building of competencies and the Company s presence in foreign markets in the crude oil exploration and production sector. The plans for 2006 also provide for investments in the domestic market. Slated for implementation is, inter alia, a project seeking to establish a company manufacturing ethyl benzene, jointly with Chemical Company Dwory SA. What gives PKN ORLEN a strong competitive edge is its long-term development of petrochemical operations discussed in the updated strategy. Positive macroeconomic trends and consumption forecasts for this segment, coupled with the integration of our petrochemical and refining operations constitute an essential element of our competitive advantage. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OUR OTOCZENIEM STR ATEGY 21

26 ticular in countries such as Kazakhstan, Russia or Iraq. During this period, acquisitions will target assets with low risk profile, with preference given to projects implemented as joint ventures. At this stage, PKN ORLEN intends to purchase minority stake without assuming the role of an operator and instead taking advantage of partners competencies. The second stage of the programme provides for a gradual assumption of the role of an operator and engagement in the exploration of new deposits, including the development of Reserves (milion tonnes) technical skills and the construction of organisational structures making use of local human resources. Objec tives under the upstream operations development programme in PK N ORLEN Crude oil production volume targets envisage a gradual increase in the volume of the raw material from 0.4m tonnes in 2007 to 4.3m tonnes in Investment outlays required to implement the programme are estimated at USD 130m per year between , and at USD 438m annually for another five years thereafter Should a particularly attractive opportunity come up in the upstream sector, which will meet the set boundary conditions, we will allow for speeding up of the implementation of our strategy for this segment. Reserves 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 Planned production and expected processing of crude oil (million tonnes per year) Production Processing 1) Processed crude oil volume of crude oil processed by PKN ORLEN (including Unipetrol a.s.), assuming the implementation of currently known measures serving to increase processing 22

27 PKN ORLEN IN THE C APITAL MARKET Shareholding structure as at PKN ORLEN s shares are listed on the Warsaw Stock Exchange and as Global Depositary Receipts (GDR) on the London Stock Exchange. Depositary receipts are also traded in the USA on the OTC market. PKN ORLEN s shares were quoted for the first time in November The share capital of the Company is divided into 427,709,061 ordinary bearer shares with the nominal value of PLN 1.25 each. The depositary of the Company s depository receipts is the Bank of New York. A trading unit on the London Stock Exchange is 1 GDR representing two shares in the company. PKN ORLEN s share price (WSE) PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OUR OTOCZENIEM STR ATEGY * Percentage share held in the share capital of PKN ORLEN by the above-mentioned shareholders corresponds to the percentage share in the voting rights at the General Meeting of PKN ORLEN 23

28 Common Wspólna Way droga

29 ORLEN GRUPA BRAND ORLEN

30 O R L E N B R A N D ORLEN brand has been present on the market for six years and during this time has attained the status of one of the most valuable Polish brands. At present, in order to ensure consistent corporate identity of companies belonging to the holding, 29 subsidiaries use ORLEN designation in their names, while 9 associated companies use the words ORLEN Group as a part of their own designations. By adopting such a solution, ORLEN brand has become an element of the image of individual companies and their products. The Company s pride is its chain of petrol stations operated under ORLEN brand. Apart from building new locations, over the recent years we have also rebranded selected CPN and Petrochemia Płock petrol stations. The outlets were given a new visual identity and standards consistent with the requirements attached to ORLEN brand. Currently, PKN ORLEN has nearly 2,700 petrol stations in Poland, Germany and the Czech Republic. Also carrying ORLEN logo are engine oils and operating fluids, car lubricants, car cosmetics and a wide range of car chemical products. Continual growth of the brand s value is an essential element of creating value of the entire holding and this aspect is an inseparable element of all measures planned and implemented by us. We are doing it with ever greater care the more so that one of the major problems we had to face in late 2004 and early 2005 was a crisis of the Company s image sparked off primarily as a fall-out of the activity of the Parliamentary Investigation Committee, popularly known as ORLEN Committee. Even though accusations appearing in the media were not levelled at the Company itself, but only at people working in its environment, this information still had a considerable negative impact on the Company s image. NASZE R E L AC J E Z ORLE OTOCZENIEM N B R AND PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

31 During the work of the Investigation Committee, on many occasions the Company took measures aimed at neutralising the negative impact of the Committee s work on its own image and its brand image, inter alia, by making an appeal requesting that the common and misleading name ORLEN Committee be no longer used. We addressed an open letter to the mass media and the general public asking them not to overuse the Company s name in the context of the Committee s political actions. As a counterbalance to communications relating to the Investigation Committee, we openly communicated the findings of audits and inspections and information about self-cleansing of the Company. We also approached the media directly offering expert assistance with clearing up all irregularities and doubts. The Company quickly and decisively responded to unfavourable groundless media reports, originating from the work of the Committee by placing disclaimers, making statements and engaging in polemics. An image survey conducted in 2005 showed that the adopted own value creation strategy and honest communication of the results of the strategy helped to achieve the desired result. A tangible result of the strategy was a growth of the value of ORLEN brand. In the ranking published by Rzeczpospolita daily and prepared in collaboration with Ernst & Young and AC Nielsen in 2005, ORLEN brand was valued at PLN 1,961.5m and ranked second according to value. In comparison with the results of the same ranking published in 2004, the estimated value of the brand rose by PLN 374.5m. The position of ORLEN brand was further consolidated by the award in 2005 of the marketing Oscar. The Independent Brand Council, comprising leading figures from the Polish marketing community awarded to PKN ORLEN the title of Superbrands Polska in the Automotive Industry category. ORLEN brand is also highly recognisable and liked by Polish customers. In 2005, we received the title of the Trusted Brand in the most extensive European consumer survey carried out by Reader s Digest publishing house. The success is even greater as ORLEN received the gold statuette in the petrol stations category already for the fourth time. This title is a token of trust which customers place in ORLEN brand, but at the same time it is an obligation to maintain the highest quality of products and services offered by our petrol stations. ORLEN brand has great worth to us and is a source of great pride. We take care of its image and credibility. Even though it has been present on the market for relatively short time, it stands now in Poland for world class products and the model expansive enterprise. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N B R AND 27

32 Vehicle inspection

33 We are changing our Company

34 WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y W E A R E C H A N G I N G O U R C O M P A N Y Transparenc y and ethics In present times, it is not enough to observe the economic law and regulations governing the capital market to maintain proper relations between shareholders and the Company s governing bodies. Shareholders expect the company s operations to be as transparent as possible and demand the compliance with the rules commonly known as fair play. Although corporate governance principles require from the governing bodies of public companies extra organisational effort in managing the company, the benefits for both parties obtained by closely following those principles are considerable. The implementation of corporate governance principles and a high standard of investor relations lower the investment risk, thus inspiring the trust of shareholders. Professing the above principles, at the beginning of 2005 the Company s Management Board adopted all (except for principle no. 20 concerning the independence of members of the supervisory board) corporate governance principles recommended by the Warsaw Stock Exchange in the document entitled Best practices in public companies. In the wake of the Management Board s decision, we took firm measures to align procedures applicable in the Company in order to ensure that the assumed commitment to observe all corporate governance principles could be fulfilled as fully as possible in PKN ORLEN. We have amended the Statute of PKN ORLEN, the Rules and Regulations of the General Meeting, the Supervisory Board and the Management Board. At the same time, we continued to work on aligning the rules and regulations of the Supervisory Board and the Management Board with the adopted principles. Thereby, the Company s Management Board has fully complied with self-imposed commitments published in the statement on corporate governance principles. The observance of corporate governance principles has translated into rapidly rising ratings of PKN ORLEN in corporate governance rankings. Worth noting is the jump from the 70th to the 6th place on the ranking list prepared by the Polish Institute for Market Economics and a promotion to A category in the ranking prepared by the Polish Corporate Governance Forum. In the WarsawScan 2005 study assessing the quality of co-operation between companies and their shareholders, analysts singled out ORLEN as the best company in the field of investor relations. Ranked second among the most valuable presidents of companies was President of PKN ORLEN Igor Chalupec in recognition of strategy formulation, company development and communicativeness. In 2005, we received a special award which Gazeta Parkiet daily has been handing out already for 12 years For the highest quality of investor relations in the annual ranking Bulls and Bears. 30

35 Image among investor s Corporate culture Respecting corporate governance principles, ethics, transparency of conducted activity, all these are methods of rebuilding the company s image. In pursuance of these principles, we have put in place new standards for presenting the Company s operational activity. The beginning of 2005 saw the adoption in PKN ORLEN of the strategy for The Creation of the Company s Value for the years One of the main assumptions of this strategy was a change in the corporate culture. In this area, we have launched the process of in-depth changes, first of all, serving to: We inform the capital market about generated financial results and the progress of the implementation of strategic, investment and acquisition projects on a regular basis. The methods of presenting development plans based on ROACE and EBITDA as adopted by the Company make it much easier to rate the company in terms of operational efficiency and significantly build up investors trust. One should stress a favourable reception by the market of the presentation of EBITDA under comparable conditions, which brings out pure change in the Company s efficiency without the impact of independent macroeconomic external factors. enhance the Company s competitiveness and credibility, enhance the credibility of the Company as an employer in relation to its employees, improve the viability of the strategy by ensuring consistency of our actions and by increasing motivation of the employees. Working to change the corporate culture, the Management Board of PKN ORLEN has adopted Key Values. Providing guidance to all employees, they are at the same time a voluntary commitment which employees take on themselves when performing tasks entrusted to them. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY 31

36 Key values of PK N ORLEN: Consistency in pursuing goals: I am conscientious in performing my duties. I am determined to achieve my goals. I am commited to my work. I ask questions when I m in doubt. Co-operation: I cooperate with others for the benefit of the my company. I communicate with others in a clear and direct manner. By cooperating with others I enhance confidence-building. The success of the team is the most important thing. Integrity: I am honest to others and myself. I speak my mind openly. I follow the principles of the Code of Ethics. I take proper care of the Company s property. Professionalism: I want to be an expert in my field. I strive for the highest quality I respect customers and fellow employess regardless of their position. I develop my skills. Responsibility: I keep my word. I assume responsibility for my actions and for the team under my supervision. I don t make promises I cannot keep. I always finish tasks that I started. Entrepreneurship: I identify myself with my job and my Company. I am willing to take on new tasks. I take risks consciously. I am cost-aware. I am creative and flexible about changes. Code of Ethics One of the elements of the change in the corporate WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y culture is the Code of Ethics of PKN ORLEN adopted in December This document contains a list of the most important principles and values to be followed by all employees of the Company. The Code addresses the ways of maintaining relations between the company and its environment, co-operation with the corporation s partners and internal relations within the Company. The aim of the Code of Ethics is 32

37 to shape a proper culture of living, in particular the culture of work within the Company and between the Company and its business and social environment. The Ethics Compliance Officer elected in Q1 2006, who is a person enjoying popular trust elected by all PKN ORLEN employees is keeping watch over the compliance with the provisions of the Code of Ethics. 48 % of our Company s personnel took part in the ombudsman election. The main tasks of the Officer include: educating about and promoting ethical attitudes and building the corporate culture based on the highest ethical standards. RESTRUCTURING An assumption which is given priority in the adopted Strategy for the Creation of the Company s Value for the years is the improvement of the organi-sation s efficiency. This strategic objective is the sum of individual tasks targeted at particular areas of the Company s operations. Due to the need of reverting a falling trend as regards PKN ORLEN s share in the retail market, activities in this field are becoming particularly important. A path to achieving the set targets was a comprehensive restructuring programme prepared by us. We wish to be a role model not only as regards economic performance, but also in terms of social responsibility and transparent principles of conduct. We are consistently building the Company s image as one having a uniform corporate culture, operating in accordance with the principles of transparency and ethics. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY 33

38 WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y The restructuring programme attached particular importance to the social aspect of this process. We adopted a basic guideline stating that when building the new regional structure we would attempt to ensure possibly full inclusion of employees engaged in the current regional structures. The restructuring process proceeded according to the adopted principles laid down in the restructuring agreement of 2002 and was supported by the Employment Protection Schemes. The Company provided extensive assistance to employees who wished to change the place of work or to start up their own business. The changes were made with the consent, and even at the request of concerned employees. To this end, we prepared a special incentives system encouraging them to make difficult choices and decisions. From the word go, the regional structures reconstruction programme was socially transparent, and we resolved all issues, even the most difficult ones, through open dialogue with the social partner and by looking for solutions that were most suitable for employees. Restruc turing of regional struc tures One of the first stages of the restructuring was an improvement of the performance of regional structures mainly by: decentralising sales management, centralising the Company s operational back-office functions, including the restructuring of ancillary operations. As a result of the project implementation, a new organisational structure in the Retail division has been put in place. This has made it possible to: decrease the number of operational management centres from 11 Regional Retail Trade Offices to 3 Retail Trade Regions. decentralise sales management processes, take over tasks and functions supporting operational management by the Head Office, centralise product ordering and non-fuel product procurement processes, increase the scope of responsibilities of Micromarket Managers, bring uniformity to management principles, decrease the number of Regional Financial Offices from 14 to 3 Financial and Accounting Regions, build a centralised Inventory Department and Department of Settlements with Petrol Stations, 34

39 thus ensuring process optimisation and function consolidation, increase the organisation s operational efficiency. The implemented restructuring processes were supported by protection schemes targeted at employees from the restructured areas, including: Voluntary Leave Programme an entitlement accruing to employees covered by the restructuring programme, whereby they could express their intention to terminate the employment relationship by mutual agreement of the parties in exchange for a one-time cash payment. Training package an entitlement to participate in dedicated obligatory training (guaranteed by the Company) and optional training selected by the employee within the allowable cash limit. Relocation package designed for employees who changed their place of work within PKN ORLEN. The package included settling-in allowance, reimbursement of home removal expenses, reimbursement of real estate agent's fees and reimbursement of apartment rent for 12 months. Outplacement package possibility for employees to start up their business on the basis of separate assets of PKN ORLEN. Company achieved in the Best Practice Competition organised by the Responsible Business Forum. Restruc turing of administration The process for the restructuring of the administration completed in 2005 sought to align its structure with organisational changes in regional centres and take advantage of the synergy effects for the benefit of ORLEN Group through the provision of services by a specialised entity the Centre for Administrative Services. ORLEN Administracja Sp. z o.o. was established on 15 December 2005 and started to operate on 23 December Restruc turing of ORLEN Group In 2005, we continued the process of restructuring ORLEN Group, whose objective was to reduce the Company s capital exposure, in particular in areas not The social and legal aspects of the implemented restructuring programme were appreciated outside the Company. This is evidenced by high rating which the PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY 35

40 directly related to refining and petrochemical opera- COST OP TIMISATI ON tions and sale of petroleum products. Comprehensive Operating Costs ORLEN Group is being restructured, inter alia, by: Reduc tion Programme disinvestment in companies not related to the The cost optimisation programme is a key element Company s core business of PKN ORLEN s strategy. In 2005, we completed the disinvestment of a part of companies assets not Comprehensive Operating Costs Reduction Program- involved in the Company s core operations me (COCRP) run since 2003, whose aim was to lower consolidation within ORLEN Group aimed at stre- annual costs by PLN 800m between in amlining the use of assets and lowering operating comparison with the cost level prevailing in costs. Under the programme, we exceeded our performan- Proceeds from disinvestment will allow us to finance ce improvement targets. As at the end of 2005, we and improve the efficiency of core operations. achieved a permanent improvement of efficiency, which saved us PLN 882m in comparison with the As a part of restructuring activities, in 2005 we sold: cost level in The biggest savings were made in the following areas: 2 service companies - Serwis Mazowsze Sp. z o.o., Serwis Nowa Wieś Wielka Sp. z o.o.; production PLN 377m, 3 recreation companies - Zawitaj Świnoujście logistics PLN 199m, Sp. z o.o., ZW Mazowsze Sp. z o.o. and DW Ma- retail PLN 146m, zowsze Sp. z o.o. other areas PLN 160m (altogether). Two companies Education Centre and Techno- The biggest improvement in efficiency was achieved logy Commercialisation Centre were contributed with regard to material costs, accounting for 95% of WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y in kind to the Płock Industrial and Technological Park SA. As a result of the process, the size of ORLEN Group was reduced by 7 companies. savings, while a reduction in personnel costs accounted for 5% of total savings. We incurred over PLN 38m in capital expenditure throughout the programme duration. This spending allowed for implementing in the Company many solutions producing disproportionately strong effects compared to incurred expenditure. The initiatives, whose successful outcome depended on the implementation of investment projects, brought in nearly PLN 150m in savings. 36

41 OPTIMA programme The aim of OPTIMA programme is to considerably improve the operational efficiency of ORLEN Group by optimising processes of key importance for cost effectiveness and capital expenditure. OPTIMA programme seeks to achieve: a minimum of PLN 600m in improved cost effectiveness over and above the effects of KPRKO and a minimum of PLN 600m in savings on capital expenditure. The effects of these measures are expected to manifest themselves in the years As regards the optimisation of PKN ORLEN's operating costs, it is the Company's key departments that will benefit the most from the implemented measures: Efficiency of ORLEN Group companies will be improved by enhancing performance in support areas by: implementing operating costs reduction programmes throughout all business functions of key ORLEN Group companies, optimising and centralising procurement processes in the entire ORLEN Group (BONUS programme). The efficiency improvement will be achieved here by implementing a new comprehensive procurement system, facilitating co-operation with trade partners and taking advantage of the economies of scale of all Group companies. The optimisation of capital expenditure in PKN ORLEN pertains to the package of highly-efficient investment undertakings prepared within the context of the Company Development Programme, in particular such as the Paraxylene and PTA plants, Diesel Desulphurisation, Butadiene, Ethyl Benzene plants, Olefins Plant III, ensuring the growth of the Company's value. Production improved efficiency of production processes (increased energy efficiency of production processes, bigger utilisation of capacities of key production units), Logistics optimisation of the planning and monitoring of delivery schedules and optimisation of stocks and the network of warehouse depots, Retail reduction of unit selling costs thanks to the implementation of the new retail sales strategy. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY 37

42 SEGMENT MANAGEMENT co-ordinating support functions (e.g. procurement, logistics, financial management, PR policy, Segment management is a classic form of organising marketing policy, human resources management, a company consisting of multiple entities. Our Capital organisational, environmental prevention and Group, following the acquisition of Unipetrol, consi- protection, etc.). sted of 76 companies as at 31 December When implementing segment management, we have found In connection with the implementation of segment how to properly co-ordinate both business areas and management, we expect to identify and realise syner- support functions (e.g. financial planning and control- gies in the following areas: ling, marketing, staffing and procurement functions). This process entails not only a change in how we think optimisation of capital expenditures, about the company, but also a reformulation of many production and sales synergies as a result of the procedures and the way PKN ORLEN and individual optimisation of operational planning (optimised subsidiaries are organised. margins under multi-plant production conditions), co-ordination of procurement policy throughout Our environment customers, investors, analysts, they ORLEN Group, all expect ORLEN Group to come across to the outside centralisation and cost savings in the support world as a single company managed in a consistent functions area, manner according to uniform standards and procedu- cost savings in ORLEN Group companies. res. Segment management is also a way of creating a shared strong ORLEN brand, perceived not as a parent Business segments company and a loosely-related federation of subsidia- According to the adopted segment management ries pursuing their own goals, but as a single uniform model, we have singled out six business segments to Capital Group sharing a single strategy and a single which we assigned ORLEN Group companies based mission. The Capital Group is a source of strength that on the scope of their business. Additionally, we have can be tapped by all subsidiaries, and each and every also assigned Companies to support function areas, WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y subsidiary makes up a part of a single organism. Segment management entails, inter alia: enforcing a consistent strategy and co-ordination of investment projects within the Company; co-ordinated planning and controlling; integrated operational management, including maintaining uniform standards throughout the Company and taking advantage of synergy by setting consistent goals and key performance indicators; while the remaining unassigned Companies are supervised by the Member of the Management Board responsible for Organisation and Capital Group. Business segments: 1. Refinery (companies assigned to the segment: ORLEN Asfalt Sp. z o.o., ORLEN Eko Sp. z o.o.). 2. Oils (companies assigned to the segment: Trzebinia Refinery, Jedlicze Refinery, ORLEN Oil Sp. z o.o.). 38

43 3. Wholesale (companies assigned to the segment: According to the programme s assumption, we are ORLEN Gaz Sp. z o.o., five Regional Fuel Market planning to incorporate Unipetrol Group companies Operators, Petrolot Sp. z o.o., SHIP-SERVICE SA). into segment management in January Retail (Poland companies assigned to the segment: ORLEN Budonaft Sp. z o.o., ORLEN Segment management also means: Centrum Serwisowe Sp. z o.o., Motell Sp. z o.o.); (Germany company assigned to the segment: one company: collaboration within the Company ORLEN Deutschland AG). managerial team sharing goals and responsibility 5. Petrochemicals (company assigned to the seg- for the bottom line, ment: Basell Orlen Polyolefins Sp. z o.o.). joint strategy: formulating and enforcing a joint 6. Chemicals (company assigned to the segment: strategy for the entire Company across segments, ZA Anwil SA). elimination of bureaucracy: devolving some decision-making authority to levels below the Manage- The following ORLEN Group companies have been ment Board, simplification of procedures clear-cut assigned to areas providing support functions: responsibility for and focus on key tasks, Logistics: Inowrocławskie Kopalnie Soli Solino co-ordinated planning: co-ordinated planning and SA, ORLEN Koltrans Sp. z o.o. and road transport financial and investment reporting within the Group companies. and segments, Procurement and Costs: Petrotel Sp. z o.o, ZBA SA. comprehensive human resources policy: compre- Technology and Power Engineering: ORLEN hensive human resources policy, common standar- Automatyka Sp. z o.o., ORLEN Wir Sp. z o.o. ds and incentive systems (MBO) - ultimately, one Property Investments: ORLEN Projekt SA. corporate culture, Organisation: ORLEN Ochrona Sp. z o.o., ORLEN optimisation at the Company level: optimisation of Laboratorium Sp. z o.o., Płocki Park Przemysło- operations at the Company level (investments, mar- wo-technologiczny SA, WISŁA Płock Sportowa gin management), SA, ORLEN Administracja Sp. z o.o.. central functions support: support functions at the Human Resources: ORLEN Medica Sp. z o.o., SAMRELAKS Mąchocice Sp. z o.o. As regards Unipetrol Group companies, they have been assigned to the area supervised by Vice- President of the Management Board responsible for Capital Investments, who is responsible for defining and implementing the most suitable form of supervision over those entities until they are covered by segment management. head office level assist business units; centralisation of selected services, uniform procedures and standards. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y WE NASZE ARE CHANGING R E L AC J E Z OUR OTOCZENIEM COMPANY 39

44 Caution! Crossing

45 Relations with outside parties

46 R E L A T I O N S W I T H O U T S I D E P A R T I E S Student Song Festival in Cracow the most extensive review of songs performed by artists from the university community in Poland. We are a leader and precursor as regards the adoption of corporate culture principles and principles of social Being the biggest Polish company, PKN ORLEN is not responsibility of the business community. These are indifferent to the most important national events com- also the principles forming the basis for our corporate memorating the history of the Polish nation. The most policy on communications with outside parties. important undertakings in this respect include: sponsorship of the celebration of the 25th anniversary of Patron of culture Solidarity in Brussels and support for the production of the documentary Battle for Warsaw 44, which In pursuing the mission of a patron of culture, we had its television premiere on the Discovery Channel have contributed to the protection of national he- on the 61st anniversary of the Warsaw uprising. ritage assets. In 2005, we donated to the Frederic Chopin Museum in Warsaw an extremely valuable Sponsor of spor t manuscript of C sharp minor etude opus 10 no. 4 by Frederic Chopin, purchased at an auction at Sotheby s As a company affiliated with the automotive industry, auction house in London. As a follow-up, we sponso- we regularly endorse campaigns aimed at improving red a special artistic event the 15th Frederic Chopin safety on Polish roads. In 2005, ORLEN joined the International Piano Competition. In addition, in De- public awareness campaign initiated by Krzysztof cember 2005, PKN ORLEN awarded a scholarship to Hołowczyc s Foundation Safe Driver, whose slogan the best Polish pianist Rafał Blechacz, the winner of was: Shift into neutral you are going on holiday. the Competition. In 2005, we clearly marked our presence in the calen- For several years now, we have been a sponsor of the dar of automotive events in Poland. We were the main National Museum in Warsaw housing the largest and sponsor of the most prestigious rallies: the 62nd Rally R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTI ES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y most valuable art collection in Poland and one of the largest collections in Central Europe. We have also cooperated with the Institute of Art in organising the of Poland held on dirt roads in the region of Mazury and the 43rd Barbórka Rally in Warsaw. Krzysztof Hołowczyc racing for the ORLEN team did extremely Photo: Dominik Skurzak/The Warsaw Voice 42

47 well in both events. Also held was the already forth participated in conferences, panels and other impor- edition of the best known Polish off-road rally ORLEN tant events focusing around the fuel sector and the TROPHY 4x4, which at the same time was a qualifying economic life in Poland and throughout the region. round for the European Rally Championships. In October 2005, PKN ORLEN together with the World Once again, our ORLEN Rally Team participated in the Refining Association staged a conference Central & most demanding motor rally event Dakar Jacek Eastern Refining & Petrochemicals 8th Annual Round- Czachor was ranked 14th in the final classification and table. The conference participants voted the Płock proved to be among the world s best. ORLEN Team ra- refinery the Best Refinery 2005 in Central and Eastern cer is one of 93 motorcyclists who finished the 28th Europe. Moreover, PKN ORLEN took part in the 15th edition of the desert classic race. Due to a hand injury, Economic Forum in Krynica and in the conference Marek Dąbrowski had to pull out from the race after Energy Security of Poland the third leg. Bad luck also caught up with Krzysztof Hołowczyc and Jean-Marc Fortin, who withdrew from In 2005, one of PKN ORLEN s greatest achievements the race following an engine defect in their car. was a successful integration with the Czech holding Unipetrol a.s. PKN ORLEN came top in the overall ran- We also extend our patronage to other sport discipli- king of the largest and most effective companies from nes. As a sponsor of the Polish Olympic Movement, 13 countries of Central and Eastern Europe Giants for years we have been actively supporting Polish of Central Europe. In addition, it came top in the Olympians representing our country respectively at categories: Companies in Poland and Chemicals, the Olympic Games in Athens in 2004 and in Torino Crude Oil, Gas. in Observing corporate governance principles, we acti- Business leader vely participated in conferences dealing with this issue: New regulations in the capital market and In 2005, we took up measures serving to build the Corporate governance in public enterprises. Company s image as a business leader in the region of Central and Eastern Europe. The Company actively We were also actively involved in the organisation of the 4th International Scientific and Technological Conference entitled Contemporary challenges and development opportunities for the Polish mining, crude oil processing and gas sectors. We also sponsored the European Self-Government Academy preparing Polish officials for the absorption of EU funds. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 43

48 Good citizen PKN ORLEN does not forget about its roots and about the development of the local community. As a part of these measures, we embark on our own ventures and support projects implemented by local authorities. The biggest number of local events are financed from the Grant Fund, whose benefactor is ORLEN. The Grant Fund for Płock was established on 31 July 2003 by PKN ORLEN, the City of Płock and UNDP in order to more efficiently support civic initiatives and boost involvement in the implementation of the strategy for sustainable development of Płock. The Fund s resources were appropriated for the implementation of projects of non-governmental organisations and other non-profit institutions, which work for sustainable development. The supported projects, among other things, dealt with enterprise development, environmental protection, protection of cultural heritage, combating unemployment, fighting against social exclusion and the improvement in the level of education. Moreover, we are engaged in the sponsorship of Wisła Płock sports club, as well as the sponsorship of the International Wheelchair Tennis Tournament ORLEN Polish Open, which has become a permanent fixture in Płock s event calendar. In 2005, already the 11th edition of this Championship of international rank ITF2 assigned by the International Tennis Federation was held. In August 2005, with the financial support from the Company, the 54-hour long non-stop music marathon or the International Festival of Electronic Music and Visualisation Płock was held. As regards environmental protection measures which are a part of our action strategy, the Company provided financial support not only to the World Earth Days organised in the Mokotowskie fields in Warsaw, but also to the County Earth Days, during which many events were staged in Płock and in the neighbouring municipalities. In place of the Grant Fund, on 15 December 2005, R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y the Grant Fund for Płock Foundation was established. The main strength of the established Foundation will be its ability to raise funds from legal and natural persons, as well as apply for EU grants for NGOs. Proceeds so obtained will be used for fulfilling the Foundation s statutory objectives. The establishment of the Grant Fund for Płock Foundation opens up a chance for many local small NGOs and informal groups to obtain support, both financial and technical, for the execution of their projects. 44

49 ORLEN Dar Serc a Foundation We are a company which is sensitive to social needs. We pursue our charity policy by operating ORLEN Dar Serca Foundation set up in The aim of the Foundation is to take up, run and support charitable initiatives for health care, recreation and rehabilitation of the disabled, promotion of national tradition and development of education and science. In December 2005, within the context of assistance provided to little patients from the Children s Burns Centre of the University Children s Hospital in Cracow, the Foundation organised a campaign, whose purpose was to draw attention to the problems of children who sustained burns. Between December 2005 in Cracow, a Warm Hearts Zone was set up, encircling the Old Town with a wide ribbon. Inside the zone, a street collection was held by volunteers to raise funds for the treatment and rehabilitation of children with burns. Representatives of PKN ORLEN and the Foundation handed over to the Hospital s Director a cheque for the amount of PLN 200,000, thereby declaring to donate this amount as an assistance to the Burns Centre and its little patients. Ever since it was established the Foundation has taken care of family-type children s homes, which are the most favourable form of foster homes. About 250 children and their guardians spend summer in Masuria as part of holidays organised and funded by the Foundation. A few dozen families not only may take a rest but also get to know each other, develop new contacts and share their experiences. The Foundation remembers about family-type children s homes throughout the year. It assists them with daily needs and - on the occasions, such as the Children s Day or Christmas - helps forget about everyday worries by organising social events. With a view to assisting children and young people, in particular those from rural areas, in enjoying equal education opportunities, the Foundation has prepared a scholarship programme. Over 80 schoolchildren and over 40 students hold the Foundation s scholarships for the 2005/2006 school year. Those are very gifted people from poor families. Thanks to the Foundation s scholarships, they have an opportunity to continue education and develop their interests PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 45

50 Internal communic ations The year 2005 was a time of restructuring and improving the internal communication system in PKN ORLEN with a view to improving information flow. By synchronising in time internal and external communications, we managed to avoid a situation where employee obtained information from external media. A change of mission, co-operation between internal corporate media ORLEN Express bi-weekly and ORLEN Studio radio station and their complementing each other, as well as the setting up of a new intranet platform, all these developments have helped to get information across to various groups of employees in the most successful manner. New information channels were launched, targeted at specific audiences, such as news for employees covered by the restructuring process. We have also launched new interactive electronic communication tools: a discussion forum, intranet ask-a-question boxes, newsletters. one of the projects, the Restructuring of Regional Structures, won recognition of the Responsible Business Forum and in November 2005 the project was qualified for presentation at the Best Practice Fair. We have initiated measures seeking to integrate employees with the Company: charitable events brought together employees around noble aims; team building activities, such the Chemist s Day, brought results in the form of closer ties between employees themselves and closer identification of employees with the Company; our employees successfully competed in important sports events: in European Corporate Olympics in Athens, the Berlin Marathon, the Polish Bridge Championships of the Financial Market and Public Companies, the Polish Indoor Football Championships of the Automotive Industry and the City Business League. It is not only channels and tools that add to the new quality of corporate communications, but first of all R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTI ES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y it is the involvement of managers in communication processes within the context of projects run by them. Open communication of projects implemented in the company has made it easier to introduce changes and has made it possible to identify potential threats early on. The manner of handling communications about 46

51 EMPLOY EES Per sonnel Management Strategy The announced Company s strategy for the years was reflected in the need to change the personnel management strategy and introduce many modern methods and tools supporting business divisions in generating profits. We started the introduction of a major change, also calling for the implementation of transparent corporate governance principles. The tasks which were completed in this regard and projects which were launched with great effectiveness include in particular: Implementation of clear recruitment, assessment, promotion and remuneration procedures. Creation of career paths within the entire Company, recruitment and screening of human resources, depoliticization of the Company. Rational selection of qualified staff ensuring the achievement of strategic objectives, including expansion abroad. Establishment of proper communications in the Company and the Capital Group, assessment and development of human resources. Integration of the capital group, joint staffing policy. Performance-linked incentive system (MBO). Setting up a system of training responding to business needs based on competencies and assessment. Employment restructuring while maintaining dialogue and social peace. Promotion of ethical attitudes, change of behaviours. Employment in the years (PKN ORLEN) Employment in the years ORLEN Group PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 47

52 Work force At the end of 2005, ORLEN Group employed 21,826 people, of whom 5,334¹ worked for PKN ORLEN, while 7,739 were employed in Unipetrol Group. As regards the employment structure in PKN ORLEN, the recent years have seen a rise in the number of employees in the age bracket. The most numerous group in 2005 were employees aged between 31 and 50. In 2005, 728 people quit working for PKN ORLEN, of whom over 65% (478 people) left work under the Voluntary Leave Programme launched within the context of the Restructuring of Regional Structures. In 2005, women accounted for 27.3% of all those employed with PKN ORLEN, while men for 72.7%. In comparison with 2004, these proportions slightly shifted (30% women and 70% men in 2004). Educ ation The Company s staffing policy is one of the factors boosting work efficiency. For this reason, we consistently seek to engage people with high professional qualifications. The number of employees with a university degree increased by nearly 3% over 2004, while the number of people with secondary education fell by 2% versus Employment structure by age R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y ¹ Level of employment excluding long-term absentees 48

53 Recruitment Internships for graduates Human resources are the basic factor providing competitive edge, and for this reason on the hand we take care of the development of our employees competencies, but on the other hand we attach great importance to recruiting candidates displaying the highest possible qualifications. Striving to optimise the candidate recruitment and selection process, in 2005 we started work on the implementation of an IT tool supporting the recruitment process MrTedTalentLink. It will enable the optimum selection of qualified employees and allow candidates to manage their profile and monitor how successful their applications are. Because of PKN ORLEN s expansion into foreign markets, we have dynamically marked our presence as an employer also on the international labour market, in particular in Germany and the Czech Republic. In 2005, we continued co-operation with the County Labour Offices throughout Poland as regards the provision of internships for graduates. In 2005, we took on about 120 graduates as interns, of whom 50% gained recognition of their mentors and joined the ranks of PKN ORLEN employees. Most frequently, interns learnt the ropes in the area of production, marketing and sales. A ssessment centre An important element of our personnel policy pursued in 2005 was the introduction of the assessment centre methodology, both as a method supporting the recruitment process and as a tool for assessing employees potential. Level of education of employees in the years PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 49

54 Competencies development programme ployees of PKN ORLEN and ORLEN Group, including employees from foreign companies. The system s task In 2005, we started work on the implementation of is to support the implementation of the strategy for a pilot Competencies Development Programme. The growth of the Company s value and to improve the project aims to support the Company s current and efficiency and increase control over money spent on future business objectives by identifying key compe- bonuses. tencies from the point of view of the implementation of PKN ORLEN s strategy for the years , de- Training fining strengths and areas within which to develop employees competences. Training provided by us is conducted in the form of for-employee-only courses, which directly translates Talent Management into training quality and allows us to fully tailor them to the specific needs of our Company and its deve- Another development-oriented initiative is the Talent lopment directions. Our training courses helped over Management project, whose aim is to set up a staff 1500 employees to develop their skills. Over 3700 reserve list for the entire ORLEN Group. The assump- employees have been trained in HSE and participated tion of the project is to educate prospective mid-level in other compulsory training programmes. An impor- management staff, who will be ready to manage se- tant event in 2005 was the completion of an initial lected business areas on their own. stage preparing the way for the implementation of an e-learning platform, a tool which is to give PKN Business Ac ademy ORLEN employees better access to training courses of interest to them. In November 2005, we launched the Business Academy, which is a series of training courses for over 270 Employee benefits people from the managerial staff. The Business Academy aims to prepare the attendees for challenges In 2005, we centralised 12 employee benefit funds R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTI ES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y the Company will face in coming years. The training programme covered managers from PKN ORLEN and ORLEN Group, as well as those who participated in the Talent Management scheme. Motivation system MBO (Management by Objec tives) In 2005, we introduced the system of motivating by objectives, or Management by Objectives (MBO), which is the most popular and proven business management system. The system covered 157 key em- existing theretofore into one joint In-house Employee Benefits Fund. The Fund started to operate at the beginning of It is governed by the Regulations of In-house Social Activity worked out together with company trade unions. A change in the rules of disbursement of employee benefits introduced in the course of centralisation was made in observance of social interest, guaranteeing the provision of social security and care to all the entitled employees at a similar level as before. At present, about people are covered by social care in PKN ORLEN. 50

