ORLEN ORLEN Group 2017
Integrated Report

Management’s Discussion and Analysis of 2017 Financial Results

GRI INDICATORS:
Capitals:

In 2017, the ORLEN Group posted a record-high EBITDA LIFO of PLN 10.4 billion before impairment of non-current assets, an increase of over PLN 1.0 billion on the previous year, with only limited impact of the macro factors. We were able to deliver such high EBITDA LIFO primarily due to favourable market climate, including the high rate of economic growth of the countries where the ORLEN Group operates and, additionally, successful measures to curb the grey economy in fuel trade in Poland. The ORLEN Group recorded a 7.2% year-on-year increase in sales volumes despite maintenance shutdowns of its important production units. The record-high result of the Retail segment, of PLN 2.0 billion, has confirmed the correctness of the segment’s strategic development directions. High operating profits translated into operating cash flows of PLN 8.1 billion, enabling us to allocate PLN 3.9 billion to capex projects, pay dividend of PLN 3.0 per share, and reduce the Company’s net debt by PLN 2.6 billion.

Wiesław Protasewicz
Member of the PKN ORLEN Management Board, Finance


The sales revenues of the ORLEN Group amounted to PLN 95,364 million and increased by 19.9% (y/y), which reflects both the increase in volumes by PLN 2,929 thousand. tonnes, ie by 7.4% (y/y), and crude oil prices by 10.5 USD/bbl and as a result of quotations of the ORLEN Group products.

Operating profit increased by depreciation before taking into account the impact of changes in crude oil prices on the valuation of inventories (the so-called LIFO EBITDA) and net impairment losses on non-current assets1 in 2017 reached a record level of PLN 10,448 million.

 

1Net records updating the value of property, plant and equipment and intangible assets:
– 2017 in the amount of PLN (169) million - mainly related to the prospecting assets of the ORLEN Upstream Group in Poland.
– 2016 in the amount of PLN 145 million - mainly related to the write-down of the refining assets of the Unipetrol Group in the amount of PLN 316 million and impairment losses on the assets of the ORLEN Upstream Group in Poland in the amount of PLN (73) million and ORLEN Oil assets in the amount (55) million PLN.

The ORLEN Group’s EBITDA LIFO before impairment of noncurrent assets was higher by PLN 1,036 million y/y.

  • PLN 165 million y/y – the positive impact of macroeconomic factors, including in particular stronger margins on refined products, olefins, PTA, aromatics, and plastics, with the financial results adversely affected by the negative impact of the Urals/Brent differential, lower margins on polyolefins and fertilizers, and the appreciation of the Polish currency against foreign currencies.
  • PLN 1,660 million y/y – favourable market conditions and bringing the Unipetrol Group’s ethylene and FCC units back on stream after the 2016 shutdown supported solid growth in sales volumes across all operating segments and, in consequence, a rise in sales volumes by.
  • PLN (789) million y/y – the negative impact of other factors was and included mainly:
    • PLN (463) million y/y – change in net other income (expenses), resulting mainly from lower y/y compensation paid by insurers in respect of the failure of the Unipetrol Group's ethylene production unit.
    • PLN (323) million y/y – other factors, including mainly a lower by PLN (446) million y/y impact of net changes in revaluation of inventories to net realizable value.

After taking allowances for non-current assets, EBITDA LIFO of the ORLEN Group in 2017 amounted to PLN 10,279 million.

The positive impact of changes in crude oil prices on the valuation of inventories amounted to PLN 799 million. As a result, the ORLEN Group's EBITDA for 2017 amounted to PLN 11,078 million.

After taking into account depreciation costs of PLN (2,421) million, the ORLEN Group's operating profit in 2017 amounted to PLN 8,657 million.

Net financial revenues in 2017 amounted to PLN 60 million and mainly included positive net exchange differences in the amount of PLN 645 million, net interest costs in the amount of PLN (274) million and settlement and measurement of net financial instruments in the amount of PLN (305) million.

After taking into account tax charges of PLN (1,544) million, the ORLEN Group's net profit for 2017 amounted to PLN 7,173 million and was higher by PLN 1,433 million (y/y).

Equity at the end of 2017 amounted to PLN 35,211 million and was higher by PLN 5,926 million compared to the end of 2016, mainly due to the net profit of PLN 7 173 million and payment of dividends from previous years' profits in the total amount (PLN 1,372) million.

The net financial debt of the ORLEN Group at the end of 2017 amounted to PLN 761 million and was lower by PLN (2,602) million compared to the end of 2016.

Increasing the scale of operations in areas including energy, logistics, purchases, IT and retail sales resulted in an increase in employment in the ORLEN Group by 532 people (y / y) to the level of 20,262.

Segments’ results of the ORLEN Group

The ORLEN Group conducted business operations under three operating segments. Corporate functions provide support for business processes implemented as part of segments.

EBITDA LIFO segments’ results [PLN million]

Change in segments’ results [PLN million]

Capital expenditures of the ORLEN Group

The ORLEN Group allocated PLN 4 602 million for the implementation of the investment program in 2017.

Capital expenditures (CAPEX) [PLN million]

Breakdown of expenditure by operating markets [%]

 

Major investments projects carried out in 2017 included:

DOWNSTREAM

 
  • Construction of CCGT units with related infrastructure in Włocławek and Płock
  • Construction of a polyethylene unit (PE3) in Litvinov
  • Construction of a metathesis unit in Płock

RETAIL

 
  • 89 new service stations opened (39 in Poland, 11 in Germany, and 39 in the Czech Republic)
  • 55 service stations upgraded and rebranded (23 in Poland and 32 in the Czech Republic)
  • 102 new Stop Cafe and O!Shop outlets opened

UPSTREAM

 
  • Exploration and production projects in Poland and Canada to expand their own oil and gas resources
  • Canada – PLN 609 million
  • Poland – PLN 169 million


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