Management’s discussion and analysis of 2014 financial performance

However, the successful pursuit of our strategic business objectives would not have been possible without a simultaneous effort to maintain sound financial ratios. By diversifying our financing sources, we build a strong platform for the implementation of our ambitious investment plans in the coming years and also strengthened our reputation as a reliable partner on financial markets. This is confirmed by the current valuation of our shares – an effect of the steps taken as part of our strategy, under which we had committed to achieving an average EBITDA LIFO in 2014-2017 of PLN 5.1bn and a steady growth of dividend per share.

Read more - Letter from the President of the Management Board

In 2014, the ORLEN Group’s record EBITDA LIFO result of PLN 5,213m, before impairment allowances of non-current assets, was PLN 2,127m higher (y/y).

Orlen Group

*) before impairment allowances of non-current assets

The positive impact changes of macroeconomic factors, which was evident especially in the 2-nd half of 2014, amounted to PLN 1,473m (y/y).

The positive sales volume effect of PLN 574m (y/y) related mainly to the higher sales of downstream segment in the Czech Republic and increase in retail sales in all markets as well as recognition of the results of upstream segment in Canada.

The positive effect of other factors was not significant (y/y) and related mainly to changes on the balance of other operating activity of PLN 347m (y/y) (before impairment allowances of non-current assets), the positive net effect of repurchase transaction and sales of mandatory reserves in 2013 and 2014 in the amount of PLN 297m (y/y), and a negative effect of other elements of PLN (-) 564m (y/y) comprised mainly the effect of revaluation at the end of 2014 of inventories to net realisable value due to decrease in crude oil prices and consequently decrease in prices of refinery and petrochemical products.

The ORLEN Group’s Strategy for 2014−2017, adopted in July 2014, reflects the suppressed consumption of fuels due to prolonged economic downturn, refining overcapacity and the mounting pressure on margins caused by the shale revolution in the United States and economic changes in Russia.

Based on tests carried out in accordance with IAS 36 (“ Impairment of Assets”), the ORLEN Group recognized net impairment allowances of PLN (-) 5,360m related mainly to the ORLEN Lietuva Group’s assets of PLN (-) 4,181m and the Unipetrol Group’s assets of PLN (-) 752m, recognized in Q2 2014, as well as impairment allowances of the ORLEN Upstream Group assets in Canada of PLN (-) 311m, recognized in Q4 2014.

Taking into account the above mentioned impairment allowances, EBITDA LIFO of the ORLEN Group for 2014 amounted to PLN (-) 147m.

On the back of the global decline in crude oil prices, particularly in the 2-nd half of 2014, the non-cash effect of inventories revaluation on reported results (co-called LIFO effect) was PLN (-) 2,573m.

In consequence, the ORLEN Group’s EBITDA for 2014 amounted to PLN (-) 2,720m.

In 2014, total capital expenditure reached PLN 3,788m and were higher by PLN 1,304m (y/y).

ORLEN Group’s segment results

LIFO ebitda

ORLEN group’s EBITDA LIFO by operating segments

Downstream

In 2014, EBITDA LIFO of ORLEN Group in downstream segment, before impairment allowances of non-current assets, amounted to PLN 4,210m and increased by PLN 1,803m (y/y).

Orlen Group

*) before impairment allowances of non-current assets

The growth of model downstream margin reflecting the changes in macroeconomic parameters contributed to the increase of EBITDA LIFO of the segment by PLN 1,473m (y/y).

Impact of the higher sales of downstream segment on the Czech market as well as improved sales structure (reduction of exported shipped sales, reduction of production and sales of heavy fuel oil by improving yields) have contributed to increase in segment’s EBITDA LIFO by PLN 197m (y/y).

The positive effect of other factors amounted to PLN 133m (y/y) and related mainly to changes on the balance of other operating activity of PLN 412m (y/y) (before impairment allowances of non-current assets), positive net effect of repurchase and sales of mandatory reserves in 2013 and 2014 of PLN 297m (y/y), and a negative effect of other factors of PLN (-) 576m (y/y) comprised mainly the effect of revaluation at the end of 2014 of inventories to net realisable value in accordance with IAS 2 (“Inventories”) due to decrease in crude oil prices and consequently decrease in prices of refinery and petrochemical products.