55 ENVIRONMENTAL PROTECTION Caring about the welfare of local communities by sustainable exploitation of the natural environment is one of the most important principles guiding our mission. Serving this purpose were pro-ecological measures undertaken by us, allowing the Company to operate in compliance with the applicable environmental law and the adopted environmental policy. The most important development in 2005 in this area was our obtaining of an Integrated Permit for the production facilities at the Płock plant, attesting to the use of Best Available Techniques (BAT), as well as the compliance with environmental standards on the land to which the Company has a legal title and beyond. The Integrated Permit issued by the Governor of the Mazowieckie Province covers: installations in the chemical sector: for crude oil refining Refinery, for production of organic chemical semiproducts and products Petrochemicals, installations in the power engineering sector: for burning fuels with a power rating of over 50 MWt Heat and power generating plant. The Integrated Permit was issued in June 2005 and is valid until 31 December The construction of new production facilities or a significant modernisation of the existing ones will each time require amending the issued permit or obtaining a new one. The fixed conditions of plant operation are very disciplinatory. Such assumptions were affected by the fact that many plants of different operators located on a single site interacted with each other and that the plant protection zone was eliminated at the end of In 2005, ORLEN Group companies operating on the site of the Płock plant, i.e. ORLEN Asfalt Sp. z o.o., ORLEN Oil Sp. z o.o. and Basell Orlen Polyolefins Sp. z o.o. also obtained an Integrated Permit for their installations. A unique situation arose in relation to ORLEN Eko Sp. z o.o., which obtained the Integrated Permit, which at the same time put it under an obligation to implement an adaptation programme for the waste incineration plant operated by it. This programme will be ongoing until mid As regards the Company s distribution and warehousing operations, the most important measures included the modernisation of fuel storage facilities and petrol stations carried out at many sites with a view to adapting individual sites to technical requirements promoting the reduction of environmental nuisances. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 51

56 Environmental Polic y Environmental protec tion investments Being aware of the Company s impact on the environment, we declare to systematically bring both planning methods and execution of processes in line with environmental protection requirements. Our aim is to make the Company s manufacturing activity and products made by it as neutral as possible to the environment. Our mission and existing and future development programmes formulated on its basis are all subordinated to this aim. Care about environment also underlies other measures carried out within the framework of the Environmental Management System implemented in the Company according to the requirements of ISO standard, which covers the production, warehousing and wholesale areas. The Integrated Environmental Management System was implemented in 2005 by another ORLEN Group company - ORLEN Eko Sp. z o.o. In 2005, capital expenditure on projects relating to environmental protection at the refining and petrochemical complex in Płock amounted to over PLN 179m and tripled in comparison with These involved activities bringing about an eventual reduction of nuisance caused by ongoing production, warehousing and distribution processes, as well a further improvement in the quality of produced fuels. We executed the total of 409 environmental tasks at petrol stations from the ORLEN network, warehouse depots and separate plants, spending over PLN 68m on them. We estimate that the total capital expenditure of PKN ORLEN on environmental protection in 2005 amounted to some PLN 250m. R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTI ES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

57 Responsible Care The year 2005 was the ninth year in which PKN ORLEN carried out the Responsibility and Care programme initiated by the Canadian Chemical Industry Association under the name Responsible Care. Currently, 85% of world chemical output comes from companies participating in this programme. Within the framework of the programme, in 2005 we took up, among other things, initiatives such as: co-operation with non-governmental organisations and local administration in the field of environmental protection, including: participation in the programme of restoration of the peregrine falcon in Poland (in a nesting box on the chimney on Claus plant, a pair of baby falcons were ringed); ecological education of the Company s employees and the local community, including updating PKN ORLEN SA Employee Ecological Guidebook on an ongoing basis; health prevention measures targeted at the Company s employees and their families. We also implemented a number of investment projects, including the construction of the first section of the liquid sediments disposal facility, modernisation of buildings with high level of acoustic activity, reduction of sulphur contents in fuel for technological furnaces (down to 0.25%). In 2005, another ORLEN Group company - ORLEN Eko Sp. z o.o. joined the Responsible Care programme, while ZA Anwil SA celebrated the 10th anniversary of its participation in the programme. Sulphur dioxide emission versus volume of processed crude oil in the years PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 53

58 In-House Ecologic al Inspec tion Air protec tion The activity of the PKN ORLEN In-House Ecological Inspection is a sign of concern about the control and full monitoring of production processes, which may have impact on the environment (in particular in situations where the normal operation of the plant is disrupted). The inspection is also responsible for monitoring the operation of the refining and petrochemical complex by handling complaints from local communities about temporary nuisances and explaining reasons for such complaints. In 2005, we recorded 10 such complaints, which mainly pertained to temporary odour nuisance during particularly unfavourable weather conditions. At the same time, the monitoring of pollution concentration conducted along the plant s perimeter did not reveal any instances of exceeding permissible standards, either momentarily or on annual average basis. Control measurements of emissions taken in 2005 did not reveal any cases of exceeding permissible levels set in the Integrated Permit. Increased volume of processed crude oil which went up by 3% versus 2004 and putting new and expanded production plants into operation caused a slight rise in total pollution emissions. At the same time, we recorded a drop in the emission of sulphur dioxide thanks to the use of fuels with lower sulphur content. As a result, environmental charges fell by about 3%. We also recorded a drop in pollution emissions at the Company s distribution and retail facilities. It resulted from air-tight sealing of yet another group of petrol stations, as well as from bigger supply of diesel oils versus petrol. R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTI ES PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

59 A new challenge taken on in 2005 was our involvement in the creation of the national system of trading in carbon dioxide (CO 2 ) emission permits. Enrolled in the system are two installations of the plant in Płock (refinery and heat and power generating plant) and six installations operated by ORLEN Group companies. The National Plan for the Distribution of Carbon Dioxide Emission Permits adopted by way of the Ordinance of the Council of Ministers dated 27 December 2005 specified the number of permits awarded to individual installations during the reference period, as well as annual average volumes, which for refining plants amount to 2,548m Mg, while for heat and power generating plants - 3,170m Mg of CO 2. The report on emissions for those plants for 2005, prepared for review, shows that the permitted targets were met in 98.6% for the refinery and in 94.6% for the heat and power generating plant. Also worth noting is a drop in average sulphur content and an increase in the content of bio-components in fuels produced by PKN ORLEN. As a result, the amount of harmful substances emitted to the environment by vehicles with internal combustion engines has also fallen. Green Projec t In 2005, we started to implement the project involving planting trees around the plant in Płock. During the first stage, over 1300 trees have been planted, including 100 oaks planted by the Company s employees. The aim of the project is to compensate for trees and bushes cut down when projects are implemented, as well as to promote pro-ecological attitudes among the Company s employees. Product Sulphur and bio-components contents in motor spirits in the years Average sulphur content (% weight) ETBE content (% weight) Eurosuper Eurosuper 95 with EETB Super Plus Super Plus 98 with EETB Uniwersalna 95* Uniwersalna 95 with EETB Eurosuper 95 with Etanolem (4.6% V/V) VERVA Average content of substances in motor spirits * universal 95 petrol was no longer produced in 2005 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E L NASZE ATIONS R WITH E L AC J OUT E Z OTOCZENIEM SIDE PARTIES 55

60 D rive safely

61 Retail segment

62 NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y R E T A I L S E G M E N T A rise in raw material prices in 2005 directly contributed to the overall drop in the consumption of engine fuels in Poland. In comparison with 2004, particularly noticeable was a 5.3% fall in the demand for petrols offset by 5.6% higher consumption of diesel oil. While retail prices of petrol and diesel oil kept rising steeply, a sizeable group of drivers opted for LPG autogas, which resulted in an 18% increase in LPG consumption in 2005 over the previous year. Strategy Considering the need to make a radical change in the way the retail division operated and taking account of years of neglect in this area, the Company s Management Board adopted the Plan for the development of retail sales in Poland until The published strategy envisages, first of all, a reversion of the current negative trend regarding our share in the domestic retail fuels market and the achievement of a market share at the level of at least 30% by Moreover, we will be seeking to increase the share of non-fuel products in the total margin up to about 30%. Getting in sync with market trends, we have also announced that the retail sales structure will be put in order by, inter alia, introducing a division into premium and economy stations. The main objectives of the strategy for the two brands are improved profitability and efficiency of the stations, which in the long term is to translate into a bigger market share. We are planning to set up about 1000 petrol stations operating under the economy brand BLISKA by In addition to fuels, all economy brand outlets, of which we opened 30 until the end of 2005, offer only basic car and food products. The price of fuels at BLISKA stations is a few groszys lower than at premium ORLEN brand stations. Cheaper offerings of the BLISKA chain are possible thanks to lowering station operating costs resulting from limiting the range of services and giving up VITAY loyalty scheme. Incorporated in the BLISKA chain will be franchised, affiliated, associated and independent stations meeting the requirements of the economy brand. We are also planning to find new locations for some outlets. Volumes In 2005, we sold over 3.7 bln litres of engine fuels in Poland through our retail network, a 2.5% drop versus For yet another year in a row, we recorded a fall in the sales of petrol, with a concurrent increase in the demand for diesel oil and LPG. 58

63 Structure of fuel sales in Margin structure in % 7.7% 47.8% 8.1% 22% 49% 21% 44% 5% 6% 38% 44.1% 24% 29% petrol diesel oil LPG petrol diesel oil LPG Non - fuels and services In 2005, an average volume of sales of all engine fu- was made possible by a significant rise in store mar- els per station in our own network amounted to 2m gins (by PLN 14m), resulting, among other things, litres, a figure nearly 3.5% lower than in The from the implementation of measures focusing on average for the entire fuel sales network dropped the optimisation of product categories with regard over the same period by some 3%. to trade terms and the careful selection of product offerings meeting the needs and expectations of cu- PKN ORLEN s share in the retail fuel market fell from stomers. 28.6% in 2004 to 27% as estimated at the end of New fuels The sales of non-fuel products in 2005 amounted to In 2005, we took measures with a view to strengthe- PLN 871m. (1) ning our market position in the premium station segment. On 19 September, we introduced new enriched Margins 2005 fuels VERVA ON and VERVA 98 to ORLEN stations. In 2005, we achieved the total margin of PLN 1,194 bln, a 13.1% increase over The margin on retail sales of petrol, diesel and LPG amounted to PLN 942m and was 14.1% higher than the margin achieved the year before. The reversal of the negative trend was largely possible thanks to more efficient management of the retail network structures and favourable market conditions, in particular in Q Margin on sales of non-fuel products and services grew by 9.5%, amounting to PLN 252m. This result We have developed the new generation VERVA fuels, having in mind the improvement of engine operating conditions in different weather conditions and under changing load. A higher content of cleaning additives keeps the inlet system clean, allowing for the elimination of sediments depositing during the use of fuels of unknown origin. New fuels, whose quality is controlled on a continuing basis at each production stage, are available only at ORLEN stations. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT 1) Sales in stores, bars, listing fee, car washes, vacuum cleaners, lease and other 59

64 Number of stations lected most points. Super VITAY cards give their holders additional benefits and prestige that goes with a At the end of 2005, we had in Poland: gold, personalised card own stations (52 stations more Flot a scheme than in 2004), 465 affiliated stations (64 stations fewer Flota scheme is a programme designed for institutional than in 2004), customers operating their own vehicle fleets, who are 92 franchised stations (34 stations more looking for an easy-to-use, friendly fuel tank-up system than in 2004). and basic road assistance services, bringing economic benefits. Participants in the Flota scheme include both In 2005, we built 40 new stations and completely mo- specialised forwarding companies and trade, manufac- dernised 64 locations. turing, service companies, as well as public institutions, e.g. banks, diplomatic posts, government offices. Fleet VITAY scheme cards allow their holders to make cashless purchases of fuels, products and services at ORLEN stations. VITAY scheme is a loyalty scheme targeted at individual customers. Each purchase at a station from our In 2005, we achieved a significant growth of sales paid network is rewarded with a certain number of points, for using Flota cards. In 2005, the volume of sales of which a card owner can redeem against prizes (fuel or fuels paid for using Flota cards ran up to over 350m other gifts and gadgets). litres. About 5,000 businesses actively participated in the programme. By the end of 2005, we issued more than 5.7m VITAY cards. DK V/ORLEN co -branded c ard programme Super VITAY scheme DKV/ORLEN card is the first fuel card in Europe NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y Super VITAY scheme is a loyalty scheme addressed to customers patronising PKN ORLEN fuel station network, who participate in the VITAY scheme and col- combining the microchip technology of the Flota card with the magnetic card of the DKV international network. Holders of DKV/ORLEN fuel card are institutional customers. The card allows its holder to make cashless purchases of fuels, goods and car accessories and use many road-assistance services. 60

65 The year 2005 was a time of continued development of the co-branded card of PKN ORLEN and DKV EURO SERVICE GmbH. In comparison with 2004, the number of cards issued until the end of 2005 grew eight-fold. Pre-paid c ards Pre-paid cards are offered to institutional customers as an effective, modern and efficient tool for promoting and advertising products and services of card buyers. In 2005, the following companies made use of prepaid cards: Nestle, Kamis, Polfa Kutno, Mercedes Benz, Gillette, Społem, Raffeisen, Daewoo. Ef fec tive execution of the retail net work development plan on the Polish market Summary of completed actions: centralisation and enhancement of the support functions (finance, administration, investments) - headcount reduction by 150, closure of 5 service stations. Operating efficiency has been enhanced: retail market share decline stopped at c. 27%, investment programme progressed as planned (modernisation of 64 stations at existing locations, and building of 40 stations at new locations), growth of the number of the Flota loyalty programme customers by 20%, to 4,600, 1.4% increase in non-fuel sales. Implementation of a two-brand strategy: launch of BLISKA, a new Economy brand (increase in sales dynamics, after rebranding, from planned 15% to 19%), launch of VERVA, a new Premium fuel brand (VERVA s share in total fuel sales at Premium stations was 16%; originally budgeted at 10%) (1). The retail network has been restructured: implementation of the distribution channels management programme, appointment of 116 micro-market managers (including 26 new ones), 1) Share of PKN ORLEN retail sales in total retail fuel sales, where the total retail sales were determined as 75% of total diesel consumption and 100% gasoline & LPG consumption. Source: Company estimates, Nafta Polska, PFC Energy, Citibank Handlowy. 2) In the period of November-December market share (2) min. 30% including in fuel market 35% (gasoline, diesel), sales volume bln l/year, intensification of Flota programme 20% share in sales, average fuel throughput per station (CODO) > 2.5m l/year, non-fuel margin in total retail margin (CODO) 30%. Key operating targets (2009) PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT 61

66 RETAIL SALES IN GERMANY St ations in 2005: Volumes stations were operated under ORLEN brand, 336 stations were operated under STAR brand, In 2005, we sold over 1.49 bln litres of fuels through 26 stations were operated on supermarkets the retail network in Germany, a 2% increase over the premises. last year. An average volume of sales per station exceeded 3.1m litres, a figure higher by some 100,000 Restruc turing and development of ORLEN litres than in The sales of non-fuel products Deutschland AG exceeded EUR 143m, an increase by EUR 17m in comparison with The restructuring plan for ORLEN Deutschland AG assumes: Margins 2005 one-off cost at a level of ca. EUR 31 m (1), as a result of in-depth restructuring taking place In 2005, the margin on sales of fuels in the German chiefly in 2006, incremental operating profit shall retail network amounted to EUR 71,408m, and was be recorded from 2007, nearly EUR 2m lower than the year before. An average realization of this strategy generates the best margin ran at the level of 4.79 eurocents per litre of possible positive financial results in the long term, fuel, or 0.23 eurocents less than in the previous year. execution of the SWAP agreements will allow PKN ORLEN to realize a ROACE for the German retail Petrol stations sites which, from PKN ORLEN s perspective, will be at a level acceptable to the Company s strategy, In 2005, within the retail network in Germany we ma- acquisition of ca. 250 sites by 2009 would create naged 478 petrol stations, of which: the potencial to gain a 10% share of the Northern German market, 381 stations belonged to our own network, while, realization of the scenario assumes spending NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y outlets were operated under franchise agreements. additionally ca. EUR 50 m for acquisition and rebranding sites, this strategy does not exclude the future sale of the business under better conditions. Key financial figures (2009) ROACE 18.4% (2) NPV EUR 142 m One off expenses EUR 81 m 1) Excluding effects of SWAP - ROACE = ca. 7.7% 2) Towards these costs a PLN 120 m provision has been created in 4Q

67 EBITDA (EUR m) Petrol stations At the end of 2005, our retail network in the Czech Republic included 315 petrol stations operated under BENZINA brand, of which: 306 stations belonged to our own network, 4 outlets were operated under franchise agreements, while 5 non-public stations serviced vehicle fleets of RETAIL SALES IN THE CZECH REPUBLIC particular companies. ORLEN strategy in the Czech Republic Volumes In 2005, we sold 446.7m litres of fuels through the retail network in the Czech Republic under our management. An average volume of sales per station amounted to 1.45m litres. The sales of non-fuel products amounted to EUR 69.1m. One of the major tasks we set ourselves in 2006 is the strengthening of the image of BENZINA brand and the improvement of the customer service quality at petrol stations. We also wish to place great emphasis on the development of non-fuel segment and the reduction of operating costs. Margins 2005 In 2005, the margin on sales of fuels amounted to EUR 29.9m, while the average margin reached the level of 6.6 eurocent per litre of fuel. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E R ETAIL Z OTOCZENIEM SEGMENT 63

68 L uminous way

69 Wholesale segment

70 WHOLESALE SEGMENT Ekoterm Plus Fuels A drop in sales of Ekoterm Plus in 2005 in comparison with the previous year was mainly caused by lower In 2005, we sold 6,603,000 tonnes of fuels on the do- domestic consumption resulting from buyers uncer- mestic and European wholesale market, thus genera- tainty about the plans for aligning excise tax on hea- ting a 3.7% growth over Of the above volume, ting oil with excise tax on diesel oil. A rise in prices of 5,995,000 tonnes of petrol and oils were sold on the light heating oils by PLN PLN 0.60 net per litre Polish market, a 2.4% increase over was also an important factor. As a result, customers abandoned many heating units and converted to re- Total wholesale sales of fuels in the years (thousand tonnes) newable energy sources encouraged by the state and co-financed by the EU Change (%) Petrols 1,755 1, Despite a fall in total sales in 2005, we recorded a 1% Diesel oils 2,552 2, rise in Ekoterm Plus s share in the domestic market of Light heating oil 1,702 1, light heating oils. JET A Total 6,355 6, JET A-1 Contributing to the achieved dynamics was an over Petrols 17% growth of export sales and an over 3% increase in domestic sales in comparison with sales generated The achieved growth rate primarily resulted from in A biggest increase in purchases by nearly higher export contracts, which in 2005 grew by 6.5% was recorded with regard to Petrolot company. nearly 40% in comparison with Sales to dome- NASZE R E WHOLESALE L AC J E Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y stic wholesale buyers increased over the same period by some 2.5%. Diesel oils Sales of diesel oil increased mainly due to bigger sales to foreign companies operating in Poland, as well as to associated stations and independent clients. These groups stepped up their purchases by 14.8% compared to Wholesale sales of fuels in the years export (thousand tonnes) Change (%) Petrols Diesel oils JET A Total

71 Non-fuel produc ts Market fac tor s In 2005, the total volume of wholesale sales of nonfuel products in PKN ORLEN amounted to over 3m tonnes, a 4% increase over In addition, this segment grew as a result of the launch of export sales of petrol for pyrolysis (about 105,000 tonnes), which had not been in offer in In 2005, we saw a drop in wholesale sales of petrochemical products. Sales fell by over 10% as a result of the limited supply of products caused by prolonged repair shutdowns of Olefins Plant II and Aromatics Plant. In 2005, the consumption of fuels (petrols, diesel oils and light heating oil) in Poland amounted to 13.4m tonnes and was about 1% lower than in The year 2005 was marked by an increase in the consumption of diesel oil, accompanied by a drop in the consumption of petrols and light heating oil. The level of demand for individual fuels in Poland in 2005 was as follows: diesel oil 6.8m tonnes (a 5.7% increase over 2004), petrols 4.0m tonnes (a 5.3% decrease versus 2004), light heating oil 2.5m tonnes (an approx. 9.5% decrease versus 2004). Total wholesale sales of petrochemical products in the years (thousand tonnes) Change (%) Phenol Acetone Ethylene Propylene Glycols Ethylene oxide Butadiene Benzene Orthoxylene Paraxylene Other petrochemical products 189,5 160, Total 1, PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E WHOLESALE L AC J E Z OTOCZENIEM SEGMENT 67

72 Market share 2005 In 2005, PKN ORLEN s biggest domestic competitor was still LOTOS Group with an estimated share in the market at the level of 21%. Imports of fuels in 2005 grew by some 9%, and for petrols amounted to 0.6m tonnes, for diesel oil 2.4m tonnes and for light heating oil 0.4m tonnes. Most fuel was imported from Germany, Slovakia and Belarus. Both LOTOS Group s fuel and imported fuel is available throughout Poland. As in previous years, also in 2005 the declining consumption of petrols was most significantly affected by the dynamically developing LPG autogas market. Compared to 2004, sales of LPG in 2005 grew by 23%, reaching 1.8m tonnes. According to estimates, in 2005 PKN ORLEN had a 54% share in the domestic fuel market. As regards individual types of fuels the market share was as follows: Petrols 63%, Diesel oil 46%, Ekoterm Plus 61%. Domestic sales of fuels generated by PKN ORLEN caused: share in the petrol market to rise by approx. 1 pp (up to 63%), share in the diesel oil market to fall by approx. 2 pp (down to 46%), share in the light heating oil market to rise by approx. 1 pp (up to 61%). NASZE R E WHOLESALE L AC J E Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

73 Considering very strong competition, an increase in the share in the petrol and light heating oil market is a huge success, achieved thanks to the development of contract sales and loyal distribution channels. Cost optimisation The implementation of the three-year Comprehensive Operating Costs Reduction Programme (KPRKO) in the field of wholesale operations yielded nearly PLN 2m in permanent savings at the end of Within the framework of the formulated wholesale strategy for the years , we will further optimise our offerings aligning them with the wholesale market needs and will at the same time modify the organisational structure of the Wholesale Trade and centralise the sales administration. We are planning to implement a comprehensive margin optimisation (CMO) project. New management system On 1 January 2006, we implemented a completely new segment management system in ORLEN Group, whose major aims are to improve management efficiency, take advantage of the economies of scale and realise cost and income synergies at the level of ORLEN Group. As a result of the introduced changes, beginning from 2006, the wholesale segment in ORLEN Group will be made up of ORLEN Gaz, five fuel companies run by regional market operators (RMO) and Petrolot Sp. z o.o. We are planning to incorporate Unipetrol Group companies into segment management in January Share in the domestic fuel market in the years PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E WHOLESALE L AC J E Z OTOCZENIEM SEGMENT 69

74 P lenty of assistance

75 Refining segment

76 R E F I N I N G S E G M E N T Produc tion volume As a result of the consolidation of the production assets in the Czech Republic in 2005, we increased crude oil processing capacity of ORLEN Group up to nearly 22m tonnes per year. In six refineries managed by PKN ORLEN we processed in 2005 the total of m tonnes of raw material. As the production of light heating oil Ekoterm Plus declined as a direct result of higher production of diesel, the total yield of fuels in the refinery in Płock remained at the level prevailing in The yield rate of white products stood at the level of 80%. It is worth noting that in October 2005, we processed the 400 millionth tonne of crude oil. Fuels The main refinery in Płock processed in 2005 in excess of 12.5m tonnes, a 3% increase over An increase in the volume of processed raw material was a direct result of growing demand for engine fuels in Poland. The highest growth, by over 18%, was recorded with regard to LPG, of which we produced 35,000 tonnes more than in Such a notable change was mainly caused by 24% increase in LPG consumption in Poland in comparison with In 2005, the Polish LPG market was considered as the largest in the world, both in terms of the level of demand and the number of petrol stations selling autogas. On 1 January 2005, we launched in Płock the production of unleaded petrols with reduced aromatic and sulphur contents (by volume). According to EN 228:2004 standards, we lowered these values respectively from 42% to 35% and from 150 mg/kg to 50 mg/kg. From the beginning of 2005, the entire volume of Ekodiesel Ultra diesel oil offered by us has sulphur content below 10 mg/kg. Ekodiesel Ultra meets the strictest quality and environmental requirements imposed on diesel fuels in the EU countries. Such a low sulphur content in diesel oil will not be adopted as obligatory across the EU until NASZE R E L AC R E J F E I NING Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y We also recorded a significant increase in the output of motor fuels a nearly 4% rise and diesel over 5%. 72

77 In September 2005 we launched in Płock the production of completely new types of premium fuels under a trade name VERVA. We expanded our range of fuels to include diesel oil VERVA ON with a cetane number of 55 and high-octane petrol VERVA 98 with sulphur content of 10 ppm and increased content of detergent additives. Production volume of selected refining products in the years (thousand tonnes) Change /2004 Crude oil processing 12,194 12, % Motor fuels 2,753 2, % Diesel oils 3,347 3, % Ekoterm light heating oil 1,707 1, % Investments In January 2005, we started work on the modernisation of the diesel oil stabilisation facility fed by the Hydrodesulphurization of the Heavy Vacuum Residue plant. Enriched higher quality product is intended to be used as a component of other high quality products, mainly light heating oil Ekoterm. We are planning to put the facility in operation at the end of In 2005, we completed basic construction and assembly work on the FCC Naphtha Desulphurization plant. In the second half of 2006, we are expecting to obtain first volumes of FCC Naphtha of higher quality, which will be a regular component of Eurosuper 95 petrol. JET A-1 aviation fuel % Liquid gas % Total fuels 8,344 8, % Fuel yield % pp White products yield % pp Refi nery utilisation ratio % pp PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC R E J F E INING Z OTOCZENIEM SEGMENT 73

78 Cost optimisation The implementation of the three-year Comprehensive Operating Costs Reduction Programme (KPRKO) in the field of refining operations brought in around PLN 144m in permanent savings at the end of Between , within the context of the new cost optimisation programme OPTIMA, we are expecting to achieve further positive results of production processes and increased utilisation of capacities of key plants. As a result of the implemented changes, at the beginning of the new year, apart from the refinery in Płock, the refining segment will also incorporate ORLEN Asfalt and ORLEN Eko, Jedlicze Refinery and Trzebinia Refinery have been assigned to the new oil segment. We are planning to incorporate Unipetrol Group companies into segment management in January New management system On 1 January 2006, we implemented a completely new segment management system in ORLEN Group, whose major aims are to improve management efficiency, take advantage of the economies of scale and realise cost and income synergies at the level of ORLEN Group. NASZE R E L AC R E J F E I NING Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

79 Key projec ts and initiatives in refiner y segment: CAPEX includes, among others, investments in capacity increase: HON VII, (Hydrodesulphurisation of diesel oil) Intensification Butadiene, Reforming VII, FCC Naphtha Desulphurisation, Ethyl-benzene Instalation, New hydrocracker revamp (Unipetrol a.s.), Selective hydrogenation of FCC Naphtha (Unipetrol a.s.), NOx reduction ECP phase (Unipetrol a.s). Refinery segment CAPEX (PLN bln, % of total CAPEX) Refinery segment EBITDA in 2009 (PLN bln, % of total EBITDA) PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC R E J F E INING Z OTOCZENIEM SEGMENT 75

80 Reflectors

81 Petrochemical segment

82 P E T R O C H E M I C A L S E G M E N T Produc tion volume Due to the modernisation lasting for several months and the start-up of the Olefins Plant II, in 2005 petrochemical output of the production plant in Płock fell by nearly 12%. It was not until the last two months of 2005 that we boosted ethylene and propylene production capacity the basic petrochemicals for the plastics processing industry. In addition to increasing output, the modernisation of Olefins plant II also has fundamental impact on the synergy with the refining division of the plant by creating greater flexibility in managing petrol and diesel oil. Upgraded installations of Olefins Plant II enable us to produce up to 700,000 tonnes of ethylene and 385,000 tonnes of propylene annually. We are expecting to fully utilise the doubled production capacity in We will supply a predominant share of the increased output to ORLEN Group companies to the new polyolefins plant of Basell Orlen Polyolefins Sp. z o.o. (BOP) and the upgraded polyvinyl chloride (PVC) plant in Anwil in Włocławek. Production volume of selected petrochemicals in the years (tonnes) Change /2004 Ethylene 348, , % Propylene 245, , % Butadiene 45,997 40, % Benzene 76,855 64, % NASZE PETROCHEMICAL R E L AC J E Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y Toluene 73,449 79, % Paraxylene 31,550 27, % Phenol 52,967 43, % Acetone 33,828 27, % Glycols 104,982 88, % Cooling liquids 17,349 12, % Solvents 17,461 14, % Aromatics 239, , % Sulphur 106, , % Ethylene oxide 17,845 13, % 78

83 We expect the new BOP plants launched in 2005, in which PKN ORLEN has a 50% stake, to produce 400,000 tonnes of polypropylene (PP) and 320,000 tonnes of high density polyethylene (HDPE) per year. Including the capacity of the low density polyethylene (LDPE) plant, the annual combined capacity of the BOP plants will amount to some 870,000 tonnes. Products offered by BOP have a wide range of applications both in the consumer market and in the industrial market, inter alia, in the production of packaging, including food and drink packaging, films, textile products, as well as car parts and pipes. Investments Complementing investments relating to the modernisation of Olefin II and the start-up of plants at BOP was the launch in July 2005 of the modernised Aromatics extraction plant producing benzene and toluene based on raw materials from the Reforming Plant V and Olefins Plant II. Production capacity of the modernised Aromatics Extraction plant is 27.4 tonnes/h of toluene and 22.4 tonnes/h of benzene. In 2005, the Management Board of PKN ORLEN made a decision to build a new Paraxylene Plant with production capacity of 400,000 tonnes per year in Płock and a Terephthalic Acid Plant with production capacity of 600,000 tonnes per year in Zakłady Azotowe Anwil Włocławek. Total volume of BOP s production * in the years (thousand tonnes) Polyethylene LDPE HDPE 28 Polypropylene Total volume of BOP s sales * in the years (thousand tonnes) Polyethylene LDPE HDPE 10 Polypropylene * products from Płock PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE PETROCHEMICAL R E L AC J E Z OTOCZENIEM SEGMENT 79

84 Cost optimisation New management system The implementation of the three-year Comprehensive Operating Costs Reduction Programme (KPRKO) in the field of petrochemical operations brought in about PLN 36m in permanent savings at the end of 2005 (relative to 2002). Between , within the context of the new cost optimisation programme OPTIMA, we are expecting to achieve further positive results of production processes and increased synergy between the petrochemical and refining divisions. On 1 January 2006, we implemented a completely new segment management system in ORLEN Group, whose major aims are to improve management efficiency, take advantage of the economies of scale and realise cost and income synergies at the level of ORLEN Group. As a result of the introduced changes, as from 2006, the petrochemical segment in ORLEN Group will be made up of the production plant in Płock and BOP company, while Zakłady Azotowe Anwil Włocławek has been assigned to the new chemical segment. We are planning to incorporate Unipetrol Group companies into segment management in January NASZE PETROCHEMICAL R E L AC J E Z OTOCZENIEM SEGMENT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

85 Key projec ts and initiatives in petroche - mic al segment: Key projec ts and initiatives in chemic al segment: CAPEX includes, among others, investments in capacity increase through instalation of PX and PTA. Increase of EBITDA share in total EBITDA of PKN ORLEN Group to ca. 37% in Investment in PVC instalation (Spolana). Increase of storage capacity for PVC (Spolana). Increase of production capacity PCV (Anwil). Increase of storage capacity (Anwil). Streamcracker expansion (Chemopetrol). Control system modernisation (Chemopetrol). New butadiene unit (Kaučuk). Petrochemical segment CAPEX Chemical segment CAPEX (PLN bln, % of total CAPEX) (PLN bln, % of total CAPEX) Petrochemical segment EBITDA in 2009 (PLN bln, % of total EBITDA) Chemical segment EBITDA in 2009 (PLN bln, % of total EBITDA) PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE PETROCHEMICAL R E L AC J E Z OTOCZENIEM SEGMENT 81

86 Make haste slowly

87 Logistics

88 L O G I S T I C S The basic task of Logistics is to provide full and flexible service for all sales channels while keeping costs at an optimum level. An effective range of logistic services of PKN ORLEN comprises own and rented transhipment and warehouse sites, a pipeline network and road and rail transport. Obligator y reser ves PKN ORLEN s logistic infrastructure is also used for maintaining national obligatory reserves of crude oil, semi-products and finished products. Such an obligation is imposed on producers and importers by the Ordinance of the Minister of Economy of , pursuant to which by the end of 2008, we are obligated to build up reserves corresponding to 76 days daily output including imports and intra-community purchases less exports and intra-community sales. In accordance with the timetable, at the end of 2005, our reserves reached a volume equal to 58 days output. In 2005, we stored obligatory fuel reserves at 14 locations in Poland, while crude oil reserves were stored in salt caverns. Underground crude oil warehouses IK S Solino SA Underground crude oil and fuel storage facilities constitute a strategic link in the Company s logistic network. In 2005, we continued investment work with a view to expanding salt cavern s cubic capacity from 3m cubic metres we had in 2004 to 5m cubic metres. Our strategic plan also provides for the construction of an underground storage facility in another salt deposit. We are planning to use new capacities to store not only crude oil, but also petrochemical products. Warehouse depots In 2005, we continued measures aimed at optimising own and third party warehouse depot structures. We have achieved the target structure of our own network of warehouse sites in Poland, reducing their number, as planned, down to 13, out of which 11 were used for trading operations and two as tranship- NASZE R E L AC J E Z OTOCZENIEM LOGISTICS PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

89 ment bases. Concurrently, we continued the process of the modernisation and adaptation of the warehouse depot infrastructure to the EU standards as regards full air-tight sealing and securing against seepage of products into water and ground. Pip elines To transport fuels, we use a 232-km long network of our own product pipelines and a 570-km network of pipelines owned by PERN Przyjaźń SA. In 2005, we carried out preparatory work preparing the ground for the project involving the construction of additional pipelines on the Ostrów Wielkopolski Wrocław and Boronów Trzebinia routes. The construction of those pipelines, by 2009, will ensure a better access to an attractive market of the Lower and Upper Silesia region for our products. At the same time, the new pipeline network will be for PKN ORLEN a yet another tool serving to optimise the product shipment structure. Pipeline transport is the cheapest and safest means of transporting fuels, therefore we are seeking to intensify the utilisation of the potential afforded by longdistance pipelines. In 2005, share of pipeline transport in the fuel shipment structure stood at 65%, a 1% rise over Rail transpor t In 2005, we transported over 1m tonnes of products, i.e. approx. 55% more than in 2004, using our own rail transport, i.e. arranged by PKN ORLEN. Share of own transport in the Company s total rail transport grew from 15.1% in 2004 to 17.4% at the end of This change had a positive impact on timeliness of deliveries and further reduction of logistic costs. In 2005, we also enlisted close co-operation of the Czech company Unipetrol Doprava a.s. regarding rail transport and rolling stock management. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OTOCZENIEM LOGISTICS 85

