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Letter from the President of the Management Board

Krawiec JacekLadies and Gentlemen, Dear Shareholders,

2013 was the first year of the Company's new strategy until 2017, in which we are concentrating on the development of two new segments – oil and gas exploration and production, and power generation – while maintaining solid financial security and the operational excellence in the existing areas of our business. Last year, delivering on one of our key strategic objectives, we paid out a dividend – for the first time since 2008 – at a yield of 3.8%, based on the average share price in 2012.

In 2013, the total sales volume of the ORLEN Group amounted to nearly 36 million tonnes, which translates into a revenue of PLN 113bn and LIFO-based EBITDA of PLN 3.2bn. We achieved a record-high retail profit of PLN 1.3bn, and excellent results in the petrochemical segment which came in at more than PLN 2bn, while refining profits were down by PLN 0.5bn on the back of some unfavourable macroeconomic conditions.

With ongoing confidence in the potential of the retail segment, we continued to expand our service station network both in Poland and abroad reaching 2,706 stations as the end of 2013. We also vigorously developed our non-fuel services, opening 234 new Stop Cafe and Stop Cafe Bistro catering outlets in 2013, which increased the network size to a total of 1,047 outlets.

Leveraging our potential as the largest petrochemical company in the region, we reported higher sales in Poland of polymers, monomers, aromatic hydrocarbons, plastics and PTA. However, there was a slump in the Czech market sales volumes.

The refining segment's weaker performance was attributable to adverse macroeconomic conditions, with refining margins reaching their 10-year low in Q4 2013 and diesel oil sales negatively affected by the fuels grey market. However, despite those challenges, the Company's total sales volumes grew in Poland and on ORLEN Lietuva's markets, while the Czech Republic market fell.

Last year, in line with current Company strategy objectives such as revenue source diversification, we were active in developing our upstream segment. To date, we have drilled ten unconventional gas exploration wells in Poland including three horizontal ones, and performed two hydraulic fracturing treatments of horizontal well sections. The acquisition of TriOil Resources, a Canadian production company, marked a breakthrough in the development of the ORLEN Group's upstream segment making us a truly global company. TriOil not only operates producing oil and gas wells, but also possesses unique expertise which is key for our shale gas exploration projects in Poland. This knowledge capital is particularly valuable to PKN ORLEN, Poland's leading unconventional hydrocarbon exploration company.

The ORLEN Group's major power generating project in 2013 was the CCGT unit in Włocławek, the construction of which began in spring. As soon as 2015, the new unit will commence the co-generation of electricity and heat for the ANWIL Group, PKN ORLEN and also third-party customers.

Our cash flows from operating activities came in at PLN 5.7bn, enabling the pursuit of our investment plans, payment of a dividend and further reduction of our debt, which at the end of 2013 was PLN 4.6bn having decreased PLN 2.1bn year on year.

Aiming to diversify our finance sources, and encouraged by the resoundingly successful corporate bonds issue the previous year, we issued PLN 0.7bn worth of retail bonds, well received by the market. We also sold another portion of our mandatory oil stocks, thus freeing up PLN 1bn of the Group's assets.

It is my great pleasure to report that the Company's consistent strategy and flexible investment policy have been recognised by rating agencies. Fitch Ratings and Moody's Investors Service raised PKN ORLEN's credit rating to BBB- and Baa3, respectively. Thus, the Company regained its investment grade rating from the two world's leading rating agencies.

As the ORLEN Group recognises feedstock supply security as the key to its stability, last year we signed our first direct supply contracts with a crude oil producer, securing deliveries to the Płock refinery and to the Unipetrol Group.

Bearing in mind the growing importance of natural gas, we are also pursuing a number of strategic projects to diversify our sources of this feedstock. To this end, we signed short-term contracts with five natural gas suppliers, and new contracts in early 2014, this time with six suppliers. Furthermore, we are expanding our range of modern trading channels, for instance by acquiring a licence to trade in natural gas on the EEX (European Energy Exchange) in Leipzig and membership of the Polish Power Exchange. We are convinced that these measures will position us well to benefit from the opportunities offered by the deregulated gas market in Poland.

Last year, we also focused on the development of direct relations with our trading partners. We optimised our fuel and fuel oil wholesale framework by transferring small and medium-sized accounts to ORLEN Paliwa, which allowed us to better leverage our sales potential, benefit from economies of scale and improve our customer service flexibility.

In early 2014, PKN ORLEN took over Petrolot's aviation fuel sales to incorporate them under its wholesale operations, while Petrolot became an independent operator providing aviation fuel storage and aircraft refuelling services to fuel suppliers at the largest airports.

As regards supplier relations, we consolidated the purchasing processes at 14 ORLEN Group companies using the innovative CONNECT Procurement Platform.

In November 2013, we initiated the acquisition of 16.4% of shares in Česká Rafinérská from Shell. Following its closing in early 2014, this USD 27m transaction raised our ownership interest in Česká Rafinérská to 67.6%, significantly improving our ability to effectively manage the company.

Our dynamic growth was recognised by independent market experts. PKN ORLEN topped Euromoney's list of the best-managed oil companies, was ranked first in the Coface ranking of the largest CEE companies for the eighth consecutive time, and was listed high, in 79th position, in Platts’ Global Energy Company Rankings. For seven consecutive editions, we have remained part of the elite group of companies included in the RESPECT Index of the Warsaw Stock Exchange. Our efforts in the field of information reporting were appreciated as well, as we were named ‘The Best of The Best’ for our financial reports published on the WSE. In a ranking list put together by Rzeczpospolita daily, ORLEN emerged as the most valuable Polish brand, with its value estimated at PLN 3.9bn.

It was only natural that being the largest company in Poland we should be active in debates on the most pressing social and economic issues, both in Poland and in the international arena. Last year's key discussions featuring representatives of the ORLEN Group included those held at the European Financial Congress, the Economic Forum in Krynica and the European Forum of New Ideas. Our delegates also participated in conferences abroad, such as the CERAWeek in Houston and the St. Petersburg International Economic Forum, where the most important global economic issues are discussed.

During the past year we expanded the range of our sponsorship projects. In addition to the VERVA Street Racing and Poles with Verve initiatives, we implemented a project aimed at promoting healthy lifestyles – the ORLEN Warsaw Marathon. The event generated great interest, with the first edition attracting more than 26 thousand runners both from Poland and around the world, as well as thousands of spectators. Encouraged by this success, we decided to organise the second edition of the National Running Day in 2014, which also attracted crowds of running enthusiasts.

Without any doubt, 2013 was a landmark year in the Company's history. Thanks to the commitment of our Employees, the highest governance standards and a well-defined growth strategy, we were not only able to prove that success is possible in a difficult market environment, but also that we are capable of effectively expanding our business and delivering on our strategic objectives, thus creating strong value-building foundations for the coming years.

I would like to offer my sincere thanks to Supervisory Board members, Management Board members, the Management Staff and all Employees, as it is their hard work that warrants an optimistic future outlook. I am also grateful to you, our Shareholders, for the trust you have placed in us when making your investment decisions.

Dariusz Jacek Krawiec

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CEO, President of the Management Board
PKN ORLEN

 

 

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