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1 PKN ORLEN: value growth and strategy implementation – activity update Igor Chalupec, CEO September 2006

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Page 1: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

1

PKN ORLEN: value growth and strategy implementation – activity update

Igor Chalupec, CEOSeptember 2006

Page 2: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Mažeikių Nafta acquisition process– updatePKN ORLEN is consequently executing steps in order to close the transaction

Yukos International UK B.V., Government of Lithuania and PKN ORLEN signed the agreement for the sale/purchase of the Mazeikiu Nafta stake - Yukos 53.70% ( signed on May 26th) and GoL 30.6% (signed on June 9th)

Approval of the Lithuanian government for Agreement signed with Yukos Int. UK B.V.

Approval of the Lithuanian Parliament for the Agreement signed with Lithuanian

Government

GOL’s failure to exercise its right of first refusal with respect to the shares

being purchased by PKN ORLEN from Yukos International

Consent of the Antimonopoly Commission in Ukraine

Consent of the United States anti-trust authorities

European Commission clearancePKN ORLEN to submit the application seeking consent for the transactions for the purchase of the majority of Mazeikiu Nafta shares

Once closing conditions are satisfiedSimultaneous closing of both transactions is expected, at the latest, in Q4 2006

2Q 2006

Activities already

accomplished - in order to

close the transaction

Process to closing

After Closing Mandatory tender offer for 5.64% public float will be launched

Page 3: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Mažeikių Nafta acquisition process – updateAdvanced state of financing planning for the transaction

280

250

2 800

0

500

1000

1500

2000

2500

10%

of

shar

es b

elon

gto

the

GoL

PK

N O

RLE

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anci

alre

sour

ces

New

fina

ncia

lre

sour

ces

for

acqu

isiti

on

MN

pay

men

t

mln USD

STAGE 2: Planning new financial sources

• Revolving credit EUR 800 million

(5 years with the possibility of extending)

• Bridge credit

EUR 800 million(up to 12 months)

STAGE 3: Refinancing of the bridge credit

• Issue of bonds on the European market (4Q 2006 or 1H 2007)

Mažeikių Nafta acquisition: financial sources

Partial use of the present credit

lines

STAGE 1: Preparing own financial resources

• Cash in hand (in 3Q06 around USD 250 million)

Page 4: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Mažeikių Nafta acquisition process – updateMažeikių Nafta included in segment management structure immediately after acquisition

Gradual integration (e.g. as in Unipetrol)

Taking advantage of the Unipetrol integration experience

Taking control (~1 year)

Integration (~1 year)

Realisation of the development and

value growth possibilities

Immediate integration, starting from Day One

(1-1.5 year)

Realisation of the development and

value growth possibilities

Taking over control and simultaneously integrating MN into the segment management structures, PKN ORLEN will accelerate the process.

It will positively impact on value creation in MN

It will unlock additional opportunities in PKN ORLEN

Accelerated “segment” approach to the Mažeikių Nafta integration

Page 5: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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UNIPETROL EBITDA* assuming average 2004 macroeconomic conditions (EUR m)

An improvement of over EUR 30 million has

already been captured in 2005

442

304138

304

45%

Partnership Programme effects:almost EUR 40 m in 1H’2006, assuming average 2004 macroeconomic conditions

PKN ORLEN and Unipetrol integrationPartnership Programme realization well on track

Q1’2006 Q2’2006

17.1 22.6

Partnership Programme Leaders :In EUR mln in 1H’06Uniraf : 16.1Chemopetrol: 14.8

Impact of Partnership Programme% EBITDA increase

2004 baseline result

* Consolidated EBITDA includes UNIPETROL, UNIPETROL Rafinerie, Paramo, Chemopetrol, Kaučuk, Spolana, BENZINA consolidated fully, Česká Rafinérská consolidated following the proportional method and Agrobohemie and Aliachem consolidated following the equity method. EBITDA calculations do not consider the effects of possible divestments

** Adjusted for one-off expenses as well as non-operating and extraordinary charges*** Expected EBITDA forecast calculated under fixed 2004 macroeconomic conditions: Brent crude USD 38.2/b, Brent/Ural differential USD 4.1/b, refinery margin

USD 3.6/b, CZK/EUR 31.90 Source: Unipetrol

2008*** resultin 2004 conditions

2004 operating result**

Page 6: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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PKN ORLEN and Unipetrol integrationAdvanced preparations for implementation of segment base management

Phase 2Design & Construct

Phase 3Implementation

June’06 Q3’06 Q4’06 - 2007

Phase 1Shared Service Strategy

Final preparation of the implementation phase

Define scope of functional split in production, sales and support functions

Prepared mapping plan of Unipetrol segments with PKN ORLEN

Centralize all functions (both corporate and service)

Align structure in functional segments (e.g., purchasing, IT) with PKN ORLEN functional

managers as executives in Shared Service Centre (SSC)(SSC: Finance accounting, Tax, HR, Legal, IT, Supply chain, Purchasing, Maintenance)