90 Road transpor t Sea transshipment Fuels are transported to the station network (secondary logistics) by eight transport companies, of which one Lublin-based company was sold to a private company Nij man Zeetank operating in this sector. As a result of the companies restructuring and the lowering of haulage rates, secondary logistics costs are similar in comparison with European operators. An important element of PKN ORLEN s logistic potential is access to the infrastructure of Naftoport a company engaging in the transshipment of crude oil imported by sea. Naftoport Sp. z o.o., in which PKN ORLEN has an 18% stake, is the owner and user of two sea transshipment sites for tankers. The total crude oil transshipment capacity of Naftoport Sp. z o.o. amounts to 34m tonnes per year. Logistic infrastruc ture NASZE R E L AC J E Z OTOCZENIEM LOGISTICS PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

91 Cost optimisation The implementation of the three-year Comprehensive Operating Costs Reduction Programme (KPRKO) in the field of logistic operations brought in about PLN 199m in permanent savings at the end of 2005, relative to New management system On 1 January 2006, we implemented a completely new segment management system in ORLEN Group, whose major aims are to improve management efficiency, take advantage of the economies of scale and realise cost and income synergies in the entire ORLEN Group. As a result of the introduced changes, from the beginning of 2006, the logistics segment in ORLEN Group includes the following companies: IKS Solino SA, ORLEN KolTrans Sp. z o.o., PPPP Naftoport Sp. z o.o. and seven road transportation companies. We are planning to incorporate Unipetrol Group companies, i.e. railway company Unipetrol Doprava a.s. and road transportation company Petrotrans a.s. into the logistics segment in January Share of individual means of transpor t ation in liquid fuel shipping struc ture in PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z OTOCZENIEM LOGISTICS 87

92 Fastened seat belt

93 Integration with Unipetrol a.s.

94 I N T E G R A T I O N W I T H U N I P E T R O L A. S. The purchase of shares in Unipetrol a.s. is the largest Polish foreign investment strengthening the Company s position in the downstream and petrochemical sectors in Central and Eastern Europe. We have opened a new chapter in PKN ORLEN s history. It is another step towards achieving the objective set in the strategy published at the beginning of 2005 becoming a regional leader in Central Europe. In accordance with the strategy, the Czech market is treated on equal terms with the Polish markets as a home market, while the creation of the value of the merged companies has been a priority for us. Transac tion On 24 May 2005, PKN ORLEN purchased 62.99% of shares in Unipetrol a.s. for CZK 11,303.9m, 9.76% of shares in Spolana a.s. for CZK 1.0m and receivables due from companies from Unipetrol Group with a nominal value of CZK 3,564m for CZK 1,745.1m. Unipetrol s shares were purchased under the agreement entered into on 4 June 2004 between PKN ORLEN and the National Assets Fund of the Czech Republic, while Spolana s shares and receivables were purchased under agreements entered into on 4 June 2004 between PKN ORLEN and the Czech Consolidation Agency, after PKN ORLEN has obtained required approvals and fulfilled all conditions precedent to the agreements of 4 June 2004, including obtaining consent of the European Commission for taking over control over Unipetrol. In order to fully complete the transaction, PKN ORLEN had to meet obligations arising under the Czech law towards minority shareholders of Unipetrol, Spolana and Paramo and obligations assumed under the agreement for the purchase of shares in Unipetrol and towards the Government of the Czech Republic. INTEGR NASZE ATION R E L WITH AC J E UNIPETROL Z OTOCZENIEM A. S. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

95 On 12 October 2005, we stopped accepting tenders of shares in Unipetrol, Spolana and Paramo within the context of an obligatory tender offer announced by PKN ORLEN. Minority shareholders expressed their intention to sell shares accounting for respectively 3.7% (Paramo), 3.6% (Spolana) and % (Unipetrol) of the share capital of those companies. The total value of tendered shares at a price set in the tender offer amounted to CZK 91.97m. On 4 November 2005, PKN ORLEN paid in an additional CZK 1,645 bln, or 14.55% of the price agreed in the agreement for the purchase of the strategic shareholding in Unipetrol a.s. holding. The additional payment resulted from the provisions of the agreement for the purchase of shares in Unipetrol a.s., allowing for the possibility of a 15% upward adjustment of the price, should the value of the Czech holding s assets rise significantly. The final price and the amount of the additional payment was agreed as a result of arrangements with the National Assets Fund of the Czech Republic. In effect, the total purchase price for 62.99% of shares, including the extra payment, amounted to CZK 12,949,203,475. Under the agreements of 2004 entered into with ConocoPhillips Central and Eastern Europe Holdings B.V. and Agrofert Holding, a.s., PKN ORLEN, as the majority shareholder of Unipetrol, was obligated to arrange for the sale by Unipetrol of certain assets to ConocoPhillips and Agrofert. The transactions were to be concluded after PKN ORLEN has taken over corporate control over the company, at fixed prices agreed in the said agreements. The Company s Management Board commissioned independent experts to analyse all possible ramifications of implementing the provisions of the agreements under the terms laid down therein. A strategy of action providing for minimisation of negative effects of the above-mentioned agreements for PKN ORLEN and its shareholders has been prepared. All possible legal and formal measures have been taken with a view to protecting the interests of PKN ORLEN and its shareholders as effectively as possible. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y INTEGR NASZE ATION R E L WITH AC J E U Z NIPETROL OTOCZENIEM A. S. 91

96 Integration As the majority shareholder of Unipetrol, on 8 June 2005 PKN ORLEN introduced its representatives into the Czech Company. Changes in the make-up of strategic governing bodies, such as Supervisory Boards and Management Boards of Unipetrol Group Companies reflected the holding s new ownership structure, including the introduction of a new management model based on the One Company philosophy making it possible to manage a complicated holding structure. This approach provides for one management team responsible for the fulfilment of joint targets and sharing responsibility for the bottom line. The new management model forms the basis for implementing segment management throughout the entire Unipetrol Group. plan actions relating thereto and implement specific initiatives. In all, about 150 PKN ORLEN employees have been involved in the merger between the companies, of whom one third were temporarily posted to work in the Czech Republic. The integration work resulted in the presentation on 17 October 2005 of the financial year and the operational Value Creation Programme. In line with PKN ORLEN s expectations, the implementation of operation improving measures in Unipetrol will ensure an internal rate of return on investment at the At the same time, a project seeking to integrate operations of Unipetrol and PKN ORLEN has been started. A key part in the project, called the Partnership Programme, is played by a team of the best Czech and Polish specialists, whose task is to manage the integration process, identify achievable benefits and synergies, INTEGR NASZE ATION R E L WITH AC J E UNIPETROL Z OTOCZENIEM A. S. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

97 level of at least 33.9% (without financial reserves, relative to macroeconomic conditions prevailing in 2004). As a result of streamlining and aligning Unipetrol s operations with ORLEN Group companies, by 2008 Unipetrol s EBITDA will have increased by at least EUR 138m (relative to macroeconomic indicators prevailing in 2004). An extra EBITDA value identified under the Partnership Programme is a result of nearly 200 initiatives developed by 26 teams consisting of Czech and Polish experts. This value will be generated mainly in the refining segment by implementing income-boosting initiatives. Already in 2005, Unipetrol generated EUR 28m by introducing the so-called fast improvements. Apart from profits for Unipetrol, the integration will also bring profits for PKN ORLEN, generated in the area of production planning, streamlining of wholesale operations and investment planning. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y INTEGR NASZE ATION R E L WITH AC J E UNIPETROL Z OTOCZENIEM A. S. 93

98 Winter tyres

99 ORLEN Group

100 O R L E N G R O U P Sale of shares in ORLEN Group Companies In 2005, we continued the process of restructuring ORLEN Group by reducing the Company s capital exposure, in particular in areas not directly related to the Company s core business. The disinvestment process was conducted with regard to 19 companies. These primarily included recreation, transport, service and telecommunication companies. In 2005, we closed the sale of blocks of shares and stocks in 8 companies, including: 30.77% of shares in Naftoport Sp. z o.o. (Liquid Fuel Transshipment Company) the transaction was worth in total PLN 67,692,308, while gross profit on the sale amounted to PLN 45,385,571; Shares in three recreation companies: 98.73% of shares in Dom Wczasowy Mazowsze Sp. z o.o., % of shares in Zespół Wypoczynkowy Mazowsze Sp. z o.o. and % of shares in ZAWITAJ Świnoujście Sp. z o.o. the transaction was worth in total PLN 7,240,554 while gross profit on the sale amounted to PLN 646,920. The launched disinvestment projects are ongoing in These include, inter alia, the sale of blocks of shares in five transport companies and two telecommunication companies and exercising a put option on shares in AW SA Holland II B.V. On 28 December 2005, PKN ORLEN made a demand on Kulczyk Holding SA to enter into the sale agreement on the basis of an option right envisaged in the Supplementary Agreement of 14 November On 27 February 2006, the Final Sale Agreement between PKN ORLEN and Kulczyk Holding SA was concluded. After conditions set out in the Final Sale Agreement become fulfilled, which is to occur within 3 months from the Agreement s effective date, the title to shares in AWSA Holland II B.V will be transferred from PKN ORLEN to Kulczyk Holding SA. On the effective date of the Sale Agreement, PKN ORLEN received a cash payment for the shares in the amount of PLN 73,007,000. NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y The total value of the transactions concluded in 2005 was PLN 78,565,906. Given the book value of the sold assets of PLN 31,792,710, the transactions yielded gross profit of PLN 46,773,195. Proceeds generated in this way will be used to finance the development of the Company s core operations. 96

101 ORLEN Group Struc ture At the end of 2005, PKN ORLEN held shares or stocks directly in 76 commercial companies: 43 subsidiaries (stake in the capital greater than 50%), 2 jointly owned companies (stake in the capital equal to 50%), 4 associated companies (stake in the capital between 20% and 50%), 27 companies with minority shareholding (stake in the capital below 20%). In accordance with the adopted policy, ultimately, ORLEN Group will number about 20 companies (excluding Unipetrol and new acquisitions). In 2006, we started to implement a new management structure in ORLEN Group based on segment management principles. These changes aim to improve operational efficiency within the ever growing and developing ORLEN Group. We have singled out six business segments: Refinery, Oils, Wholesale, Retail, Petrochemicals and Chemicals, managed by executive directors who have taken over some duties from the Management Board, and at the same time have assumed the task of operational coordination of given operations across the entire Capital Group, within the framework of applicable procedures and regulations. The segment management principles will be implemented in the Czech capital group as from 1 January PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 97

102 REFINERY SEGMENT OR L EN A s f al t Sp. z o. o. ORLEN Asfalt Sp. z o.o. is the biggest company in Poland manufacturing and selling road and industrial bitumen. Currently, the company s product range includes road bitumen, modified bitumen ORBITON, multigrade bitumen BITREX, industrial bitumen and cements and bitumen-based products. ORLEN Asfalt Sp. z o.o. has two production and trade centres in Płock and in Trzebinia, where customers from all over Poland may buy the Company s products. At the 3rd International Infrastructure Fair in Warsaw, the Company received the Award of the Minister of Infrastructure for the best fair offerings in the category of Road Construction and Maintenance Materials. Moreover, ORLEN Asfalt Sp. z o.o. received the Construction Company of the Year 2005 Award. In 2005, the company joined the Responsible Care programme, which is being implemented by companies from the chemical sector world-wide. Shareholding structure as at PKN ORLEN 82.46% Rafineria Trzebinia SA % Financial data: NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y As ORLEN Group expanded to include the Czech company Unipetrol, looking for optimum trade policy and synergy effects with regard to the sale of bitumen, ORLEN Asfalt Sp. z o.o. has become an entity responsible for and authorised to sell and distribute in Poland bitumen originating from the Czech company Paramo a.s. on an exclusivity basis. Paramo a.s., in turn, offers and distributes bitumen from ORLEN Asfalt Sp. z o.o. in the Czech Republic and Slovakia. In 2005, ORLEN Asfalt Sp. z o.o. received a medal for modified bitumen ORBITON at the 11th International Road Construction Fair Autostrada Poland in Kielce, which attested to the highest European quality translating into improved standard, comfort and safety of Polish road surfaces. Sales PLN 454,216,000 Share capital PLN 60,635,000 Employment as at employees Net profit PLN 31,191,000 Shareholders equity PLN 134,009,000 98

103 ORLEN Eko Sp. z o.o. Financial data: Sales PLN 14,909,000 ORLEN Eko Sp. z o.o. was established in 2004 as a spin off of PKN ORLEN s Sewage and Disposal Department. The Company s main business purpose is thermal disposal of hazardous waste and waste other than hazardous produced at technological facilities of PKN ORLEN s Production Plant and by other entities. In 2005, the company obtained an Integrated Permit issued by the Governor of the Mazowieckie Province for carrying on activity in the field of recovery, collection and disposal of waste, including hazardous waste. In the same year, the company joined the Responsible Care programme, which is being implemented by companies from the chemical sector world-wide. Share capital PLN 2,000,000 Employment as at employees Net profit PLN 419,000 Shareholders equity PLN 2,383,000 PKN ORLEN is the only shareholder of ORLEN Eko Sp. z o.o. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 99

104 PETROCHEMIC ALS SEGMENT Basell Orlen Polyolefins is the only manufacturer of polyolefins in Poland and as a result of the integra- Basell Orlen Polyolefins Sp. z o.o. tion of sales and marketing operations with Basell, products manufactured in Płock will be offered by a Basell Orlen Polyolefins Sp. z o.o. (BOP), the only Po- newly-established trading company - Basell Orlen Po- lish manufacturer of polyolefins, is a joint venture es- lyolefins Sprzedaż Sp. z o.o. (BOPS), wholly owned by tablished by PKN ORLEN and Basell Europe Holdings BOP. Products offered by BOPS are distributed from B.V., the largest manufacturer of polypropylene and the new BOP s Logistic Platform, being one of the lar- the leading producer of polyethylene in the world. gest and most modern facilities of this type in Europe. BOPS has well-developed customer service channels, In November 2005, Basell Orlen Polyolefins Sp z o.o. ensures access to an extensive local sales network and officially inaugurated the launch of two new po- provides full technical service to its customers in Po- lyethylene and polypropylene plants. The commissio- land. ned BOP s production units worth about EUR 500m are among the most modern polyolefins production Basell Orlen Polyolefins Sp. z o. o. participates in ini- plants in the world. tiatives under the United Nations Development Programme (UNDP) implemented within the framework BOP comprises: of the UN. Thanks to that, as a Polish company it has an opportunity to support economic and social deve- Polypropylene plant (PP Spheripol), lopment of Poland, in particular, towns from the Płock High density polyethylene (HDPE) plant Hostalen, region and the region itself. Logistic platform. The annual output of the new plants will amount to Shareholding structure as at ,000 tonnes of polypropylene (PP) manufactu- PKN ORLEN 50% red using Spheripol technology owned by Basell and Basell Europe Holdings B.V. 50% NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y ,000 tonnes of high density polyethylene (HDPE) manufactured using Hostalen technology also licensed from Basell. Including the production capacity of the low density polyethylene plant (LDPE), the annual capacity of the BOP s plants and the transshipment capacity of the Platform will amount to 870,000 tonnes. Financial data*: Sales PLN 1,014,661,000 Share capital PLN 907,398,000 Employment as at employees Net profit PLN 31,128,500 Shareholders equity PLN 1,096,499,000 * Consolidated data for BOP Sp. z o.o Group 10 0

105 CHEMIC ALS SEGMENT Zak łady A zotowe Anwil SA Zakłady Azotowe Anwil SA is a leading company in the Large Scale Industrial Chemical Synthesis sector in Poland and one of the largest companies in the Kujawsko-Pomorski region. It is the only producer of suspension polyvinyl chloride in Poland and an important producer of this substance in Central and Eastern Europe, as well as one of the largest domestic producers of nitrogen fertilisers. efforts aiming at achieving better and better economic results and strengthening its position in the sector. The most prestigious of these include: The Fourth Diamond for the Gold Statuette of the Polish Business Leader received in Pillar of the Polish Economy a title awarded on the basis of the ranking published by "Puls Biznesu" and the recognition of Anwil as the best company in the Kujawsko-Pomorski region. "Teraz Polska" emblem and advertising slogan for nitrochalk CANWIL awarded by the Polish Promotional Emblem Foundation. The year 2005 saw further strengthening of the Company s market position. One of the most important projects executed by the company was the extension and modernisation of the chlorine and soda lye production plant. By completing this project, ZA Anwil SA acquired a complete modern production line for polyvinyl chloride offering very good technological parameters. Shareholding structure as at PKN ORLEN 84.49% Power Company ENERGA Spółka Akcyjna 4.13% State Treasury 5.54% Other 5.84% Financial data*: In 2005, ZA Anwil SA received numerous awards and honorary mentions in recognition of the company s Sales PLN 1,493,971,000 Share capital PLN 314,170,000 Employment as at ,439 employees Net profit PLN 131,817,000 Shareholders equity PLN 1,383,889,000 * Consolidated data for ZA Anwil SA Capital Group The Company holds shares in 9 subsidiaries and associated entities. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 101

106 OIL SEGMENT Rafineria Tr zebinia SA Rafineria Trzebinia SA is one of the oldest refineries in Poland. The year 2005 was a time of significant changes for the Company with regard to its production and trading profile. In the middle of 2005, the Company discontinued the processing of crude oil. In keeping with the adopted strategy, the Company started operations in the new production segment, i.e. biofuels. The year 2005 saw the launch of the complete bio-diesel production plant, the most modern one in Poland and the only one in operation in Central Europe, whose target capacity will be 200,000 tonnes per year, in addition to 11,500 tonnes of pharmaceutical glycerine. ON BIO (bio-diesel) fuel is a mixture of mineral diesel oils and bio-diesel extracted from vegetable oils. Shareholding structure as at PKN ORLEN 77.15% State Treasury 9.19% Other 13.65% Financial data*: Sales PLN 907,844,000 Share capital PLN 52,916,000 Employment as at employees Net profit/loss PLN - 27,606,000 Shareholders equity PLN 421,448,000 * Consolidated data for Rafineria Trzebinia SA Capital Group The Company holds shares in 6 subsidiaries and associated entities. In Q4 2005, the Company put into operation the paraffin hydrofining facilities. High-quality paraffins with high chemical purity manufactured and sold by the Company meet the requirements of European standards. NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

107 Rafineria Naf t y Jedlic ze SA Shareholding structure as at PKN ORLEN 75.00% Rafineria Nafty Jedlicze SA is a leader in terms of the production output of heating and lubricating oils. Located in the Podkarpacie region, it is one of the oldest refineries in Poland (its origins go back over 100 years). The object of the Company s business is: regeneration and purchase of spent oils, production of lubricating oils (including well-know brands: Hipol, Hydrol, Velol, Freol, Amortyzer) and lubricants, production and sale of fuels. State Treasury 10.01% Other 14.99% Financial data*: Sales PLN 421,672,000 Share capital PLN 88,210,000 Employment as at employees Net profit PLN 13,487,000 Shareholders equity PLN 176,734,000 * Consolidated data for Rafineria Nafty Jedlicze SA Capital Group The Company holds shares in 9 subsidiaries. The company is known as a leader in the field of environmental protection measures. For almost 40 years, it has been specialising in spent oil regeneration. In 2005, the hydrofining plant started to additionally handle diesel oil desulphurisation process. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 103

108 ORLEN Oil Sp. z o.o. ORLEN Oil Sp. z o.o. is a leading producer and distributor of lubricating substances in Poland. The Company s offerings include a wide range of products for the automotive sector and the industry. These include: The work on the implementation of the concept Restructuring of southern assets of PKN ORLEN Capital Group pertaining to oil segment companies is being continued. The concept envisages, inter alia, the optimisation and consolidation of the production and sale of engine, lubricating oils and paraffin in the ORLEN Group. the latest generation of Platinum oils designed Shareholding structure as at NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y for the automotive sector, whose quality exceeds the requirements of European and American standards, industrial oils (hydraulic, compressor, gear, hardening oils), technological oils (emulsifiable, anti-adhesive, neat cutting oils), plastic lubricants, operating fluids, Platinum IMPACT cosmetics and car care products solvents, oil bases. High quality of products offered by ORLEN Oil Sp. z o.o. is confirmed by approvals granted by wellknow car manufacturers (including Mercedes-Benz, Volkswagen, Volvo) and industrial machinery manufacturers (Flender, Denison, Siemens), as well as numerous awards and honourable mentions received in 2005 at industry fairs and exhibitions, including the Main Prize of the 3rd Automotive Fair AUTO SHOW 2005, the Reliable Company Title, the Title of the Market Leader 2005 in the Product category, the veness Certificate Innovati PKN ORLEN 51.69% Trzebinia Refinery 43.84% Jedlicze Refinery 4.47% Financial data*: Sales PLN 623,783,000 Share capital PLN 75,093,000 Employment as at employees Net profit PLN 48,734,000 Shareholders equity PLN 173,348,000 * Consolidated data for ORLEN Oil Sp. z o.o. Capital Group The Company holds shares in 13 subsidiaries and associated entities. 104

109 RETAIL SEGMENT ORLEN Deutschland AG ORLEN Deutschland AG is a company incorporated under the laws of Germany, with the registered office in Elmshorn, which manages PKN ORLEN s retail network in Germany. The company was established as a result of PKN ORLEN s investment made in December 2002 in the chain of petrol stations in northern and eastern Germany, purchased from British Petroleum. The Company purchased then 494 locations operated under brands: BP, ARAL and Eggert for an exceptionally good price of USD 140m. In this way, it captured about 3% of the German market, a share accounting for 7% of the fuel market in northern Germany. ORLEN Deutschland AG sells fuel through a chain of 478 petrol stations (381 own stations, 97 affiliated stations) operated under the ORLEN and STAR logo. Petrol stations offer products and services whose quality meets high standards of the European market. Looking for the best solution to the problem of capital commitment to ORLEN Deutschland, we analysed, among other things, a possibility of withdrawing from the German market. However, following a number of analyses, we made a decision to stay and undertake restructuring. In 2005, the Company took a number of initiatives seeking to improve the company s profitability, in particular: 11 unprofitable petrol stations were shut down, a risk relating to the co-operation with HPV company was mitigated through intensive negotiations and debt collection, an acquisition package covering 57 stations was prepared after conducting economic and technical analysis of those locations, co-operation was started with Roland Berger company in preparing the strategy for improving the company s profitability and network management efficiency. A decision to invest in Germany was made at the time when macro- and microeconomic forecasts were optimistic and did not predict a situation marked by nearly zero growth of fuel consumption in the German market, which occurred in 2004 and PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 105

110 After conducting an analysis of the possibility of achieving the economies of scale effect in the German market, the Company s measures are currently focused on developing its retail network, i.e. purchases of new petrol stations. The plan for 2006 envisages the escalation of the streamlining of the retail network (shutting down unprofitable locations, improving network profitability) and measures aimed at streamlining head office costs. ORLEN Deutschland AG posted a loss of EUR 25,407,000 as at the end of December This loss resulted, inter alia, from the creation of reserves and revaluation provisions (in the amount of EUR 38,795,000), which are mainly attributable to loss-making and unprofitable petrol stations. A high level of reserves completely distorts the actual earnings of the company in Moreover, the net profit for 2005, as it includes the created reserve, does not meet the criteria of comparability to the net profit posted in Despite streamlining of the existing network and further increasing of the number of stations, the profitability of ORLEN Deutschland as a stand alone business still remains below strategic targets of PKN ORLEN. The final decision will be made, taking account of SWAP transactions, which considerably improve financial indicators throughout PKN ORLEN. With a considerable surplus of fuels in Poland, SWAP agreements allow PKN ORLEN to utilise its refining capacity stably and increasingly. Financial data: Sales PLN 8,600,855,000 Share capital PLN 283,020,000 Employment as at employees Net profit PLN - 137,598,000 of which reserves PLN 149,741,000 Shareholders equity PLN 324,529,000 NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

111 WHOLESALE SEGMENT ORLEN Gaz Sp. z o.o. ORLEN Gaz Sp. z o.o. is the largest Polish company operating on the liquid gas market in Poland since The Company engages in the sale and distribution of the highest quality products: propane, butane and propane-butane mixture. Gas sold by the Company meets the requirements of the Polish PN C standard and the European EN-589 standard. The Company manages twelve large, conveniently located gas bottling plants and thousands of LPG points of sale. The distribution network guarantees to customers comprehensive service as regards deliveries of gas in bulk and in bottles, as well as the fitting and lease of autogas, heating and industrial installations. Customers are offered a high-quality product, delivered in a timely and reliable manner, supported by reliable service and awareness that they are using a truly ecological energy source. In 2005, the Company bought and put in place a liquid gas bottling line based on the latest technological solutions in the Liquid Gas Bottling Plant in Jaworzno. Bottle sales network has also been expanded to include the German market. Also, new IT solutions improving quality and work efficiency have been put in place. Financial data: Sales PLN 565,001,000 Share capital PLN 25,024,000 Employment as at employees Net profit PLN 7,507,000 Shareholders equity PLN 52,425,000 PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 107

112 Fuel companies Regional Market Operator s (RMO) RMO companies were established between 1996 and They currently engage in the wholesale of solid, liquid and gaseous fuels and retail sale of fuels through their own chain of stations, as well as provide transportation and warehousing services. RMOs include five companies with registered offices throughout Poland: ORLEN PetroCentrum Sp. z o.o., ORLEN PetroProfit Sp. z o.o., ORLEN Morena Sp. z o.o., ORLEN PetroZachód Sp. z o.o., ORLEN PetroTank Sp. z o.o saw the launch of the process of transferring petrol stations owned by those companies to the Company s retail network. Another assumption of the new RMO model is the restructuring of assets not related to core operations in order to improve performance of the core business segment. The abovementioned measures are a tool for bringing order to the structures of the sales and distribution channel formed by RMO companies. In 2005, RMOs purchased from PKN ORLEN 630,000 tonnes of engine fuels, which accounted for 14% of wholesale of fuels sold by PKN ORLEN (excluding provisioning of own stations). NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y The year 2005 saw the beginning of work on the restructuring and a new model of functioning of RMO companies. These measures were a direct upshot of the course of action adopted in recent years by PKN ORLEN aiming at taking full control over those companies by buying shares from minority shareholders. The aim of the new RMO model is the optimisation of the companies operations, taking account of synergy effects for ORLEN Group. The new strategy seeks to focus the Companies operations on wholesale of fuels and to hive off retail operations from their structures. 10 8

113 Petrolot Sp. z o.o. Financial data: Sales PLN 594,652,000 The object of Petrolot s business is the sale of aviation fuel JET A-1 and aviation petrol 100LL through the provision of tank-up services for aircraft at eleven national airports and airports operated by flying clubs. Share capital PLN 20,039,000 Employment as at employees Net profit PLN 15,623,000 Shareholders equity PLN 62,927,000 In 2005, the Company derived most of its income from the sale of aviation fuel JET A-1, supplied by PKN ORLEN (also car fuels) and the Agency of Material Reserves. Aviation petrol 100LL was still supplied by the Refining Industry Research and Development Centre in Płock. The Company s largest customer is PLL LOT S.A., which buys about 68% of aviation fuel JET A-1 sold by the Company. Other key customers are foreign airlines. PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 109

114 LOGISTICS suppor t for business segments The Company s strategic plans provide for the construction of an underground warehouse in another salt deposit. Inowroc ławsk ie Kopalnie Soli Solino SA Shareholding structure as at PKN ORLEN 70.54% Inowrocław Salt Mines Solino SA is a significant lo- State Treasury 25.19% gistic operator in the field of storage of crude oil and Other 4.27% fuels and a leading exporter of highly-processed salt products to the European market. Financial data: The object of IKS Solino SA s business is under- Sales PLN 108,822,000 ground storage of crude oil and liquid fuels in salt Share capital PLN 30,779,000 deposits and the production of industrial brine and Employment as at employees processing of evaporated salt. The Company is also Net profit PLN 10,847,000 the biggest producer of brine in Poland, extracted at Shareholders equity PLN 81,494,000 modern fully-automated borehole mines in Góra and Mogilno. Transpor t companies In 2005, the second stage of the Construction of Underground Crude Oil and Fuels Warehouse (PMRiP) In ORLEN Group, there are 8 transport companies: was completed, whose aim was to expand storage space. The current storage capacity of PMRiP Góra is railway company ORLEN Koltrans Sp. z o.o. 2.6m cubic metres, while after the completion of the road transport companies: last stage of the project planned for the end of 2006, ORLEN Transport Płock Sp. z o.o., NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y it will increase to 5m cubic metres. The PMRiP facility in Góra will comprise seven crude oil storage caverns and three fuel storage caverns. Given the number and capacity of storage caverns, PMRiP Góra is one of the largest underground warehouses in Europe. ORLEN Transport Kraków Sp. z o.o., ORLEN Transport Kędzierzyn Koźle Sp. z o.o., ORLEN Transport Płock Sp. z o.o., ORLEN Transport Szczecin Sp. z o.o., ORLEN Transport Słupsk Sp. z o.o., ORLEN Transport Olsztyn Sp. z o.o. 110

115 ORLEN KolTrans Sp. z o.o. Shareholding structure as at PKN ORLEN 99.85% ORLEN KolTrans was established in 2000 as a spin off of PKN ORLEN s ancillary services at the time of their restructuring. The company renders services relating to: operation of tank wagons, rail transport, running repairs of rolling stock, cleaning of tank wagons, tank trucks and structures. Other 0.15% Financial data: Sales PLN 48,160,000 Share capital PLN 40,859,000 Employment as at employees Net profit PLN 6,272,000 Shareholders equity PLN 47,961,000 The Company qualified for the ranking of the most dynamically developing small and medium-sized enterprises Gazelles of Business PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 111

116 Road transpor t ation companies Road transportation companies were established in the course of restructuring as spin offs of Road Transport Establishments functioning within the structures of Petrochemia Płock S.A. (one company) and Centrala Produktów Naftowych S.A. The Companies engage in road transport of liquid fuels and oil-derived products, offering nation-wide coverage. Transport companies ensure timely deliveries of liquid fuels to 1,380 petrol stations within PKN ORLEN s network. As a part of consolidation of transport companies in 2005, three transport companies were merged: ORLEN Transport Płock (acquiring company) merged with ORLEN Transport Poznań and ORLEN Transport Warszawa (acquired companies) by way of the transfer of all the assets of acquired companies to ORLEN Transport Płock (merger by acquisition). The merger between ORLEN Transport Płock and its two subsidiaries ORLEN Transport Warszawa and ORLEN Transport Poznań resulted in the establishment of one strong haulier engaging, among other things, in the provisioning of 455 PKN ORLEN petrol stations in Central Poland (provinces of Mazowieckie, Łódzkie, Wielkopolskie, Kujawsko-Pomorskie). The consolidation of the integrated entity resulted in greater carriage capacity, realisation of the economies of scale effect when buying trucks, optimisation of transportation routes and parking spaces. The merger of the Companies into one entity will enhance the Company s credibility in relation to business partners. NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y

117 ORLEN GROUP STRUCTURE AT PKN N O ORLEN R L S SA A R ANNUAL A P O RT RO REPORT C Z N Y NASZE R E L AC J E Z ORLE OTOCZENIEM N GROUP 1) These are maintenance and support entities 113

118 Reliable vehicle

119 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS TOGETHER WITH AN INDEPENDENT AUDITOR S OPINION

120 OPINION OF THE INDEPENDENT AUDITOR To the General Meeting of Polski Koncern Naftowy Orlen Spółka Akcyjna We have audited the accompanying consolidated financial statements of Polski Koncern Naftowy Orlen Spółka Akcyjna Group (PKN Orlen SA Group) based in Płock, 7 Chemików Street, consisting of the consolidated balance sheet as at 31 December 2005, with total assets of and total liabilities and equity of PLN 33,404,311 thousand, the consolidated profit and loss account for the year then ended with a net profit of PLN 4,637,776 thousand, the consolidated statement of changes in equity for the year then ended with an increase in equity of PLN 5,681,675 thousand, the consolidated cash flow statement for the year then ended with an net increase in cash amounting to PLN 396,280 thousand and supplementary notes, comprising significant accounting policies and other explanatory notes. PK N O R L E N A nnual Repor t The Management of the Parent Company is responsible for the preparation and true and fair presentation of the consolidated financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and in respect to matters that are not regulated by the above standards, in accordance with the accounting principles as set out in the Accounting Act dated 29 September 1994 (Official Journal from 2002, No. 76, item 694 with amendments) and respective bylaws and regulations and the requirements for issuers of securities admitted or sought to be admitted to trading on an official stock-exchange listing market. Our responsibility, based on our audit, is to express an opinion on these financial statements. The financial statements of the Company for the financial year ended 31 December 2004, before the transition described in note 39 First time adoption of International Financial Reporting Standards of the supplementary notes, were audited by another auditor, whose report dated 5 May 2005, expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with section 7 of the Accounting Act dated 29 September 1994, the professional standards established by the Polish National Council of Certified Auditors and International Standards on Auditing. Those standards require that we plan and perform the audit to obtain a reasonable assurance about whether the consolidated financial statements are fee of material misstatement. An audit includes examining, on a test basis, evidence and consolidation documentation supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles applied in the Group and significant estimates made by the management of the Parent Company, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Opinion of the Independent Auditor 116

121 In our opinion, the accompanying consolidated financial statements of Group PKN Orlen SA Group present fairly, in all material respects, the financial position of the Group as at 31 December 2005, the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union, and in respect to matters that are not regulated by the above standards, in accordance with the accounting principles as set out in the Accounting Act dated 29 September 1994 and respective bylaws and the requirements for issuers of securities admitted or sought to be admitted to trading on an official stock-exchange listing market and the provisions of law that apply to the consolidated financial statements, applicable to the Group. As required under the Accounting Act dated 29 September 1994 we also report that the Report of the Management Board of the Parent Company on the Group s activities includes, in all material respects, the information required by Art. 49 of the Act and by the Decree of the Ministry of Finance dated 19 October 2005 on current and periodic information provided by issuers of securities (Official Journal from 2005, No 209, item 1744) and the information is consistent with the consolidated financial statements. Certified Auditor No /7598 Monika Bartoszewicz For KPMG Audyt Sp. z o.o. 51 Chłodna Street; Warsaw PK N O R L E N A nnual Repor t Certified Auditor No. 9451/7175 Leszek Dubicki, Member of the Management Board Warsaw, 27 April 2006 Opinion of the Independent Auditor 117

122 SECURITIES AND EXCHANGE COMMISSION Consolidated Annual Repor t 2005 (current year) (in accordance with 86 section 2 and 87 section 1 of the Minister of Finance Decree of 19 October 2005, Official Journal No. 209, item 1744) (for issuers of securities whose business activity embraces manufacture, construction, trade and services) for the reporting year 2005, that is for the period from 1 January 2005 to 31 December 2005, and for the reporting year 2004, that is for the period from 1 January 2004 to 31 December 2004, which includes consolidated financial statements prepared in accordance with International Financial Reporting Standards with amounts stated in the Polish functional currency (PLN) on 28 April 2006 (submission date) PK N O R L E N A nnual Repor t full name of the issuer: POLSKI KONCERN NAFTOWY ORLEN SPÓŁKA AKCYJNA abbreviated name of the issuer: PKN ORLEN SA industrial sector in line with classification of Warsaw Stock Exchange: CHEMICAL zip code: location: PŁOCK street: Chemików number: 7 telephone: (48 24) fax: (48 24) [email protected] NIP: REGON: www: Consolidated financial statements KPMG Audyt Sp. z o.o. (entity authorized to conduct audit) 118