Impairment allowances of property, plant and equipment amounted to PLN (-) 5,062m and related mainly to the impairment allowances recognized in the II quarter of 2014 of the ORLEN Lietuva Group’s assets of PLN (-) 4,181m, the Unipetrol Group’s assets of PLN (-) 752m, and the ANWIL Group’s petrochemical assets of PLN (-) 64m.

Taking into account the above mentioned impairment allowances, EBITDA LIFO of the ORLEN Group for 2014 amounted to PLN (-) 852m for 2014.

On the back of the global decline in crude oil prices, particularly in 2-nd half of 2014, the non-cash effect of inventories revaluation on reported results (co-called LIFO effect) was PLN (-) 2,573m. As a result, EBITDA of ORLEN Group in downstream segment amounted to PLN (-) 3,425m.

In 2014, the segment’s capital expenditure increased by PLN 1,118m (y/y), to PLN 2,714m. Key investment projects carried out in 2014 included construction of the Power Plant CCGT in Włocławek, the Installation of Catalytic Denitrification and Dedusting, the Installation of Flue Gas Desulphurization and Metathesis Installation in PKN ORLEN, finalization of construction of Visbreaker Vacuum Flasher Installation in the ORLEN Lietuva and projects related to the construction of the CCGT Power Plant in Włocławek in the ANWIL Group.

Retail

In 2014, EBITDA of the retail segment of the ORLEN Group achived record level of PLN 1,440m, higher by PLN 172m (y/y).

Group Orlen

Increase of fuel margins on Polish market, accompanied by the limitations on other markets and increase of results from sale of non-fuel products and services exerted a positive impact on EBITDA of the segment by PLN 121m.

Higher sales volumes (y/y) on all markets improved EBITDA by PLN 81m (y/y).

The negative effect of other factors amounted to PLN (-) 30m (y/y) and related mainly to higher costs of operations of fuel stations resulting from higher by 3.5% (y/y) sales volume.

As at the end of 2014, the ORLEN Group network operated of 2,692 fuel stations and 1,371 Stop Cafe and Stop Cafe Bistro catering outlets.

In 2014, the segment’s capital expenditure was PLN 345m and mainly included the construction and modernization of fuel stations.

Upstream segment

In 2014, the Upstream segment’s EBITDA, before impairment allowances of non-current assets, amounted to PLN 152m and increased by PLN 184m (y/y).

The observed decline in crude oil prices on the world markets, had influenced on the Upstream segment results of ORLEN Group in Canada. As a result of the tests performed in the IV quarter of 2014 in accordance with IAS 36 (“Impairment of Assets”), an impairment allowance of assets related to development and extraction of mineral resources had been recognized of PLN (-) 311 in Canadian TriOil, belonging to the ORLEN Upstream Group. The fair value of assets related to development and extraction of mineral resources in Canada at as 31 December 2014 was determined on a basis of the reserves evaluation developed by an independent company in accordance with professional standards in force in the Canadian market. The total value of impairment allowance of assets of upstream segment amounted to PLN (-) 322m.

As a result, EBITDA of the ORLEN Group in Upstream segment amounted to PLN (-) 170m.

The segment’s 2014 capital expenditure amounted to PLN 499m and comprised mainly the preparation of new production wells, development of upstream infrastructure in Canada and an unconventional projects in Poland.

Under unconventional projects at the end of December 2014, 11 drillings were completed, including 7 vertical drillings and 4 horizontal drillings. In the area of conventional projects 2 prospecting drills under Sieraków project and 1 exploration drilling under Karbon project. In 2014, 36 new drillings have started in Canada (21.7 net amount of drillings, ie. after adjusting for the interests of other partners) and as a consequence the average production in the 4th quarter of 2014 reached more than 8 thousand barrels of oil equivalent per day.

Corporate Functions

In 2014, EBITDA of the Corporate Functions amounted to PLN (-) 565m and remained at the similar level (y/y) despite the lack of positive effect in balance of the other operating activity from 2013 due to received compensation and reimbursements of taxes paid in previous years.

The capital expenditure of Corporate Functions in 2014 related mainly to conversion of perpetual usufruct of land into ownership rights in respect of the part of area of the Production Plant in Płock and an adjacent areas and in remaining part mainly related to realised IT projects.