Key activities undertaken in process of preparation to implement segment base management

Support the capture of synergies by creating functional segmentswithin Unipetrol

Page 7: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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PKN ORLEN and Unipetrol integrationSplit processing and commercial functions in key Unipetrol subsidiaries

Refining Petchem Retail Lubes/Bitumens

Production/ processing Česká

RafinerskáChemopetrol

production

UNIPETROLlubes/

bitumenbusinesses

*

* Integration of Paramo fuels with UniRaf to be resolved** Integration of olefin sales to UniRaf to be resolved

Commercial

Support functions

Corporate centre

Shared services: Finance accounting, Tax, HR, Legal, IT, Supply chain, Purchasing, HSF, Maintenance

UNIPETROL, a.s.: Controlling, Strategy, Planning, Risk management, Change management, Internal audit

BenzinaChemopetrol

commercial**

UniTrade

Refining

UniRaf

Wholesale

PKN ORLEN segments

Page 8: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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PKN ORLEN and Unipetrol integrationNew initiatives in HR

MBO system related issues:• A further step for alignement with PKN ORLEN is the implementation of MBO• The MBO committee for coordination and monitoring of MBO targets

(financial and operational) will start to work in Q4 2006.• MBO will cover 224 employees in 2006 and a further 172 employees in 2007

(in the whole PKN ORLEN Capital Group, the MBO system will cover 803 employees in 2006 and 1,262 in 2007)

New HR tools to be implemented :New HR tools for more effective and transparent work with staff will be proposed

for new structure such as:• SDP= succession development planning• risk assesment for high potential employees,• IDP = individual development plan

Page 9: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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External environmentHigh volatility of margin and differential. Data to September 25th, 2006

0123456789

1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep

Q2'2006 Q2'20052006E Q3'2006

02

468

1012

1416

1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep

Q2'2006 Q2'20052006E Q3'2006

2,5

3,0

3,5

4,0

4,5

5,0

1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep

PLN/USD Q2'2006 PLN/EUR 2Q'2006PLN/USD 2006E PLN/EUR 2006EQ3'2006

Average exchange rates1

2 2

Refinery margin$4.00/b average in 3QTD’20063 Decrease by 34% y/y and 29% q/q

Brent/Ural differential$3.8/b average in 3QTD 2006 Decrease by 15.5% y/y and by 21% q/q

2

3Q’ 06

September 25

3 Q’ 06

September 25

2 kw.06

3Q’06

Brent crude oil$70.3/b average in 3QTD 2006 Increase by 14.5% y/y and 1% q/q

0102030405060708090

1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep

Q2'2006 Q2'2005

2006E Q3'20063 Q’ 06

September 25 September 25

22

1) Source: NBP (Polish National Bank)2) Estimates published in PKN ORLEN Strategy

3) Calculated as: Products (88.36%) vs. Brent Dtd (100%). Products contain Premium Unl (25.21%), USLD (23.20%), Naphtha (16.51%), LHO (15.31%), HSFO (5.44%) i Jet (2.69%)

(source: CIF NWE quotations, except HSFO FOB ARA)

Page 10: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Petrochemical market Quotation improvement for olefins and polyolefins. Data to Septembers 15th 2006

0

100

200

300

400

500

600

700

800

900

1000

1-Jan 1-Apr 1-Jul 1-Oct 1-Jan 1-Apr 1-Jul

Ethylene Average (Ethylene-Naphta) Naphta

Ethylene

398413

211

398

Spread (Ethylene-Naphfa)

338

0

100

200

300

400

500

600

700

800

900

1-Jan 1-Apr 1-Jul 1-Oct 1-Jan 1-Apr 1-Jul

Propylene Average (Propylene-Naphta) Naphta

293353

211

383

Spread (Prophylene-Naphta)

338 346

Propylene

in EUR/tone

346386

in EUR/tone

416

Source: Market quotations

0

200

400

600

800

1000

1200

1-Jan 1-Apr 1-Jul 1-Oct 1-Jan 1-Apr 1-Jul

PP Average (PP-Propylene) Propylene

176296

376257

Spread (Prophylene-propylene)

Polyethylene (LDPE) Polypropylene

0

200

400

600

800

1000

1200

1-Jan 1-Apr 1-Jul 1-Oct 1-Jan 1-Apr 1-Jul

PE Average (PE-Ethylene) Ethylene

352

166

357 286

Spread (PE-Ethylene)

272 237

in EUR/tone

267275 267

in EUR/tone

258

Page 11: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Operating results after 2 months of Q3’06Significant volume sales increase in Poland and in whole Group

Key operating data

July-August 2005 July-August 2006 y/y [%] y/y [%]