123 SELECTED FINANCIAL DATA Selected financial data: (thousand PLN) (thousand EUR) Data in respect of MSSF condensed consolidated financial statement I. Total sales revenues II. Profit/(Loss) from operations III. Profit before tax IV. Net profit attributable to equity holders of the parent V. Net cash provided by operating activities VI. Net cash used in investing activities ( ) ( ) ( ) ( ) VII. Net cash provided by / (used in) financing activities ( ) ( ) ( ) ( ) VIII. Net change in cash and cash equivalents as of as of as of as of IX. Non-current assets X. Current assets XI. Total Assets XII. Non-current liabilites XIII. Current liabilities XIV. Equity XV. Share capital* XVI. Equity attributable to equity holders of the parent XVII. Number of issued ordinary shares XVIII. Book value and diluted book value per share (in PLN/EUR) * Share capital after revaluation in accordance with IAS 29. The above data for 2005 and 2004 were translated into EUR the following exchange rates: specific positions of assets, equity and liabilities - by the average exchange rate published by the National Bank of Poland as of 31 December PLN/EUR, specific items in profit and loss and cash flows - by the arithmetic average of average exchange rates published by the National Bank of Poland as of every last day of month during the period (1 January - 31 December 2005) PLN/EUR. Consolidated financial statements PK N O R L E N A nnual Repor t

124 CONSOLIDATED BAL ANCE SHEET (all amounts in PLN thousand) ( Translat ion of a document originally issued in Polish) Notes 31 December December 2004 ASSETS Non-current assets Property, plant and equipment Goodwill Intangible assets Long-term financial investments Investments in associates Loans (granted) Deferred tax assets Investment property Perpetual usufruct of land Other non-current assets Total non-current assets Current assets Inventory Trade and other receivables Income tax receivable Short-term investments Short-term prepayments Cash and cash equivalents Other financial assets Non-current assets clasiffied as held for sale Total current assets Total assets PK N O R L E N A nnual Repor t Consolidated financial statements LIABILITIES AND SHAREHOLDER S Equity Equity Share capital Share capital revaluation adjustment Share capital* Nominal share premium Share premium revaluation adjustment Nominal share premium Hedging reserve Foreign exchange differences on subsidiaries from consolidation ( ) (9 444) Retained earnings: incl. net profit of the parent company accumulated profit/loss from previous years - effects of changes in accounting policy Total equity (attributed to shareholders of the parent company) Minority interest Total equity Non-current liabilities Interest-bearing loans and borrowings Provisions Deferred tax liabilities Other non-current liabilities Total non-current liabilities Current liabilities Trade and other liabilities and accrued expenses Provisions Income tax liability Interest-bearing loans and borrowings Deferred income Other current financial liabilities Total current liabilities Total equity and liabilities * Share capital after revaluation in accordance with IAS 29. The accompanying notes are an integral part of these consolidated financial statements 120

125 CONSOLIDATED PROFIT AND LOSS (all amounts in PLN thousand) ( Translat ion of a document originally issued in Polish) Notes For the year ended 31 December 2005 For the year ended 31 December 2004 Operating activities Net sales revenues Sales of goods Excise tax and other charges ( ) ( ) Revenues from sale of finished goods Revenues from sale of merchandise and raw materials Total sales revenues Cost of finished goods sold ( ) ( ) Revenues from sale of merchandise and raw materials ( ) ( ) Gross profit on sales Distribution expenses ( ) ( ) General and administrative expenses ( ) ( ) Other operating revenues* Other operating expenses 27 ( ) ( ) Profit on the sale of all or part of shares of related parties Profit from operations Financial revenues Financial expenses ( ) ( ) Net financial revenues and expenses Share in profit from investments accounted for under the equity method** Profit before tax Income tax expense 29 ( ) ( ) Net profit including: Minority interest attributable to equity holders of the parent * including in 2005 the excess of share in the net consolidated assets of Unipetrol a.s. over cost in the amount of PLN 1,893,688 thousand. ** including the share in the net result of Polkomtel SA in the amount of PLN 209,259 thousand in 2005 and PLN 181,118 thousand in PK N O R L E N A nnual Repor t Consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements 121

126 CONSOLIDATED STATEMENTS OF C ASH FLOWS (all amounts in PLN thousand) ( Translat ion of a document originally issued in Polish) Notes For the year ended 31 December 2005 For the year ended 31 December 2004 Cash flows - operating activities Net profit Adjustments for: Share in profit from investments accounted for under the equity method ( ) ( ) Depreciation and amortisation Interest and dividend income net Income tax expense (Profit) / Loss on investing activities ( ) (Increase) in receivables 23 ( ) ( ) (Increase) in inventories 23 ( ) ( ) Increase in liabilities and accruals Increase in provisions Other* ( ) ( ) Income tax paid ( ) ( ) Net cash provided by operating activities PK N O R L E N A nnual Repor t Cash flows - investing activities Acquisition of property plant and equipment and intangible assets ( ) ( ) Proceeds from the sale of property plant and equipment Proceeds from the sale of other shares Acquisition of shares** ( ) (48 299) Acquisition of short-term securities ( ) ( ) Proceeds from the sale of short-term securities Interest and dividends received Loans (granted) / repaid (5 648) Acquisition of liabilities of the Unipetrol Group ( ) - Other (10 016) Net cash used in investing activities ( ) ( ) Cash flow - financing activities Proceeds from long and short-term borrowings and loans Repayment of long and short-term borrowings and loans ( ) ( ) Interest paid ( ) ( ) Dividends paid ( ) ( ) Other (42 967) (24 847) Net cash provided by / (used in) financing activities ( ) ( ) Consolidated financial statements Net change in cash and cash equivalents Effect of exchange rate changes Cash and cash equivalents beginning of the period Cash and cash equivalents end of period incl Cash and cash equivalents not available for use * including in 2005 the elimination of the excess of share in the net consolidated assets of Unipetrol a.s. over cost in the amount of PLN (1,893,688) thousand and in 2004 exchange rate gains in the amount of PLN (312,501) thousand. ** including in 2005 the acquisition of Unipetrol Group in the amount of PLN (1,582,169) thousand decreased by acquired cash and cash equivalents. The accompanying notes are an integral part of these consolidated financial statements 122

127 STATEMENTS OF CHANGES IN CONSOLIDATED EQUIT Y (all amounts in PLN thousand) ( Translat ion of a document originally issued in Polish) Share capital Share premium Hedging reserve Foreign exchange differences on subsidiaries from consolidation Retained earnings Minority interest Total equity 1 January (9 444) * Foreign exchange differences on consolidation ( ) - - ( ) Dividend ( ) - ( ) Net profit attributable to equity holders of the parent Valuation of hedging instruments at fair value - - (27 573) (27 573) Minority interest Change in shareholder structure Other December ( ) Share capital Share premium Hedging reserve Foreign exchange differences on subsidiaries from consolidation Retained earnings Minority interest 1 January * Foreign exchange differences on consolidation (71 810) - - (71 810) Dividend ( ) - ( ) Net profit attributable to equity holders of the parent Valuation of hedging instruments at fair value Minority interest Change in shareholder structure ( ) ( ) Other December (9 444) Total equity PK N O R L E N A nnual Repor t * Including retained earnings due to changes in accounting policies in the amount of PLN 1,741,958 thousand as at 1 January 2005 and PLN 1,848,711 thousand as at 1 January Statement of changes in equity regarding profits and losses in 2005 and Cash flow hedges (27 573) Other Net profits / (losses) recognized directly in equity (22 639) Net profit for the period Total profits and losses recognized in the period Consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements 123

128 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR 2005 (all amounts in PLN thousand) ( Translat ion of a document originally issued in Polish) 1. Principle ac tivit y of the group The Parent Company of the Polski Koncern Naftowy ORLEN Capital Group ( Group ) is Polski Koncern Naftowy ORLEN SA ( Company, PKN ORLEN, Parent ), seated in Płock, 7 Chemików Street. The Company was formed through the transformation of a state-owned enterprise into a joint stock company, on the basis of the Public Notary Act of 29 June The Parent was registered as Mazowieckie Zaklady Rafineryjne i Petrochemiczne Petrochemia Płock SA in the District Court in Płock. Effective 20 May 1999, the Company changed its business name to Polski Koncern Naftowy Spolka Akcyjna. On 7 September 1999, Centrala Produktów Naftowych CPN Spółka Akcyjna was incorporated, thus CPN was removed from the commercial register. Effective 12 April 2000, the Company changed its business name to Polski Koncern Naftowy ORLEN Spółka Akcyjna. According to the Articles of Association dated 7 October 2005, the Company s activity include: PK N O R L E N A nnual Repor t Consolidated financial statements processing of crude oil and manufacturing of oil-derivative (refinery and petrochemical) products and semi finished products, domestic and foreign trade on own account, on commission, and as a consignee, including in particular: the trade of crude oil, oil-derivative and other fuel, sale of motor vehicles, parts and accessories for motor vehicles, sale of industrial and consumer goods, research and development activity, project work, construction and production activities on own account and as a consignee, in the areas of processing, storage, packaging and trade in solid, liquid and gaseous oil products, derivative chemical products as well as transportation: by land, by rail, water and by pipeline, storage of crude oil and liquid fuels, creation and management of oil stock in accordance with appropriate regulations, services connected to the principal activity, especially: land and sea reloading, refining of gas and oil including ethylization, dyeing and blending of components, purchase, trade and processing of used lubricant oils and other chemical waste, manufacturing, transportation and trade in electrical and heating energy, overhaul of appliances used in principle activities, especially refinery and petrochemical installations, oil storage appliances, petrol stations and means of transportation, operation of petrol stations, bars, restaurants and hotels, capital investment activities, in particular: purchasing and trade of shares and stakes in domestic and foreign trade, providing services in respect of the clearance of electronic fuel cards, crude oil exploration, natural gas exploration. The Capital Group consists among others of: The Capital Group of Rafineria Trzebinia SA, producing mainly fuels, lubricants, industrial oils and paraffin, The Capital Group of Rafineria Nafty Jedlicze SA, producing motor fuels, oils and re-processing of used oils, The Capital Group of Anwil SA, the major client for ethylene from Parent Company, producing mainly nitric fertilisers and PVC, Inowroclawskie Kopalnie Soli Solino SA, mining and processing of salt as well as storing crude oil and fuels, The Capital Group of SHIP-SERVICE SA ship servicing in sea harbors, loading and storing of goods, Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 124

129 A German company, ORLEN Deutshland, concentrated on liquid fuels trading, ORLEN Asfalt Sp. z o.o., producing and processing of crude oil refining products, The Capital Group of Unipetrol a.s., operating in the chemical sector in the Czech Republic, concentrating on activities related to crude oil processing, fuels distribution, fertilizers the production and the petrochemical production, Companies engaged in the trading and distribution of refinery products. The Company jointly controls Basell Orlen Polyolefins Sp. z o.o. ( BOP ), producer and seller of polyolefins. The Parent Company controls its subsidiaries, jointly controls its joint ventures and has a significant influence on associates. Until the second public offering, completed in July 2000, the Group was primarily controlled, directly or indirectly, by the Polish State Treasury with a minority shareholding of employees and others. The State Treasury supervised the Group through its control of the Group s a majority shareholder, Nafta Polska SA. As at 31 December 2005 Nafta Polska SA owned directly or indirectly 17.32% of the Company s shares, the Polish State Treasury 10.20%, Bank of New York (as a depositary) held 11.33% shares and other shareholders owned 61.15% of the Company s Shares. The composition of the Management Board of PKN ORLEN SA The composition of the Management Board of the Company as at 31 December 2005 was as follows: Igor Chalupec - President of the Management Board, CEO Wojciech Heydel - Vice-President of the Management Board of Sales Jan Maciejewicz - Vice-President of the Management Board of Cost Management and IT Cezary Smorszczewski - Vice-President of the Management Board, Chief Investment Officer Paweł Szymański - Member of the Management Board, Chief Financial Officer Dariusz Witkowski - Member of the Management Board of Organization During the year 2005 the following changes in the composition of the Management Board of PKN ORLEN SA took place: On 29 June 2005, due to the elapse of the 3-year term of the Management Board of PKN ORLEN SA, the mandates of all members of the Management Board expired. Hence, the Supervisory Board of PKN ORLEN SA, at a meeting held on 30 June 2005, appointed the Management Board of PKN ORLEN SA for the next 3-year term. On 30 June 2005 the Supervisory Board of PKN ORLEN SA appointed for a 3-year term Mr Igor Chalupec to the position of President of the Management Board General Director of PKN ORLEN SA and, after his motion, Mr Wojciech Heydel, Mr Jan Maciejewicz and Mr Cezary Smorszczewski to the position of Vice-President of the Management Board of PKN ORLEN SA and Mr Paweł Szymański to the position of Member of the Management Board. PK N O R L E N A nnual Repor t On 19 July 2005 the Supervisory Board of PKN ORLEN SA, after a motion of the Minister of State Treasury, in accordance with paragraph of Articles of Association, appointed Mr Dariusz Witkowski to the position of Member of the Management Board of PKN ORLEN SA, effective 1 August On 21 December 2005 the Supervisory Board of PKN ORLEN SA, after a motion of Minister of State Treasury, in accordance with paragraph of Articles of Association, appointed Mr Cezary Stanisław Filipowicz to the position of Vice-President of the Management Board of PKN ORLEN SA, effective 2 January The following changes to the composition of the Management Board took place after 31 December 2005: The Supervisory Board of PKN ORLEN SA, at the meeting held on 31 March 2006, dismissed Mr Dariusz Witkowski from the position of Member of the Management Board and appointed Mr Krzysztof Szwedowski to position of Member of the Management Board of PKN ORLEN SA. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 125

130 The composition of the Management Board of PKN ORLEN as at the day of publication of the financial statements is the following: Igor Chalupec - President of the Management Board, CEO Cezary Filipowicz - Vice-President of the Management Board, Upstream & Crude Oil Procurement Wojciech Heydel - Vice-President of the Management Board, Sales Jan Maciejewicz - Vice-President of the Management Board, Cost Management Cezary Smorszczewski - Vice-President of the Management Board, Chief Investment Officer Paweł Szymański - Member of the Management Board, Chief Financial Officer Krzysztof Szwedowski - Member of the Management Board, Organization and Capital Group The composition of the Supervisory Board of PKN ORLEN SA The composition of the Supervisory Board as at 31 December 2005 was as follows: PK N O R L E N A nnual Repor t Jacek Bartkiewicz Chairman of the Supervisory Board * Andrzej Olechowski Deputy Chairman of the Supervisory Board Raimondo Eggink - Member of the Supervisory Board Maciej Gierej - Member of the Supervisory Board Krzysztof Obłój - Member of the Supervisory Board Małgorzata Okońska - Zaremba Member of the Supervisory Board Adam Maciej Pawłowicz Member of the Supervisory Board Adam Sęk Member of the Supervisory Board Ireneusz Wesołowski Secretary of the Supervisory Board * On 8 December 2005, the Appeal Court in Warsaw, having recognized the appellation of Bengodi Finance SA, has declared the invalidity of Resolution No 14 of the Extraordinary General Meeting of PKN ORLEN as of 5 August 2004 regarding the appointment of Mr. Jacek Bartkiewicz to the position of Chairman of the Supervisory Board of PKN ORLEN SA. The Company submitted an annulment in the respective case which was not regarded until the date of preparation of these financial statements. During 2005 the following changes in the composition of the Supervisory Board of PKN ORLEN SA took place: On 30 March 2005 the Management Board of PKN ORLEN SA was informed of resignation of Mr Krzysztof Żyndula from the position of Member of the Supervisory Board of PKN ORLEN SA. On 29 June 2005 The Ordinary General Shareholders Meeting of PKN ORLEN SA appointed to the Supervisory Board Mr Adam Sęk and Mr Andrzej Olechowski. Consolidated financial statements Due to the appointment by the Shareholder s Meeting of PKN ORLEN SA of new members to the Supervisory Board: Mr Andrzej Olechowski and Mr Adam Sęk, and the resignation of Mr Michał Stępniewski from the position of Deputy-Chairman of the Supervisory Board of PKN ORLEN SA, the Supervisory Board at the meeting held on 7 July 2005 appointed Mr Andrzej Olechowski to the position of Deputy-Chairman of the Supervisory Board. On 6 September 2005 the Management Board of PKN Orlen was informed of the resignation of Mr Piotr Osiecki from the position of Member of the Supervisory Board of PKN ORLEN SA, effective from the date of the first subsequent Shareholders Meeting. On 14 October 2005 the Extraordinary Shareholder s Meeting of PKN ORLEN SA appointed Professor Krzysztof Obłój to the Supervisory Board of PKN ORLEN SA. On 15 November 2005 the Management Board of PKN ORLEN SA was informed of the resignation of Mr. Michał Stępniewski from the position of Member of the Supervisory Board of PKN ORLEN SA, effective 14 November On 2 December 2005 the Management Board of PKN ORLEN SA was informed by the Minister of the State Treasury that, due to resignation of Mr Michał Stępniewski, he had appointed, on behalf of the shareholder the State Treasury, Mr Adam Maciej Pawłowicz to the Supervisory Board of PKN ORLEN effective from 1 December Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 126

131 The following changes to the composition of the Supervisory Board of PKN ORLEN SA took place after 31 December 2005: On 31 January 2006 the Extraordinary General Shareholders Meeting of PKN ORLEN SA dismissed Mr Jacek Bartkiewicz from the position of Chairman of the Supervisory Board and from the Supervisory Board. In addition, the Extraordinary General Shareholder s Meeting dismissed from the Supervisory Board: Mr Maciej Gierej, Mr Krzysztof Obłój, Mrs Małgorzata Okońska-Zaremba, Mr Adam Sęk and Mr Ireneusz Wesołowski. Simultaneously, the Extraordinary General Shareholder s Meeting appointed to the Supervisory Board: Mr Dariusz Dąbski to the position of Chairman of the Supervisory Board, Mr Maciej Mataczyński to the position of independent Member of the Supervisory Board and Mr Zbigniew Macioszek and Mr Wojciech Pawlak to the positions of Members of the Supervisory Board. On 28 March 2006 the Management Board of PKN ORLEN SA was informed by the Minister of State Treasury that, due to resignation of Mr Adam Maciej Pawłowicz (a representative for the Ministry of State Treasury), he had dismissed him from his position on the Supervisory Board effective 28 March The composition of the Supervisory Board as at the day of publication of the financial statements is the following: Dariusz Dąbski - Chairman of the Supervisory Board Andrzej Olechowski Deputy-Chairman of the Supervisory Board Raimondo Eggink - Member of the Supervisory Board Zbigniew Macioszek - Member of the Supervisory Board Maciej Mataczyński - Secretary of the Supervisory Board Wojciech Pawlak Member of the Supervisory Board 2. Principles of presentation Information on principles adopted for preparation of consolidated financial statements for 2005 As of 1 January 2005, the amended Polish Accounting Act imposed a requirement on the Group to prepare its consolidated financial statements in accordance with International Financial Reporting Standards ( IFRSs ) adopted by the European Union. The International Accounting Standards Board issued International Financial Reporting Standard No. 1 ( IFRS 1 ) First-time Adoption of International Financial Reporting Standards which is applicable to the preparation of financial statements for periods beginning on or after 1 January In addition to entities preparing their first financial statements in accordance with IFRS, IFRS 1 is also applicable to entities such as PKN ORLEN, which have already applied IFRS yet their statements contained a comment on non-compliance with particular standards. In particular, IFRS 1 requires that an entity will disclose in its IFRS financial statements all assets and liabilities which are to be recognized under IFRS. In accordance with IFRS 1, an entity may state its property, plant and equipment at fair value as of the IFRS adoption date i.e. 1 January 2004 and recognize the fair value as the cost of the property, plant and equipment as at that date. PK N O R L E N A nnual Repor t From 1 January 2005 the Group prepared its consolidated financial statements for the first time in compliance with IFRS 1 as it complies with the conditions defined in that standard. From 1 January 2005, PKN ORLEN, acting under Resolution No. 3 of the Extraordinary General Shareholders Meeting of Polski Koncern Naftowy ORLEN SA of 30 December 2004 (adopted in compliance with Art. 45 1c of the Accounting Act, wording effective from 1 January 2005), has prepared its statutory standalone financial statements in accordance with IFRS approved by the European Commission for In the preparation of these financial statements the Group has applied the International Financial Reporting Standards adopted by the European Union (IFRSs) in force as at 31 December Consolidated financial statements The carrying amount of property, plant and equipment was revalued as of 1 January 2004 by an independent expert. The Group recognized the effect of the measurement. The revaluation covered non-current assets of all entities in the Group, in accordance with the principles discussed under section 4, Accounting Principles Property, plant and equipment in order to achieve full compliance with the International Accounting Standard 29 Financial Reporting in Hyperinflationary Economies (IAS 29) and the International Accounting Standard 16 Property, Plant and Equipment (IAS 16), applying IFRS 1. The Company recognized the revalued amount as the deemed cost as at the date of measurement. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 127

132 The consolidated financial statements are compliant with all IFRS requirements adopted by the EU and present a true and fair view of the Group s financial position as at 31 December 2005 and 31 December 2004, results of its operations and cash flows for the years ended 31 December 2005 and 31 December The consolidated financial statements have been prepared assuming that the Group will continue to operate as a going concern in the foreseeable future. As at the date of approval of these financial statements there is no evidence indicating that the Group will not be able to continue its operations as a going concern. Statement of the Management Board Under the Minister of Finance Decree of 19 October 2005 on current and periodical information provided by issuers of securities, the Management Board of PKN ORLEN SA hereby honestly and sincerely declares that the foregoing consolidated financial statements and comparative data were prepared in compliance with the Group accounting principles in force and that they reflect a true and fair view on the financial status and financial result of the PKN ORLEN Group and that the yearly report of the Management Board presents a true overview of the development, achievement and business situation of the PKN ORLEN Group, including its basic risks and exposures. PK N O R L E N A nnual Repor t The consolidated financial statements have been prepared in accordance with accounting principles contained in the International Financial Reporting Standards adopted by the European Union and in the scope required under the Minister of Finance Decree of 19 October 2005 on current and periodical information provided by issuers of securities (Official Journal no. 209, item 1744). The statements cover the period from 1 January to 31 December 2005 and the comparative period from 1 January to 31 December The Management Board of PKN ORLEN declares that the entity, authorized to audit and conduct the audit of the consolidated financial statements, was selected in compliance with the law and that the entity and auditors conducting the audit met the conditions to issue an independent opinion in compliance with the relevant regulations of the domestic law, In compliance with principles of corporate governance (as adopted by the Management Board of PKN ORLEN SA) the auditor was selected by the Supervisory Board by means of resolution No 485/2005 of 21 January 2005 on the selection of an auditor. The Supervisory Board made the selection in order to ensure complete independence and objectivity of the selection itself as well as fulfillment of tasks by the auditor. Reorganization of the Group Consolidated financial statements In connection with the Polish Government s Restructuring and Privatization Program for the Polish Oil Sector Companies, the Polish State Treasury, through its holding in Nafta Polska SA, reorganized the Polish oil sector in The existing Group is a result of this reorganization of several significant operating companies, which were all under the common control of Nafta Polska SA and the Polish State Treasury. In particular, this reorganization included the following transactions: Before the merger of Centrala Produktów Naftowych CPN SA ( CPN ) with Petrochemia Płock: separation of Dyrekcja Eksploatacji Cystern Sp. z o.o. from CPN the entity dealing with the operation of railway tanks for crude oil products transportation, sales of shares in Naftobazy Sp. z o.o by CPN operator of large warehouse facilities used to store crude oil products Acquisition of refineries: Rafineria Trzebinia SA and Rafineria Nafty Jedlicze SA, Merger of Petrochemia Płock with Centrala Produktów Naftowych CPN SA the main distributor in the area of the retail sales of fuels in Poland. To the extent of the Polish State Treasury s control over the restructured Polish oil sector companies, these transactions were presented as if they were under common control using the pooling of interest method according to International Accounting Standard No 22 Business Combinations (IAS 22). Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 128

133 Entities included in the consolidated financial statements These consolidated financial statements for the periods ended 31 December 2005 and 31 December 2004 include the following entities within the Group located in Poland, Germany and the Czech Republic: Share in total voting rights (1) 31 December December 2004 (rounded to nearer full percentage) PKN ORLEN SA Parent Company ORLEN Deutschland AG 100% 100% ORLEN Gaz Sp. z o.o. 100% 100% ORLEN PetroCentrum Sp. z o.o. 100% 100% ORLEN Medica Sp. z o.o. 100% 100% ORLEN Budonaft Sp. z o.o. 100% 100% ORLEN Powiernik Sp. z o.o. 100% 100% ORLEN KolTrans Sp. z o.o. 100% 100% ORLEN Transport Szczecin Sp. z o.o. 100% 100% ORLEN Asfalt Sp. z o.o. (formerly Bitrex Sp. z o.o.) 100% 100% Capital Group of ORLEN Petroprofit Sp. z o.o. including: 100% 100% Petro Oil Lubelskie Centrum Sprzedaży Sp. z o.o. 76% 100% Petrooktan Sp. z o.o. 51% 51% ORLEN Morena Sp. z o.o. 100% 100% Raf Trans Sp. z o.o. 99% 99% ORLEN Transport Kraków Sp. z o.o. 98% 98% ORLEN Transport Płock Sp. z o.o. 98% 98% ORLEN Transport Nowa Sól Sp. z o.o. 97% 97% Zakład Budowy Aparatury SA 97% 97% ORLEN Transport Słupsk Sp. z o.o. 97% 97% ORLEN Transport Poznań Sp. z o.o. (2) - 96% ORLEN Laboratorium Sp. z o.o. including: 95% 95% RAF-LAB Sp. z o.o. (3) 100% - ORLEN Transport Olsztyn Sp. z o.o. 95% 95% ORLEN Transport Warszawa Sp. z o.o. (2) - 94% Capital Group of ORLEN Oil Sp. z o.o. 96% 92% ORLEN Oil Cesko s.r.o. 100% - Platinum Oil Mazowsze Sp. z o.o. 99% - ORLEN PetroTank Sp. z o.o. 90% 90% ORLEN Transport Kędzierzyn-Koźle Sp. z o.o. 94% 94% Petrotel Sp. z o.o. 75% 89% Capital Group of Anwil SA including: 84% 76% Przedsiębiorstwo Inwestycyjno-Remontowe Remwil Sp. z o.o. 100% 100% Przedsiębiorstwo Produkcyjno-Handlowo-Usługowe Pro-Lab Sp. z o.o. 99% 99% Przedsiębiorstwo Usług Specjalistycznych i Projektowych Chemeko Sp. z o.o. 56% 56% Capital Group of Rafineria Trzebinia SA, including: 77% 77% Energomedia Sp. z o.o. 100% 100% Euronaft Sp. z o.o. 100% 100% Nafto Wax Sp. z o.o. 100% 100% Ekonaft Sp. z o.o. 99% 99% Capital Group of Rafineria Nafty Jedlicze SA including: 75% 75% RAF-LAB Sp. z o.o. (3) - 100% RAF-ENERGIA Sp. z o.o. 100% 100% RAF-KOLTRANS Sp. z o.o. 100% 100% RAF-REMAT Sp. z o.o. 96% 96% RAF-EKOLOGIA Sp. z o.o. 93% 93% Konsorcjum Olejów Przepracowanych Organizacja Odzysku SA 81% 81% Inowrocławskie Kopalnie Soli Solino SA 71% 71% Capital Group of Unipetrol a.s. (4) including: 63% - CHEMOPETROL a.s. including: 100% - Unipetrol a.s. DOBRAVA a.s. 100% - PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 129

134 Share in total voting rights (1) 31 December December 2004 (rounded to nearer full percentage) KAUČUK a.s. 100% - Unipetrol a.s. TRADE a.s. including: 100% - CHEMAPOL (SCHWEIZ) AG 100% - Unipetrol a.s. AUSTRIA GmbH 100% - ALIACHEM VERWALTUNGS GmbH 100% - Unipetrol a.s. DEUTSCHLAND GmbH: 100% - ALIAPHARM GmbH 100% - Unipetrol a.s. CHEMICALS IBERICA SA 100% - Unipetrol a.s. RAFINERIE a.s. 100% - BENZINA a.s. including:: 100% - BENZINA Trade a.s. 100% - PETROTRANS a.s. 100% - SPOLANA a.s. 82% - PARAMO a.s. 74% - Česka Rafinerska a.s. (5) 51% - Capital Group of Ship-Service SA (1) including: 56% 56% Bor-Farm Sp. z o.o. 100% 100% Ship Service Agro Sp. z o.o. 100% 100% ORLEN Automatyka Sp. z o.o. 52% 52% ORLEN PetroZachód Sp. z o.o. 52% 52% ORLEN Petrogaz Wrocław Sp. z o.o. 52% 52% Petrolot Sp. z o.o. 51% 51% ORLEN Projekt SA 51% 51% ORLEN Wir Sp. z o.o. 51% 51% Capital Group of Basell Orlen Polyolefins Sp. z o.o. (5) including: 50% 50% Basell Orlen Polyolefins Sprzedaż Sp. z o.o. 100% 100% PK N O R L E N A nnual Repor t ) Share in total voting rights is equal to share in equity except for share in equity in Capital Group of Ship-Service SA, where it accounts for 61%. 2) Entities taken over by ORLEN Transport Płock Sp. z o.o. in 2 quarter of ) On 11 December 2005 shares in RAF-LAB Sp. z o.o. were sold to Orlen Laboratorium Sp. z o.o. 4) The Group acquired in 2 quarter ) Entities consolidated using the proportionate method of consolidation. 3. Func tional currenc y and presentation currenc y of financial statements and methods applied to translation of data denominated in foreign currencies a) Functional currency and presentation currency The functional currency of the Parent Company, and the presentation currency of the foregoing consolidated financial statements is the Polish zloty. The financial statements of foreign entities for consolidation purposes are translated into Polish zloty using the following procedures: Consolidated financial statements assets and liabilities of each balance sheet are translated at the closing rate at the given balance sheet date, items in the profit and loss are translated at the exchange rate at the date of transactions. All resulting exchange differences are recognized as a separate component of equity. b) Methods applied to translation of data denominated in foreign currencies The financial data denominated in EUR were converted in line with the following methods: assets and liabilities at the closing rate for 31 December 2005 PLN / EUR, for 31 December 2004 PLN / EUR, income and expense items and positions of the statement of cash flows at the arithmetic average of exchange rates of the period from 1 January 2005 to 31 December 2005 PLN / EUR; for the period from 1 January 2004 to 31 December 2004 the rate was PLN / EUR. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 130

135 The financial data denominated in CZK were converted by the following methods: assets and liabilities at the closing rate for 31 December 2005 PLN / CZK, for the date of acquisition PLN / CZK, income and expense items and positions of the statement of cash flows at the arithmetic average of exchange rates of the period from date of acquisition of Unipetrol a.s. Group to 31 December 2005 PLN / CZK. 4. Accounting pr inciple s In the presented reporting period the Group introduced changes to the respective accounting principles applied by the Group for 2004 statutory reporting. The changes concern the adoption of International Financial Reporting Standards from 1 January 2005 in accordance with amended Polish Accounting Act (wording effective 1 January 2005) in accordance with the decision of the General Shareholders Meeting of PKN ORLEN SA of 31 December The last consolidated annual financial statements prepared by the Group were the annual statements for the year ended 31 December 2004 prepared in compliance with Polish Accounting Standards (PAS). The accounting principles applied in the foregoing financial statements are discussed below. The consolidated financial statements have been prepared based on historic cost, except for: derivatives, financial instruments at fair value through the profit and loss statement financial assets available for sale, and investments properties stated at fair value. a) Accounting policies Property, Plant and Equipment Property, plant and equipment, excluding land and investment property, are stated at cost which consists of the acquisition cost and direct costs related to bringing the fixed asset into use as well as estimated costs of dismantling and removal of the asset and the cost of restoration of the site/land to the initial state regardless of whether the obligation exists at acceptance of the asset for use or arises during its use. After initial recognition, property, plant and equipment are depreciated and subject to impairment allowances. Property, plant and equipment items acquired after 31 December 1996 are stated at acquisition cost less accumulated depreciation and impairment allowances. PK N O R L E N A nnual Repor t Property, plant and equipment acquired before 1 January 1997 are stated at fair value determined as at 1 January 2004 in accordance with deemed cost less accumulated depreciation and impairment allowances. The cost of the current maintenance of property, plant and equipment is recorded in the financial result during the period when they are incurred. The cost of significant repairs and regular maintenance programs is recognized as property, plant and equipment and depreciated in accordance with their economic useful lives. Depreciation of property, plant and equipment begins when it is available for use, that is from the month it is in the location and condition necessary for it to be capable of operating in the manner intended by the management, over the period reflecting their estimated economic useful life, considering the residual value. The appropriateness of the applied periods and depreciation rates is verified periodically (once a year), and respective adjustments are made to the subsequent periods of depreciation. Components of property, plant and equipment which are material for the whole item are depreciated separately in accordance with their economic useful life. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 131

136 The Group estimates the residual value of property, plant and equipment. The residual value is the net amount which the Group would currently obtain from the disposal of the assets, having deducted the estimated cost of disposal, if the assets were already of the age and in the condition expected at the end of their useful life. The residual value is not subject to depreciation and is reviewed periodically (once a year). The following useful lives are used for property, plant and equipment: Buildings and constructions Machinery and equipment Vehicles and other years 3 25 years 4 17 years If there have been events or changes which indicate that the carrying amount of property, plant and equipment may not be recoverable, the assets are analyzed for potential impairment. If there are indications of impairment, and the carrying amount exceeds the estimated recoverable amount, the value of those assets or cash-generating units is decreased to the recoverable amount by an appropriate allowance. The recoverable amount of property, plant and equipment reflects the statement higher of net selling price and value in use. Impairment allowances are recognized as operating costs in the profit and loss statement. Finance lease A lease contract, under IAS 17, is regarded as a finance lease if it transfers substantially all risks and rewards incidental to ownership of the leased asset. PK N O R L E N A nnual Repor t Assets used under lease, tenancy, rental or similar contracts which meet the criteria defined in IAS 17, Leases, are regarded as non-current assets and recognized at the lower of fair value of the leased asset at the commencement of the lease term and the present value of the minimum lease payments. Depreciation methods for leased assets being depreciated are consistent with normal depreciation policies applied for similar Group owned assets and depreciation is calculated in accordance with IAS 16 and IAS 38. If it is not certain that the lessee will obtain title to the asset before the end of the lease term, the asset is depreciated over the shorter of the lease term and the asset s useful economic life. Assets leased out based on lease, tenancy, rental or similar contracts meeting the above finance lease criteria are initially recognized as long-term receivables and stated at the net lease investment value. Goodwill Goodwill resulting from a business combination is stated at the acquisition date as the excess of the cost of the business combination over the acquirer s share in the fair value of the net identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is decreased by impairment allowances. Consolidated financial statements Goodwill is tested for impairment annually or more frequently if events or circumstances indicate that it might be impaired. Goodwill is not amortized. Excess of net fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost If the acquirer s share resulting from a business combination in the net fair value of identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination the acquirer: reassesses the identification and measurement of the identifiable assets, liabilities and contingent liabilities and the cost of the business combination; recognizes immediately in the profit and loss any excess remaining after the reassessment in the period in which the business combination was carried out. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 132

