Audit confirms record results of PKN ORLEN for 2005

Excluding the effect of negative goodwill, ROACE equalled 13.5 %, while EBITDA profit level amounted to PLN 4,835 m. The difference between the actual EBITDA result and the one previously published resulted from a technical and accounting correction pertaining to completion of the valuation of the assets of Ceska Rafinerska and the conducted test for the loss of value by individual Unipetrol companies.

Net pecuniary flows from operations amounted to PLN 3,664 m in 2005. The declared objective of repeatable savings in the terms of the Comprehensive Program of Operating Cost Cutting was exceeded by PLN 82 m.

In 2005 the audited profit amounted to PLN 4,638 m and EBITDA - to PLN 6,728 m. Another major element affecting those results was creation of one-off reserves against economic risk, restructuring and deprecation of liabilities of PLN 282 m. Excluding those one-off deductions, the audited EBITDA level would amount to approx. PLN. 4,834 billion, i.e. above an average for 3 quarters of the previous year.

The decisive element determining the issue of payment of dividends will be the completion of the bid for the purchase of Mažeikių Refinery. If PKN Orlen continues to participate in the bidding process for Mažeikiu Nafta, the Management Board proposes to allocate the entire net profit minus the deduction for the Enterprise Fund of Welfare Benefits for reserve capital. This would amount to PLN 2,522 m. If PKN ORLEN finally decides to withdraw from bidding for acquisition of Mažeikiu Nafta, the Management Board proposes to apply a new dividend policy starting from 2006 (payment of profits for 2005) and allocate the dividend of PLN 4.50 per stock unless the Mažeikiu bid proceeds. The proposed amount of PLN 1,925 m constitutes 76% of the net profit of PKN ORLEN S.A. for 2005 and 50% of Free Cash Flow to Equity.

The Management Board are convinced that the potential investment in Mažeikiu Nafta represents a much greater potential of value growth for shareholder than payment of dividends.

The process of consolidation of Unipetrol assets was completed in 2005. The negative goodwill of the share of PKN Orlen in the net assets of Unipetrol over the acquisition price according to audited Unipetrol results and after completion of the valuation of the entire property of Unipterol Gorpu (in accordance with MSSF) amounted to PLN 2,025 m. (against previously published amount of PLN 2,006 m).

As a result of the full valuation of the property of the Czech group as of the end 2005 and the involved test for the loss of value of assets of Paramo and Kaucuk companies, the value of those companies went down, which yielded a total decline in the negative goodwill by PLN 258 m. The final level of the surplus between acquired Unipetrol assets and the acquisition price went down (against the initially presented amount PLN 2,006 m, affecting Q4’05 results) by PLN 113 m., down to PLN 1,893 m.

Starting form Q1’05 PKN ORLEN has published, for the sake of better comparison, Group’s results recalculated for 2004 macroeconomic conditions and with elimination of this year’s impact of negative goodwill in connection with Unipetrol acquisition.

Factors, which in our opinion support the presentation of results under 2004-comparable conditions, include:
• The possibility to eliminate macroeconomic effects significantly affecting variance of results
• Identification of the effects of restructuring and pro-effectiveness measures undertaken by the Management Board
• Better comparability of quarter-to-quarter and year-to-year results of the Group
• Elimination of one-off elements, e.g. negative goodwill
• The possibility of full accountability of the managerial staff for the operating objectives that were set, e.g. sales volume growth, fixed and variable costs control and optimisation of investment outlays.

In the case of EBITDA, in 2005 in comparable conditions we attained the growth of 22,6%, and of almost 70% if negative goodwill is taken into account. In the case of ROACE level, in conditions comparable to 2004, after 12 months of 2005 we attained the value of 14% or 22.8% if negative goodwill is taken into account (the level of 14% ensues from a significant rise in denominator value after Unipetrol acquisition).

The major macroeconomic factors shaping economic conditions for the oil sector in 2005 were: a rise of crude oil prices up to the level of $54.48/, that is by 42% compared to 2004, a drop in refinery margin by 9% (year/year) to the level of $5.12 and an increase by 2% (year/year) of Brent/Ural differential to the level of $4.2/b.

In the first quarter of 2006 the refinery margins were at definitely lower level that in analogous period of 2005. As late as in April they attained the level assumed by the Company for this year. Moreover, due to unusually cold winter, gas supplies were diminished to virtually all of Europe. This significantly affected PKN ORLEN, which is the largest earth gas consumer in Poland. This also significantly affected the portfolio of the offered products.

Refinery margins in the first quarter 2006 were at an average level of USD 2.56/b and Brent/Ural differential at the level of USD 3.63/b. This signifies a drop by approx. 9% and 29% respectively for refinery margin and Brent/Ural differential against the average for the first quarter last year (USD 3.6/bbli and USD 5.1/bbl respectively). Group’s forecasts for this year assume an annual average level of refinery margin at the level of USD 5.33/b and of Ural/Brent differential at the level of USD 3.5/b.