PKN ORLEN parent

companyPKN ORLEN

PKN ORLEN parent

companyPKN ORLEN

PKN ORLEN parent

companyPKN ORLEN

Wholesale fuel volume sales (kt) 1,4 890 1,439 1,009 1,520 13.4% 5.6%

Petrochemical volume sales (kt) 4 133 335 279 408 109.8% 21.8%

Retail volume sales (m litres) 2 687 1,028 729 1,095 6.1% 6.5%

Utilisation ratio3 93% 105% 12.5%

Crude oil throughput (kt) 2,096 2,883 2,411 3,238 15.0% 12.3%

1) Refers to gasoline, diesel, Jet, LHO2) Refers to retail sales of gasoline, diesel, LPG3) Refers to deep processing capacity at PKN ORLEN 13.5 m t/y in 2005 and 13.8 m t/y in 20064) Refers to PKN ORLEN parent company excluding export

Page 12: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Retail segment in PolandFavourable effects from continuation of implemented initiatives

Area Effects of the initiatives undertaken in retail segment

Quality service

Sales

Sales dynamics at a satisfactory level of 6.1% in Poland (for July-August 2006, y/y) and 6.5% for whole Group.BLISKA sites recorded ca 30% volume sales increase on like-for-like basis. Average throughput per site in whole network is ca 2.1 ml/l annuallyDynamic increase by ca 12% on non-fuel sales in our shops y/y (for July-August 2006)

Modern management systems, marketing support, new initiatives and loyal employees results in better network performance.

We have recorded an increase in average number of transaction by ca. 6% q/q and average value of these transactions by 5% q/q

InvestmentsCapex plan realisation is on track in terms of the investments fulfilled and cash spendCurrently we operate under 109 BLISKA sites. By the end of 2006 we plan to operate 176

Page 13: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Thank you for your attention

For more information please contact the IR Department: phone: + 48 24 365 33 90fax: + 48 24 365 56 88e-mail: [email protected]

Page 14: PKN ORLEN: value growth and strategy implementation ...€¦ · PKN O R L E N own f i na nc ial re so u r ce s Ne w f i na nc ial re so u r ce s f o r ac q u is it io n M N pa y m

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Main oil & gas assets in Central Europe and logistics infrastructure

Lisichansk(8.5; 8.2)

Home markets of PKN ORLEN

Refinery (capasity m tonnes p.a.; Nelson complexity index)

Source: Oil & Gas Journal (as of January 2005), PKN Orlen, others , Concawe,Reuters, WMRC, EIA, NEFTE Compass, Transneft.ru

Batman (1.1; 1.9)

Yaroslavi

Sea terminal [capacity]Oil pipeline Ca [capacity]

Ingolstadt (5.2; 7.5)

Litvinov (5.5, 6.7)

Kralupy(3.4; 9.8)

Plock (13.8; 9.5)

Gdansk (90.0)

(6; 11.1)

Mazeikiai (10.0; 9.0) Novopolotsk

(8.3; 7.7)

Mozyr(15.7; 4.6)

Bratislava (6.0; 12.3)

Schwechat(10.2; 6.2)

Burghausen(3.5; 7.3)

Holborn (3.8; 6.1)

Bayernoil(12.8; 8.0)

Harburg(4.7; 9.6)

Leuna(11.0; 7.1)

Schwedt (10.7; 10.2)

Aspropyrgos(6.6; 8.9)

Corinth (4.9; 12.5)

Elefsis(4.9; 1.0)

Thessaloniki (3.2; 5.9)

Izmit (11.5; 6.2)

Izmir (10.0; 6.4)

Kirikkale (5.0; 5.4)

Duna(8.1, 10.6)

Arpechim(3.6; 7.3)

Petrobrazi(3.4; 7.3)

Petrotel(2.6; 7.6)

Rafo(3.4; 9.8)

Petromidia(5.1; 7.5)

Rijeka (4.4; 5.7)

Sisak (3.9; 4.1)

Novi Sad (4.0; 4.6)

Pancevo(4.8; 4.9)

Neftochim(5.6; 5.8)

Drogobich(3.8; 3.0)

Kremenchug (17.5; 3.5)

Odessa(3.8; 3.5)(ex 12)

Kherson (6.7; 3.1)

DRUZHBA

DRUZHBA

DRUZHBA

ADRIA

IKL

ADRIA

(49.1) Ventspils

Butinge(38.2)

(163.7) PrimorskKirishi

Yuzhniy(ex 4)

Brody

Tiszaojvaros

Triest

Rostock

[Ca 78]

[Ca 60]

[Ca 34][Ca 18]

[Ca 82][Ca 50]

[Ca 34]

Ca 27

[Ca20][C

a 30

]

[ Ca

24]

[Ca 15]

Novorossiysk(ex 45)

[ Ca 29]

Trzebinia (0,5)

Orlen OilJedlicze (0,1)

[Ca 45]

[Ca 13]

[Ca 25]

[Ca 120]

Rafineria PKN ORLENProjected Oil pipeline