137 Intangible assets Intangible assets are recognized if it is probable that the expected future economic benefits that are directly attributable to the assets will flow to the entity. Initially intangible assets are stated at acquisition or construction cost. The intangible assets acquired in a business combination are initially recognized at fair value as defined at the business combination date. After initial recognition, intangible assets are measured at acquisition or construction cost less amortization and impairment allowances. Intangible assets with a definite useful life are amortized when it is available for use, that is when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management over their estimated economic useful life. The appropriateness of the applied amortization periods and rates is periodically reviewed, at the minimum end of the reporting year, and potential adjustments to amortization allowances are made in subsequent periods. Intangible assets with an indefinite useful life are not amortized. Their value is decreased by impairment allowances. The residual value of intangible assets is usually assumed to be zero, unless: there is a commitment by a third party to purchase the asset at the end of its useful life the residual value is then defined by the contract for disposal of the title to the asset; or there is an active market for the asset, its value may be reliably estimated, and it is highly probable that such a market will exist at the end of the asset s useful life. The economic standard adopted useful lives for the amortization of intangible assets are: Acquired licenses, patents, and similar intangible assets 2 15 years Acquired computer software 2 10 years All intangible assets generated by the Group are not recognized as assets and are recorded in the profit and loss for the period when the related cost has been incurred except for intangible assets arising from development (or from the development phase of an internal project). Intangible assets with indefinite useful lives and intangible assets which are not yet in use are tested for impairment once a year. Other intangible assets are tested for impairment only if there are indications that their carrying amount may not be recoverable. If there are indications of impairment, and the carrying amount exceeds the estimated recoverable amount, the value of those assets or the related cash-generating units is decreased to the recoverable amount. The recoverable amount of those assets is the higher of the assets net selling price and their value in use. PK N O R L E N A nnual Repor t The titles to perpetual usufruct of land obtained under an administrative decision are recognised by the Group at fair value as an off balance sheet items. Investment property Investment property is initially recognized at acquisition cost including transaction costs. After initial recognition the investment property is presented at fair value. Gains and losses resulting from changes in the fair value of the investment property are presented in the profit and loss account in the period when incurred. Investment property is subject to an impairment allowance when the property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Any gains or losses arising from allowances of the investment property are recognized in the profit and loss account in the period when they are made. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 133

138 Inventories Inventories are measured at the lower of cost and net realizable value, considering any inventory allowances. The net realizable value is the selling price estimated in the ordinary course of business activity less the estimated costs of completion and the estimated selling costs. Cost of usage is determined based on the weighted average costs formula. For finished goods, costs comprise of related fixed and variable indirect costs for ordinary production levels, excluding external financing costs. Receivables Trade and other receivables are recognized when they arise at the present value of the expected proceeds and are stated in subsequent periods at amortized cost using the effective interest method less allowances for doubtful receivables. If there is objective evidence that an impairment loss has been incurred, the amount of difference between the asset s carrying amount and the present value of estimated future cash flows is recognized in profit and loss. Cash and cash equivalents Cash comprises cash on hand and in a bank account. Cash equivalents are short-term highly liquid investments (of initial maturity up to three months), that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. PK N O R L E N A nnual Repor t The cash flows balance of cash and cash equivalents consists of the above defined monetary assets and their equivalents less bank overdrafts, if they form an integral part of an entity s cash management. Revenue from sale Revenue from sale is recognized when it is probable that the economic benefits associated with the sale transaction will flow to the Group and the amount of revenue can be measured reliably. Sale of goods includes excise tax and fuel charges. The net revenue from the sale of finished goods is recognized after deducting value added tax (VAT), excise tax, fuel charges and discounts. Revenue from the sale of finished goods and merchandise is recognized when the finished goods/merchandise are issued and related risks and rewards have been transferred. Revenue from settlement of cash flow hedge instruments adjusts the sales revenue. The revenue is measured at the fair value of the received or due payment. Consolidated financial statements Revenue from dividends Dividends are recognized when the shareholder s right to receive payment is established. Equity Equity is stated in the accounting books by type, in accordance with legal regulations and the Company s Articles of Association. The share capital is stated at nominal value in accordance with the Company s Articles of Association and the entry in the Commercial Register, except for shares issued before Those shares were adjusted using a general price index in line with IAS 29. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 134

139 The stated outstanding share capital contributions are recognized as outstanding share capital contributions. Own shares and outstanding share capital contributions decrease the Company s equity. Share premium is created by the surplus of the issuance value in excess of the nominal value of shares decreased by issuance costs. Issuance costs incurred by setting up a joint stock company or increasing the share capital decrease the share premium to the amount of the surplus of the issuance value in excess of the nominal value of shares, and the remaining portion is presented by the Group as retained earnings. Changes in the fair value of cash flow hedges related to the portion regarded as an effective hedge are included in equity as hedging reserve. Equity resulting from the conversion of convertible bonds, liabilities and loans into shares is stated at the nominal value of those financial instruments, liabilities and loans, considering non-amortized discounts or premiums, interest accrued and unsettled before the conversion date, which will not be paid out, unrealized foreign exchange differences and capitalized cost of issue. The amounts arising at profit distribution, transfer from revaluation reserve (the difference between the fair value and the acquisition cost less deferred tax of assets available for sale is transferred to the revaluation reserve if their price is determined on the regulated active market or if their fair value may be reliably estimated by alternative methods), the undistributed result for prior periods and the current period net profit are presented in the financial statements as retained earnings. Interest-bearing bank loans and borrowings Interest-bearing bank loans and borrowings are initially stated at the fair value of proceeds received, net of transaction costs. They are subsequently recognized at amortized cost using the effective interest rate method. The difference between the net proceeds and the buyout amount is recognized as financial revenue or cost over the term of the loan or borrowing. External financing costs Cost of loans and borrowings, including foreign exchange differences related to loans and borrowings drawn in foreign currencies are expensed in accordance with the benchmark treatment of IAS 23 in the profit and loss in the period to which they refer. Retirement benefits and jubilee bonuses PK N O R L E N A nnual Repor t Under the Group s remuneration plans, its employees are entitled to jubilee bonuses and retirement benefits. The jubilee bonuses are paid to employees after elapse of a defined number of years in service. The retirement benefits are paid once at retirement. The amount of retirement benefits and jubilee bonuses depends on the number of years of service and an employee s average remuneration. The Group does not assign assets which would be used for future retirement or jubilee liabilities. The Group creates a provision for future retirement benefits and jubilee bonuses in order to allocate costs to relevant periods. In accordance with IAS 19, jubilee bonuses are long-term employee benefits and retirement benefits are classified as post-employment benefit plans. The present value of those liabilities is estimated at the end of each reporting year by an independent actuary and adjusted if there are any material indications impacting the value of the liabilities. The accumulated liabilities equal discounted future payments, considering employee rotation, and relate to the period ended at the last day of the reporting year. Demographic data and information on employee rotation are based on historical records. Actuarial gains and losses are recognized in the profit and loss. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 135

140 Foreign currency transactions Transactions denominated in foreign currencies are recognized after their translation to the functional currency, at every balance sheet date in the following way: a) foreign currency monetary items shall be translated using the closing rate; b) non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and c) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. Any gains or losses resulting from changes in foreign exchange rates after the transaction date are recognized as financial income or expenses in the profit and loss statement. The exchange differences are stated in the profit and loss at their net amount. Financial instruments Financial assets are classified in the following categories: financial assets held to maturity, financial assets at fair value through profit and loss, loans and receivables and financial assets available for sale. Financial assets held to maturity are investments with determined or determinable payments and a fixed maturity date, which the Group intends and has the ability to hold to the maturity date, except for the Group s own receivables and loans. Financial assets acquired in order to generate profits on short-term price fluctuations are classified as financial assets at fair value through profit and loss. PK N O R L E N A nnual Repor t All other financial assets, which are not borrowings or receivables of the Group, are classified as financial assets available for sale. Financial investments held to maturity are part of non-current assets if their maturity dates exceed twelve months from the balance sheet date. Financial assets measured at fair value through profit and loss, are classified as current assets if the Management Board intends to realize them within twelve months from the balance sheet date. Purchases and sales of financial assets are recognized at the transaction date. At the moment of the original recognition those assets are measured at acquisition cost, i.e. at fair value, including transaction costs. Financial assets at fair value through profit and loss, are measured at fair value without deduction of the transaction costs and considering their market value as at the balance sheet date. The change in fair value of those financial assets is recognized as financial income or expenses in the profit and loss. Financial assets held to maturity are measured at amortized cost using the effective interest rate. Consolidated financial statements Financial assets available for sale are recognized at fair value, without deduction of the transaction costs, and considering their market value at the balance sheet date. If the financial instruments are not traded on an active market and it is impossible to estimate reliably their fair value by alternative methods, financial assets available for sale are measured at acquisition cost adjusted by impairment allowances, if they have been valued at historical cost. Positive and negative differences between fair value and acquisition cost, net of deferred tax, of financial assets available for sale are reflected in the revaluation reserve if their market price is determinable on a regulated active market or fair value may be estimated by some other reliable method. Decrease in the value of financial assets available for sale due to impairment allowances is charged to financial expenses in the profit and loss. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 136

141 Granted loans are recognized at amortized cost. Derivatives which are not designated as hedging instruments are classified as financial assets or liabilities at fair value are stated at fair value, considering its changes, through profit and loss. Derivatives treated as cash flow hedging instruments are carried at fair value with changes in value accounted for in the following way: the portion determined to be an effective hedge is recognized directly in equity through the statement of changes in equity; the portion determined to be an ineffective hedge is recognized in the profit and loss; revenues or expenses on settlement of cash flow hedging instruments adjust sales revenues when recognized in the profit and loss. Embedded derivatives are separated from the host contracts and accounted for as derivatives if all of the following conditions are met: the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; a separate instrument with the same realization terms as the embedded derivative would meet the definition of a derivative; is not the hybrid (combined) instrument. The hybrid (combined) instrument is not measured at fair value and changes in fair value are not recognized in the net profit or loss. Embedded derivatives are accounted for in a similar way as other derivatives which are not designated as hedging instruments. The Group recognizes financial asset on its balance sheet when the Group becomes a party to the contractual provisions of the instrument. The financial asset is derecognized when the contractual rights to economic benefits and risk related to this financial asset were executed, expired or the Group transferred the contractual rights and risks. Derivatives used by the Group in order to hedge against foreign exchange risks comprise mainly of currency forwards. Such instruments are measured at fair value. PK N O R L E N A nnual Repor t The fair value of currency forwards is estimated with reference to current futures rates for contracts of similar maturity. When applying hedge accounting, hedges are classified as cash flow hedges against cash flow changes attributable to a particular type of risk related to a recognized asset, liability, or a forecast transaction. They may also be regarded as fair value hedges which are attributable to a particular type of risk related to a recognized asset or liability. If the specific criteria for hedge accounting are met, a portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in equity and the ineffective portion of the gain or loss is recognized in the profit and loss. The gain or loss from the re-measurement of the derivative instruments at fair value that do not comply with the hedge accounting criteria are recognized directly in the profit and loss. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 137

142 The Company discontinues hedge accounting when the underlying instrument expires or is sold, terminated or realized, or when the hedge no longer meets the criteria for hedge accounting. In such a case, total gain or loss on the hedging instrument, previously recognized in equity, is recognized in equity until the forecast transaction takes place. If the Group no longer expects the forecast transaction to take place, the total net gain or loss recognized in equity is presented in the financial result of the current period. Corporate income tax Income tax is measured on gross profit considering deferred tax. The deferred tax is measured using the balance sheet liability method. The deferred tax reflects the net tax effect of temporary differences between the carrying amount of a given asset or liability and its tax base. The deferred tax assets and liabilities are measured at the effective tax rates enacted for subsequent years when the temporary differences are expected to be realized at tax rates enacted or substantially enacted as at the balance sheet date. Deferred tax assets are recognized for negative temporary differences and unrealized tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be realized. Deferred tax liabilities are recognized for all temporary tax differences. Deferred tax assets and liabilities are recognized regardless of when the timing difference is likely to be realized. Deferred tax assets and liabilities are not discounted and they are accounted for as non-current assets or long-term liabilities in the balance sheet. PK N O R L E N A nnual Repor t Non-current assets held for sale Non-current assets held for sale are those which comply with the following criteria: a decision was declared by the Company s Management Board for the disposal; the assets are available for an immediate sale in their present condition; an active programme to locate a buyer has been initiated; the sale transaction is highly probable and could be settled within 12 months following the sale decision; the selling price is reasonable in relation to its current fair value; it is unlikely that significant changes to the sales plan of these assets will be introduced. If the criteria are met after the balance sheet date, the asset is not reclassified at the end of the reporting year prior to the designation for sale. The reclassification is reflected in the reporting period when the criteria are met. Depreciation is discontinued for the asset when it is designated for sale. Consolidated financial statements Assets held for sale are measured at the lower of the net carrying amount and the fair value less selling costs. Earnings per share Basic earnings per share for each period are calculated by dividing the net profit for a given period by the weighted average number of shares outstanding during that period. Diluted earnings per share for each period are calculated by dividing the net profit for a given period adjusted by changes of the net profit resulting from conversion of the dilutive potential ordinary shares by the weighted average number of shares. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 138

143 Provisions The Group shall recognize a provisions when it has a present obligation (legal or constructive) as a result of past event if it has such a legal or constructive obligation as a result of past events and if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and if a reliable estimate may be made of the amount of the obligation. The provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. When the effect of the time value of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation. If the discounting method is applied, the increase of provisions with time is recognized as external financing costs. Environmental provisions The Group makes provisions for future liabilities for reclamation of contaminated land or elimination of harmful substances if there is such a legal or constructive obligation. Environmental provisions for reclamation are periodically reviewed based on reports prepared by independent experts. The Group conducts regular reclamation of contaminated land that decreases the provision by its utilization. Government grants The government grants are recognized at fair value if there is reasonable assurance that the grant will be obtained and the entity will comply with the conditions attached to it. If the grant relates to an expenditure, it is recognized as income over the period necessary to match it with the related costs which the grant is intended to compensate. If the grant concerns assets, its fair value is recognized as deferred income and on a systematic basis recorded in the profit and loss over the estimated useful life of the underlying asset. Liabilities Trade and other liabilities are stated at the amount due, and financial liabilities, which contractual settlement is to be made by way of issue of non-monetary financial assets or due to exchange for financial instruments, are recognised at fair value. Contingent liabilities and receivables Contingent liabilities are defined as obligations that arise from past events and which are dependent on occurrence or non-occurrence of some uncertain future events. Contingent liabilities are not recognized in the balance sheet however the information on contingent liabilities is disclosed unless the probability of outflow of resources relating to economic benefits is remote. PK N O R L E N A nnual Repor t Contingent liabilities acquired as the result of a business combination are recognized as provisions in the balance sheet. Contingent receivables are not recognized in the balance sheet, however the respective information on the contingent receivable is disclosed if the inflow of assets relating to economic benefits is probable. Business segments The scope of financial information in the Group s segment reporting is defined based on requirements of IAS 14. The Group adopted a business segments as the primary reporting format, i.e. as the dominant source of risks and benefits related to sale of goods and services. A secondary reporting format is geographical segments that are associated with activity conducted in different geographical areas. Consolidated financial statements Segment assets (liabilities) are those operating assets (liabilities) that are employed by that segment in operating activity (result from operating activity of a segment) and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 139

144 The segment result is determined at the level of profit from operations. The revenues, result, assets and liabilities of a given segment are defined before inter-segment adjustments are made. For the purpose of this report, the excess of fair value of the acquired net assets over the acquisition cost was allocated to particular business segments results proportionally to the value of segment assets of the Unipetrol Group. The operations of the Group are divided into two main segments: Refining Segment and Chemical Segment. The Refining Segment comprises crude oil processing as well as wholesale and retail trade in refinery products, The Chemical Segment encompasses production and sales of petrochemicals by PKN ORLEN and fertilisers and PVC by Anwil SA. Other operations include mainly support functions in PKN ORLEN SA, transportation, service and maintenance activities and construction conducted by other subsidiaries of PKN ORLEN SA. Segment revenues and assets were defined before inter-segment adjustments. Sales prices in inter-segment transactions are similar to market prices. Segment operating costs have been allocated as appropriate. Other costs which cannot be reliably determined have been included as unallocated expenses, reconciling total segment results to profit from operations. The Company s Management Board estimates PK N O R L E N A nnual Repor t The preparation of financial statements in accordance with IFRSs requires that the Management Board makes expert estimates and assumptions that affect the adopted methods and presented amounts of assets, liabilities, revenues and costs. The estimates and related assumptions are based on historical expertise and other factors regarded as reliable in given circumstances and their effects provide grounds for expert assessment of the carrying amount of assets and liabilities which is not based directly on any other factors. In the matters of considerable weight, the Company s Management Board bases its estimates on opinions of independent experts. Actual results may differ from the estimated values. The estimations and related assumptions are verified on a regular basis. Changes in accounting estimates are recognized in the period when they are made only if they refer to that period or in the present and future periods if they concern both the present and future periods. Application of the accounting principles The above principles are applicable for comparative data, except for principles concerning treatment of assets held for sale, which have been applied since 1 January Consolidated financial statements Impact of new Standards and interpretations on the Company s financial statements As at 31 December 2005 the Company recognized new Standards and interpretations to International Financial Reporting Standards, regarding: MIFRS 6 Exploration for and Evaluation of Mineral Resources in force from 1 January 2006; IFRS 7 Financial Instruments: Disclosure in force from 1 January 2007; IFRS 1 First-time Adoption of International Financial Reporting Standards in force from 1 January 2006; IAS 1 Presentation of Financial Statements in force from 1 January 2007; IAS 19 Employee Benefits in force from 1 January 2006; IAS 39 Financial Instruments: Recognition and Measurement in force from 1 January 2006; IAS 21 The Effects of Changes in Foreign Exchange Rates in force from 1 January 2006; IFRIC 4 interpretation: Determining Whether an Agreement Contains a Lease in force from 1 January 2006; IFRIC 5 interpretation: Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds in force from 1 January 2006; Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 140

145 IFRIC 6 interpretation: Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment - in force from 1 January 2005; IFRIC 7 interpretation: Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies in force from 1 March 2006; IFRIC 8 interpretation: IFRS 2 Share-based payment in force 1 May 2006; IFRIC 9 - Reassessment of Embedded Derivatives in force from 1 June Acceptance of IFRIC 7, IFRIC 8 and IFRIC 9 by the European Union is pending. The Company assessed the impact of application of the above interpretations and determined that the changes in IFRS 6, IFRS 7, IAS 1, IAS 19, IAS 21, IAS 39, IFRIC 4, IFRIC 7 and IFRIC 9 might have impact on the financial statements when applied. According to a preliminary assessment, the application of changes would not have a significant influence on the financial statements. b) Principles of consolidation Subsidiaries The Group consolidated financial statements include Polski Koncern Naftowy ORLEN SA and entities under its control. The control is normally evidenced when the Group holds directly or indirectly more than 50% of the voting rights in a company or is able to govern the financial and operating policies of a company so as to benefit from the results of its activity. The minority interest is presented in equity. Net profit attributable to minority shareholders is presented in the profit and loss. The purchase method is applied at acquisition of shares of business entities. Entities acquired or disposed of over the year are included in the consolidated financial statements from the acquisition date or to the disposal date, respectively. Investments in associates Investments in associated companies (overall investments ranging from 20% to 50% in a company s share capital) where the Group exercises significant influence on the financial and operating policies, yet does not have control over them, are accounted for using the equity method. Assessment of the value of investments in associates is performed when there are indications that the asset has been impaired or the impairment allowances recognized in prior years are no longer required. Investments in jointly controlled entities Investments in jointly controlled entities where the Group exercises joint control are accounted for using the proportionate method whereby a proportional share in a jointly controlled entity s assets, liabilities, revenues and expenses, after deduction of an impact of mutual transactions and settlements, is presented line by line with similar items in the consolidated financial statements. PK N O R L E N A nnual Repor t Adjustments from consolidation Intragroup balances and transactions and any related unrealized gains or losses as well as the Group income and expenses are eliminated at preparation of the consolidated financial statements. Unrealized gains resulting from transactions with associates and jointly controlled entities are excluded from the consolidated financial statements proportionally to the Group s share in those entities. Unrealized losses are excluded from the consolidated financial statements in the same manner as unrealized gains, until there are indications of impairment. 5. Proper t y, plant and equipment 31 December December 2004 Land Buildings and constructions Machinery and equipment Vehicles and other Construction in progress Total property, plant and equipment Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 141

146 Changes of property, plant and equipment by categories: Land Buildings and Machinery Vehicles Construction Total constructions and equipment and other in progress Gross book value 1 January Incl. foreign exchange differences on ORLEN Deutschland AG Increase Reclassification - 8 (325) Decrease (29 904) ( ) ( ) (52 787) ( ) ( ) 31 December January Incl. foreign exchange differences on ORLEN Deutschland AG Increase Reclassification (3 749) Decrease (21 293) ( ) ( ) (79 533) ( )* ( ) Increases due to acquisition of Unipetrol a.s December PK N O R L E N A nnual Repor t Consolidated financial statements Accumulated depreciation and impairment allowances 1 January Incl. foreign exchange differences on ORLEN Deutschland AG Depreciation Other increases Impairment allowances Reclassification (875) Decrease (1 099) (91 775) ( ) (40 359) - ( ) 31 December January Incl. foreign exchange differences on ORLEN Deutschland AG Depreciation Other increases Impairment allowances (7 151) Reclassification (2 436) Decrease (44) ( ) ( ) (83 075) - ( ) Increases due to acquisition of Unipetrol a.s December Net book value 1 January December January December * Including in 2005 e.g. transfers to specific groups of property, plant and equipment that amounted to PLN 3,028,146 thousand. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 142

147 Impairment allowances for property, plant and equipment as at 31 December 2005 and 31 December 2004 amounted to PLN 857,708 thousand and PLN 253,028 thousand respectively. In 2005 the Group reviewed economic useful lives of property, plant and equipment applied afore. Should the rates from previous years be applied, depreciation expense would be higher by PLN 150,487 thousand. The gross book value of all fully depreciated property, plant and equipment still in use as at 31 December 2005 and as at 31 December 2004 amounted to PLN 1,257,894 thousand, and PLN 930,461 thousand respectively. Impairment allowances disclosed in property, plant and equipment movement table are equal to the amount by which the carrying amount of assets exceeded its recoverable amount. The impairment allowances are charged to operating expenses. The allowances concern mainly liquid fuels storage facilities and petrol stations. Property, plant and equipment of PLN 346,533 thousand and PLN 167,327 thousand as at 31 December 2005 and 31 December 2004, respectively, were used as a pledge for the Group s liabilities. As at 31 December 2005 the Group adjusted the carrying amounts of property, plant and equipment disclosed in financial statements in compliance with previously applied accounting principles. The below table presents differences identified and reported by the Group between IFRSs and Polish Accounting Standards (PASs) in force as at 31 December Land Buildings and Machinery Vehicles Construction Total property, constructions and equipment and other in progress plant and equipment Balance sheet amounts reported in financial statements for 2004 in compliance with previously applied accounting principles Reclassification of catalysts and advertising cost of petrol stations to property, plant and equipment Separate presentation of rights to perpetual usufruct of land (35 717) (35 717) Value of precious metals previously disclosed as inventories Application of benchmark treatment of IAS 23 Borrowing costs (26) (24 597) (33 824) (5 432) - (63 879) Revaluation of property, plant and equipment at fair value Proportionate consolidation of Basell Orlen Polyolefins Sp. z o.o. Capital Group Impairment of property, plant and equipment of ORLEN Deutschland AG (39 904) (25 477) (65 381) Balance sheet amounts reported as comparative data in the financial statements as at 31 December 2005 in compliance with IFRSs PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 143

148 As of 31 December 2005 and 31 December 2004 construction in progress included: 31 December December 2004 PK N O R L E N A nnual Repor t Change in technology of production of chlorine from diaphragme to membrane Construction of desulfurization of petrol installation Cracking Modernization of warehouse bases nr 21, 51, 61, 91, 93 and Extension of polyprophylene storage containers Installation of hydrorefining of paraffins Installation of Polymeroasphalt tank V=10000 M Construction of underground crude oil and petrol storage Construction of tanks 41D and 43 A,B,C,D Canwil warehouse Division of EPS production lines Reactor R 101 for ammonia production line Construction of petrol station: cost of documentation and construction Reconstruction of turbogenerator TG Installation Polypropylene III-Spheripol Modernization of low-pressure compressor GB Modernization of bitumen production line installation of new reactor BITUROX Modernization of distilling chamber Modernization of sewerage installation I and II Modernization of cracking junction heat recovery Modernization of utilization of liquid sediment junction Infrastructure of Polypropylene III and Polyethylene III Loyalty cards consumer system Modernization of boiler-house Modernization of condensate treatment station Revamping and infrastructure of Olefins II production unit Plates production line no Benzene warehouse Drilling of exploitation hole M Construction od biodiesel production installation Intensification of Aromatics Extraction Installation Intensification of IFP, Pyrotol, Butadiene Installation Polypropylene HD HOSTALEN Construction of logistics platform in BOP Modernization of P21 installation Technological building in Petrolot Modernization of sewing installation Construction of installation of candle production Construction of petrol station in Gdynia Total specified construction in progress Other * * Total construction in progress * other include PLN 147,706 thousand as at 31 December 2005 and PLN 83,756 thousand as at 31 December 2004 relating to insignificant investment projects of the Parent. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 14 4

149 6. Investment proper t y The following changes were recognized in investment property in 2005 and 2004: Investment property, beginning of period Purchase of land for resale Revaluation at fair value Investment property, end of period Investment property of the Group comprise social-office building, partially designated for rent, valued at PLN 11,453 thousand and PLN 9,122 thousand as at 31 December 2005 and 31 December 2004, respectively and land purchased for resale of PLN 104 thousand. The fair value of investment property was assessed and disclosed on the basis of the expertise prepared by an independent asset surveyor, authorized for valuation of investment property and experienced in valuation of investment property of a similar location and qualified within the same category. By virtue of characteristics of the investment property, revenue approach was applied to assess the fair value. Due to variability of revenues in foreseeable future, calculation was based on discounted cash flows method, using 5-year period forecasts. The discount rate reflected the relation, as expected by the buyer, between yearly revenue from an investment property and expenditures required to purchase investment property, Forecasts of discounted cash flows relating to the valued objects consider provisions included in all rent agreements as well as external data, e.g. current market rent charges for objects similarly located, in the same technical condition and standard and designated for similar purposes. 7. Goodwill The changes of goodwill in 2005 and 2004 were as follows: 31 December December 2004 Orlen PetroTank Sp. z o.o Ship-Service SA PetroProfit Sp. z o.o Other Total PK N O R L E N A nnual Repor t December December 2004 Goodwill, beginnig of period Goodwill on entities consolidated for the first time in Impairment (3 500)* (355) Goodwill, end of period * impairment of Ship-Service SA Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 145

150 8. Intangible assets 31 December December 2004 Acquired licenses, patents and similar intangible assets Acquired computer software Goodwill Other Total intangible assets The changes of intangible assets were as follows: Acquired Acquired licenses, Goodwill Other Total computer patents and similar software intangible assets Gross book value 1 January Increase Decrease (4 089) (162) (3 962) (5 842) (14 055) 31 December January Increase Decrease (2 818) (1 300) (759) (1 767) (6 644) Increase due to acquisition of Unipetrol Group December PK N O R L E N A nnual Repor t Accumulated depreciation and impairment allowances 1 January Depreciation Other increases Impairment allowances (43) Decrease (863) (3 535) (1 056) (3 289) (8 743) 31 December January Depreciation Other increases Impairment allowances Decrease (4 397) (2 124) (373) (351) (7 245) Increase due to acquisition of Unipetrol Group December Consolidated financial statements Net book value 1 January December January December Impairment allowances for intangible assets as at 31 December 2005 and 31 December 2004 amounted to PLN 61,055 thousand and PLN 7,919 thousand. In 2005 the Group reviewed economic useful lives of intangible assets applied afore. Should the rates from previous years be applied, adjustment to depreciation expense would not be material. The gross book value of all fully depreciated intangible assets still in use as at 31 December 2005 and as at 31 December 2004 amounted to PLN 154,110 thousand, and PLN 75,081 thousand respectively. The titles to perpetual usufruct of land obtained under an administrative decision were recognised by the Company at fair value as off balance sheet items in the amount of PLN 1,060,593 thousand. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 146

151 As at 31 December 2005 the Group adjusted the carrying amounts of intangible assets disclosed in financial statements in compliance with previously applied accounting principles. The below table presents differences identified and reported by the Group between IFRSs and Polish Accounting Standards (PASs) in force as at 31 December Acquired licences, patents and similar intangible assets Acquired computer software Goodwill Other Total intangible assets Balance sheet amounts reported in financial statements for 2004 in compliance with previously applied accounting principles Revaluation of intangible assets at fair value Proportionate consolidation of Basell Orlen Polyolefins Sp. z o.o. Capital Group Balance sheet amounts reported as comparative data in the financial statements as at 31 December 2005 in compliance with IFRSs Financial assets a) Significant shares in other parties Seat 31 December 2005 Agrobohemie a.s Czech Republic - Prague % - Retail sale Aliachem a.s. Czech Republic - Pardubice % - production of chemicals Telewizja Familijna Poland - Warszawa % / 9.61% 11.96% / 9.61% radio and television related activity SK Eurochem Sp. z o.o. Poland - Włocławek % 17.37% production of chemicals construction, operation Naftoport Sp. z o.o. Poland - Gdańsk % - and maintenance of loading station for liquid fuels AW SA Holland II B.V. The Netherlands - Amsterdam % Parent company of Autostrada Wielkopolska SA Other Total Impairment allowance for Telewizja Familijna (26 004) (26 004) Other impairment allowances (46 421) (46 321) Total impairment allowances (72 425) (72 325) Net value of significant shares in other parties b) Investments held to maturity 31 December 2004 Seat Group s interest in capital/ voting rights as at 31 December December December 2004 Principal activity 31 December 2005 Telewizja Familijna SA bonds * Poland Warszawa Impairment allowance (26 000) (26 000) Net value of investments held to maturity - - Total net value of financial assets PK N O R L E N A nnual Repor t Consolidated financial statements * On 8 April 2003 the bankruptcy of Telewizja Familijna SA was declared; book value of shares and bonds as at 31 December 2005 and 31 December 2004 was fully covered by a relevant allowance. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 147

152 10. Investments accounted for using equit y method As at 31 December 2005 and 31 December 2004 the Group s investments accounted for using equity method were as follows: Book value as at Group s interest in capital/ voting rights as at Principal activity 31 December December December December 2004 Polkomtel SA % 19.61% rendering mobile telecommunication services construction, operation Naftoport Sp. z o.o % and maintenance of loading station for liquid fuel Niezależny Operator rendering ground % 35.00% Międzystrefowy Sp. z.o. o.* telecommunication services Płocki Park Przemysłowo-Technologiczny SA % 50.00% business activity advisory Other Total * Detailed information in Note 33 l In accordance with IAS 28 Investments in associates, condensed financial data comprising total assets and liabilities as at 31 December 2005 and 31 December 2004, revenues, financial expenses and profit for 2005 and 2004 in Polkomtel SA are described below: PK N O R L E N A nnual Repor t December December 2004 Polkomtel SA Current assets Non-current assets Current liabilities Non-current liabilities Total sales revenues Financial expenses ( ) ( ) Profit before tax Income tax expense ( ) ( ) Net profit Inventories 31 December December 2004 Consolidated financial statements Raw materials* Work in progress* Finished goods* Merchandise Total inventory, net * Starting from 2002, mandatory reserves are established based on the schedule in accordance with the Minister of Economy Decree (the decree of 19 December 2005 currently in force, Official Journal no 266. item 2240) to arrive at the end of 2008 at the level equal to 76 days of average daily production, import and intra-community acquisitions less export and intra-community supplies (In addition the relevant economy Minister is obliged to establish the reserves of liquid fuels in the amount equal to consumption of fuels in 14 days on average in a given year). The value of mandatory reserves held by the Company as at 31 December 2005 and 31 December 2004 amounted to PLN 1,953,479 thousand and PLN 1,304,472 thousand respectively. The value of inventories valued at net realizable value amounted to PLN 846,202 thousand as at 31 December 2005 and PLN 102,964 thousand as at 31 December The inventory allowances to net realizable value amounted to PLN 66,006 thousand in 2005 and PLN 11,657 thousand in Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 148

153 As at 31 December 2005 and 31 December 2004 inventories of PLN 66,059 and PLN 14,380 thousand, respectively, were used as a pledge for the Group s liabilities. 12. Trade and other receivables 31 December December 2004 Trade receivables* Taxation, duty and social security receivables Receivables from sale of property, plant and equipment Prepayments for property, plant and equipment Other receivables* Total trade and other receivables, net Receivables allowances Total trade and other receivables, gross * In 2005 the increase resulted from the acquisition of the Unipetrol Group Trade and other receivables include PLN 1,905,490 thousand of amounts denominated in foreign currencies as at 31 December 2005 and PLN 392,428 thousand as at 31 December Trade receivables result primarily from the sales of finished goods and sales of merchandise. Concentration of credit risk relating to trade receivables is limited due to a large number of customers with specified trade credit limits and their dispersion across many different industries principally in Poland, Germany and Czech Republic. The assumed repayment period of receivables involved with the usual course of sales operations is 14 to 30 days. Maximum trade credit limit risk amounted to PLN 4,403,335 thousand as at 31 December The Management Board believes that the risk of doubtful receivables is reflected by the relevant allowance. As at 31 December 2005 and 31 December 2004 transfers of rights to receivables as a security for the Group s liabilities amounted to PLN 196,791 and PLN 167,541 thousand, respectively, including due to collateral for the investment loan granted to IKS Solino in the form of endorsement of receivables due from PKN ORLEN for the lease of the underground warehouse of crude oil and liquid fuels in the amount of PLN 117,133 thousand as at 32 December 2005 and PLN 127,700 thousand as at 31 December The receivables allowances: PK N O R L E N A nnual Repor t December December 2004 Receivables allowances, beginning of period Allowance made during the period incl. acquisition of Unipetrol a.s Allowance reversed during the period ( ) (95 955) Allowance used during the period (45 098) (11 407) Receivables allowances, end of period Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 149

154 13. Shor t-term investments Short-term investments as at 31 December 2005 and 31 December 2004 included government bonds and bills, debt securities and other short-term investments of PLN 104,938 thousand and PLN 1,123,616 thousand, respectively, including: 31 December December 2004 Financial instruments at fair value through profit and loss Held to maturity Available for sale Total Prepayments 31 December December 2004 Subscriptions Insurances Other* Total * other prepayments include tax on means of transportation, toll fees and other. 15. Cash and cash equivalents PK N O R L E N A nnual Repor t December December 2004 Cash on hand and in bank Other cash (incl. cash in transit) Other monetary assets Total Incl. cash and cash equivalents not available for use Total cash and cash equivalents denominated in foreign currencies amounted to PLN 735,429 thousand as at 31 December 2005 and to PLN 482,142 thousand as at 31 December Taking into account cooperation of the Group mainly with well-established Polish and international banks, the risk relating to depositing cash and cash equivalents is considerably limited. Consolidated financial statements Since 2001 the cashpooling system has been introduced in the Capital Group. The system comprised of nineteen companies of capital group as at 31 December The accumulation of cash denominated in Polish zloty in cashpooling system is assisted by three banks, whereas accumulation of cash denominated in foreign currencies is assisted by one bank. Due to the application of the system the Group records considerable financial benefits. Cash and cash equivalents not available for use as at 31 December 2005 and 31 December 2004 amounted to PLN 100,331 thousand and PLN 269,932 thousand, respectively (they relate mainly to amounts blocked on bank accounts in relation to credits granted and in 2004 also to cash blocked on a restricted deposit account in Prague in relation to the planned acquisition of Unipetrol a.s.). Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 150

155 16. A ssets held for sale The following assets has been classified as held for sale in ORLEN Group as at 31 December 2005: 31 grudnia 2005 Shares in AW SA Holland II B.V.* Shares in CELIO** Assets held for sale in Anwil SA, including: *** land shares 507 buildings and constructions 226 machinery and equipment 3 Petrol station (land, immovables)**** Other 183 Total assets held for sale * As at 31 December 2005 PKN ORLEN held 165,924 shares standing for 9.218% stake in AW SA Holland II BV ( AWSA ). Shares in AWSA have been classified as held for sale. The value of shares was increased by the effect of valuation of the put option and presented separately in assets, due to it being a subject to sale of shares agreement concluded on 27 February 2006 between PKN ORLEN and Kulczyk Holding SA The conclusion of the Pledged Sale Agreement resulted from exercising by PKN ORLEN of an option to sell the shares that was determined in the Supplementary Agreement signed on 14 November 2002 between PKN ORLEN SA and Kulczyk Holding SA The Supplementary Agreement provided that the put option is exercisable on each demand until 31 December The relavant demant was submitted to Kulczyk Holding SA on 28 December Upon fulfilment of agreed provisions of the Pledged Sale Agreement, that are expected to be fulfilled at latest upon elapse of 3-month period from the date the agreement was signed, PKN ORLEN shall transfer its rights to shares in AWSA to Kulczyk Holding SA On 27 February 2006 PKN ORLEN received PLN 73,007 thousand in cash to the bank account. The above described shares had been purchased by PKN ORLEN from Orbis SA in November 2002 for the amount of PLN 61,400 thousand. AWSA, through its subsidiary, controls Autostrada Wielkopolska SA, a concessionaire for the construction of A2 motorway in Poland. Shares of AWSA are not quoted on an active market. ** The share of Unipetrol Group in CELIO company, constituting % stake in the share capital, has been classified as assets held for sale due to the fact that its carrying amount would be recovered primarily by means of sale transaction, and neither by its future use. The Management Board of Unipetrol a.s. has approved the sale plan for the asset. The offer received from a potential buyer indicates that the fair value of shares would exceed its carrying amount increased by transaction costs. The sale transaction is expected to be completed in 3 quarter of *** In accordance with the Resolution of the Supervisory Board of Anwil SA of 12 December 2005, the assets of Agro Azoty II Włocławek company were designated for sale. The sale transaction is expected to be completed in the first half of Due to the above, the assets hale been reclassified and presented as held for sale. As at 31 December 2005 the assets for sale comprise of real estate, movables and shares in the net amount of PLN 4,006 thousand. **** On 25 November 2005 the Management Board of Rafineria Trzebinia SA decided to dispose a petrol station located in Sławków (land and facilities), owned by Rafineria Trzebinia SA The announcement in nationwide press has been issued. Due to the afore, Rafineria Trzebinia SA presents the above immovables as assets held for sale in its financial statements for The sale transaction is expected to occur in As at 31 December 2005 no indications for impairment allowance occurred. Assets held for sale are stated at cost less impairment losses since it is not quoted in an active market and their fair value cannot be reliably estimated by alternative methods. PK N O R L E N A nnual Repor t Interest-bearing loans and borrowings Note 31 December December 2004 Bank loans (a) Borrownings (b) Debt securities (c) Total including: Short-term Long-term Maturities of principal instalments as at 31 December 2005 and 31 December 2004 were as follows: 31 December December 2004 Up to 1 year Between 1 and 5 years Above 5 years Total Consolidated financial statements The value of interest-bearing loans and borrowings drawn by the Group and debt securities issued increased in 2005 by PLN 2,185,634 thousand net. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 151

156 The change in indebtedness level resulted primarily from: PK N O R L E N A nnual Repor t drawing of foreign currency loans translated to PLN: CZK 750,000 thousand (PLN 103,500 thousand) in BH w Warszawie SA CZK 750,000 thousand (PLN 103,500 thousand) in PKO BP SA EUR 44,154 thousand (PLN 170,387 thousand) in consortium of banks (Societe Generale acting as Agent) drawing of loans in PLN: PLN 79,306 thousand in Bank Pekao SA PLN 28,193 thousand in BH w Warszawie SA PLN 45,275 thousand in PKO BP SA PLN 42,952 thousand in Bank Ochrony Środowiska SA PLN 21,988 thousand in BPH PBK SA PLN 7,652 thousand in BRE Bank SA PLN 10 thousand in Kredyt Bank SA increase in indebtedness as at 31 May 2005 due to acquisition of Unipetrol Group by CZK 11,714,060 thousand (PLN 1,552,113 thousand) lawns drawn by Unipetrol Group of CZK 148,352 thousand (PLN 19,716 thousand) increase in indebtedness due to acquisition of Unipetrol Group (issue of debenture bonds by Unipetrol Group until 31 May 2005) of CZK 4,115,959 thousand (PLN 547,011 thousand) PLN 23,796 thousand resulting from foreign exchange differences at PKN ORLEN SA lawns drawn by ORLEN Deutschland AG of EUR 60,650 thousand (PLN 234,105 thousand) repayment of foreign currency loans translated to PLN: CZK 750,000 thousand (PLN 102,716 thousand) in BH SA, CZK 750,000 thousand (PLN 99,625 thousand) in PKO BP SA USD 18,411 thousand (PLN 61,532 thousand) of a consortium double currency loan (ING acting as Agent) repayment of loans in PLN PLN 37,084 thousand in PKO BP S.A PLN 31,074 thousand in BH w Warszawie SA PLN 25,480 thousand in ING Bank Śląski SA PLN 16,606 thousand in Bank Pekao SA PLN 10,680 thousand in Narodowy Fundusz Ochrony Środowiska PLN 7,708 thousand in BPH PBK SA PLN 8,360 thousand in BNP PARIBAS POLSKA PLN 5,639 thousand in Bank Współpracy Europejskiej SA PLN 4,178 thousand in Kredyt Bank SA PLN 3,286 thousand in BGŻ SA PLN 1,700 thousand in BOŚ SA PLN 1,356 thousand in LG PETRO BANK SA PLN 943 thousand in Bank Millenium SA PLN 31,366 thousand resulting from foreign exchange differences in BOP Sp. z o.o. PLN 12,142 thousand resulting from foreign exchange differences in ORLEN Deutschland AG repayment of loans in ORLEN Deutschland AG of EUR 5,259 thousand (PLN 20,301 thousand according to historical exchange rates) repayment of loans in Unipetrol Group of CZK 2,348,337 thousand (PLN 312,094 thousand according to historical exchange rates) Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 152

157 a) Bank loans by currency (translated to PLN) 31 December December 2004 PLN (1) USD (2) CHF (3) EUR (4) CZK (5) Total As at 31 December 2005 and 31 December 2004 the level of flat interest rates and loan margins relating to bank loans with floating rates based interest were as follows: PLN (1) Margin/rate 31 December 2005 Indebtedness balance within the range Floating rate T/N WIBOR 0.06% 1.00% 1M WIBOR 0.07% 3.00% 3M WIBOR 0.55% 3.00% Total PLN USD (2) Margin/rate 31 December 2005 Indebtedness balance within the range Floating rate M LIBOR 0.40% 1.35% 3M LIBOR 0.40% 2.70% 6M LIBOR to 0.15% Total USD CHF (3) Margin/rate 31 December 2005 Indebtedness balance within the range Floating rate M LIBOR to 1.00% Total CHF EUR (4) Margin/rate 31 December 2005 Indebtedness balance within the range Flat rate % 7.30% Floating rate M LIBOR to 1.00% 1M EURIBOR 0.40% 1.00% 3M EURIBOR 0.40% 1.50% 6M EURIBOR 0.30% 1.35% Total EUR CZK (5) Margin/rate 31 December 2005 Indebtedness balance within the range Flat rate % 3.27% Floating rate D PRIBOR to 0.30% 1W PRIBOR to 0.30% 2W PRIBOR 0.25% 0.70% 1M PRIBOR 0.45% 0.90% 3M PRIBOR 0.60% 0.80% 6M PRIBOR 0.48% 0.90% Total CZK PK N O R L E N A nnual Repor t Consolidated financial statements Total Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 153

158 PLN (1) Margin/rate 31 December 2004 Indebtedness balance within the range Floating rate T/N WIBOR 0.15% 1.00% 1T WIBOR 0.60% 2.50% 1M WIBOR 0.02% 3.20% 3M WIBOR 0.40% 1.00% 6M WIBOR to 0.95% Total PLN USD (2) Margin/rate 31 December 2004 Indebtedness balance within the range Floating rate M LIBOR to 0.45% 3M LIBOR to 0.40% Total USD CHF (3) Margin/rate 31 December 2004 Indebtedness balance within the range Floating rate M LIBOR to 1.00% Total CHF EUR (4) Margin/rate 31 December 2004 Indebtedness balance within the range PK N O R L E N A nnual Repor t Consolidated financial statements Flat rate % 7.90% Floating rate M LIBOR 0.45% 1.00% 1M EURIBOR 0.16% 0.50% 3M EURIBOR to 0.45% 6M EURIBOR to 0.30% Total EUR Total As at 31 December 2005 and 31 December 2004 interest rates for specific bases were as follows: 31 December December 2004 T/N Wibor 4.60% 6.67% 1W Wibor 4.60% 6.66% 1M Wibor 4.60% 6.66% 3M Wibor 4.60% 6.64% 6M Wibor 4.60% 6.61% 1 M Euribor % % 3 M Euribor % % 6 M Euribor % % 1M Libor (USD) % % 3M Libor (USD) % % 6M Libor (USD) % % 1M Libor (EUR) % % 3M Libor (EUR) % % 3M Libor (CHF) % % Rediscount Interest rates of National Bank of Poland 4.75% 7.00% As at 31 December 2005 and 31 December 2004 bank loans and borrowings of PLN 691,780 thousand and PLN 357,566 thousand, respectively, were pledged on the Group s assets. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 154

159 b) Interest bearing loans 31 December December 2004 Wojewódzki Fundusz Ochrony Środowiska i Gospodarki Wodnej 34 Narodowy Fundusz Ochrony Środowiska Total Loans floating interest rates amounted to 1.90%-3.20% and 2.80%-9.00% as at 31 December 2005 and 31 December 2004, respectively. c) Debt securities Debt securities by type Face value Fair value measurement in relation to bonds quoted at the Stock Exchange in Prague Discount in relation to zero coupons bonds Book value Interests terms End of holding period Type of surety Flat rate bonds* Unsecured Zero coupons bonds (17 044) Unsecured * Interest calculated on flat rate bonds are recognised in the amount of PLN thousand as current liabilities. As at 31 December 2005 the liabilities related to debt securities issued by the Group amounted to PLN 547,011 thousand. The Group monitors opportunities to obtain loans and borrowings based on more favorable terms due to changes in market conditions. The Group utilizes loans both in PLN and foreign currencies, subject mainly to floating interest rates. As at 31 December 2005 and 31 December 2004, in accordance with agreements concluded with banks, the Company had unutilized amount of bank loans and borrowings at floating rate of PLN 3,896,154 thousand and PLN 1,128,369 thousand respectively. 18. Provisions Long-term provisions 31 December December 2004 Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total Short-term provisions Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total The Group has legal or constructive obligation to reclaim contaminated land in area of production plants, petrol stations and warehouse bases. In the period an assessment of the contaminated objects and estimation of future expenditures on land reclamation were conducted by independent experts. The amount of the environmental provision was reassessed by the Management Board on the basis of analyses of independent experts. The amount of the provision is the Management Board s best estimate in respect of future expenditures taking into account the average level of costs necessary to remove contamination, by facilities constituting basis of creating the provision. 31 December December 2004 PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 155

160 The changes in provisions in particular periods were as follows: Changes in long-term provisions Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total 1 January Provision made during the period * *** incl. increase due to acquisition of Unipetrol a.s Provision used during the period (1 689) (4 451) - - (1 690) (7 830) Provision reversed during the period (7 624)** (8 059) (33 294) - (11 779) (60 756) 31 December * incl. the amount of PLN 51,561 of land reclamation provision reclassified from short to long term portion ** incl. the amount PLN 5,036 of land reaclamation provision reclassified from long to short term portion *** incl. business risk provision of ORLEN Deutschland AG Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total PK N O R L E N A nnual Repor t January Provision made during the period Provision used during the period (1 011) (10 278) - - (553) (11 842) Provision reversed during the period (85 483) (8 189) (81) - (11 107) ( ) 31 December Change in short-term provisions Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total Consolidated financial statements 1 January Provision made during the period ** *** incl. increase due to acquisition of Unipetrol a.s Provision used during the period (17 710) (16 037) (734) (36 782) (10 956) (82 219) Provision reversed during the period (53 789)* (695) (87 081) - (24 890) ( ) 31 December * incl. the amount of PLN 51,561 of land reclamation provision reclassified from short to long term portion ** incl. the amount PLN 5,036 of land reaclamation provision reclassified from long to short term portion *** incl. provision for the negative financial impact of execution of the agreements concerning the disposal of portion of of assets and liabilities of Unipetrol Group Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 156

161 Land reclamation provision Retirement benefits and jubilee bonuses Business risk provision Shield programmes provision Other provisions Total 1 January Provision made during the period Provision used during the period (22 300) (14 673) (8 183) - (2 874) (48 030) Provision reversed during the period (39 261) (2 815) (50) - (6 635) (48 761) 31 December ( ) 19. Trade and other liabilities and accrued expenses Trade and other liabilities comprised of the following: 31 December December 2004 Trade liabilities Liabilities due to acquisition of property, plant and equipment Social Funds Holiday pay accrual Payroll liabilities Loyalty programme VITAY Dividends liabilities Excise tax and fuel charge liabilities Other taxation, duty and social security liabilities Other liabilities and accrued expenses Total Trade and other liabilities and accrued expenses denominated in foreign currencies amounted to PLN 3,712,599 thousand as at 31 December 2005 and PLN 1,339,592 thousand as at 31 December The carrying amount of short-term trade liabilities is equal to its fair value by virtue of its short-term characteristics. The VITAY is a loyalty program created for individual customers. The VITAY program is in operation on the Polish market since 14 February Purchases made by customers are granted with VITAY points that can be subsequently exchanged for fuel or VITAY gifts. PK N O R L E N A nnual Repor t The Company creates provision for the number of points granted to customers but not yet exchanged for gifts. The cost is recognized in the profit and loss in the period points had been granted. The provision is estimated on the basis of total unrealized amount of points and current cost per one VITAY point and equals 75% of the value of unrealized points (75% being a ratio for points realizability). 20. Deferred income 31 December December 2004 Subventions Other Total Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 157

162 21. Shareholders equit y In accordance with the Commercial Register, the share capital of Polski Koncern Naftowy ORLEN SA as at 31 December 2005 amounted to PLN 534,636 thousand. It is divided into 427,709,061 shares with nominal value of PLN 1.25 each. The share capital as at 31 December 2005 and 31 December 2004 consisted of the following series of shares: Share series Number of shares issued as at 31 December 2005 Number of shares issued as at 31 December 2004 Number of shares authorized as at 31 December 2005 Number of shares authorized as at 31 December 2004 A series B series C series D series Total In Poland, each new issuance of shares is labeled as a new series of shares. All of the above series involve the exact same rights. The balance of the hedging reserve results from valuation of derivatives meeting the criteria for hedge accounting (for cash flow hedges). The shareholder structure as at 31 December 2005 was as follows: PK N O R L E N A nnual Repor t Number of shares Number of voting rights Nominal value of shares % share in share capital Nafta Polska SA % Skarb Państwa % Bank of New York (as a depositary) % Other* % Total % *In accordance with the regulatory announcement no. 33/2005 issued on 25 May 2005, FMR Corp. with its direct and indirect subsidiaries, seated in Boston and Fidelity International Limited with its direct and indirect subsidiaries, seated in Bermuda, held 21,436,944 PKN ORLEN shares as at 24 May 2005, which is 5.01% of the share capital and gives title to 21,436,944 votes at the General Shareholders Meeting and 5.01% of the total votes at the General Meeting of PKN ORLEN. In accordance with the regulatory announcement no. 7/2006 issued on 24 January 2006, FMR Corp. with its direct and indirect subsidiaries, seated in Boston and Fidelity International Limited with its direct and indirect subsidiaries, seated in Bermuda, held 21,023,196 PKN ORLEN shares, which is 4.92% of the share capital and gives title to 21,023,196 votes at the General Shareholders Meeting and 4.92% of the total votes at the General Meeting of PKN ORLEN. The balance of foreign exchange differences on subsidiaries from consolidation is adjusted by differences resulting from translation of the financial statements of ORLEN Deutschland AG from EUR into PLN and Unipetrol a.s. from CZK into PLN. Consolidated financial statements Retained earnings comprise of the following titles: 31 December December 2004 Reserve capital Revaluation reserve from revaluation of property, plant and equipment in Revaluation reserve from disposal of property, plant and equipment revalued in Privatization Fund created with the privatization of Petrochemia Płock SA Undistributed profit from changes in accounting policies Net profit attributable to equity holders of the Parent Total retained earnings Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 158

163 The share capital and share premium as at 31 December 1996, in accordance with IAS and 29.25, were revalued on a basis of monthly general price indices by PLN 691,802 thousand (PLN 522,999 thousand revaluation of share capital and PLN 168,803 thousand revaluation of share premium). The afore were presented as share capital revaluation adjustment and share premium revaluation adjustment in the balance sheet. In 2005 the Company paid dividends to shareholders. The Company s General Shareholders Meeting held on 29 June 2005 adopted a resolution to pay a dividend from the net profit of 2004 in the amount of PLN 911,020,299,91. The date of payment was defined in the following way: the first instalment of PLN 457,648,695,27, giving PLN 1.07 per share, was paid on 1 September 2005; the second instalment of PLN 453,371,604,64, giving PLN 1.06 per share, was paid on 1 December Minorit y interests Minority interests represent part of the net assets of subsidiaries that is not owned, directly or indirectly, by the Group. Minority interests by company: 31 December December 2004 Anwil SA Group Rafineria Trzebinia SA Group Rafineria Nafty Jedlicze SA Group Inowrocławskie Kopalnie Soli Solino SA Petrolot Sp. z o.o ORLEN PetroZachód Sp. z o.o Unipetrol a.s Other Total PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 159

164 23. E xplanation of dif ferences bet ween changes in the balance sheet positions and changes presented in the cash flow statement Balance sheet change in other non-current assets and trade and other receivables ( ) (67 169) Change in Group structure (15 229) Other (38 427) (52 822) Change in receivables in the cash flow statement ( ) ( ) Balance sheet change in other long-term liabilities and trade and other liabilities and accrued expenses Change in Group structure ( ) Other Change in liabilities and accrued expenses in the cash flow statement Balance sheet change in inventories ( ) ( ) Change in Group structure (2 812) Other (26 730) (18 228) Change in inventories in the cash flow statement ( ) ( ) PK N O R L E N A nnual Repor t Balance sheet change in provisions Change in Group structure ( ) (2 303) Change in deferred tax liabilities relating to fair value adjustment of non-current assets (24 233) Recognition of deferred tax change recorded in equity in the prior period Other (1 406) Change in provisions in the cash flow statement Sale of shares in subsidiaries and associates In 2005 the Group sold shares in 8 subsidiaries and associates. The cumulative impact of the transactions amounted to: Consolidated financial statements Proceeds from sales of shares Sales price Net assets of entities sold Result Net Cash and Cash equivalents proceeds Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 160

165 24. Segment data Revenues, costs and financial result by business segments: Refining Segment for the year ended Chemical Segment for the year ended Other operations for the year ended Adjustments for the year ended Total for the year ended 31 December December December December December December December December December December 2004 Revenues Sales to external customers Transactions with other segments ( ) ( ) - - Settlement of hedging transactions Total revenues ( ) ( ) Total operating cost ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Other operating revenue Other operating expenses ( ) ( ) (96 350) (76 326) ( ) ( ) ( ) ( ) The excess of the fair value of acquired net assets over the acquisition price * ( ) Result Segment result (32 373) ( ) Unallocated revenues of the Group Unallocated excess of the fair value of acquired net assets over the acquisition price Unallocated costs of the Group ( ) ( ) Profit (loss) on the sale of all or part of shares of related parties Profit from operations Financial revenue Financial expenses ( ) ( ) Share in profit from investments accounted for under equity method 985 (309) (7 477) Gross profit Income tax expense ( ) ( ) Net profit * incl. PLN 1,249 thousand relating to ORLEN Oil Sp. z o.o. PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 161

166 Other information by business segments: Refining Segment for the year ended Chemical Segment for the year ended Other operations for the year ended Adjustments for the year ended Total for the year ended 31 December December December December December December December December December December 2004 Other information Segment assets employed * ** *** ( ) ( ) Investments in associates Unallocated assets **** Total consolidated assets Segment liabilities ( ) ( ) Unallocated liabilities Total consolidated liabilities Cost incurred to acquire segment property plant and equipment and intangible assets Unallocated cost incurred to acquire property plant and equipment and intangible assets Total cost incurred to acquire property plant and equipment and intangible assets PK N O R L E N A nnual Repor t Segment depreciation Depreciation of unallocated assets Total depreciation Non-cash expenses other than depreciation Impairment allowances Unalocated allowances Total impairment allowances Reversal of impairment allowances Unallocated reversal of unnalocated allowances Reversal of impairment allowances * including assets classified as held for sale of PLN 1,776 thousand (petrol stations). ** including assets classified as held for sale of PLN 4,006 thousand (real estate, movables and shares). *** including assets classified as held for sale of PLN 183 thousand (other). **** including assets classified as held for sale: shares in AW SA Holland II B.V. of PLN 72,469 thousand and shares in Celio a.s. of PLN 10,410 thousand. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 162

167 At the Group s assets as at 31 December 2005 and 31 December 2004 are located in Poland, Germany, Czech Republic, Switzerland, Austria and Spain, where also all capital expenditures were incurred in the years ended 31 December 2005 and 31 December Impairment allowances by business segments include items recognized in the profit and loss, i.e.: receivables allowances; inventories allowances; property, plant and equipment impairment allowances. Allowances and reversals were performed in conjunction with occurrence or extinction of indications in respect of overdue receivables, uncollectible receivables or receivables in court as well as potential impairment of property, plant and equipment. Allowances made in the Refining Segment concerned primarily impairment of petrol stations and warehouse bases. Allowances for idle assets and obsolete raw materials were recognized in other activities segment. Geographical segments The below table presents the Group s sales revenues by geographical segments for the periods ended 31 December 2005 and 31 December Revenues from sale by geographical area: Poland Germany Czech Republic Other countries Total revenues from sale by geographical area Financial instruments a) Transactions within derivatives of Parent Company for the year ended 31 December 2005 for the year ended 31 December 2005 PK N O R L E N A nnual Repor t According to Market risk management policy in PKN ORLEN SA, the reduction of the volatility of cash flows and potential losses resulting from events which could have a negative impact on the Company s result is the Company s major goal in terms of market risk management. Market risk management includes identification, measurement and definition of risk mitigation, taking into consideration fluctuation of exchange rates, interest rates and prices of goods. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 163

168 As at the end of 2005 the Company s portfolio comprised hedging instruments (concluded in 2003), hedging sales revenues of petrochemical products. As a consequence, the Company significantly reduced fluctuations of revenues from sale of the above mentioned products in The Company applies currency-interest EUR/PLN swap transactions. The principles of cash flows hedge accounting are applied to the instruments. The portion determined to be an effective hedge, recognized directly in equity, decreased by PLN 32,045 thousand in comparison to 2004 and amounted to PLN 96,840 thousand. The portion determined to be an ineffective hedge was recognized in the profit and loss of 2005 in the amount of PLN 7,894 thousand. The cash flows resulting from the settlement of the instruments in 2005 amounted to PLN 103,740 thousand. In June 2004 the Company signed a conditional agreement for purchase of shares in Unipetrol a.s. with the Czech government bodies. In conjunction with the transaction the Company decided to hedge CZK/PLN exchange rate on the futures market. Currency forward contracts were used to minimize foreign exchange rate risk resulting from the future liability corresponding with realization of the above agreement. The instruments were settled in May 2005 with a loss of PLN 153 thousand. Principles of hedge accounting were not applied to this group of transactions, In September and October 2005 the Company applied currency forward contracts to hedge the repayment of a bank loan drawn in CZK for the purposes of Unipetrol a.s. holding s entities. In October 2005 the Company hedged the currency exposure in CZK on the futures market. The exposure related to the adjustment to acquisition price of Unipetrol a.s. Currency forward contracts were used to minimize foreign exchange risk corresponding with repayment of these liabilities. Principles of hedge accounting were not applied to the forwards due to its short-term characteristics. The instruments were settled in October and November 2005 with a profit of PLN 4,143 thousand. PK N O R L E N A nnual Repor t Consolidated financial statements The Company values derivatives at fair value using financial instruments valuation models that utilize widely available data from active markets. The transactions can only be concluded with reliable partners that were authorized to participate in transactions as a result of procedures obliging in the Company and within limits granted. In accordance with the Market risk management policy in PKN ORLEN SA conclusion of transactions for speculation is unallowable. All the concluded transactions are reflected in the physical transactions and hedge risk resulting directly from relevant actual transactions or belong to the group of probable transactions. Recognition of hedging transactions: Financial assets hedging transactions derivatives Financial liabilities hedging transactions derivatives Fair value as at 31 December Increase - - purchase, creation, drawing - - valuation - - revaluation - - reclassification - - Decrease sale, release, repayment - - valuation - - revaluation reclassification - - Fair value as at 31 December Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 16 4

169 As at the end of 2005 fair value of hedging instruments decreased in comparison to the end of The change resulted from settlement of profit on transactions realized in the current period (decrease in value) and revaluation to fair value of transactions to be realized in forthcoming periods (increase in value). Characteristics of term transactions Company Type of term transaction Transaction concluded on: Period of transaction Amount of PLN required to settle term contract for the sales of EUR Interest rate for nominal amount** Exchange rate** PKN ORLEN PKN ORLEN PKN ORLEN PKN ORLEN Currency-interest swap (EUR/PLN) depreciated using the straight-line method* % 4.5 Currency-interest swap (EUR/PLN) depreciated using the straight-line method* % 4.5 Currency-interest swap (EUR/PLN) depreciated using the straight-line method* % 4.6 Currency swap (EUR/PLN) depreciated using the straight-line method* % 5.5 Payment date of interest from the amount bought forward Payment date of interest from the amount sold forward Amount of interest received by the PKN ORLEN in the year ended 31 December 2005 Amount of interest paid by the PKN ORLEN in the year ended 31 December 2005 Fair value as at 31 December 2005 Fair value as at 31 December 2004 Last working day of a month * Derivatives as at the end of the period are valued at fair value, whereas every month interest is accrued on unamortized portion of base value of the financial instrument. ** Interest rates and exchange rates rounded to one decimal. b) Transactions within derivatives of subsidiaries Chemopetrol entered into interest swap contracts to hedge against interest rate risk. Data relating to interest swaps as at 31 December 2005 are presented in below table: Company Bank Type of transaction Chemopetrol CITIBANK N.A. Interest swap Chemopetrol CITIBANK N.A. Interest swap Transaction concluded on Period of transaction Amount Base interest rate USD fix 6,70 <=> 6M USD LIBOR USD fix 6,35 <=> 6M USD LIBOR Fair value at 31 December PK N O R L E N A nnual Repor t Interest swap was divided into headge accounting part (99.224%) and available for sale part (0.776%). Chemopetrol entered into Cross Currency swap for trading purposes. Data relating to Cross Currency swap as at 31 December 2005 are presented in below table: Company Chemopetrol Bank Česká spořitelna, a.s. Type of transaction Cross Currency swap Transaction concluded on Period of transaction Amount EUR 25,6 mln <=> CZK 768 mln Base interest rate 6M EURIBOR <=> 6M PRIBOR Fair value at 31 December Consolidated financial statements Interest paid by the Group in 2005 amounted CZK 26,342, Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 165

170 c) Financial instruments by class: 31 December December Financial assets at fair value through profit and loss Financial assets held to maturity Financial assets available for sale Loans and receivables including: loans granted trade receivables Cash and cash equivalents Financial liabilities at fair value through profit and loss Trade liabilities Interest-bearing loans and borrowings The value of long-term financial assets stated at cost less impairment charges as at 31 December 2005 amounted to PLN 37,845 thousand and as at 31 December 2004 to PLN 523,033 thousand and included mainly shares and stakes not quoted in an active market. The Group presents derivative transactions with positive fair value as financial assets at fair value through profit and loss and derivative transactions with negative fair value as financial liabilities at fair value through profit and loss. The value of other financial assets available for sale stated at fair value as at 31 December 2005 includes hedging derivative instruments of PKN ORLEN. PK N O R L E N A nnual Repor t The value of short-term financial assets held to maturity as at 31 December 2005 and 31 December 2004 amounted to PLN 12,969 thousand and PLN 1,042,152 thousand, respectively and included mainly buy-sell back transactions concerning treasury bonds and bills in the Group amounting PLN 1,016,899 thousand as at 31 December d) Interest rate risk The Group s financial liabilities are held to maturity. The effective interest rate is similar to nominal interest rate (the Group does not pay commission on majority of loans received; loan margins are at relatively low level). Cash flow surpluses are deposited primarily in treasury securities i.e. State Treasury bills and/or bonds. The Group uses bank loan financing. The fluctuation of interest rates impacts both financial expenses and financial revenues. An increase in interest rates results in an increase in the Group s financial expenses, in particular interest on loans and borrowings, as well as it contributes to an increase in interest from deposited cash. e) Credit risk Consolidated financial statements The Management Board believes that no significant credit risk in respect of receivables from financial instruments or loans granted by members of the Group exists (details in note 12). Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 166

171 26. Cost by kind for the year ended 31 December 2005 for the year ended 31 December 2004 Materials and energy Cost of merchandise and materials sold External services* Payroll social security and other employee benefits Depreciation Taxes and charges Other Total Adjustments: Change in inventory and prepayments ( ) (76 091) Cost of products and services for own use ( ) ( ) Operating cost * including PLN 13,012 thousand in 2005 and PLN 19,966 thousand in 2004 of research and development cost 27. Other operating revenues and expenses Other operating income for the year ended 31 December 2005 for the year ended 31 December 2004 Profit on sale of non-financial non-current assets Provision reversal Allowances reversal* Penalties and compensations earned Other** Total * including reversal of allowances for: Receivables (1) Inventories Property, plant and equipment and intangible assets Total ) including in 2005 receivables allowance regarding sale of shares in Niezależny Operator Międzystrefowy Sp. z o.o. in the amount of PLN 111,500 thousand. PK N O R L E N A nnual Repor t ** including in 2005 the excess of share in the net consolidated assets of the Unipetrol Group over the cost of PLN 1,893,688 thousand Other operating income for the year ended 31 December 2005 for the year ended 31 December 2004 Loss on sale of non-financial non-current assets Revaluation of non-financial non-current assets Creation of provisions* Impairment allowances** Donations Nonculpable shortages in non-current assets Other Total * Described in detail in Note 33 f 33g 38 c ** including allowances for: Receivables Inventories Property, plant and equipment and intangible assets Total Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 167

172 28. Net financial income and expenses for the year ended 31 December 2005 for the year ended 31 December 2004 Interest paid ( ) ( ) Negative foreign exchange surplus ( ) (7 120) Interest received Positive foreign exchange surplus Gains on trade in shares and other securities Dividends received Unrealised discount on the acquisition of liabilities of Unipetrol Group Decrease in receivables allowances Increase in receivables allowances (28 436) ( ) Other financial expenses Total Income tax for the year ended 31 December 2005 for the year ended 31 December 2004 Current tax ( ) ( ) Deferred tax Total ( ) ( ) PK N O R L E N A nnual Repor t Consolidated financial statements The difference between reported income tax expense in the profit and loss statement and the amount calculated based on profit before tax results from the following items: The ORLEN Group does not constitute a tax group under Polish regulations. The Group contains the Basell Orlen Polyolefins Sp. z o.o capital group which is also a tax capital group comprising Basell Orlen Polyolefins Sp. z o.o. and Basell Orlen Polyolefins Sprzedaż Sp. z o.o. for the year ended 31 December 2005 As the companies in the Group are separate taxpayers, the deferred tax assets and liabilities in the individual companies must be evaluated on a standalone basis. As a result, the consolidated balance sheet presents deferred tax assets of PLN 62,131 thousand as at 31 December 2005 and PLN 19,673 thousand, as at 31 December 2004 and deferred tax liabilities of PLN 1,020,159 thousand as at 31 December 2005 and PLN 458,512 thousand as at 31 December for the year ended 31 December 2004 Profit before tax Corporate income tax for 2005 and 2004 by the valid tax rate (19% in Poland) ( ) ( ) Difference between Polish and German (40%) tax rates Difference between Polish and Czech (26%) tax rates (41 551) - The impact of taxation on permanent and temporary diffrences, incl. Taxation on the excess of the fair value of acquired net assets over cost Business risk provision Valuation of financial instruments (5 037) The excess of tax depreciation (34 316) (13 051) Subventions granted Impairment of property, plant and equipment - (12 422) Valuation of entities accounted under the equity method (39 759) (34 412) Other (54 613) Corporate income tax ( ) ( ) Effective tax rate 13% 19% Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 168

173 The net deferred tax liability as at 31 December 2005 and 31 December 2004 comprised the following: 31 December December 2004 Deferred tax assets Land reclamation provision Other receivables allowances Retirement benefits and jubilee bonuses Expenses for loyalty programme prizes Deferred tax on impairment of non-current assets Impairment of long-term investments (19 419) (27 443) Provision for long-term financial assets Impairment of property, plant and equipment and intangible assets Deferred tax on other provisions Other Total deferred tax assets Deferred tax provision Investment relief* Difference between carrying amount and tax base of property, plant and equipment Unrealised positive foreign exchange differences Difference in contribution in kind to Basell Orlen Polyolefins Sp. z o.o Impairment of property, plant and equipment and intangible assets Other Total deferred tax provision Deferred tax provision, net * According to the Polish tax regulations, taxpayers were entitled to deduct qualified investment expenditures in a given tax year from taxable income (investment relief). In addition, taxable income could have been further reduced in the following year by 50% of the previous year s deduction (investment premium). This is described in detail in Note 33 b. Unipetrol Group companies were granted tax relief in the period in the amount of PLN 282 million, including PLN 51 million that is planned to be utilized until As at the date of preparation of the consolidated financial statements, the amount of utilized investment relief used totaled PLN 66 million. 30. Leases a) The Group as a lessee operating lease Lease agreements and other agreements of an operating nature relate mainly to the lease of tanks, gas facility, buildings, cars, tractors, semitrailers, vehicle tanks, forklifts and computer equipment. The minimum lease payments recognized as costs of 2005 amounted to PLN 30,233 thousand and PLN 4,213 thousand in PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 169

174 Future minimum lease payments under non-cancellable operating lease agreements as at 31 December 2005 and 31 December 2004 were as follows: 31 December December 2004 Up to 1 year Between 1 and 5 years Above 5 years - - Total minimum lease payments * * including in 2005 operating lease of Unipetrol Group of PLN 258,925 thousand finance lease Finance lease agreements relate mainly to the lease of cars, computer equipment, vehicle tanks, wagons, buildings, tractors, semitrailers and forklifts. The minimum lease payments recognized as costs in 2005* amounted to PLN 17,950 thousand and PLN 7,512 thousand in Future minimum lease payments under non-cancellable finance lease agreements as at 31 December 2005 and 31 December 2004 were as follows: 31 December December 2004 Up to 1 year Between 1 and 5 years Above 5 years Total minimum lease payments * PK N O R L E N A nnual Repor t * including in 2005 finance lease of Unipetrol Group of PLN 101,318 thousand b) The Group as a lessor operating lease Operating lease agreements relate to the lease of machinery, equipment, buildings and cars. The minimum lease payments amounted to PLN 16,683 thousand in 2005 and PLN 21,084 thousand in Gross investment in leases due as at 31 December 2005 and 31 December 2004 for future periods were as follows: 31 December December 2004 Up to 1 year Between 1 and 5 years Above 5 years Total gross lease investments in leases * Consolidated financial statements * including in 2005 operating lease of Unipetrol Group of PLN 34,053 thousand Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 170

175 The lease agreements were concluded for an indefinite period hence there is no possibility to define future minimum lease payments. finance leases Finance lease agreements relate to the lease of distributors and steering devices owned by the Parent Company. The agreements were concluded for a definite period. The lease term is for the major part of the economic life of the asset. After expiration of a lease agreement a lessee can purchase the object of the lease on mutually agreed conditions. Gross investments in the lease due as at 31 December 2005 and 31 December 2004 for future periods were as follows: Unearned finance income as at 31 December 2005 amounted to PLN 109 thousand and as at 31 December 2004 to PLN 522 thousand. 31 December December 2004 Up to 1 year Between 1 and 5 years Above 5 years - - Total gross lease investments in the leases As at 31 December 2005 and 31 December 2004 the Group companies did not record contingent rents recognized in the profit and loss and allowances for bad debts concerning minimum lease payments. There were also no unguaranteed residual values accruing to the benefit of the Group. 31. Commitments resulting from investment expenditures Investment expenditures in 2005 accounted for PLN 2,183,066 thousand, including PLN 223,984 thousand of environmental protection related investments. Planned investment expenditure in the Group for the period of 12 months from the balance sheet date amounts to PLN 1,910,482 thousand, including PLN 169,199 thousand of environmental protection related investments. As at 31 December 2005 future liabilities resulting from signed contracts amounted to PLN 373,581 thousand. 32. Related par t y transac tions a) Transactions with members of the Management Board, Supervisory Board, their spouses, siblings, descendants and ascendants and their other relatives PK N O R L E N A nnual Repor t In 2005 and 2004 Group companies did not grant any advances, loans, guarantees and commitments, or other agreements obliging the Management Board, Supervisory Board and their relatives, to render services to the Company and related parties. As at 31 December 2005 and 31 December 2004 Group companies did not grant any loans to managing and supervising persons and their relatives. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 171

176 In the years ended 31 December 2005 and 31 December 2004 there were no significant transactions concluded with members of the Management Board, Supervisory Board, their spouses, siblings, descendants, ascendants or other relatives. b) Transactions with related parties concluded through the supervising persons In 2005 the Company obtained statements on transactions with related parties extended in scope in regard of the amended IAS 24 Related Party Disclosures. Sale Purchase Receivables Liabilities Dividend paid Legal persons* Natural persons** * Transactions in the period of performing duties as supervising persons in the Company. ** In the period covered by the financial statements the recorded transactions comprised of those below EUR 500 thousand. In the period presented in the financial statements 13 persons served as members of the Supervisory Board. c) Transactions with related parties concluded through the managing persons of the Company In 2005 members of the Company s key executive personnel did not conclude any significant transactions with related parties in regard of IAS 24 Related Party Disclosures. d) Transactions with related parties, not consolidated by the full method, were concluded at market rates and are presented below: Companies consolidated by the equity method PK N O R L E N A nnual Repor t Sale Purchase Short term receivables 31 December December Gross short term liabilities 31 December December The above transactions with related parties relate to the sale and purchase of petrochemicals, and purchase of repair, transport and other services. Prices are similar to market conditions. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 172

177 33. Contingent liabilities and risk s a) Guarantees and other contingent liabilities The Group granted the following guarantees and sureties: 31 December 2005 Expiration of liability Guarantees and sureties granted to: other entities, including: performance Bond till customs guarantee till guarantee related to the change in chlorine production technology investment till bid guarantee till guarantee for customers liabilities related to the Paylink Card Agreement till other (customs guarantees, debt repayment guarantee, lottery guarantee, rent contract payment guarantee) till non consolidated related entities, including: performance bond till Total guarantees and sureties: Other contingent liabilities: excise tax guarantees, including collateral submitted on behalf of third parties in respect of movements of harmonized excise goods under the excise tax suspension procedure and excise tax liability on goods kept in warehouses under the excise tax suspension procedure statement of voluntary submission for execution Receivables endorsement blank bills legal casus letters of credit collateral for factoring with recourse Other Total other contingent liabilities: Guaranties and sureties granted Other contingent liabilities: Total contingent liabilities: b) Investment relief PK N O R L E N A nnual Repor t In accordance with the tax regulations, in force in previous years, Group companies reduced the taxable income for the purposes of corporate income tax under the following titles: investment expenditures incurred in a given tax year (investment relief), 50% of the previous year s investment relief (investment premium). During the period Group companies reduced taxable income by investment relief and investment premium in the following amounts: Year of deduction Investment relief Investment premium Total Consolidated financial statements Despite the fact that the investment reliefs and investment premiums are of a contingent nature, the Group does not identify a risk that its right to the deductions might be denied by the tax authorities. The Group companies do not also identify a risk of losing the right to reliefs and premiums due to breach of conditions which in effect oblige the return of the amounts deducted. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 173

178 c) Excise tax contingent liability of Rafineria Trzebinia SA On 15 October 2004, the Head of the Customs Office in Kraków instituted tax proceedings in order to determine the excise tax liability at Rafineria Trzebinia SA for May, June, July and August As a result of the proceedings, on 5 April 2005 Rafineria Trzebinia SA received decisions from the Head of the Customs Office in Kraków, where the total excise tax liability was set for the period of May-August 2004 at about PLN 60 million. According to the Management Board of Rafineria Trzebinia SA, the company possesses all necessary expert opinions confirming the correctness of the applied classification of goods taxed at a 0% rate. On 12 April 2005, the Management Board of Rafineria Trzebinia SA filed an appeal against the discussed decisions and a motion to suspend execution of the decision until the date of settling the matter in the court of second instance. On 5 May 2005, in reply to its motion to suspend execution of a decision until the date of the matter, Rafineria Trzebinia SA received a decision from the Head of the Customs Office in Kraków suspending execution of the above decision. On 9 June 2005 the Director of the Customs Chamber in Kraków, having examined the Company s appeal of 12 April 2005 against the decision of the Head of the Customs Office in Kraków of 31 March 2005, quashed the decision of the first instance authority and submitted it for further examination. On 28 July 2005 the Head of the Customs Office, upon receipt of the Customs Chamber decision, and without providing any further evidence in the case determined an excise tax liability for May-September 2004 at total amount of about PLN 100 million. The above decisions were issued without any references to claims presented in the appeal of 12 April The Management Board of Rafineria Trzebinia SA still claims that it possesses all necessary legal opinions confirming the correctness of the applied classification of goods taxable at a 0% rate, which according to the Management Board guarantees a positive outcome for the proceedings. PK N O R L E N A nnual Repor t Consolidated financial statements On 9 August 2005 the Management Board of Rafineria Trzebinia SA appealed against the above decisions and filed a motion to suspend execution of the decisions until the case could be decided by the second instance authority. On 11 August 2005, the Head of the Customs Office in Kraków, having examined the appeal of Rafineria Trzebinia SA of 8 August 2005, suspended the decision in respect of setting the excise tax liability for the period of May-August 2004 at about PLN 100 million. On 14 November 2005 the Head of the Customs Office in Krakow had refused to accept evidence from the hearings of witnesses using the argument that it does not constitute any significant circumstances in respect of the case. In addition, the Customs Office declined to accept corrections to excise tax declarations submitted by the company for the period May-September 2004, resulting from the change in excise tax rate for technological oils from 60 PLN/Mg to 0%. The Office declined acceptance based on the fact that there were proceedings in progress in respect of the case. On 30 December 2005 the Head of the Customs Office in Krakow issued a decision keeping the first instance authority s decision in force. Rafineria Trzebinia SA prepared a complaint to the Woivodship Administrative Court against the decision of the Head of the Customs Office in Krakow together with a motion to suspend execution of the decision. The complaint and a motion to suspend execution of the decision was submitted to the Woivodship Administrative Court in Kraków on 3 February Currently, apart from the aforementioned proceedings initiated by the Customs Office in Kraków, acting under the authorization from the General Tax Control Inspector of 18 January 2005, the Tax Control Office in Kraków is conducting control proceedings with respect to the reliability of the stated tax bases and correctness of calculation and settlement of excise tax and value added tax for 2002 and The deadline for completion of control proceedings is 30 June As at the date of preparation of these financial statements, the final outcome of the above control proceedings or potential impact of control extended to other periods is not yet known. On 25 November 2004, the Supervisory Board of Rafineria Trzebinia SA adopted a resolution on performing a tax audit for the period from 2000 to 2004, including a review of correctness of procedures and correctness of tax settlements to be summarized in Report on agreed upon procedures concerning review of control procedures at Rafineria Trzebinia SA. The tax audit was completed and its results were presented to the Supervisory Board. On 22 April 2005, having received the report from the first phase of the audit of procedures, the Supervisory Board of Rafineria Trzebinia SA has recommended carrying out the second, more detailed phase of the Report on agreed upon procedures, encompassing the analysis of transactions in selected areas of the company s activity. The Supervisory Board has been acquainted with the results of the second phase of the audit and issued appropriate recommendations regarding the assessment of internal control to the Management Board. As at the date of preparation of these financial statements the Management Board of Rafineria Trzebinia SA has taken legal action against the individuals responsible for the irregularities stated in the report. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 174

179 d) Power transfer fee in settlements with Zakład Energetyczny Płock SA According to paragraph 36 of the Decree of the Ministry of Economy dated 14 December 2000 relating to detailed methods of determination and computation of tariffs and electricity settlement regulations (Official Journal No. 1 dated 15 January 2001), the method of settlement of system fee, constituting an element of a power transfer fee was changed. According to paragraph 37 of the Decree a different method of system fee calculation has been allowed. Following the decision of the Chairman of the Energy Regulatory Office, the electricity sale agreement between Zakład Energetyczny Płock SA ( ZEP SA ) and PKN ORLEN was signed. The agreement did not determine contentious issues concerning system fees for the period from 5 July 2001 to 30 June 2002, as it was regarded as a civil case to be settled by an appropriate court. ZEP SA called on PKN ORLEN to a compromise agreement, while the District Court in Warsaw summoned PKN ORLEN as a co-defendant in a court case Polskie Sieci Energetyczne against ZEP SA. The Company s Management Board estimated the claim and in 2002 set up an accrual in the amount of PLN 8,272 thousand for liability to ZEP SA, and created a provision for that purpose in the amount of PLN 9,781 thousand. As a consequence of the court decision PKN ORLEN was obliged to pay a liability connected with the system fee to ZEP SA in the amount of PLN 46,232 thousand. In relation to that in 2004 the provision for the business risk was increased by PLN 28,179 thousand to cover the whole claim. The proceedings were suspended by the ruling of the District Court in Warsaw of 2 June 2005 until the case of PSE SA against ZEP SA, where PKN ORLEN SA is an outside intervener, is decided. On 3 August 2005 a complaint was filed against the above decision of stay of proceedings. On 12 December 2005 the Court of Appeal in Warsaw, I Civil Department, dismissed the complaint regarding the decision of stay of proceedings. In conjunction with the fact that the above described proceedings have not yet been ended, in 4 quarter 2005 PKN Orlen increased the provision for potential interest on the principal amount by PLN 8,900 thousand. e) Anti-trust proceedings As at the date of the preparation of this report, the Company is a party in two anti-trust proceedings. Upon to the decision of the Chairman of the Office of Competition and Consumer Protection ( OCCP ) from 21 March 2005, an anti-trust proceeding was started in connection with an allegation that Polski Koncern Naftowy ORLEN SA in Płock concluded an agreement with the Grupa Lotos SA in Gdańsk which limited competition on the domestic sale market of universal petrol U95 through an unanimous decision to give up production and distribution of U95 and thus eliminating competition on the domestic U95 sale market as well as excluding the risk of market take-over by the competitor. Relating to the received letter PKN ORLEN SA released a statement on put charges and gave answers to questions set by the Chairman of OCCP. The proceedings to take evidence are pending. They have been prolonged due to motions filed by PKN ORLEN SA in order to limit access rights to evidence and due to relative decisions that were issued in this respect by the Chairman of OCCP and which were sued at the Consumer and Competition Court by the Lotos Group SA On 22 February 2006 the proxy of PKN ORLEN SA filed complaint against the decision of Chairman of OCCP refusing taking into account one of the PKN ORLEN s motions concerning limitation of access rights to evidence by Lotos Group SA. On 14 April 2006 OCCP informed the Company of the prolongation of the anti-trust proceedings until 31 May By virtue of the actual course of the proceedings, limited to court verification of decisions issued by the Chairman of OCCP, it is difficult to assess the risk that PKN ORLEN SA may be fined. However, in the light of lack of evidence that would indicate concluding of prohibited agreement, the Company assesses the risk of penalty as low. On 21 March 2005, the Company received a letter in which the Chairman of OCCP requested information on monoethylene glycol and radiator liquid market in the years The letter concerns the proceedings in the area of setting prices for antifreeze Petrygo liquid for radiators and prices for monoethylene glycols. In these proceedings OCCP issued a decision of 19 July 2000 imposing a penalty in the amount of PLN 40 million. The Company appealed to the Anti-Trust Court against the negative decision of OCCP. On 13 August 2001 the Anti-Trust Court annulled fully the decision of OCCP, which accused PKN ORLEN SA of applying monopolistic practice, at the same time annulling the cash penalty. Consequently, in 2001 due to this fact the provision was fully reversed in PKN ORLEN. OCCP applied on 4 October 2001 to annul the verdict. On 10 July 2003 the Supreme Court annulled the verdict of the District Court dated 13 August The case was conducted again by the District Court in Warsaw and the Consumer and Competition Court (former Anti-Trust Court), which at the hearing on 21 July 2004 pronounced the judgment again revoking the appealed decision of OCCP. PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 175

180 Due to the received letter, PKN ORLEN SA answered the questions of OCCP on 11 April Simultaneously OCCP approved prolongation of the period for responding to queries up to 6 May 2005 concerning determining the proper geographical market of monoethylene glycol. A response defining the adequate geographical market of monoethylene glycol was sent to OCCP on 6 May Upon the OCCP s request, additional information was provided on 18 May 2005 and 7 December On 14 March 2006 OCCP informed the Company of the prolongation of the anti-trust proceedings until 30 April 2006 due to the necessary completion of evidence from proceedings. The proceedings to take evidence are still pending. They were prolonged due to motions filed by PKN ORLEN SA and the petitioner in order to limit access rights to evidence and due to respective decisions issued in this respect by the Chairman of OCCP and which may be sued at the Consumer and Competition Court. By virtue of the actual course of the proceedings it is difficult to assess the risk that PKN ORLEN SA may again be fined. However, in the light of time passed and significant changes in PKN ORLEN s market environment, the risk of penalty was assessed by the Company as low. In both proceedings PKN ORLEN SA is represented by the legal office Kancelaria Adwokacka Prawa i Konkurencji based on the power of attorney granted by the Company s Management Board. The financial statements do not include provisions related to the above proceedings as, in the view of the PKN ORLEN SA Management Board, supported by an independent legal opinion, the risk that the Company will be charged with a fine is remote. f) Compensation program for employees PK N O R L E N A nnual Repor t Consolidated financial statements On 14 June 2005, in connection with the Parent Company s announcement of Regional Organizational Units Restructuring Program, Regulations for Group Redundancy in Regional Organizational Units of Parent Company has been issued. All employees, who are employed in areas mentioned in the Regulations and declare to dissolve the employment agreement by mutual consent or will be dismissed due to reasons independent from employees, are subject to the Regulations. In the period the Regulations are in force, employees are entitled to a single money consideration due to dissolution of the employment agreement by mutual consent due to reasons independent from employees. The money consideration is equal to 12 monthly remunerations or the amount of PLN 50 thousand increased by PLN 4 thousand for every started year of service with an employer operating in PKN ORLEN SA or its legal predecessors. The above described money consideration includes money considerations granted to employees in accordance with obligatory law regulations, in particular in accordance with Particular principles of dissolution of employment agreement due to reasons independent from employees act of 13 March 2003 (Official Journal no. 90 item 844 with later amendments) and other considerations for the benefit of employees in accordance with other internal regulations and agreements in force. In addition, in order to facilitate the getting of other employment or the starting of economic activity, the employee is entitled to participate in a selected training organized by PKN ORLEN SA which will be financed or partially financed by the employer up to PLN 2 thousand. g) Shield programs To support the restructuring process conducted in the Parent Company the Voluntary Leave Programme (VLP) was launched in the Company. VLP provides additional money considerations for employees with whom the employment agreement was or would be dissolved by mutual consent due to reasons independent from employees by virtue of the restructuring process. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 176

181 Due to the above, the Parent Company created a provision in the amount of PLN 236,000 thousand, including: for realization of Employment Restructuring Program in the period the amount of PLN 167,000 thousand, for realization of Employment Restructuring Program in 2007 the amount of PLN 69,000 thousand The above provision was created in accordance with the Management Board s Resolution No 2537/05 of 22 December h) Claims and court proceedings Tankpol Sp. z o.o. In accordance with an agreement of 20 December 2002, Tankpol Sp. z o.o. ( Tankpol ) transferred to PKN ORLEN ownership of 40% shares in ORLEN PetroTank Sp. z o.o. ( Petrotank ) in exchange for receivables due from Tankpol. In a law suit dated 11 August 2003 Tankpol demanded obligation of PKN ORLEN to transfer ownership of 324 shares in Petrotank and compensation of PLN 198 thousand. The demand was modified several times. Finally, in a note dated 22 January 2004, Tankpol modified its suit demanding compensation of PLN thousand with interest from the date of the law suit until the payment date. In case of PKN ORLEN s refusal to compensate, Tankpol demanded that the court obliged PKN ORLEN to transfer ownership of 253 shares in Petrotank to Tankpol. On 22 March 2005 the District Court in Warsaw dismissed Tankpol s suit and adjudged PKN ORLEN with a compensation of relevant costs. On 4 May 2005 Tankpol appealed against the verdict, on 27 June 2005 PKN ORLEN submitted its response to the appeal. The Court of Appeals in Warsaw declared that the Tankpol s appeal will be recognized on 21 March The Court of Appeals postponed pronouncing the judgment till 31 March On 31 March 2006 the Court of Appeals changed the verdict of the District Court in Warsaw (which dismissed Tankpol s suit as a whole). The Court of Appeals declared that PKN ORLEN is obliged to transfer ownership of 26 shares in Petrotank. According to verbal justification of the verdict, the Court of Appeals is convinced that PKN ORLEN has appropriately executed the transfer of ownership agreement of 20 December The verdict of the Court of Appeals is legally binding and feasible, however both parties are entitled to submit an annulment to the Supreme Court. i) Polish tax regulations Taxes in Poland are imposed both by the central government and by local authorities (to a smaller extent). The notion of a tax has been defined in the Tax Order Act, as a civic-public, free of charge, compulsory, non-returnable money consideration for the benefit of the State Treasury, voivodship, or district, resulting from an act on taxation. PK N O R L E N A nnual Repor t The current taxation system in Poland comprises eleven tax titles, covered by specific material tax law: common income tax, tax on goods and services (value added tax, VAT), excise tax, real estate tax, tax on means of transportation and civil law activity tax (e.g. sale of shares or real estates). Beside corporate income tax stated at 19% rate in 2005, the majority of companies conducting business activity are taxpayers of value added tax (VAT). The basic VAT rate amounts to 22%, reduced rates are 7%, 3% and 0%, whereas some goods and services are exempt from VAT. Business activity involves also excise tax. Excise goods are precisely defined in the act. These goods comprise e.g. engine fuels, heating oil, natural gas, alcoholic beverages, tobacco products and electricity. By virtue of PKN ORLEN s business activity, excise tax is a significant economic cost for the Parent and group companies. Activities under excise tax include: production of harmonized excise tax goods, release of harmonized excise tax goods from a tax consignment warehouse, sale of excise tax goods on Polish territory, export and import of excise tax goods, intra Community supply and intra Community acquisition of goods, acquisition and possession of excise tax goods with an excise tax unsettled in the proper amount, which does not indicate excise tax to be a multiphase tax. Excise tax rates are described as: percentage of tax base, amount per unit of excise tax goods and percentage of maximum retail price. In practice, tax rates described in decrees issued by the Minister of Finance are applied, whereas maximum tax rates were defined in the excise tax act. Consolidated financial statements In the common view of entrepreneurs, Poland qualifies as a country with an exceptionally high level of tax risk. The tax law is often amended, which results in lack of clarity as well as inconsistencies. In addition, frequent discrepancies in tax law interpretations provided within tax authorities and administrative judiciary are observed. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 177

182 The tax system in Poland is judged as unstable, with highly formalized tax regulations combined with rigorous laws in respect of sanctions. Tax settlements and other regulated areas of activity (e.g. customs or currency exchange control) might be subject to control from the relevant authorities, entitled to impose severe penalties and sanctions with interest. Tax settlements may be subject to a tax control over five years since the end of the calendar year when the tax liability reaches its maturity. Considering the above described rationale the activities of PKN ORLEN and other entities of the group that conduct business activity in Poland, may be subject to a tax risk. j) German tax regulations The German tax system is similar to the Polish one, where beside direct income tax (corporate income tax), there are also indirect taxes such as value added tax and excise tax. The German tax system is more stable, where the tax risks connected with business activity are mitigated by the taxpayer s entitlements. Taxes in Germany may be imposed by state, federal and local authorities. Business activity is connected with the obligation to pay corporate income tax, personal income tax, social security charges, value added tax, excise tax, capital gains tax and real estate tax. The calendar year is a fiscal year for the purpose of personal income tax. Tax rates are up to 42%. Employers are obliged also to pay social security, health insurance and unemployment fund. Charges are cofinanced by an employer and an employee. Due to the level of charges, employment costs are very high in Germany. For the purposes of corporate income tax, companies domiciled in Germany or having the factual management headquarter in Germany are taxpayers on total income earned. Taxable income is calculated based on income on operating activity, which is increased and decreased by certain items. Corporate income tax rate amounts to 25%. PK N O R L E N A nnual Repor t Additionally, direct taxes are increased by so-called merger charges. Value added tax is applied to goods and services. Basic rate amounts to 16% and reduced 7%. The tax is based on the solutions applied in the EU. Similarly to VAT, excise tax regulations also reflect regulations applicable in the EU. This is the basis for imposing excise tax on e.g. production and import of petrol or diesel oil in Germany. Real estate tax is charged on all items of real estate (land and buildings) situated in Germany. Tax regulations in Germany, similarly to other countries, might be subject to different interpretations from taxpayers and tax authorities. Expiration period for liabilities equals maximum 7 years. Regulations in respect of utilization of accumulated tax losses from prior years, which may be deducted from future income in a limited amount, are crucial for ORLEN Deutschland AG activity in Germany. k) Czech tax regulations Consolidated financial statements Group companies, conducting their business activity in the Czech Republic, are subject to value added tax, excise tax, corporate income tax, personal income tax and social security regulations. Corporate income tax rate, including capital gains tax equals 26%. Taxpayers can select a tax year that is different from the calendar year. Tax losses can be settled during the consecutive five years. Transactions between related parties must be based on market prices tax authorities may assess the level of prices applied in intercompany transactions and impose severe fines, should the prices differ from the market level. Taxpayers may however request binding interpretation in respect of transfer pricing. Czech value added tax is based on EU standards. Supply of goods and rendering of services (including sale of rights) are subject to VAT. Taxpayers may, in most cases, deduct tax paid on purchases (input tax). Basic rate amounts to 19%, but some goods and services are subject to the reduced rate of 5%. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 178

183 Legal entities conducting business activities may also be obliged to pay real estate tax, tax on means on transportation used in business activity and excise tax. Similarly to other EU countries, petrol and diesel oils are subject to excise tax. Tax regulations are frequently interpreted in a different manner. Tax authorities can adopt different interpretations of the tax law than Group companies. Tax settlements may be subject to tax control over three years since the end of the calendar year when the taxpayer was obliged to submit the tax return. Should the tax authorities initiate control before the end of the three year period, the expiration period is prolonged for the next three years. The maximum period of expiration may not exceed 10 years from the end of a given settlement period. For breaching of tax law leading to tax arrears, severe fines may be imposed, including even a possibility of suspension of business activity. Fines are also imposed when tax returns are submitted with a delay. Due to the above stated reasons business activity of Czech companies is subject to tax risk. l) Disposal of shares in NOM Sp. z o.o. On 20 May 2003, the Management Board of the Company submitted a put option execution declaration for all Niezależny Operator Miedzystrefowy Sp. z o.o. ( NOM ) shares owned by PKN ORLEN SA to Polskie Sieci Energetyczne SA ( PSE ). The put price amounted to PLN 111,500 thousand and was calculated as the sum of nominal value of the shares sold and a cumulative investment premium calculated according to the Agreement dated 8 June 2000 regulating the cooperation between NOM shareholders. On 20 October 2003, PSE filed a suit at the Court of Arbitration of the Polish Chamber of Commerce (PCC) in Warsaw, regarding the determination of the invalidity of the sale of shares agreement. On 26 April 2005 the Company received a verdict of the Court of Arbitration of the Polish Chamber of Commerce in Warsaw. The verdict of the arbitration court is unfavorable for the Company. As a consequence the estimations of the Management Board in relation to the assessment of the risk of non-collection of the above receivable were changed. The Company provided an allowance for the receivable in the amount of PLN 111,500 thousand presented in the financial statements for the year On 20 May 2005 the Company issued a complaint to the District Court in Warsaw regarding waiving of the above verdict of the Court of Arbitration together with a motion to suspend execution of the verdict. On 23 June 2005 the District Court issued a decision to dismiss the motion to suspend execution. The District Court set a trial date on 23 March On 6 April the District Court in Warsaw, 20 Commercial Department, issued a verdict in respect of the PKN ORLEN SA complaint against the verdict of the Court of Arbitration of the Polish Chamber of Commerce in Warsaw, dated 14 April 2005, in the case against PSE SA regarding sale of shares in NOM. The District Court dismissed PKN ORLEN s complaint and adjudged the return of proceeding s expenses of PLN 7,200 for the benefit of PSE. PK N O R L E N A nnual Repor t The verdict is not legally binding and may be appealed against. The attorney of PKN ORLEN in the described case has issued a motion in respect of preparation and submission of justification of the verdict. On 29 July 2005, PKN ORLEN demanded that PSE would repay within a week the contractual penalty of PLN 111,500 thousand. On 8 August 2005 PKN ORLEN received a letter from PSE where PSE stated it was not bound to settle the penalty. On 15 September 2005 PKN ORLEN filed at the Court of Arbitration of PCC in Warsaw a suit for adjudication of the contractual penalty of PLN 33,453,390. According to the declaration of the Court of Arbitration of 7 December 2005, PKN ORLEN submitted a letter with motions of evidence and the statement regarding eventual suspension of the proceedings. PKN ORLEN s attorney received an analogous letter from PSE. The Court of Arbitration did not declare the date of the next sitting. As of 31 December 2005, shares in NOM were presented in the financial statements as investments in associates in the net amount of PLN 18 million, after consideration of an impairment of shares allowance based on an independent expert s valuation. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 179

184 m) Collateral for shares of Basell ORLEN Polyolefins Sp. z o.o. ( BOP ) Under the share pledge agreement of 19 December 2003 PKN ORLEN pledged all own shares of BOP, i.e shares of nominal value of PLN 500 per each, representing 50% of the share capital of BOP and having 50% of the voting rights at the Shareholders Meeting. The pledge was for the benefit of Kredyt Bank SA, based in Warsaw, operating as a Pledge Agent. The condition for the pledge to be effective included its registration in a collateral register held by the registry court, which was completed on 23 January Collateral set by the pledge agreement of 19 December 2003 secures repayment of current and future claims by BOP, to which the Pledge Agent is entitled due to the financial collateral agreement concluded between entities financing BOP up to the highest secured amount of EUR 750 million. n) Tax audit in ORLEN Oil Sp. z o.o. On 13 December 2004, the Supervisory Board of Orlen Oil Sp. z o.o. adopted a resolution to conduct a tax audit for the period from 2000 to the present date, including the control of correctness of the Company s procedures and controls of settling tax liabilities which would be summarized in Report on agreed upon procedures concerning review of control procedures in Orlen Oil Sp. z o.o.. The Supervisory Board were acquainted with the conclusions of the audit. Both the tax audit and Report on agreed upon procedures concerning review of control procedures in Orlen Oil Sp. z o.o. did not reveal any material risks or discrepancies. o) Tax audit in Rafineria Nafty Jedlicze SA PK N O R L E N A nnual Repor t On 17 December 2004 the Supervisory Board of Rafineria Nafty Jedlicze SA adopted a resolution to conduct a tax audit for the period from 2000 to the present date, including the control of correctness of the Company s procedures and controls of settling tax liabilities which would be summarized in Report on agreed upon procedures concerning review of control procedures in Rafineria Nafty Jedlicze SA The Supervisory Board were acquainted with the conclusions of the audit. The tax audit did not disclose risks which initially estimated value would have a significant impact on the company s further operations. p) Court proceedings against Benzina a.s. ( Benzina ) As a part of a court proceeding in progress since August 2001, the Anti-Trust Bureau declared a disposition in respect of violation of the Economic Competition Protection Act. Due to the disposition, Benzina had imposed a penalty of CZK 98 million. The penalty was returned to Benzina as at 29 July Consolidated financial statements The disposition of the first instance of the Anti-Trust Bureau was annulled due to the serious legal faults mentioned in the appeal submitted by Benzina. The Management Board of Benzina believes that Regional Court will pronounce the judgment in favour of Benzina. However, taking into account the repeated dispositions of the Anti-Trust Bureau in respect of the penalty and the fact that the court has not yet announced its verdict, Benzina created a provision for the penalty in the amount of CZK 98 million. r) Other risks As it has been presented in note 18 to the consolidated financial statements, the Group reported in the balance sheet as at 31 December 2005 the balance of reclamation of land provision on the basis of independent experts analyses taking into consideration the legal and constructive obligations concerning the reclamation of contaminated land. The potential future changes in legal and constructive obligations concerning environmental protection can affect the amount of the provision in future periods. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 18 0

185 34. Compensation, together with profit-sharing paid and due to the Management Board, Super visor y Board and key executive personnel in accordance with IA S 24. The Management Board, Supervisory Board and key executive personnel remuneration includes short-term employee benefits, post-employment benefits, other long-term employee benefits and termination benefits paid, payable and potentially payable during the period. a) Remuneration of Management Board, Supervisory Board and key executive peronnel of the Parent Company in 2005 The Management Board of the Parent Company, including: compensation paid to Management Board Members performing the function as at 31 December remuneration potentially due to Management Board Member performing the function as at 31 December remuneration paid to other Management Board Members remuneration potentially due to other Management Board Members* - The Supervisory Board of the Parent Company 854 Key executive personnel of the Parent Company, including: remuneration paid remuneration due Key executive personnel of subsidiaries ** * The Supervisory Board did not assessed realization of set goals, therefore the potentially due bonus was not estimated. ** included in 2005 remuneration of Unipetrol a.s. Group 2005 Remuneration of Supervisory Board of the Parent Company Jacek Bartkiewicz 118 Raimondo Eggink 101 Maciej Gierej 101 Krzysztof Lis 8 Krzysztof Obłój 22 Małgorzata Okońska-Zaremba 101 Andrzej Olechowski 51 Piotr Osiecki 79 Adam Pawłowicz 8 Adam Sęk 51 Michał Stępniewski 88 Ireneusz Wesołowski 101 Krzysztof Żyndul 25 Total 854 Remuneration paid to Management Board Members of the Parent Company performing the function as at 31 December 2005 Insurance policies * Potentially due, not paid remuneration to Management Board Members of the Parent Company is due to the new bonus policy - Management by Objectives (MBO) in force from 1 January Bonus was calculated based on preliminary appraisal of the Management Board of Parent Company performed by the Supervisory Board Potentially due* Igor Chalupec Wojciech Heydel Jan Maciejewicz Cezary Smorszczewski Paweł Szymański Dariusz Witkowski Salary Bonus PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 181

186 Remuneration paid to other Management Board Members of the Parent Company Salaries Bonus Insurance Policies Post-employment compensation / prohibition from competition Sławomir Golonka Krzysztof Kluzek Andrzej Macenowicz* Andrzej Modrzejewski Jacek Strzelecki Janusz Wiśniewski* * The Supervisory Board did not perform an appraisal of realization of set goals, therefore potentially due bonus was not assessed In 2005 the new incentive system for key executive personnel of ORLEN SA and Capital Group was introduced Management by Objectives (MBO). The new incentive system concerns the Management Board and key executive personnel. Individuals participating in the MBO are rewarded for individual goal realization and solidarity goals (SVA), set at the beginning of the period. The Supervisory Board sets goal for each Management Board Member. Set goals are of a qualitative and quantitative nature and are assessed on the basis of Bonus Policy, after the end of the year to which they relate. Compensation paid to Management Board and Supervisory Board Members of the Parent Company for acting as a Supervisory Board Members of subsidiaries, jointly-controlled companies and associates Management Board Members of PKN ORLEN SA, acting in 2005 as Management Board Members or Supervisory Board Members of subsidiaries, jointly controlled companies or associates of the ORLEN Group did not receive compensation in that virtue, excluding Unipetrol a.s., where compensation paid is transferred to the ORLEN Dar Serca foundation. PK N O R L E N A nnual Repor t Supervisory Board Members did not act as Management Board or Supervisory Board Members of subsidiaries, jointly controlled companies or associates of PKN ORLEN in The remuneration Management Board of the Parent Company include in 2005 an estimate of potential bonus for Board Members, not included in costs of 2005 and compensation (including annual bonuses) paid to 5 former Board Members that amounted to PLN 12,802 thousand, including PLN 5,362 thousand of post-employment compensations (money consideration for serving as a Board Member due after termination/expiration of a contract, as specified in those contracts, among others due to prohibition from competition). Part of compensation paid to former Board Members in 2005 amounting to PLN 10,500 thousand was included in prior year s costs. The Management Board s remuneration for 12 months of 2004 includes questionable part of compensation as at 31 December 2004 amounting to PLN 9,252 thousand. During 12 months of 2005, 40 persons, taking into consideration changes during the year, served as key executive personnel (additionally 7 members of key executive personnel engaged in 2004 were included in 2005 year s remuneration) and 36 in 2004, respectively. Consolidated financial statements b) Remuneration of Management Board, Supervisory Board and key executive personnel of the Parent Company in 2004 The Supervisory Board of the Parent Company 882 The Management Board of the Parent Company, including: compensation paid to Management Board Members performing the function as at 31 December compensation paid to other Board Members Key executive personnel of the Parent Company Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 182

187 Remuneration of Supervisory Board of Parent Company Jacek Bartkiewicz 67 Marian Czekański 17 Raimondo Eggink 40 Maciej Gierej 74 Edward Grzywa 27 Krzysztof Kluzek 31 Andrzej Kratiuk 27 Maciej Andrzej Kruk 2 Krzysztof Lis 40 Ryszard Ławniczak 59 Grzegorz Mroczkowski 8 Orest Andrzej Nazaruk 27 Małgorzata Okońska-Zaremba 40 Piotr Osiecki 40 Michał Stępniewski 51 Andrzej Studziński 32 Krzysztof Szlubowski 59 Jan Waga 67 Jacek Walczykowski 30 Ireneusz Wesołowski 40 Andrzej Wieczorkiewicz 32 Janusz Zieliński 32 Krzysztof Żyndul 40 Total Remuneration paid to Management Board Members of Parent Company performing the function as at 31 December 2004 Salaries Salaries Bonus Bonus Other contributions Other contributions Post-employment compensation / prohibition from competition Insurance policies Igor Chalupec Wojciech Heydel Andrzej Macenowicz Jan Maciejewicz Cezary Smorszczewski Paweł Szymański Janusz Wiśniewski Remuneration paid to other Management Board Members of the Parent Company Insurance Policie Sławomir Golonka 845 2, Krzysztof Kluzek Jacek Strzelecki Jacek Walczykowski* Zbigniew Wróbel* * The remuneration includes questionable amount of PLN 9,252 thousand. Compensation paid to Management Board and Supervisory Board Members of the Parent Company acting as Supervisory Board or Management Board Members of subsidiaries, jointly-controlled companies or associates Compensation in subsidiaries Post-employment compensation / prohibition from competition Sławomir Golonka 98 Jacek Strzelecki 63 Andrzej Macenowicz 79 Janusz Wiśniewski 159 Total PK N O R L E N A nnual Repor t Consolidated financial statements Compensation in jointly controlls companies Andrzej Macenowicz 42 Total Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 183

188 35. Auditors remuneration due or paid, resulting from audit and review of financial statements In the period covered in these financial statements change of an auditor took place in the Parent Company. Remuneration presented in 2004 relates to the agreement dated 10 July 2003 concluded between the Parent Company and Ernst & Young Audit Sp. z o.o. for audit and review of interim stand-alone and consolidated financial statements for the period On 18 January 2005 agreement with Ernst & Young Sp. z o.o. was concluded for review of stand-alone and consolidated financial statements for the first quarter of Beginning from second quarter of 2005 interim reviews and audit of stand-alone and consolidated financial statements are performed by KPMG Audit Sp. z o.o. according to the agreement dated 30 May 2005 for the period for the year ended 31 December 2005 for the year ended 31 December 2004 Audit fees of Ernst & Young Audit Sp. z o.o.* Fees for audit related services of Ernst & Young Audit Sp. z o.o.** Audit fees of KPMG Audyt Sp. z o.o.* Fees for audit related services of KPMG Audyt Sp. z o.o.** Audit fees of auditors of subsidiaries Fees for audit related services of auditors of subsidiaries Total * Audit fees include amounts paid to an auditor for professional services related to an audit of the stand-alone and consolidated financial statements of the Parent Company and quarterly and half-year reviews of the consolidated financial statements. ** Fees for audit related services include other amounts paid to an auditor that include services performed in connection with audit or review of financial statements, but not disclosed under Audit fees position. In 2005 the procedure for additional orders for an auditor and auditor s related parties was set up in the Parent Company. The Audit Committee of the Supervisory Board makes decisions about ordering additional services from an Auditor. PK N O R L E N A nnual Repor t Employment struc ture Average employment by groups was as follows: for the year ended 31 December 2005 for the year ended 31 December 2004 Blue collar workers White collar workers Total In 2005 average employment of ORLEN Group includes average employment of Unipetrol Group. Consolidated financial statements Employment level as of 31 December 2005 and 31 December 2004 amounted to 20,805 and 14,296 persons, respectively. 37. Events af ter the balance sheet date Changes in the Supervisory Board of PKN ORLEN SA The Management Board of PKN ORLEN announced in its regulatory announcement no 10/2006 that the Extraordinary General Meeting of 31 January 2006 dismissed Mr. Jacek Bartkiewicz from the position of the Chairman of the Supervisory Board and from the Supervisory Board. Extraordinary General Meeting of PKN ORLEN has also dismissed the following members of the Supervisory Board: Mr. Maciej Gierej, Prof. Krzysztof Obłój, Mrs. Małgorzata Okońska-Zareba, Mr. Adam Sęk, Mr. Ireneusz Wesołowski. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 18 4

189 At the same time the Extraordinary General Meeting appointed to the Supervisory Board of PKN ORLEN SA: Mr. Dariusz Dąbski as the Chairman of the Supervisory Board, Mr. Maciej Mataczyński as an independent Member, and Mr. Zbigniew Macioszek and Mr. Wojciech Pawlak as Members of the Supervisory Board. As at 31 December 2005 the Supervisory Board of PKN Orlen included two independent members: Mr. Ireneusz Wesołowski and Mr. Andrzej Olechowski, while as at 27 February 2006 The Supervisory Board of PKN ORLEN included three independent members: Mr. Raimondo Eggink, Mr. Andrzej Olechowski and Mr. Maciej Mataczyński. The Management Board of PKN ORLEN announced in its regulatory announcement no 20/2006 that on 28 March 2006 it received a note informing that the Minister of the State Treasury had dismissed Mr. Adam Maciej Pawłowicz, performing the role of the State Treasury s representative on the PKN ORLEN Supervisory Board, from the position of PKN ORLEN Supervisory Board Member. The reason for the dismissal was the resignation of Mr. Pawłowicz from the position of PKN ORLEN Supervisory Board Member. Changes in the Management Board of PKN ORLEN SA The Management Board of PKN ORLEN announced in its regulatory announcement no 21/2006 that the Supervisory Board, at its meeting of 31 March 2006 has dismissed Mr. Dariusz Witkowski from the position of the Management Board Member of PKN ORLEN SA, effective 31 March Simultaneously, the Supervisory Board has appointed Mr. Krzysztof Szwedowski to the position of the Management Board Member with the effect from 31 March Mr. Krzysztof Szwedowski, born in 1965, graduated from the Nicolaus Copernicus University in Toruń, Master in Law, advocate, completed public prosecutor application in 1992 and controller application in Bid for purchase of shares in Mažeikių Nafta As a consequence of participation in the public tender, on 27 January 2006 PKN ORLEN made a bid for the purchase of % shares in Mažeikių Nafta (MN) offered by Yukos International UK B.V. The bid included also a declaration to purchase, on the same terms, MN s shares owned by the Lithuanian government. The bid was conditional and dependent upon fulfillment of several legal conditions, including formal and technical status of logistics assets of Mažeikių Nafta. Due to the change in the legal status of Yukos Oil Corporation and in effect of conducted negotiations, on 13 April 2006 PKN ORLEN SA submitted a complex offer to purchase % share in AB Mažeikių Nafta from the Lithuanian government. In addition, should the Lithuanian government buy the % share currently owned by Yukos International UK B.V., PKN OR- LEN has offered to purchase these shares from the Lithuanian government for a price per share equal to the price offered for the % stake. Pursuant to the expectations of the Lithuanian government, the offer comprises all components deemed significant by the Lithuanian government in respect of the selection of a strategic shareholder of Mažeikių Nafta, including the price, information on preservation of crude oil supplies to Mažeikių Nafta, investment program and a description of the proposed management method. According to PKN ORLEN s assessment, the acquisition of MN would allow PKN to strengthen its position in the region and perform further optimization of current operations. Inclusion of MN into the PKN ORLEN capital group would enable it to utilize synergies from the combining of activities performed in neighboring countries. In the addition, the purchase of Lithuanian assets would allow development of the production infrastructure and a significant increase in the processing power of the Capital Group. Moreover, the acquisition of MN would allow optimization of crude oil supply policies. The enlarged capital group would considerably increase energy security of the region. The planned investment would not constrain the Group s investment plans, including investment in the upstream activities which was described in the update of PKN ORLEN strategy for Withdrawal from contracts with Agrofert Holding a.s. by PKN ORLEN SA PK N O R L E N A nnual Repor t Consolidated financial statements The Management Board of PKN ORLEN announced in its regulatory announcement no 12/2006 that on 20 February 2006 it has decided to withdraw (in accordance with Czech Republic commercial code) from the Cooperation Agreement concluded on 19 November 2003 and General Agreement on terms of future share purchase concluded on 7 April 2004 with Agrofert Holding a.s. ( Agreements ). The reason for such withdrawal was the breaching by Agrofert Holding a.s. of the terms of the Agreements by allowing DEZA a.s. to execute the share purchase option on AGROBOHEMIE a.s and ALIACHEM a.s. shares. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 185

190 The fact of execution of the option has been confirmed by the public announcement of Unieptrol dated 15 December (see also: regulatory announcement no 85/2003 dated 20 November 2003 and regulatory announcement no 41/2004 dated 4 June 2004). 38. Supplementar y information a) Restructuring of the Southern assets The restructuring and consolidation project embraces the following companies: Rafineria Nafty Jedlicze SA, Rafineria Trzebinia SA ORLEN Oil Sp. z o.o., Paramo a.s., where Unieptrol a.s. is the majority shareholder. The objective of the project is to secure the value of assets engaged by PKN ORLEN SA by optimizing production structure in the above companies in matters of reorganization and restructuring of the possessed assets as well as the combination of selected assets and capital consolidation of the companies. The project is intended also to protect the assets of those companies against changes in the tax law, which may lead to discontinuation of crude oil processing in the southern Poland. In July 2005 PKN ORLEN s Management Board approved a restructuring project for the southern assets designed by Investekspert which aims at: PK N O R L E N A nnual Repor t consolidation of activity related to oil and lubricant production in Orlen Oil Sp. z o.o., targeted discontinuation of crude oil processing in the southern Poland and grouping assets relating to this activity within a separate business,, buy-out of minority shareholders (provided that the transaction is economically effective). On 2 December 2005, pursuant to the sale of shares agreement, PKN ORLEN purchased 3,360 shares in Orlen Oil Sp. z o.o., based in Kraków, from Rafineria Czechowice SA. The effect of the transaction PKN ORLEN is that has increased its stake in Orlen Oil from 47.21% to 51.69%. Effective 1 January 2006, Rafineria Nafty Jedlicze SA has leased Oil and Lubricants production line to Orlen Oil Sp. z o.o. The business advisor for the restructuring and consolidation project submitted recommendations in respect of the suggested action plan. The recommendations shall be consulted with the companies involved in the project by the end of May The sale process is also being carried out in respect of subsidiaries of Rafineria Nafty Jedlicze SA and Rafineria Trzebinia SA which operations were determined a non-core activity of those entities. b) Purchase of Unipetrol a.s. shares Consolidated financial statements On 24 May 2005, the Company acquired 114,224,038 registered shares in Unieptrol, which is 62.99% of all issued Unipetrol a.s shares. The acquisition was made under the agreement concluded by PKN ORLEN on 4 June 2004 with the National Property Fund of the Czech Republic. Unipetrol a.s. is a group of companies operating in the chemical sector in the Czech Republic, mainly in activities related to the processing of crude oil, fuel distribution, production of fertilizers and petrochemicals. In all those activities Unipetrol a.s. is a representative of the industry sector in the Czech Republic and Central Europe. The Unipetrol Group consists mainly of the following companies: Česka Rafinerska (a joint venture, combined with: AgipPetroli, Conoco and Shell) and Paramo the largest manufacturer of fuels, bitumin and other products related to refining of the crude oil and Unipetrol Rafinerie the largest Czech company dealing with purchase of crude oil and sale of crude oil derived products; Chemopetrol, Kaučuk i Spolana manufacturers of mainly petrochemical products and plastics; Benzina the network of petrol stations in the Czech Republic. The Unipetrol Group has the following entities: Lovochemie an important manufacturer of industrial fertilizers and other non-organic chemical products; Aliachem a group of enterprises engaged in organic and non-organic chemical and plastics production; and a few entities operating in the area of distribution, research and services. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 186

191 The acquisition of the Unipetrol Group was accounted under the purchase method in accordance with IFRS 3 Business combinations. Applying the purchase method involves, among others, the following steps: measuring the cost of the business combination, allocation, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed. A possible excess of the cost of the business combination over the acquirer s interest in the net fair value of identifiable assets, liabilities and contingent liabilities is recognized as goodwill as an asset in assets or directly in the profit and loss. In the case of the purchase of Unipetrol a.s. shares, PKN ORLEN s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeded the cost of business combination. As a result, the excess of interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over cost was recognized in the profit and loss account for 2005, as a component of consolidated operating revenues. As a result of the purchase of Unipetrol a.s. shares, the following categories of assets, liabilities and contingent liabilities were acquired and the transaction was settled in accordance with the purchase method in the following way: Fair value of assets and liabilities by main categories (PLN million): Cash and cash equivalents Property, plant and equipment Inventories Receivables Other assets Provisions ( ) Long-term liabilities ( ) Short-term liabilities ( ) Contingent liabilities (8 155) Other liabilities ( ) Net assets of Unipetrol a.s. at fair value PKN ORLEN s interest in the net assets of Unipetrol a.s Purchase price ( ) Transaction costs* (29 390) The excess of interest in consolidated net assets over the cost, recognized as other operating revenues Impact on the net cash flow relating to purchase of Unipetrol Group ( ) * Transaction costs include cost of advisory services, business trips, etc. PKN ORLEN has been consolidating the Unipetrol Group using the full method since the acquisition date. In accordance with IFRS 3 Business combinations the below table presents the consolidated revenues and financial result of the PKN ORLEN Group (including the consolidated data of Unipetrol a.s. for the period from 1 January 2005 to 31 December 2005), as if the acquisition date coincided with the beginning of the period. PK N O R L E N A nnual Repor t Consolidated pro forma cumulative data for 2005: Net sale revenues Operating revenues Indebtedness balance Financial revenues The Management Boards of PKN ORLEN and Unipetrol a.s. intend to restructure the Unipetrol Group. In accordance with the strategy announced on 17 October 2005 by the Management Boards of PKN ORLEN SA and Unipetrol a.s. it is projected to sell specific non-core business operations. Actual transaction costs incurred until 31 December 2005 amounted to PLN 29,390 thousand. In January 2006, the Management Board of Unipetrol a.s. initiated procedures leading to the sale of shares in Spolana and Kaucuk. The sale will be conducted by means of a public tender. In January 2006 the Management Board of Unipetrol a.s. decided to increase its share capital in Benzina, a subsidiary company. The funding acquired from the increase would contribute to strengthening a Benzina s financial position and allow it to restructure its indebtedness. Restructuring activities in Benzina would be aimed at a reduction of operating and administration costs and development of the quality of services. Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 187

192 c) Agreements for disposal of a portion of assets and liabilities related to purchase of Unipetrol a.s. shares In , the former Management Board of PKN ORLEN concluded agreements with Agrofert Holding a.s. and ConocoPhillips Central and Eastern Europe Holdings B.V. concerning the sale of a part of the assets and liabilities of the Unipetrol Group companies. In 2005, the present Management Board, having analyzed all eventual consequences resulting from the above agreements and having consulted recognized independent experts, adopted and presented to the Supervisory Board a proceeding strategy related to execution of the agreements, taking into account the best interest of the Company and its shareholders. In relation to the agreements concluded with Agrofert Holding a.s., in the second quarter 2005 the Management Board of PKN ORLEN created provisions to cover the potential negative financial effects related to execution of the agreements. Agrofert Holding a.s. agreed to disclose only portions of the agreements which it also presented at the press conference on 13 September On 25 January 2006 PKN Orlen received a copy of a law suit issued by Agrofert Holding a.s. regarding the payment of a contractual penalty of EUR 77,266,500. The court proceeding in front of Court of Arbitration by the Czech Chamber of Commerce and Czech Chamber of Agriculture in Prague is currently in progress. The risk related to the above described proceeding has been recognized in these consolidated financial statements. On 20 February 2006 the Management Board of PKN Orlen decided to withdraw (in the understanding of Czech commercial code) from the agreements concluded with Agrofert Holding a.s. The reason for such withdrawal was the breaching by Agrofert Holding a.s. of the terms of the Agreements by allowing DEZA a.s. to execute the share purchase option on AGROBOHEMIE a.s and ALIACHEM a.s. shares. PK N O R L E N A nnual Repor t Consolidated financial statements On 3 April 2006 Agrofert Holding a.s. informed via the mass media that it filed another suit against PKN ORLEN to the Court of Arbitration of the Czech Chamber of Commerce and Czech Chamber of Agriculture in Prague. Until the date of preparation of the foregoing financial statements, PKN ORLEN did not receive a copy of the suit. Consequently, both the subject and legal justification of the suit submitted by Agrofert Holding a.s. is unknown to the Company. In respect of the agreement with ConocoPhillips Central and Eastern Europe Holdings B.V., as at the date of preparation of the financial statements the parties are conducting mediations aimed at an amicable settlement of the dispute d) Agreement with DEZA a.s. In August and September 2005 Unipetrol a.s., received letters from DEZA a.s., requesting execution of the agreements regarding the sale of shares in AGROBOHEMIE a.s. and ALIACHEM a.s., Unieptrol a.s. and DEZA a.s. each own 50% shares in AGROBOHEMIE a.s. The shareholder structure in ALIACHEM a.s. is as follows: AGROBOHEMIE a.s. owns 55.01% shares, Unieptrol 38.79% and DEZA a.s. 4.67%. The remainder of 1.53% is owned by minority shareholders of ALIACHEM a.s. Letters received from DEZA regarding the agreements for future payable assignment of shares, concluded between Unieptrol and DEZA a.s. in relation to shares in AGROBOHEMIE a.s. and ALIACHEM a.s. on 12 October 2000 and 15 August 2001, respectively. The Management Board of Unieptrol, having thoroughly analyzed the concluded agreements and received letters, has determined that these documents contain vital legal faults as well as not complying with best market practice. In conjunction with this fact the Management Board of Unieptrol has proposed that DEZA a.s. modify the transaction documents in order to ensure its compliance with binding Czech law as well as market standards and practices. In spite of the endeavors of Unipetrol a.s., DEZA a.s. has rejected the proposals of the Management Board of Unieptrol. In such a situation the Management Board of Unieptrol decided to submit the case to court. On 14 December 2005 Unieptrol filed a law suit in the court in Ostrawa regarding the invalidity of agreements concerning shares of AGROBOHEMIE a.s. and ALIACHEM a.s. In response Deza a.s. claimed for penalty in amount of CZK thousand for period 2 September November 2005 and CZK thousand for period 6 October November 2005 calculated as at 11 November The amounts were calculated in line with above described agreements, which Unieptrol considers as not valid. On 24 March 2006 the Court in Ostrava rejected the motion of Unieptrol in respect of the declaration of invalidity. The rejection was substantiated by the fact that Deza a.s. filed a separate claim against Unieptrol in respect of settlement of contractual penalties. According to the view of the Court in Ostrava, proceedings related to declaration of invalidity are not necessary; hence it will be decided in front of the Court in Prague, prior to the verdict in respect of the claim submitted by Deza a.s. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 18 8

193 On 5 April 2006 Unipetrol a.s. received a warrant for payment of the contractual penalty from the Court in Prague. Unipetrol a.s. intends to submit an annulment to the warrant for payment to the Court as well as plannig to claim an invalidity of the agreements again. The legal and financial effects of claims submitted by DEZA a.s. and an interpretation of the provisions of the concluded agreements regarding the assignment of shares of AGROBOHEMIE a.s. and ALIACHEM a.s. may include the necessity of assignment of shares (for a price that is not yet determined) and payment of penalties and compensation. By virtue of faults in the agreements and substantial doubts regarding its validity, the financial impact on Unieptrol is difficult to quantify. The Management of Unieptrol has initiated a process for evaluation of the risk. Due to the loss of significant influence of Unipetrol Group on associated companies: Aliachem, Agrobohemie and Lovochemie as of 30 September 2005, these assets were accounted for using the equity method and included in the consolidated balance sheet of Unieptrol as at 31 December 2005 as long-term financial investments. By virtue of uncertainties in relation to the future outcome of court proceedings as well as difficulties in the determination of the fair value of shares in AGRO- BOHEMIE a.s. and ALIACHEM a.s., neither impairment provision in respect of the value of shares was recognized nor was provision for contractual penalties created in the financial statements. e) Polkomtel SA According to the announced strategy, activities on the sale of shares in Polkomtel SA were in progress in PKN ORLEN SA, KGHM Polska Miedź SA, Polskie Sieci Elektroenergetyczne SA and Węglokoks SA concluded a Shareholders Cooperation Agreement in Restructuring of Polkomtel SA Share Capital in July Under the Agreement, Polish shareholders of Polkomtel SA with the assistance of recognized advisors agreed on a negotiation strategy which was presented to foreign shareholders, i.e. TDC and Vodafone. In December 2005 a group of financial institutions announced a public tender offer for TDC shares. As a consequence of the settlement of the public tender offer, the control over TDC changed. According to the Articles of Association of Polkomtel SA, TDC has offered its shares in Polkomtel SA, to other shareholders. In accordance with of the Articles of Association of Polkomtel SA, pursuant to occurrence of the so-called Change in the Ownership Title in respect of TDC Mobile International A/S, other shareholders of Polkomtel SA (including Vodafone Americas Inc.) are entitled to acquire 4,019,780 shares of Polkomtel SA owned by TDC Mobile International A/S, in a proportion equal to the percentage of shares owned by each Polkomtel SA shareholder, except for the shares owned by TDC Mobile International A/S. The offer to purchase shares from TDC Mobile International A/S was issued to other Polkomtel SA shareholders on 8 February PKN ORLEN informed in its regulatory announcement no 17/2006 that on 10 March 2006 an agreement was concluded between KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA i Węglokoks SA as buyers and TDC Mobile International A/S as a seller in respect of Agreement on the approval of the offer and conditional sale of shares in Polkomtel SA. The conclusion of the above agreement was preceded by the conclusion by KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA and Węglokoks SA as shareholders of Polkomtel SA the Shareholders Agreement regarding the purchase of shares of Polkomtel SA from TDC Mobile International A/S and taking joint measures to sell all shares owned in Polkomtel SA. The conclusion of the Agreement was performed in conjunction with the execution by KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA and Węglokoks SA of the entitlement to acquire shares under the offer of TDC Mobile International A/S. The offer relates also to a dispute between Vodafone Americas Int. and TDC Mobile International A/S. As a result of the dispute, the pledge described below was established. Pursuant to the Agreement, PKN ORLEN may acquire 980,486 shares in Polkomtel SA, representing 4.78% of the share capital of Polkomtel SA, for a purchase price not exceeding EUR per share (an equivalent of PLN 833, in accordance with the exchange rates table no 50/A/NBP/2006 of 10 March 2006), that is for total purchase price not exceeding 209,863 thousand (equivalent to PLN 816,473 thousand). In case KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA and Węglokoks SA purchased the shares in result of the Agreement, these parties, together with the currently owned shares, would hold over 75% of the shares in Polkomtel SA. After the transaction is settled, PKN ORLEN would hold 24.4% stake of the share capital of Polkomtel SA The parties agreed to vote jointly at General Shareholders Meetings of Polkomtel SA in favor of dividends distributed to the shareholders as allowed under the applicable laws from the retained net profits for years preceding 2005, 100% of net profit of Polkomtel SA for years 2005 and 2006 and at least 50% of the net profit for any subsequent financial year. The amount of dividend paid out to TDC Mobile International A/S, reduced by an interest on the maximum purchase price, would result in the decrease of the final purchase price for the shares. PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 189

194 The Agreement was concluded under a suspending clause regarding termination or abatement of the pledge in respect of shares under the Agreement, established by verdict of the District Court in Warsaw of 24 February 2006, or any other pledge (or similar measure) established by any other judgemental body that would disallow the sale of shares under the Agreement in Polkomtel SA by TDC Mobile International A/S. Pursuant to the Agreement, KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA and Węglokoks SA as buyers are entitled to withdraw from execution of the Agreement for the purchase of shares in Polkomtel SA if by 10 March 2009 (or any other date agreed between parties) the above described suspending clause would not have been completed or if any circumstances exist related to the disputes between Vodafone Americas Inc. and TDC Mobile International A/S that may constitute an obstacle for the purchase of shares. As a consequence, the Agreement would dissolve at that date. With the conclusion of the Shareholders Agreement regarding the purchase of shares in Polkomtel SA from TDC Mobile International A/S and taking joint measures to sell all shares owned in Polkomtel SA the agreement signed by KGHM Polska Miedź SA, PKN ORLEN SA, Polskie Sieci Elektroenergetyczne SA and Węglokoks SA ( Shareholders Cooperation Agreement in Restructuring of Polkomtel SA Share Capital of July 2005 with later amendments) is no longer in force. On 10 March 2006 Vodafone Americas Inc. filed a suit to the International Court of Arbitration by the Federal Chamber of Commerce in Vienna, and suit six legal entities defining TDC Mobile International A/S as a Principle Respondent, Polkomtel S.A as a First Auxiliary Respondent ang KGHM Polska Miedź SA, PKN ORLEN SA, PSE SA and Węglokoks SA as Second to Fifth Auxiliary Respondents). In the above mentioned suit Vodafone Americas Inc. questioned above all the method of setting the price by TDC International A/S in the offer to other shareholders. In this consolidated financial statements of ORLEN Group, 19.61% of shares in Polkomtel SA were valued using the equity method in 2005 and in 2004, as a comparative data. Based on opinions of independent experts, Polkomtel SA has been determined an entity over which the Group exercises significant influence. PK N O R L E N A nnual Repor t The share of Polkomtel in the consolidated financial result of the Group in 2005 amounted to PLN 209,259 thousand. The share of Polkomtel in the consolidated financial result of the Group in 2004 amounted to PLN 181,118 thousand. f) CO 2 Emission rights In its financial statements, the Group recognized the CO 2 emission rights that were granted free of charge based on binding legal regulations resulting from the Kyoto Protocol dated 11 December 1997 to the United Nations Framework Convention On Climate Change, adopted by the European Union. Emission rights granted free of charge are recognized in the balance sheet as intangible assets. The Group has recognized emission rights granted for period of 3 years, as the difference between deferred income related to receipt of free of charge emission rights and its fair value at the date rights were granted. The sale of emission rights is recognized as profit or loss in other operating revenues / expenses in the reporting period when the rights were sold. Profit / loss on sales of emission rights is determined as a difference between the net sales revenues and its carrying amount. Consolidated financial statements Information on emission rights granted and its balance sheet presentation Quantity (Mg) Emission rights acquired by the Group in 2005 for the 3-year accounting period Emissions planned in 2005, including: Estimated use of emission rights in Emissions planned in Emissions planned in The net value of granted emission rights as at 31 December 2005 in the balance sheet of the Group, being the difference between granted emission rights and deferred income related to receipt of rights free of charge, amounted to nil. Value Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 190

195 g) Consolidation of BOP by proportionate method PKN ORLEN SA possesses a 50% share in a joint-venture enterprise - Basell Orlen Polyolefins Sp. z o.o., engaged in manufacture, distribution and sale of polyolefins. In the records presented for 2004 and 2005, Basell Orlen Polyolefins Sp. z o.o. has been consolidated by the proportionate method. In prior periods the company was presented on the basis of the equity method. As at 31 December 2005 and 31 December 2004, the Group share in the assets, liabilities, revenues and costs of BOP were as follows: 31 December 2005 Current assets Non-current assets Short-term liabilities Long-term liabilities Year ended 31 December 2005 Revenues Cost of finished goods, merchandise and raw materiale sold ( ) General and administration expense (8 855) Financial expense (26 878) Profit before tax Income tax expense (3 808) Net profit Impac t of IFRS adoption on prior period results Due to the fact that effective 1 January 2005 the Group has been preparing its consolidated financial statements in accordance with IFRSs for statutory purposes, the table below presents the major differences identified and reported by the Group between IFRSs adopted by the European Union and Polish Accounting Standards (PASs) with respect to changes in the opening balance of equity as at 1 January 2004 and 31 December 2004 and data in respect of the net profit for the respective year ended 31 December Net profit attributable to the equity holders of the Parent for the year ended 31 December 2004 Consolidated according to PAS Application of the benchmark treatment of IAS 23 Borrowing costs Deferred tax on capitalized borrowing costs (1 340) Valuation of property, plant and equipment at fair value ( ) Deferred tax on valuation of property, plant and equipment at fair value Alternative treatment of the excess of fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost (27 758) Reversal of goodwill amortization Consolidation of Basell Orlen Polyolefins with proportionate method Impairment of property, plant and equipment of ORLEN Deutschland AG (65 381) Distribution of profit other than dividends (4 176) Consolidation of Polkomtel SA Other (45 105) Consolidated according with IFRS PK N O R L E N A nnual Repor t Consolidated financial statements Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 191

196 Total equity attributed to shareholders of the Parent Company as at 31 December 2004 Total equity attributed to shareholders of the Parent Company as at 1 January 2004 Consolidated according to PAS Application of the benchmark treatment of IAS 23 Borrowing costs (56 336) (63 264) Deferred tax on capitalized borrowing costs Valuation of property, plant and equipment at fair value Deferred tax on valuation of property, plant and equipment at fair value ( ) ( ) Alternative treatment of the excess of fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost Reversal of goodwill amortization Consolidation of Basell Orlen Polyolefins with proportionate method Impairment of property, plant and equipment of ORLEN Deutschland AG (65 381) - Consolidation of Polkomtel SA Other (51 949) (33 271) Consolidated according with IFRS a) Capitalization of borrowing costs application of benchmark treatment of IAS 23 Borrowing costs In accordance with PAS, borrowing costs resulting from investment loans were stated as investment expenditure. Other financial expenses were recognized in profit and loss when incurred. In the financial statements prepared in accordance with the IFRS, the cost of loans and borrowings, including foreign exchange differences related to loans and borrowings in foreign currencies, are recognized in the profit and loss statement in the period to which they refer. b) Valuation of property, plant and equipment at fair value PK N O R L E N A nnual Repor t In accordance with the IFRS, the Group valued property, plant and equipment at fair value as at the date of application of the IFRS and recognized the fair value as cost of property, plant and equipment as at that date. c) Alternative treatment of the excess of fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost In accordance with PAS the Group settled the excess of fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost to revenues over the period from 2 to 5 years. Under IFRS 3, the excess of fair value of identifiable assets, liabilities and contingent liabilities over acquisition cost was recognized as retained earnings. d) Reversal of goodwill amortization Consolidated financial statements In accordance with PAS goodwill was amortized on a straight line basis over period not longer than 5 years and presented in the profit and loss statement as other operating expenses. In the financial statements prepared in accordance with IFRS, goodwill was not amortized yet decreased by impairment allowances. e) Impairment of property, plant and equipment of ORLEN Deutschland AG Due to the change in the policy discussed in detail under b) above, ORLEN Deutschland AG recognized an excess of net fair value for identifiable assets, liabilities and contingent liabilities over acquisition cost in equity as at 1 January Consequently, for the purpose of the consolidated annual financial statements the impairment allowance for property, plant and equipment of ORLEN Deutschland AG was increased by an amount reflecting the above change in the accounting principles and recognized in the 2004 financial result. f) Consolidation of BOP by proportionate method PKN ORLEN SA owns a 50% share in a joint-venture enterprise - Basell Orlen Polyolefins Sp. z o.o., engaged in the manufacture, distribution and sale of polyolefins. Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 192

197 In the records presented for 2004 and 2005, Basell Orlen Polyolefins Sp. z o.o. has been consolidated by the proportionate method. In the prior periods the Company presented in line with the equity method. g) Consolidation of Polkomtel SA Polkomtel SA was not consolidated in the past, as the Parent owned only 19.61% of votes at the General Shareholders meeting. The Parent Company states that it possesses significant influence on Polkomtel. 40. Dif ferences bet ween data disclosed in the financial statements and previously prepared and issued financial statements a) Differences as to data published in the condensed financial statements as at 28 February 2006, with the effect on net result and equity: Net profit attributable to the equity holders of the Parent for 2005 Total equity attributed to shareholders of the Parent Company as at 31 December 2005 Net profit attributable to equity holders of the Parent for 2004 Data for 2005 disclosed in the condensed financial statement for IV quarters Financial instrument valuation adjustment (26 512) - (35 127) Provision for liquidation of warehouses base (8 039) (8 039) - Reversal of provision for business risk Adjustment of excess of interest in consolidated net assets of Unipetrol a.s. over the acquisition cost ( ) ( ) - Interest in change of consolidated result of Unieptrol a.s. (1 623) (1 623) - Fair value adjustment of shares Deferred tax from the above adjustments (3 905) Other* (15 470) (49 910) (752) Data disclosed in consolidated annual financial statements for * including adjustment of Polkomtel SA results. b) Differences as to data published in the condensed financial statements as at 28 February 2006, with the effect on the cash flow statement: Data for 2005: Data for 2005 disclosed in the condensed financial statement for IV quarters 2005 Data for 2005 disclosed in the annual financial statement for 2005 Change PK N O R L E N A nnual Repor t Net cash provided by operating activities Net cash used in investment activities ( ) ( ) ( ) Net cash used in financing activities ( ) ( ) Cash and cash equivalents, end of period ( ) ( ) (1 176) Data for 2004: Net cash provided by operating activities Net cash used in investment activities ( ) ( ) (44 757) The change in presentation results from adjustments and reclassifications of consolidated financial data in the balance sheet and profit and loss statement. Data for 2005 disclosed in the condensed financial statement for IV quarters 2005 Data for 2005 disclosed in the annual financial statement for 2005 Change Consolidated financial statements 41. Other The consolidated financial statements were authorized by the Management Board of the Parent Company at its meeting on 27 April Notes to consolidated financial statements for the year 2005 (all amounts in PLN thousand) 193

198

199 SUPPLEMENTARY INFORMATION

200 Qal Qal is a completely new and advanced technology in the field of radiator fluids, confirmed by B certificate. It is designed for use in all types of motor vehicles, regardless of their cooling systems. Its excellent properties effectively protect cooling systems against low temperatures in winter and against overheating in summer. The product meets the requirements of the environmental management system ISO Ekoterm Plus Ekoterm Plus is light heating oil meeting high quality and environmental protection standards. The right selection of components and the use of several special enriching additives ensures high performance parameters and product usage safety. Platinum Platinum oils are top quality oils ensuring maximum protection of engines in all types of vehicles. The top quality grade ensures that these oils perform well under day-to-day usage conditions and in motor sports, yielding maximum engine power and ensuring perfect lubrication and resistance to high temperatures, which translates into longer engine life and longer intervals between oil changes. Petrygo Q Petrygo Q is a high quality radiator fluid. It is a product proven in all types of combustion engine cooling systems. Its properties ensure protection against overheating and low temperatures. The exceptionally high quality of Petrygo Q fluid is confirmed by the results of the simulation test based on the world standards ASTM D 2570 and by the awarded certificates: B safety certificate and ISO

201 Orbiton Orbiton is a brand of thermoplastic elastomer-modified bitumen. Elastomer modification ensures improved bitumen usage properties in comparison with traditional road bitumen. Bitumen of this type is designed for the construction of surfaces particularly exposed to heavy loads (e.g. motorways, intersections, bridges). Eurosuper 95 Eurosuper 95 is a petrol, which thanks to special enriching additives helps to take proper care of the car s engine. The results of a special research test prove that Eurosuper 95 additives considerably reduce fuel consumption and sediment deposits, lower the risk of damage and protect the engine. Super Plus 98 Super Plus 98 unleaded engine petrol is a petrol with the highest octane number distributed in the world. It is designed for car engines with catalytic converters. Super Plus 98 is a modern fuel of high European quality, both in terms of compliance with standards applicable in Poland and in terms of its performance and environmental qualities. This petrol ensures proper performance, even engine work and favourable fuel cost-effectiveness. Ekodiesel Plus 50 Ekodiesel Plus 50 is an environment-friendly diesel oil characterised by higher combustion quality index, ensuring easier start-up and more efficient operation of a vehicle. It also stands out due to its seven times lower sulphur content than as required in the EU countries. The above parameters attest to the highest quality and ensure reliable vehicle operation. 197

202 Autogas LPG Autogas LPG is a liquid fuel characterised by a stable octane number and high vapour pressure at sub-zero temperatures. In order to ensure correct and stable operational conditions of engines and devices, this fuel gas is a mixture with high propane content. VITAY VITAY scheme is a loyalty scheme targeted at individual customers. Each purchase at a PKN ORLEN station is rewarded with a certain number of points, which a card owner can redeem against prizes. To date, more than 5.7 million VITAY cards have been issued. Flota Flota scheme is a programme designed for institutional customers operating their own vehicle fleets. Fleet cards allow their holders to make cashless purchases of fuels, products and services at PKN ORLEN stations. VERVA 98 VERVA is the latest generation of fuels developed with a view to improving engine operating conditions in different weather conditions and under changing load. They meet strict European requirements for sulphur-less fuels, even though these will not be binding until VERVA 98 favourably affects engine life, increasing mechanical durability of its elements exposed to the heaviest wear. 198

203 VERVA ON VERVA ON is a product especially recommended for passenger cars equipped with modern Diesel engines with injection units, as well as with common rail systems. Increased cetane number of this oil ensures easier start-up and lowers engine working temperature. Special lubricating additives lower fuel consumption and ensure longer periods of failure-free operation of pumps in the injection system. BLISKA Bliska is the name of a new chain of economy petrol stations operated by PKN ORLEN targeted at drivers who look for proven quality, in addition to a good price. ORLEN TEAM ORLEN Team is a rally team made up of the motorcyclists - Jacek Czachor and Marek Dąbrowski and the car crew - Krzysztof Hołowczyc (race driver) and Jean Marc Fortin (pilot). Taking part in numerous motorbike and car rallies, ORLEN Team members have proven their high standing in the international arena on many occasions. 199

204 C o n t a c t : Polsk i Koncern Naf tow y ORLEN Spó łka Akc yjna ul. Chemików Płock Switchboard: phone: / facsimile: / O f f ice in War saw ul. Pankiewicza Warszawa phone: / facsimile: / Press O f f ice phone: / , facsimile: / phone: / facsimile: / [email protected] [email protected] Investor Relations O f f ice phone: / facsimile: / [email protected] ORLEN Deutschland GmbH Ramskamp Elmshorn phone: +49 (0) ,11 facsimile: +49 (0) 412,147,12,71 [email protected] Unipetrol a.s. Klimentská ,05 Praha 1 phone: +42 (0) facsimile: +42 (0) [email protected]